Spring Finance Ltd v HS Real Company Llc
| Jurisdiction | England & Wales |
| Judgment Date | 29 January 2010 |
| Neutral Citation | [2010] EWHC 3580 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 29 January 2010 |
| Docket Number | Case No: 2009 Folio 398 |
[2009] EWHC 3580 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Before: His Honour Judge Chambers QC
Sitting as a Judge of the High Court
Case No: 2009 Folio 398
Andrew Hunter (instructed by Bird & Bird LLP) for the Claimant
Robert Anderson QC and Andrew George (instructed by SJ Berwin LLP) for the Defendant
Hearing date: 23 rd October 2010
APPROVED JUDGMENT
HHJ Chambers QC:
By this application the Claimant seeks summary judgment against the Defendant as guarantor of £1.5 million that is owed by Credit Investment Limited (“CIL”) in respect of its purchase of Cheval Property Finance PLC (“Cheval”). The Claimant is the lawful assignee of the rights acquired by the vendor Cheval Investment Finance Limited (“CIF”).
It is common ground that the Defendant guaranteed the payment in question, that there has been a default in making the payment and that due demand has been made upon respectively CIL and the Defendant. It follows that the evidential burden is squarely upon the Defendant to show why judgment should not be entered against it.
The Defendant has put its case in a variety ways. The Claimant's response has been to address each situation so advanced and to seek to demonstrate that the law provides a complete answer in its favour. One can see the force in such an approach but it suffers from one fatal defect where, as here, the application is for summary judgment.
After one has read the Defendant's extensive draft defence, the witness statements and, in particular, the contemporary documents, one sees the emergence of a simple story that involves a small number of people who are intimately connected with each of the corporate entities that bedeck this case.
To explain that story I must first make brief reference to those involved, both natural and corporate.
Cheval is and was a retail lender to the property market. In order to conduct its operations it enjoyed borrowing facilities from a number of banks. Although involving nothing like the figures that the general public have now become accustomed to hearing of, the total sums involved were considerable. Most of the facilities were provided by well known houses on what would appear to have been standard terms. However a major lender was an entity called Volkomen Financiering BV (“Volkomen”). The sums in question varied but £17 million may be used as a working figure. Although the precise nature of the relationship is unclear, for the purposes of this application I find that Norman Epstein and Jeffrey Margolis may be regarded as having had a general authority to act on behalf of Volkomen both as individuals and through their company Clermont Consultants (UK) Ltd.
Messrs Epstein and Margolis are and were directors of CIF which sold Cheval to CIL on 31 May 2006 for £6 million of which £3 million was paid in cash and the remainder was payable in loan notes of which £1.5 million were paid in July 2007 and the remainder form the subject matter of this action, having become due on 1 June 2008.
CIL is and was owned and operated by Mr Colin Halpern. Its ultimate owner is the Defendant which is managed by Mr Halpern.
The Claimant's directors include Messrs Epstein and Margolis who are also shareholders. The Claimant enjoys considerable credit facilities from Volkomen.
Upon the sale of Cheval, Mr Ellis Sher was appointed as its Managing Director. No suggestion is made that he was interested in any of the other companies involved in this case. Mr Halpern became a non-executive director. Messrs Epstein and Margolis remained as directors. Mr Margolis's son Alan became, either then or subsequently, Chief Operating Officer.
It will be apparent from what I have said so far that, whatever the law concerning the discrete nature of corporate entities, at least for summary purposes, the position is that one is dealing with a group of individuals. Roughly speaking, one may regard Messrs Epstein and Margolis as being on one side and Mr Halpern on the other, with Mr Sher somewhere in the middle.
The documents show that in the late autumn following the default on the loan notes, Messrs Epstein and Margolis were concerned to hammer out a modus vivendi between Volkomen and Cheval in order best to protect Volkomen's financial involvement by the continued existence of Cheval which had suffered badly in the financial crisis. Initially the means of doing this was to be the retrospective conversion into preference shares of Cheval's debt to Volkomen and the cession to Volkomen of control over Cheval subject to certain benefits to be retained by CIL. In addition CIF/Epstein and Margolis wanted to be paid the outstanding £1.5 million. CIL/the Defendant/Halpern were concerned to minimise and postpone the obligation to pay the outstanding moneys.
Eventually it was settled between the relevant individuals that payment by the Defendant should simply be postponed for 5 years.
The elements of the deal constituted a package that was sufficiently agreed for it to be embodied in a document titled “Memorandum of Understanding” (“MOU”). It bore the legend “subject to contract”.
The document was signed on 10 December 2008 by Mr Halpern for respectively CIL and the Defendant. On 12 December 2008 Mr Margolis signed it for the Claimant. There was no signature for Volkomen, although I am satisfied from the course of dealings revealed by the email exchanges that, for present purposes, it is to be treated as having been agreeable to the terms of the MOU.
The MOU consisted of three sections respectively headed (a) “The Preference Shares” (b) “The HS Real Guarantee” and (c) “Order of Distribution of proceeds of sale of Cheval Property Finance Plc”.
Under the heading “The Preference Shares” was a sub-heading “Powers attached to Preference Shares” of which the text began, “The holders of the Preference Shares will be entitled to “run”/have full day to day control of [Cheval] and its subsidiaries as they see fit in good faith until such time as the Preference Shares and any coupon is fully repaid”. There was also a power in Volkomen to sell Cheval subject to CIL and the Defendant having a right of first refusal.
The text under the heading “The HS Real Guarantee” began “[The Claimant] will undertake not to make a call under the Guarantee for 5 years”.
Then advice was received to the effect that preference shares could not be issued in the way envisaged and on 22 December 2008 Mr Sher sent to inter alia Messrs Epstein, Margolis and Halpern an email which read as follows:
“ Update on restructure
As you are all aware the intended restructure envisaged a conversion of the current short term Volkomen debt into preference shares.
Following advice from SJ Berwin and our auditors, it has become clear that the proposed structure will not work. This is primarily for the following reasons:
1. It is not possible to retrospectively create an equity instrument as at 30/6 (i.e. new preference shares)
2. Even though Cheval had C class shares in existence as at 30/6/08, it is not possible to attach new terms to the shares retrospectively
3. Creation of preference shares that carry secured rights will need to be disclosed as debt and this defeats the purpose of the proposed restructure
The way forward now involves the amendment of the current Volkomen debt into longer term debt so that the Banks remain comfortable that Cheval has the long term support of Volkomen.
Key features of the changes to the current Volkomen facility:
1. Debt can't be called for 2 years
2. Debt carries features such that the holders control the board
3. Instrument doesn't carry interest until year three when the rate is increased to make up for the interest free period
All other aspects of the agreed proposed restructure remain unchanged (i.e. order of repayments and deferral of HS Real guarantee)
The accounts need to be lodged at Companies House by 31 January 2009
If you have any questions, please get in touch with me.”
The same day Mr Epstein sent to Mr Sher, but no one else, the following reply:
“Ok but jeff [Margolis] to confirm
We need to project a cash flow as we collect loans to repay banks and volkommen then with a capt payment it is easier to swallow int deferral How much can Volkommen be paid before banks? I recall 4 mill?
We also need to recover the 1.5 due to Spring over a period.
Norman”
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