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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Barclays Bank Plc & Ors v Eustice & Ors [1995] EWCA Civ 29 (06 July 1995) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1995/29.html Cite as: [1995] EWCA Civ 29, [1995] WLR 1238, [1995] BCC 978, [1995] 4 All ER 511, [1995] 1 WLR 1238, [1995] 2 BCLC 630 |
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM: QUEENS BENCH DIVISION
(HIS HONOUR JUDGE JACK QC)
Strand London WC2 |
||
B e f o r e :
LORD JUSTICE ALDOUS
and
LORD JUSTICE SCHIEMANN
____________________
BARCLAYS BANK PLC | ||
STEPHEN HOLLIS | ||
MICHAEL GREETHAM | ||
GRANT STEPHEN WATSON | ||
CHRISTOPHER JOHN HOWARTH | ||
v. | ||
GEORGE PAUL EUSTICE | ||
INEZ EUSTICE | ||
CHARLES GEORGE EUSTICE | ||
GILES PAUL EUSTICE |
____________________
John Larking, Chancery House, Chancery Lane, London WC2
Telephone No: 071 404 7464
Official Shorthand Writers to the Court)
MR A MANN QC and MR S DAVIES (instructed by Bond Pearce, DX 8521, Plymouth) appeared on behalf of the Respondent.
____________________
Crown Copyright ©
THE CASE FOR THE MAKING OF A S.423 ORDER
Section 423 of Insolvency Act of 1986 provides in its first sub section that:
"This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if
(a) ...
(b)...
(c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself."
"In the case of a person entering into such a transaction, an order shall only be made if the Court is satisfied that it was entered into by him for the purpose -
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make."
"Transaction" is defined in section 436 as including a gift, agreement, or arrangement.
It is thus apparent that before an order can be made under the section the court must be satisfied
1. That a transaction was entered into at an undervalue
2. That it was entered into for a prohibited purpose
"The background to the application is as follows. The Eustice family have farmed in Cornwall for some 170 years. In 1992 Paul Eustice was farming in partnership with his mother, Inez Eustice. Part of the land they farmed, Tregotha Farm, was held under a tenancy between himself as successor to his late father as freeholder and his mother and himself as tenants. Other land was held by Mr Eustice as freeholder. There was some 300 acres in all. Mr Eustice wished to acquire a further 200 acres from his uncle and to develop a strawberry farm. His bank, the National Westminster Bank, would not agree to fund the venture and he approached the Plaintiff bank, Barclays, whom I will call "The Bank". In November/December 1992 it was agreed between the bank and Mr Eustice that he should borrow £550,000 on a 20 year loan with a separate overdraft facility of £100,000. The bank took charges over his freehold land. He asserts that it was agreed that the project should be considered on a long term basis and that the overdraft facility could be increased if further funds were needed until the strawberry venture was established. There would be a limit imposed by the available security.
By November 1993 further funds were needed. The bank was prepared to increase the overdraft facility to £150,000, but only on terms that the 20 year loan was converted to a 12 month facility and that agricultural charges were given over all the agricultural assets. Mr Eustice says that he protested against the bank's breach of its promises but had no option but to accept. He did so, he asserts, on the basis of an assurance from the bank that the bank would exhaust every alternative course before exercising any remedy under the agricultural charges.
The accounts for the year ending 31 March 1994 showed a net loss of £116,028 and during 1994 the bank watched the progress of the business with care. On 9th June 1994 the bank agreed to increase the overdraft limit from £150,000 to £200,000. Their letter of that date sets out the terms on which this was offered. In accordance with those terms the bank reduced the limit to £150,000 by letter of 5th August, but on 25th August agreed to reinstate the £200,000 limit. The strawberry season was in progress over this period. In August Mr Eustice proposed to the bank the sale of certain inessential assets to raise some £300,000. By 16th December some £120,000 had been applied from this source to reduce the overdraft. On 5th October the bank sought and later obtained Mr Eustice's agreement to the appointment of Andersons, who are farming consultants, to prepare a report on the business. The context is found in the bank's letter of that day. This referred in particular to a projected overdraft of £185,000 at the end of December as opposed to approximately £105,000 projected for then as recently as August, and to an overdraft of £200,000 to £240,000 at the end of June 1995. It pointed out that there were no longer reserves of assets to finance future loss.
On 10th November 1994 the Inland Revenue distrained goods on the farms to cover amounts due for PAYE and National Insurance contributions totalling £9,982.83 and served notice to that effect on Mr Eustice.
In that month Mr Eustice himself sought the assistance of agricultural consultants named Baybrook Agriculture. On 18th November three agreements were entered into, as follows:
(a) an assignment of the lease of Tregotha Farm by Mr Eustice and his mother to his sons, Charles and Giles Eustice;
(b) an agreement granting a tenancy to his sons of the other land;
(c) an agreement for the sale of listed agricultural assets by Mr Eustice to his sons. This included assets within the Inland Revenue's distraint.
For the time being the bank was not informed of these agreements. Other than saying that they were "made as a result of consulting Braybrook Agriculture", Mr Eustice is silent as to their genesis or purpose. Although the point was not raised before me, it is clear that, at least so far as banking was concerned, the business continued to be run as before. I say that because the bank did not notice any change. If the income of the enterprises had stopped being paid into the same partnership account of Mr Eustice and his mother the bank would have noticed. Whether the sons now have separate banking facilities is not known to me. It was suggested to me on behalf of the bank that there are now no facilities. This was not contradicted.
In late November 1994 Andersons produced their report. It put forward three options:
- to continue to support and manage the business as at present, monitoring itclosely, with a review at the end of each of the primary crop seasons, and in the event of significant shortfall and further depletion of the equity taking immediate action;
- selling all the land except the 53 acres on which is the farm shop;
- a managed programme of realisation of all the assets.
The report did not recommend which should be followed, but it pointed to disadvantages with the second.
On 8th December 1994 the position was reached that the bank wished to discuss the report with Mr Eustice, but he did not wish himself to do so. He had instructed solicitors, Burgess Salmon, with whom he wished the bank to deal. The bank had not been provided by Mr Eustice's accountants with cash flow figures and details of debtors and creditors for October because he had given no information to his accountants. The bank took the view that Mr Eustice was taking a confrontational approach and that it must protect its position. It did not yet know of the transactions of 18th November. On the same day, 8th December, it called in its loans and made demands on Mr Eustice and his mother for a total of £758,476. On 9th December the bank appointed Mr Watson and Mr Haworth as receivers under its charges over the land. On 12th December Burgess Salmon wrote informing the bank of the assignment and tenancy agreements. On 21st December the Eustices disclosed to Burgess Salmon the existence of the sale agreement."
WAS THE TRANSACTION ENTERED INTO AT AN UNDERVALUE
1. The Sale Agreement
"Those assets include some but not all of the assets covered by the agricultural charges. They include some of those covered by the Inland Revenue's distraint. Points were made on behalf of the bank as to the valuation of particular items. But I am prepared to proceed on the basis that overall the figures represent their actual value but no more. The price, however, is to be paid by ten annual instalments commencing on 17th November 1995. There is no provision for interest. It is remarkable that, despite the bank's appointment of receivers under the agricultural charges on 16th December 1994, this agreement was not disclosed until 21 December. Mr Tamlin submitted I should conclude that it is a sham. I express no view on that. I am, however, satisfied that the agreement falls within Section 423(1)(c) because the provision for deferred payment renders the consideration received significantly less than the value of goods sold."
2. The Tenancy Agreement
"This provides for an annual rental of £93,000. There is no evidence to suggest that this is or is not a market figure. In the first year only £45,000 is to be paid and is to be paid in arrears on 17th November 1995. In the second year £93,000 is to be paid in arrears on 17th November 1996. In the third year £141,000 (that is £93,000 plus £93,000 less £45,000) is to be paid in arrears on 17th November 1997. These deferment provisions may render the transaction vulnerable. But what is, I consider, more likely to be fatal is its close similarity that before the Court of Appeal in Agricultural Mortgage Corporation plc v Woodward (1994) BCC 688. There a borrowing of £700,000 was secured on a farm which would have been worth over £1 million with vacant possession. The farmer fell into arrear and some £850,000 was due. Just before a deadline given by the mortgagee expired he entered into a tenancy agreement at a market rent with his wife. The intent was to preserve the farm from the bank. The effect was to reduce the value of the freehold of the farm to less than £500,000. The Court held that, because the wife would be placed in a `ransom position' as regards the mortgagee, viewing the transaction as a whole the benefits conferred by the farmer on his wife were significantly greater in value, in money or money's worth, than the value of the consideration given by her: The transaction fell within Section 423. I can see no ground for distinguishing the tenancy in the present case from that before the Court of Appeal. The bank appears to have an unanswerable case for it to be set aside."
3. The Assignment of the Lease
"Following the death of his father Mr Eustice became the freeholder and landlord. The rent is £2,000 per annum payable in half- yearly instalments in arrear. The term is 15 years from 1st April 1979 and so expired on 31st March 1994. I was not addressed as to that and will proceed on the basis that the lease is still on foot either by holding over or in some other way. The assignment provides for the tenants to hold from year to year, which supports that approach. It simply vested the interest under the lease in the sons for a consideration of £1.
When the bank took its charge over the freehold of Tregotha Farm it was unaware of the lease: It thought that it was dealing with Mr Eustice as freeholder of a freehold in hand. How this came about is not dealt with in the evidence. The charge describes Mr Eustice as "the proprietor" and his mother as "the occupier". There must however be a very real possibility that the bank is entitled to deal with Mr Eustice and his mother on the basis that Mr Eustice held an interest in hand rather than a reversion. If the bank is so entitled then either the sons have taken no interest as a result of the assignment or, if they have, the assignment must be liable to be set aside under Section 423 because of the ransom position identified by the Court of Appeal in Agricultural Mortgage Corporation plc v Woodward."
4. Each side invited us to look at these three legal arrangements as one transaction consisting of three parts. That seems realistic.
WAS THE TRANSACTION ENTERED INTO FOR A PROHIBITED PURPOSE?
"I am satisfied that there is a strong case here that in entering these transactions the aim of the defendants, and I put it in plain language, was to prevent the bank getting its hands on the land and other assets. In paragraph 38 of his first affidavit, Mr Paul Eustice deposed:
'The purpose of the transactions entered into on 18th November 1994 was solely to ensure to the best of my ability that my family was able to complete the agreement with the bank of November 1992. I wanted to ensure my family would still farm and progress new business until November 1996 without interference from the bank in accordance with the agreement in the event that contrary to the agreement, the bank sought to enforce its security.'
I underline those last words. That, indeed, is what the bank has done.
At paragraph 39 he deposed:
'There is no intention on my part to prejudice the bank or any other creditors. It is my belief that if my family is permitted to continue the business without interference from the bank and consequential costs then the enterprise will be a success by November 1996 ensuring the protection of the bank's investment and rewarding the hard work of my own family.'
The effect of that so far as the bank's position is concerned is, in short, this: that it was Mr Eustice's intention by the transactions to prevent the bank enforcing its security which would give him time and, if all went well, might enable him to pay off the bank.
However, meanwhile, the bank would be unable to enforce its security interests. The rights which the bank would otherwise have to obtain possession of the land, to obtain the sale of the land, would be defeated. In my view there is a strong case that the situation falls within those sub-sub-sections of sub-section 3 of Section 423"
I gratefully adopt the reasoning of Mr Evans-Lombe QC in Chohan v Saggar [1992] BCC 306 at p.321:
"As Lord Oliver in the well known case of Brady v Brady (1989) AC 755 acknowledged, the word "purpose" is a word of wide content. But he went on to say that it must be construed bearing in mind the mischief against which the section in which that word appears is aimed. Here, the purpose or mischief against which the section is aimed, namely section 423, is the removal of assets by their owner, in anticipation of claims being made or contemplated, out of the reach of such claimants if those claims ultimately prove to be successful. It would defeat that purpose if it were possible successfully to contend that if the owner was able to point to another purpose, such as the benefit of his family, friends or the advantage of business associates, the section could not be applied. This passage was approved by the Court of Appeal in Royscott Spa Leasing v Lovett (unreported 16.11.93)."
In the resolution of this question there are two conflicting desiderata in the background.
1. Discovery of every relevant document is desirable to help the court decide what happened and why. The right answer is more likely to be arrived at by the court if it is in possession of all relevant material.
2. It is desirable that persons should be able to go to their legal advisers knowing that they can talk frankly and receive professional advice knowing that what each party has said to the other will not be revealed to third parties.
"The doctrine of legal professional privilege is rooted in the public interest which requires that hopeless and exaggerated claims and unsound and spurious defences be so far as possible discouraged, and civil disputes so far as possible settled without resort to judicial decisions. To this end it is necessary that actual and potential litigants, be they claimants or respondents, should be free to unburden themselves without reserve to their legal advisers, and their legal advisers be free to give honest and candid advice on a sound factual basis, without fear that these communications may be relied on by an opposing party if the dispute comes before the Court for decision. It is the protection of confidential communications between client and legal adviser which lies at the heart of legal professional privilege ......................... Without the consent of the client, and in the absence of iniquity or dispute between client and solicitor, no inquiry may be made into or disclosure made of any instructions which the client gave to the solicitor or any advice the solicitor gave the client whether in writing or orally."
"For servants during their employment in breach of their contractual duty of fidelity to their master, to engage in a scheme secretly using the master's time and money, to take the master's customers and employees and make profit from them in a competing business built up to receive themselves on leaving the master's service, I would have thought that commercial men and lawyers alike would say that is a fraud."
"The Court must in every case, of course, be satisfied that what is prima facie proved really is dishonest and not merely disreputable or a failure to maintain good ethical standards and must bear in mind that legal professional privilege is a very necessary thing and is not likely to be overthrown, but on the other hand the interests of victims of fraud must not be overlooked. Each case depends on its own facts."
As Lord Wrenbury said in O'Rourke v Darbyshire [1920] AC 581 at p.632:
"Not every document relevant to the issue of fraud but documents which are not upon some other ground privileged, are exposed to production (sic). For the present purpose it is sufficiently accurate to say that documents relating to the conception and carrying out of the alleged fraud are not, but documents arising in professional conference as to defence against the alleged fraud are protected".
"The question is, whether, if a client applies to a legal adviser for advice intended to facilitate or guide the client in the commission of a crime or fraud, the legal adviser being ignorant of the purpose for which his advice is wanted, the communication between the two is privileged?"
At p.167 he quotes Lord Brougham in an early case as saying:
"If, touching matters that come within the ordinary scope of professional employment legal advisers receive a communication in their professional capacity ....from a client...or..commit to paper in the course of their employment on his behalf matters which they know only through their professional relation to the client they .... Will not be compelled to disclose the information.."
Then Stephen J said the following on the same page:
"The reason on which the rule is said to rest cannot include the case of communications criminal in themselves, or intended to further any criminal purpose, for the protection of such communications cannot possibly be otherwise than injurious to the interests of justice.....Nor do such communications fall within the terms of the rule. A communication in furtherance of a criminal purpose does not 'come into the ordinary scope of professional employment'"
Mr Morgan relied on the observations of Bushe CJ in an Irish case R v Haydn where he said at p.381:
"If any man should confide to a professional person, that he had a treasonable or felonious intention, and wished to know how he might execute it so as to escape punishment, it would be too much to say that such communication which might make the man consulted guilty of misprision, was privileged; but if a man meditates an act which, exceeding certain limits, would become criminal, and confined within certain bounds would be perfectly justifiable, the person asking the advice must be considered as seeking how he may avoid and not how he may commit a crime, and it is impossible that an attorney should be obliged to disclose such communication."
Mr Morgan also relied on what Lord Sumner said in O'Rourke v Darbyshire [1920]AC 581 at page 613:
"No one doubts that the claim for professional privilege does not apply to documents which have been brought into existence in the course of or in furtherance of a fraud to which both solicitor and client are parties. To consult a solicitor about an intended course of action, in order to be advised whether it is legitimate or not, or to lay before a solicitor a fact relating to a charge of fraud, actually made or anticipated, and make a clean breast of it with the object of being advised about the best way in which to meet it is a very different thing from consulting him in order to learn how to plan, execute, or stifle an actual fraud."
THE RESPONDENTS' NOTICE UNDER ORDER 59 RULE 6(1)(a)
The judge followed the decision of Vinelott J in Derby v Weldon that:
"The Plaintiffs are not entitled to disclosure of any documents which fall under a different head of privilege: Legal advice obtained and documents coming into existence for the dominant purpose of being used in pending or contemplated proceedings."
The order under appeal provided that discovery should
"include all documents containing or evidencing communications between the defendants and their legal advisors relating to the tenancy agreement and the assignment in their respective possession, custody or power (excepting documents to which a bona fide claim of privilege is made on the ground that the same were obtained or created for the dominant purpose of being used in pending or contemplated proceedings)"
LORD JUSTICE BUTLER-SLOSS: I also agree.