The Royal Bank of Scotland Plc v Chandra
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE DAVID RICHARDS,Mr Justice David Richards |
| Judgment Date | 28 January 2010 |
| Neutral Citation | [2010] EWHC 105 (Ch) |
| Docket Number | Case No: 4AL04859 |
| Court | Chancery Division |
| Date | 28 January 2010 |
[2010] EWHC 105 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
Before: Mr Justice David Richards
Case No: 4AL04859
Mr Mark Cawson QC and Miss Kelly Pennifer (instructed by Eversheds LLP)
for the Claimant
Mr Michael Kent QC and Miss Susan Lindsey (instructed by Edward Harte & Co)
for the First Defendant
Mr Peter Knox QC (instructed by Messrs Keoghs) for the Second Defendant
Hearing dates: 7,8,9,12,13,14,15,16,19,20 October 2009
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice David Richards :
Introduction
The Royal Bank of Scotland plc (the bank) brings these proceedings to enforce guarantees given by the defendants of borrowings made by a company jointly owned by the defendants. The relief sought is judgment for the amount said to be due under the guarantees and an order for possession of their matrimonial home, which is charged to secure the guarantees. The proceedings were commenced in the County Court but transferred to the High Court in the light of the defences raised. It is necessary to summarise briefly the basic facts, which I do in paragraphs 2 to 14, before summarising the defences.
The facts : an overview
The defendants are Bala Perampalam Chandra and Maria Perpetua Chandra. Mr Chandra was born in Sri Lanka in 1946, came to the UK as a student and became a UK citizen in 1978. He was a chemical engineer by training and profession, becoming a corporate member of the Institute of Chemical Engineers in 1980. In 1984 he was awarded a certified diploma in accountancy and finance by the Association of Certified Accountants. Mrs Chandra is an Irish citizen, born in 1950, who came to the UK in 1968 to train as a nurse, qualifying as a registered general nurse in 1972. She became a nursing sister in 1974. Mr and Mrs Chandra were married in 1972 and have two adult children.
Mr and Mrs Chandra had over a period of 17 years built up from scratch a chain of nursing homes in the North West. Their roles in the nursing home business reflected their respective experience in business and finance and in nursing. Mrs Chandra was responsible for the recruitment of staff and the effective running of the homes from a nursing and general services point of view, while Mr Chandra concentrated on the financial and commercial side. It was a successful business and in 1997 they sold it for £23m which left them with a net profit of approximately £5.3m. The nursing home business was owned by a jointly-owned company which sold the business and changed its name to BPC Enterprises Limited.
Mr Chandra was anxious to pursue further business opportunities and was anxious also to shelter the gain on the sale of the business for capital gains tax purposes by making use of roll-over relief. He identified a property in central Manchester which could be developed as a hotel. The property was a grade 2-listed Victorian office building in Princess Street. It was decided to use a wholly-owned dormant subsidiary of BPC Enterprises Limited to purchase and develop the property and to run the hotel once it opened. It was granted a franchise to run the hotel as a 4-star Holiday Inn. The subsidiary was re-named as BPC Hotels Limited (the company). Mr and Mrs Chandra were its directors. The guarantees in issue in this case were given in respect of liabilities of the company.
Mrs Chandra was content to support Mr Chandra in his plan, although I accept her evidence that she would have preferred them simply to enjoy the fruits of their labours in the nursing home business. It was envisaged that she would become involved in the staff and service side of the hotel. She was not actively involved in the acquisition and development of the property or in its financing.
The property was acquired by the company in 1998 for £1.5m. The purchase price was provided from the sale proceeds of the nursing home business. It was at first estimated that the total cost of acquisition and development would be £11.9 million but in 2000 the proposed size of the hotel was increased and the projected cost revised to £15.25m. Costain Limited (Costain) was engaged as the contractor.
The bank agreed to provide loan finance to the company for the project, following an introduction from Holiday Inn. It was initially envisaged that the bank would provide loan finance of £7.3 million but this was increased to £10.65m and it was this figure which the bank committed to lend in a finance agreement dated 20 September 2000 (the first finance agreement). Costain started work on the property on 2 October 2000 under an interim agreement dated 7 September 2000. Formal building contracts were entered into on 30 April 2001, comprising a contract in the JCT Standard Form of Building Contract 1998 Edition with Quantities and a supplemental bespoke contract, varying some of the terms of the main contract.
The first drawdown under the first finance agreement was made towards the end of July 2001. As pre-conditions to drawdown, the company granted on 23 July 2001 a debenture creating fixed and floating charges over the company's business and assets, with the usual power to appoint administrative receivers, and a first legal charge over the property. As a further pre-condition, a deed of warranty was executed on 18 July 2001 by Costain, the company and the bank. It will be necessary to look in detail at some of the provisions of these financing documents.
On 12 July 2001 the bank provided overdraft facilities, limited to £300,000 and repayable on demand, to assist the company with VAT timing differences.
In September 2001 the estimated cost of redevelopment rose by a little over £755,000 and on 30 October 2001 a second finance agreement was made between the bank and the company, whereby further loan finance of £700,000 was to be provided by the bank. It was a term of this further agreement that Mr and Mrs Chandra should give a personal guarantee of the company's borrowings, limited in amount to £700,000 and secured by a second charge on their matrimonial home. The guarantee and charge were executed by them on 30 October 2001. It was an all monies guarantee, limited to £700,000, and did not therefore secure any specific or particular borrowing from the bank.
There were difficulties in the redevelopment, and in particular disputes developed between Costain and the company from about mid-2002. It became clear that the costs were increasing and that the company would require further funds to complete the development. In February 2003 Mr Chandra informed the bank that the company would not be seeking further funding from the bank, but that he and Mrs Chandra would inject £700,000 in April 2003 to be raised from the sale of their home, which they put on the market with offers invited at over £2m. Mr Chandra later told the bank that he expected to sell the house in May 2003 and inject £900,000.
Mr and Mrs Chandra's house was not sold and further funds were not forthcoming from them. A payment of over £485,000 was due to Costain on 20 May 2003 but there was a shortfall of nearly £99,000 in the facilities available to the company. Failure to pay Costain was likely to lead to a cessation of work on site. The company requested further funding from the bank to enable the payment to be made to Costain. The bank agreed to do so on terms that Mr and Mrs Chandra gave a further guarantee, increased from £700,000 to £1.15m and secured by the second charge on their home. The guarantee was signed by them on 20 May 2003 and the funds were provided by the bank to enable payment to be made to Costain.
The further funding provided in May 2003 was in effect emergency funding to deal with an immediate shortfall but further funds were required to complete the project. Discussions with a view to a further finance agreement were not successful, principally as the bank says, and as I accept, because it was impossible to reach a reasonable degree of certainty as to future costs. Efforts to do so were hampered by Mr Chandra's refusal to allow the bank to discuss these issues, and particularly Costain's claims, directly with Costain. The bank had lost confidence in Mr Chandra's ability to manage the project and Mr Chandra refused the proposal for the introduction of a new manager. On 28 August 2003 demands for payment were made by the bank. On the same day, the bank appointed administrative receivers over the business and assets of the company. The total indebtedness of the company to the bank was then a little under £12.3m.
It appeared to be commercially desirable to complete the development of the property and to retain Costain as the contractors. Under the terms of the deed of warranty Costain could require the bank, or a person nominated and guaranteed by the bank, to become the employer under the building contracts. A structure was put in place whereby on 12 September 2003 the bank nominated a clean company owned by the receivers' firm (the special purpose vehicle or SPV) and guaranteed its liabilities to Costain.
By a letter dated 18 September 2003, the company and SPV agreed that SPV was carrying on its business, which meant the contract with Costain, as agent for the company, and the company agreed to indemnify it against all liabilities. The funding to complete the development, including the sum required to settle Costain's claims against the company, was advanced by the bank to the company in receivership. This comprised £1,655,800 to complete the development and to pay other receivership expenses and £3,207,333 to...
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