Spring Finance Ltd v HS Real Company Llc
| Jurisdiction | England & Wales |
| Judge | His Honour Judge Mackie QC |
| Judgment Date | 20 January 2011 |
| Neutral Citation | [2011] EWHC 57 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 20 January 2011 |
| Docket Number | Case No: 2009 Folio 398 |
[2011] EWHC 57 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
His Honour Judge Mackie QC
Case No: 2009 Folio 398
Mr N Tozzi QC and Mr A Hunter (instructed by Bird & Bird LLP) for the Claimant
Mr R Anderson QC and Mr A George (instructed by SJ Berwin LLP) for the Defendant
Hearing dates: 29 th November to 2 nd December 2010
His Honour Judge Mackie QC:
This is a claim for £1.5 million plus interest under a guarantee of obligations under a Loan Note Instrument. The Defendant resists liability claiming that the parties reached an agreement to defer enforcement of the guarantee for a five year period or alternatively that the Claimant is estopped from enforcing the guarantee for that period. Promissory estoppel, estoppel by representation, and estoppel by convention are all invoked.
Background
Cheval Property Finance Limited ("Cheval") is a company specialising in short term lending and bridging loans which until 31 May 2006 was owned by Cheval Investment and Finance Limited ("CIF"). The indirect beneficial owners of CIF are Mr Norman Epstein and Mr J Margolis. On 31 May 2006 CIF entered into an agreement ("the Agreement") with Credit Investment Limited ("CIL"), an English company. By this CIF sold the shares in Cheval to CIL for £6 million.
CIL was incorporated to purchase the shares in Cheval and is owned by Ambition Capital Limited which in turn is owned broadly 50% by the Defendant ("HS Real") and 50% by a trust settled by Mr Ellis Sher for the benefit of his family.
HS Real is a Delaware company which at the time of the purchase was owned by four trusts set up by Mr Colin Halpern and his wife for their children. Mr Halpern is the Manager of HS Real, a company which has a substantial shareholding in the well known and successful Domino's Pizza of which he is a director. HS Real guaranteed the obligations of CIL under the Agreement.
The purchase price was paid by £3 million in cash with the balance due under a Loan Note Instrument dated 1 June 2006 issued by CIL and guaranteed by HS Real. Under the Instrument payment of £1.5 million was to be made on 1 June 2007 and the remaining £1.5 million on 1 June 2008. The first instalment was paid but the second was not.
The claim is brought by Spring Finance Limited, a company whose beneficial shareholders and directors are Mr Epstein and Mr J Margolis. This is because, with HS Real's consent, CIF's interest in the Loan Note was transferred to Spring in 2007. HS Real does not dispute that on 7 August 2008 it became liable to Spring for £1.5 million plus interest and it accepts that there was a default for which a valid demand was made by Spring on 31 July 2008. But liability is denied because of what HS Real says were the promises and conduct of Spring.
Facts agreed or not much in dispute
Mr Ellis Sher is experienced in banking and finance and much younger than other individuals involved in this case. HS Real were clients of Investec Bank for whom Mr Sher used to work and he and Mr Halpern became friends. Mr Sher identified Cheval as a potential acquisition and was aware of it through personal and family connections with Mr Epstein and Mr J Margolis. Essentially Mr Halpern supplied the money and Mr Sher, the expertise. Mr Sher anticipated that Mr Halpern's investment would comprise not only the purchase price but also money to improve the capital structure of the business. He and Mr Halpern disagree about what the latter committed to do.
One of the attractions of Cheval to Mr Halpern and Mr Sher was a loan facility renewed at the time of the acquisition by which Volkomen Financiering BV ("Volkomen") provided up to £22 million. Volkomen's rights ranked after those of Cheval's other banks, IDB, Landsbanki and Clydesdale. Volkomen is a Dutch company funded by loans made by Fiscal Financing Limited ("Fiscal"). Fiscal's funds are/or were raised by Mr J Margolis and Mr Epstein through their own contacts. They are also directors and shareholders of Clermont Consultants (UK) Limited ("Clermont"). The ultimate owner of Volkomen is apparently a charitable trust. Its sole director is Phibren International Management BV ("Phibren"). Phibren's sole director and representative is a Miss Houtman. HS Real claims that Volkomen is a creature of Mr Epstein and Mr J Margolis. They deny this.
After a good start the fortunes of Cheval fell away as the economy deteriorated and by July 2008 there were concerns about its continuing viability. Cheval's directors then included Mr Sher, the managing director, Mr A Margolis, the son of Mr J Margolis, Mr Epstein, Mr J Margolis, a Mr Chesler and Mr Halpern. Mr Epstein, on behalf of Spring, pressed Mr Halpern to make arrangements for HS Real to pay the final instalment of £1.5 million plus interest. Cheval's debt to Volkomen by then stood at over £17 million and Mr Sher on 7 July 2008 circulated a proposal which involved converting most of that debt into equity. Relations between the parties began to deteriorate. Mr Epstein became frustrated and then infuriated by HS Real's failure to pay. Mr Sher was embarrassed as HS Real appeared to have assets, principally in the form of shares in Domino's Pizza, vastly greater in value than the amount of the guarantee and it seems that HS Real was able to sell some of those shares but for a purpose other than paying the guarantee. For his part Mr Halpern became irritated and angry by perceived conflicts of interest on the part of Mr Epstein and Mr J Margolis and by what he saw as an inappropriate call on the guarantee at a time when all involved should have been working together to restructure Cheval so that it could cope with the problems presented by a deteriorating property market.
Discussions continued unfruitfully between July and October 2008. By the beginning of November it was clear that Cheval needed a new long term arrangement with Volkomen to ensure that the other three lenders did not withdraw their support. By this point Spring had started action to recover the £1.5 million plus interest and obtain permission to serve HS Real out of the jurisdiction. 31 January 2009, the date by which Cheval had to file its accounts for the year, was beginning to loom.
On 5 November 2008 Mr Halpern met Mr J Margolis at his home to discuss both the proposed conversion of the Volkomen debt into equity and payment of the final instalment of the purchase price plus interest. The meeting was also attended by Mr Simon Minitzer, another beneficial shareholder in Spring, as an observer on Mr Epstein's behalf. Mr Epstein's approach to this meeting is summarised in an email which he sent to Mr Minitzer beforehand:
"1. Volkomen is owed 17m by Cheval and has a debenture over its assets.
2. Volkomen ranks after the banks.
3. Volkomen debt can be reduced to 14m without banks consent but just notice to the bank
4. The balance sheet of Cheval is
Assets 41m. Banks 25m Volkomen 17m
So are + —square position
5. Thus it does not pay to enforce Volkomen's debenture as banks will step in and force a firesale of properties held as securities.
6. We thus want to continue Cheval trading and it can make a profit of 2m with bank support and further reduced overheads ….
7. Ellis will probably retire…
8. Colin Halpern (the buyer) wants to continue owning 100 per cent of Cheval as he claims he needs this on his balance sheet and I believe him… We have no problems with this.
9. We must have management control to run the co with no shareholder interference.
10. The banks want V to convert its loan to redeemable prefs which is fine with us.
We need the banks.
11. Colin will, in the pref conversation documents, give us total voting and management control. This is good but they want only accrue a small pref coupon which is only payable on redemption. NO GOOD we need an annual pref coupon accruing off the balance sheet at 9 per cent pa.
12. The pref documents will allow V to sell the company and no divs or profits can be paid to shareholders until V prefs paid in full with accrued coupons. V wants in addition 25 per cent of the capital gain.
13. The unpaid purchase price of 1.5m plus int is unpaid and Colin wants this to be passed to Cheval to pay. How? This is not acceptable. The debt is guaranteed by HS Real, a Colin Halpern offshore co, and he wants this released. This is not acceptable. It will only be released when we and V are paid in full."
In his first witness statement Mr Halpern recollected that the meeting had been attended by others as well, including Mr Epstein and Mr Sher, and that an agreement was reached by which the Volkomen debt would be converted into preference shares, Volkomen would take a more active role in the operations of Cheval and Spring undertook not to make a call on the guarantee for a period of five years with agreement also being reached on how the proceeds of any sale of Cheval should be distributed. When asked in cross-examination if he regarded himself as having come to a final and concluded agreement at that meeting Mr Halpern said "yes".
Mr Margolis's recollection was that while he was able to negotiate on behalf of both Spring and Volkomen at the meeting he could not commit Volkomen. The outcome was no more than a broad agreement in principle that the parties would work towards entering into an arrangement by which Volkomen would have the right to control Cheval, the debt would be restructured as preference shares and the guarantee would be put off for five years but subject to certain conditions. Mr Margolis thought it was clear that all understood that while hands were shaken and the principles had been agreed, the matter would need to be negotiated in detail and put into a formal...
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