Mr Justice Warren
Introduction
- This is the trial of a preliminary issue in an action pursuant to which the Claimant, a French company called Cofacredit SA ("Cofacredit"), seeks from the first Defendant, Clive Morris ("Mr Morris"), payment of certain monies received by Mr Morris in his capacities first as administrator and later as liquidator of the second Defendant, an English company called Mora UK Limited ("Mora UK"). In order to put the preliminary issue in context, I should describe the nature of the claim and its background. I take the facts from the agreed Case Summary and other material agreed during the hearing.
- Cofacredit is a factoring company incorporated in France. In April 2002, Mr Morris was appointed as the administrator of Mora UK, a company incorporated in England and Wales in 1997, which carried on business in the UK as a manufacturer of plastic products. It was incorporated under the name Foray 1059 Limited, changing its name to Mora Mouldamatic Limited in December 1997 and to Mora UK Limited in January 2002. It was acquired as a wholly-owned subsidiary of a French company, Mora International SA ("Mora International") in December 1997. On 19 April 2002 a petition for an administration order over Mora UK was presented to the court by Jean Pierre Lacroix ("M Lacroix"), the managing director of both Mora International and Mora UK; an administration order was made on 24 April 2002. Mora UK ceased to trade at the end of June 2002 and was put into winding up by an order of the court on 2 August 2002. Mr Morris became liquidator of Mora UK on 4 September 2002.
- On 7 September 1999, a document entitled "Contract of Mandate" (which I will hereafter refer to as such) was entered into between Mora UK and Mora International. This document is in English – at least, if there is a French original, it has not been put before me. It is common ground that this Contract of Mandate is governed by French law. I will need to look at its terms in some detail later. For present purposes, it can be described as an authority by Mora UK to Mora International to enter into certain factoring arrangements on its behalf.
- The relevant agreement ("the Factoring Agreement") came into existence on 6 October 1999. It is in French and is governed by French law. It contains two parts: first, some general conditions ("Conditions générales du contrat d'affacturage export") and some particular conditions ("Conditions particulières du contrat d'affacturage export"), each of which I will need to look at in some detail in due course.
- Cofacredit contends that Mora International started to factor Mora UK's debts with Cofacredit on 25 November 1999 and that, during the period while the Factoring Agreement was in operation (25 November 1999 to May 2002) a substantial number of Mora UK's trade debts were offered to and purchased by Cofacredit in accordance with the terms of the Factoring Agreement. These debts, according to Cofacredit, included UK domestic debts, that is to say debts owing to Mora UK by trade debtors in the UK whose contractual relations with Mora UK were governed by English law; it may well be that the large majority in number and value of the factored debts are UK domestic debts. Cofacredit contends that it advanced monies against these debts either to Mora International for the benefit of Mora UK or to Mora UK itself. It also contends that under French law (which it says is the applicable law) Cofacredit became the absolute owner of the factored debts.
- The action was commenced in 2003. Particulars of Claim were served in May 2003; the latest version of the claim (the Re-amended Particulars of Claim) which has been served is dated 7 May 2004. Cofacredit, it can be seen, has had a long period in which to formulate its claim. The Re-Amended Particulars of Claim are fairly short so I will explain them paragraph by paragraph:
a. Paragraph 1 explains who the parties are.
b. Paragraph 2 refers to the Contract of Mandate (a copy of which is annexed to the pleading). It sets out a number of its provisions.
c. Paragraph 3 refers to the Factoring Agreement (a copy of which is also annexed to the pleading) and refers to a special sub-account which I will explain later.
d. Paragraph 4 sets out the alleged effect of Clause 6 of the general conditions of the Factoring Agreement (which, again, I will explain later), in essence alleging (a) that the factored debts would be assigned to Cofacredit and (b) debtors of such factored debts would be notified and directed to pay their debts to Cofacredit.
e. Paragraph 5 asserts (without identifying them) that a substantial number of Mora UK's debts were assigned to, and purchased by, Cofacredit following which it was the obligation of debtors to make payment to, and only to, Cofacredit. The value of the assigned debts in respect of which no payment has been made to Cofacredit is said to be some €785,000 odd. Some further information was given, pursuant to a request, in February 2005.
f. Paragraph 6 refers to the administration order of Mora UK and the appointment of Mr Morris as administrator; and refers to the petition and winding-up order.
g. Paragraph 7 reads as follows:
"After his appointment as administrator of Mora UK [Mr Morris] in his capacity as administrator or liquidator of the company started to collect the assigned debts. [Mr Morris] at all material times knew that the assigned debts were due and owing to [Cofacredit]. In the premises, [Mr Morris] had no reasonable grounds for believing that the assigned debts were the property of Mora UK which he was entitled to seize. [Mr Morris] thereby became liable to account to [Cofacredit] for the property so seized and to pay over to [Cofacredit] the monies collected by him in respect of the assigned debts. Between the date of his appointment as administrator and mid-September 2002 the value of the assigned debts collected by [Mr Morris] was stated by him to be approximately £2,560,000."
h. Paragraph 8 recites the refusal of Mr Morris both on his own behalf and on behalf of Mora UK to pay the monies collected by him or to acknowledge that Cofacredit is solely entitled to the assigned debts.
i. Paragraph 9 claims interest.
j. The prayer for relief claims against both Mr Morris and Mora UK
i. An order for payment by Mr Morris and Mora UK to Cofacredit of all sums received by them in respect of the assigned debts.
ii. In the alternative, an account of all sums received by them in respect of the assigned debts;
iii. A declaration that Cofacredit is entitled to receive payment of all the assigned debts
iv. An order for the delivery up of all invoices etc in the possession of Mr Morris and Mora UK required by Cofacredit for the collection of all assigned debts so far paid.
- Various orders were made on directions hearings. These included an order made on 17 December 2003 by District Judge Saffman in the Manchester District Registry providing for each party to have permission to adduce expert evidence on French law on the following issues:
a. The enforceability, meaning and effect of the Contract of Mandate in French law.
b. The enforceability, meaning and effect of the Factoring Agreement in French law.
c. Whether the effect of subrogation in French law under the Factoring Agreement is to transfer ownership of the subrogated debts.
- Following that order, experts' reports were exchanged in March 2003 and the experts met. In April 2003, an experts' joint statement on matters agreed and matters disputed between them was produced. The matter then came before District Judge Rawkins in the Manchester District Registry on 20 May 2004. It was formally recorded that Cofacredit acknowledged that the claim is brought against Mr Morris only in his capacity as administrator and subsequently liquidator of Mora UK and that the Contract of Mandate and the Factoring Agreement fell to be construed under French law as the proper law of the contract. There then followed these directions:
"The following issues shall be tried as a preliminary issue namely:-
Whether [Cofacredit] has the right, pursuant to the pleaded cases, under French law to recover against [Mr Morris – who was at this time the only defendant] and subject to determination thereof,
Whether [Cofacredit] has the right under English Law to recover against [Mr Morris]…."
- The District Judge also ordered the parties to agree "a factual matrix against which determination of the preliminary issue shall be made to be incorporated into an agreed case summary…." At a subsequent hearing on 13 October 2004, District Judge Rawkin made further directions including the joinder of Mora UK. Further expert reports were served in November 2004 and January 2005. He also gave leave to amend the Reply of Cofacredit.
- That amendment was effected on 7 June 2004. The main amendments (a) expressly contend that under French law Cofacredit is entitled to recover from Mr Morris the sums collected by him (b) reflect the amended terms of paragraph 7 of the Re-Amended Particulars of Claim and (c) assert that Mr Morris was not entitled to collect the debts belonging to Mora UK which had vested in Cofacredit. As to (b), it is said that
"The cause of action in respect of which the Claimant sues is for recovery of monies collected by or on behalf of the Defendant in respect of assets, namely the assets of Mora UK, the full ownership of which and title to which had vested in the Claimant prior to the Defendant's appointment as the administrator of Mora UK…"
As to (c), in the light of the notice on each invoice to the effect that the debts had been assigned to Cofacredit, it is denied by Cofacredit that Mr Morris had any reasonable ground for believing that the debts were assets of Mora UK or that he was entitled to collect or retain them.
- Following that hearing, a Re-Amended Defence of Mr Morris and Defence of Mora UK dated 19 November 2004, was produced and served. Cofacredit's claim is denied and it is asserted that, if (contrary to that denial) there is a claim at all, it is only as an unsecured creditor in Mora UK's liquidation, there being no claim against Mr Morris personally. It is pleaded that payment to Mr Morris or to Mora UK is not a discharge of the underlying debt (the debtor having had notice of the assignment) and that therefore Cofacredit's rights against the debtors remain unaffected by any receipt by Mr Morris or Mora UK; and any proprietary right it has in relation to the debts remains intact. A proprietary claim against Mr Morris and Mora UK is denied and, for good measure, it is denied that no recognisable proprietary claim is in any case disclosed by the pleaded case. It is asserted that if, (which is denied) there is any sustainable cause of action it is for a restitutionary remedy (which would be under French law) but that no such claim is advanced or made out in the pleading. The validity and effect of the Contract of Mandate are denied. The "export debts" issue [ie whether the Factoring Agreement relates to domestic debts of Mora UK] is raised and it is denied that any debts that relate to UK debtors can be "export debts…on foreign customers.." as they would need to be to fall within the Factoring Agreement. It is pleaded that the effect of French law is that there is no assignment of debts to Cofacredit under the Factoring Agreement, but only a subrogation which would create a charge over book debts of Mora UK and that that charge is void for want of registration pursuant to section 395 Companies Act 1985. It is asserted that the effect of the Factoring Agreement is to create a revolving credit, the balance on which, far from showing monies owing to Cofacredit, shows a significant sum owing to Mora UK. There is then pleaded a tender of £167,700 odd representing, according to Mr Morris and Mora UK, the net amount that had been received from the debtors whose debts Cofacredit claims to have factored. This was not an admission of liability but simply a way of disposing commercially of a claim which it would cost a huge amount of money to fight. The "David" of Mr Morris and Mora UK have no resources to take on the "Goliath" of Cofacredit.
- Counsel then worked at producing an Agreed Case Summary. This was produced, focusing on the pleaded case and the state of the expert evidence, in March 2005. Although my copy is unsigned, it bears the names of Mr Norris (on behalf of Cofacredit and who appeared for it before me behind Mr McDonnell QC) and Mr Cogley (for Mr Morris and Mora UK and who appeared for them before me). It is dated March 2005.
- I need to go though it at this stage in some detail in order to identify the facts against which I am to decide the preliminary issue, although those facts need to be supplemented by what appears from the documents before me. The Agreed Case Summary is also important in identifying what the parties then thought the issues between them were and which lead to a refinement of the preliminary issue ordered by the District Judge. The salient points are these:
a. In paragraph 3, the first area of difference is identified in this way. Cofacredit contends that under the Factoring Agreement it agreed to purchase the debts transferred to it by Mora International; Mr Morris and Mora UK admit that Mora International entered into the Factoring Agreement and contend that it is governed by French law. Mr Morris and Mora UK require Cofacredit to prove and demonstrate that, according to the proper law applicable to the Factoring Agreement, the same is fully effective and enforceable. The parties agree that the contractual documents are subject to French law
b. Paragraph 4 starts with some contentions on behalf of Cofacredit:
i. Mora International started to factor Mora UK's debts with Cofacredit on 25 November 1999.
ii. During the factoring period (from 25 November 1999 to May 2002) a substantial number of Mora UK's trade debts were offered to and purchased by Cofacredit in accordance with the terms of the Factoring Agreement.
iii. Cofacredit advanced monies on these debts either to Mora International for the benefit of Mora UK or to Mora UK itself.
c. Paragraph 4 goes on to say that Mr Morris and Mora UK contend that there is no available claim for the reasons set out in the reports of Maitre E-J Thomas (their French law expert) and in the experts' joint statement. In particular, there is identified one area of dispute which relates to the UK domestic debts which I have already mentioned. I shall refer to it as the export debts issue. The Factoring Agreement appears to include only export debts. The question is whether it is referring to exports from the UK or exports from France. Mr Morris and Mora UK say that, as a matter of construction (according to French law which both parties accept governs) UK domestic debts fall outside the scope of the Factoring Agreement, whereas Cofacredit says that they do not.
d. Paragraph 4 also records that it is conceded by Mr Morris that between May and June 2002, Mr Morris collected (through a debt collection company, KSI UK plc which he, as office-holder, had instructed) some £560,800 odd from debtors of Mora UK. It is said by Cofacredit that of that amount some £182,900 odd "appears to relate in some way to the Factoring Arrangement"; this is the sum which (after deduction of collection costs) is said to form the subject matter of the Tender referred to in the Re-Amended Defence of Mr Morris and Defence of Mora UK. It is stated that Mr Morris and Mora UK understand Cofacredit's case to be that it "owns" the allegedly factored debts and has a proprietary claim to any monies collected by Mr Morris or Mora UK in ostensible payment of those debts. It also appeared to Mr Morris and Mora UK to be inherent in Cofacredit's position that the debts had not been discharged by payment to Mr Morris. Mr Morris and Mora UK contend that no recognisable proprietary claim is disclosed; and say that any claim which it might have is a restitutionary remedy pursuant to the law of the contract, that is to say French law.
e. Paragraph 5 sets out some agreed facts. With one exception, I have mentioned them all at some stage in what I have already said. The exception appears in paragraph 5(8) to the effect that it is contended by Mr Morris and Mora UK, but denied by Cofacredit, that a full account of monies actually collected has been provided.
f. Paragraph 6 sets out Cofacredit's position in the following way. Between 25 November 1999 and 24 April 2002 Mora UK's debts were transferred by way of subrogation (ie as viewed by French law, as to the effect of which I will come) to Cofacredit. The transfers were evidenced by means of a series of "quittances subrogatives" (which I will refer to simply as "quittances") to which were annexed (i) a list of the invoices to which each quittance referred and (ii) a copy of each invoice. Upon receipt of the quittances, Cofacredit entered the value of the invoices annexed thereto to sub-account no 6002 allocated in Cofacredit's records to Mora UK's debts. Credit entries representing the value of the invoices were made by Cofacredit in sub-account no 6002 to the Compte Courant (CCV) or business account, and at the same time, in consideration of the credit entries, debt entries were made in the Compte Affacturage (CAF) or factoring account. By this process, full title to Mora UK's debts was transferred to Cofacredit which alone had the right to receive the payment of such debts from the customers in question. Cofacredit contends that each invoice allegedly subrogated in this way was (a) issued by Mora UK and (b) endorsed with a notice requiring the customer to pay the invoice to Cofacredit. Copies of some of these quittances and of the CCV statements were sent to the experts when first instructed in January and February 2004. It should be noted that the CCV is not precisely the same as a current account in English banking process. Rather, it exists where two traders or business companies carry on a running account comprising their mutual debts and credits with the ultimate balance being paid only on the closing of the account.
g. Paragraph 7 sets out the position of Mr Morris and Mora UK in the following way. They contend that large sums, in fact over half of the amount allegedly advanced, was advanced to Mora International rather than to Mora UK. In a response to a request for further information, Cofacredit contends that pursuant to the Factoring Agreement, the sum of €6,048,000 odd was advanced by Cofacredit and that of this sum the amount advanced to Mora UK was only €2,593,000 odd.
h. Paragraph 8 identifies the issues on the pleadings as they stood at 11 March 2005 as follows:
i. For Cofacredit: What monies relating to the payment of Mora UK's debts have been collected by Mr Morris and Mora UK (whether by themselves or their agents) since the date when Mora UK went into administration. Mr Morris and Mora UK contend that this information has been provided.
ii. For Mr Morris and Mora UK: Whether Mora UK's debts were ever assigned to Cofacredit either through the Factoring Agreement or at all. Mr Morris and Mora UK contend that Clause 6 of the Factoring Agreement (to which I will come and which, in translation, refers to subrogation rather than assignment) only creates a charge over book debts which requires registration under section 395 Companies Act 1985. Cofacredit contends that the debts were assigned.
iii. Mr Morris and Mora UK contend that if (which is denied) there are any available claims, they are not against the office-holder personally, are only restitutionary (and not proprietary) and "are limited by the balance outstanding between Mora UK and Cofacredit in relation to debts that fall within the Factoring Agreement and in relation to which no payment has been made to Cofacredit". [This is how the matter is recorded in the Agreed Case Summary, although it is not clear, to me at least, precisely what it means.] In relation to any such claims made out, there is no duty to account and Cofacredit is an unsecured creditor in the liquidation of Mora UK.
iv. Whether the debts which are the subject matter of this action fall within the definition of debts in the Factoring Agreement (namely "…export debts on your foreign customers…."), having regard to the fact that the bulk of Mora UK's customers were UK based (this last assertion on behalf of Cofacredit not being a fact agreed in the Agreed Case Summary and Factual Matrix).
v. Whether Cofacredit has any claim (which might give it any sort of priority over other creditors) against Mr Morris and Mora UK or only as a creditor in the liquidation of Mora UK.
vi. Whether sub-account no. 6002 allocated in Cofacredit's records to Mora UK's debts should be treated as part of the factoring current account. If it is to be so treated then the position of the factoring current account as at September 2001 showed, according to Mr Morris, that Cofacredit owed Mora UK £1,585,000 odd, a far greater sum than claimed in this action.
vii. Whether as at May 2002 Cofacredit was indebted to Mora UK in the sum of £2,515,000 odd as seen in Mora UK's cash control book.
i. In addition, Cofacredit is put to proof of each and every assignment in respect of which it claims. Mr Morris says that he was at all times acting in a purely administrative capacity in collecting the assets of Mora UK. He denies that he is under any obligation to account to Cofacredit for any debts paid to him or to his agents by Mora UK's debtors and relies on section 234 Insolvency Act 1986 as absolving him from any personal liability for negligence. As to that, I would have thought that the decision in Welsh Development Agenecy v Export Finance Co Ltd [1992] BCC 270 was conclusive against the availability of that section, but that is not a matter before me. Mr Morris is actively pursuing an investigation into whether "the true nature and effect of the claim herein is to seek to prefer the claimant as a creditor of Mora UK" in accordance with section 239.
j. Paragraphs 10 and 11 deal with the experts' reports. Paragraph 11 is of some importance. The experts agreed (a) that both the Contract of Mandate and the Factoring Agreement were valid, binding and enforceable and (b) that the effect of subrogation in French law was to vest in Cofacredit full ownership of the debts so transferred, whether the debtor was notified of the transfer or not. They disagreed on whether Cofacredit had the right in French law to recover monies paid to Mr Morris in his capacity as the liquidator of Mora UK. Maitre Thomas (for Mr Morris and Mora UK) said that since such monies were paid to Mr Morris as agent for Mora UK, Cofacredit had no right to recover against him. Maitre Bourdeaux (for Cofacredit) disagreed.
k. Paragraph 12 refers to the order that a preliminary issue should be tried. It appears to be agreed that the first issue was designed to deal with the opposing arguments put forward by the experts as to the enforceability of the claim against Mr Morris if the applicable law is French law. And it is stated that Cofacredit wishes to argue that, even if the contractual arrangements between the parties are governed by French law, the right to recover monies paid by debtors to Mr Morris in respect of debts assigned to Cofacredit and held on deposit by him in England is governed by the lex fori that is to say by the law of England and Wales. In other words, the second issue ("whether the claimant has the right under English law to recover against the defendant") is not intended to be as wide as it apparently seems but appears to be intended (at least by Mr Norris and Mr Cogley in March 2005) only to decide whether English law applies without necessarily deciding precisely what the result of English law would be.
l. A subsequent exchange of correspondence and experts evidence resulted in the export debt issue being brought into the case (with appropriate amendments to the pleadings).
m. The following reformulated preliminary issues were then set out:
i. The export debts issue. This is a pure matter of construction. If it goes against Cofacredit, Mr McDonnell will want to seek to raise – he will need permission to amend – an estoppel by convention argument.
ii. Whether Cofacredit is entitled in accordance with French law to recover from Mr Morris and/or Mora UK monies paid to them by Mora UK's debtors in respect of both domestic (ie in this context UK) and foreign debts in respect of pre-24 April 2002 assignments (that date being the date of the administration order in relation to Mora UK). This question is intended to address as much the question whether French law applies as to whether, if it does apply, the monies are recoverable.
iii. If Cofacredit is not entitled under French law to recover monies paid, whether such recovery may be made in accordance with the law of England and Wales. In the light of what I have already said, it seems that this formulation was designed only to ask whether English law applies without asking precisely what the result of English law would be if it did apply. As will be seen, the matter proceeded before me on a rather different basis.
- Skeleton arguments were exchanged sequentially in anticipation of a hearing rather earlier than the one which in fact took place before me. Mr Norris's skeleton (prepared at a time before Mr McDonnell's involvement) is dated 11 July 2005 and that of Mr Cogley is dated 25 July 2005. It is again important to see how the two sides' cases were put in the skeleton to see what it is that the preliminary issues were conceived to cover. Mr Norris explained Cofacredit's claim – that is to say its claim in the action, not simply its claim for the purposes of the preliminary issues – as a restitutionary claim. He stated:
"The claimant seeks the recovery of monies paid to or received by the defendants from debtors of Mora UK whose debts had been transferred to the claimant by way of subrogation prior to the appointment of Mr Morris as the administrator of Mora UK. In English law the claim would be characterised as a claim for monies had and received by the defendant to the claimant's use and benefit. It is submitted that under English law the claim is rightly made against Mr Morris as he is not only the recipient of the monies paid by Mora UK's debtors in respect of debts assigned by them to the claimant, but he also continues to hold the monies so paid."
I would, however, note here that it is not part of the agreed factual matrix that all the monies which collected were still retained, although undoubtedly some are. I do not, in any case, see what the retention of money has to do with a restitutionary claim in contrast with a proprietary claim save that it might make a change of position defence untenable.
- It is perhaps worth a reminder, in the light of the passage just quoted, that the property of a company in winding-up does not vest in the liquidator (unless an order is made under section 145 Insolvency Act 1986). The property remains vested in the company itself. A liquidator will no doubt open one or more liquidation accounts with a bank; but the beneficial ownership of the balances does not lie with the liquidator. This might be of significance: Mr Morris has, in his capacity as liquidator, procured payment from Mora UK's creditors but there is nothing before me to suggest that the money paid has been received by him (whether personally or in his capacity as liquidator) rather than by Mora UK itself.
- There is no hint in Mr Norris' skeleton that Cofacredit might, if English law applies, assert a different sort of claim, for instance a proprietary claim or constructive trust claim, to recover from Mr Morris the money which he retains (or, I suppose which he has parted with knowing of such a claim but that might face considerable hurdles given that such a claim had never been asserted).
- So far as concerns the third preliminary issue identified in the Agreed Case Summary and Factual Matrix (which is the same as the second preliminary issue ordered by the District Judge), paragraph 17 of Mr Norris's skeleton looks at the question whether English law can apply, rather than at what English law is, proceeding on the basis discussed earlier in the skeleton that the claim in restitution under English law is a good one. This appears to reflect the approach behind that preliminary issue.
- Mr Cogley's responsive skeleton then addresses the case as put by Mr Norris. He says that the proper law to be applied is French law and that, when applied to the dispute, there is no claim available against Mr Morris and similarly in relation to Mora UK. Even if, as a matter of French law, there could be claims against Mr Morris, they are not made out: the export debts issue results in the UK domestic debts being outside the scope of the Factoring Agreement. If, as a matter of French law, the UK domestic debts are within the scope of the Factoring Agreement, the question whether any claim can be brought against Mora UK is governed by English law. The only claim is to prove in the liquidation of Mora UK. If the proper law of the dispute is English law, there is no claim disclosed against Mr Morris and no form of amendment should be permitted bearing in mind the history of the claim.
- He points out, and I am certainly inclined to agree with this so far as concerns English law, that Cofacredit's pleadings, even if one reads the Re-Amended Particulars of Claim and the Amended Reply together, make it virtually impossible to discern what cause of action is disclosed. However, the Amended Reply does make clear, I think, the contention that, according to French law, Cofacredit would have a right recover the monies collected by Mr Morris, an issue which is subject to expert evidence. What are not pleaded so far as English law is concerned are (a) any claim for conversion/unlawful interference with goods (b) any claim of breach of fiduciary duty in carrying out the office of administrator or liquidator or otherwise and (c) any claim based on breach of trust and there is no suggestion that a remedial constructive trust should be imposed (d) any claim of breach of contract (there is, in any case, no contract between Cofacredit and Mr Morris) and (e) any proprietary claim (save insofar as such a claim is restitutionary) and (f) any claim for procuring a breach of contract or unlawful interference with contractual relationships.
- Accordingly, Mr Cogley approaches the matter, quite understandably, on the basis that the only claim in English law is a restitutionary claim and that it is only that claim which needs to be addressed in considering the conflict of law rules which must be applied in determining whether the dispute, or some particular part of it, is governed by French law or English law.
- I have gone into the history of the proceedings at some length because it is important to know precisely what is being alleged in order to deal with the preliminary issues. Mr McDonnell has effectively invited me to determine not only the three issues identified in the Agreed Case Summary and Factual Matrix, approaching the third question in the way in which I have indicated, but to go further and to decide whether or not Cofacredit's restitutionary claim under English law, if English law applies, is a good one. If he loses on that, he would then want to consider other ways of putting the claim (for instance a proprietary claim or a claim based on some sort of constructive trust); and he would also want to run his case based on conventional estoppel if I reach a conclusion against him on the export debts issue (ie if I conclude that UK domestic debts do not fall within the scope of the Factoring Agreement and that they were not effectively factored under French law outside that Agreement). It will, of course, be a matter for another day whether Mr McDonnell should be allowed to raise those issues, assuming at this stage that he needs to.
- It is, however, to my mind most unsatisfactory that the possibility of these alternative lines of argument were not addressed and formulated on behalf of Cofacredit before the preliminary issues were formulated. The export debts issue, as a question of construction of the Factoring Agreement has not, in the event, caused a problem: although it was identified only after the order of the District Judge for the trial of the preliminary issues identified in his order, the parties were able to formulate a new first issue to deal with it. However, it was not until the second report of Maitre Bourdeaux of 25 January 2005 that the possibility that the relevant debts were validly factored outside the Factoring Agreement was raised and it has, even today, not formed part of any formal amendment to any pleading (although it is dealt with in the draft Re-Amended Reply which I have seen and which forms the subject matter of an application to amend which Mr McDonnell did not move; and it is this draft which also contains the intended pleading in relation to estoppel). Further, Cofacredit now says, as I have already noted, that it may seek to rely on English law claims in addition to the restitutionary claims which are already pleaded, including the estoppel by convention argument and/or proprietary claims. Had those additional claims been identified before the District Judge had made the order which he did, he might have made a rather different order. At least by the time the matter came before me, it would have been possible for the second of the District Judge's questions to have been formulated so as to ask whether, assuming that Cofacredit did not succeed as a matter of French law, it would be open to Cofacredit to raise, as a matter of application of conflicts rules, not only its restitutionary claim but also any alternative claim. The answer might be different in relation to different heads of claim. As it is, I can deal with that third preliminary question only in the context of a restitutionary claim; and I doubt that, coming to the matter afresh, it would have been appropriate to raise a preliminary issue based on such a narrow question. I make these points to record my own concern about the way that Cofacredit has brought these preliminary issues to court, only indicating different possible claims at a late stage. It is not to be assumed that an amendment will be allowed (by me or any other judge) if amendment is necessary and it is sought to make it.
- That, however, is not an end of the problems surrounding the formulation of the preliminary issues. As I have said, one of the preliminary issues is now formulated as the question whether, if recovery cannot be made under French law, it can be made under English law. As I understand it, that question (to the same effect, in substance, as the second issue ordered by the District Judge) was originally meant to deal with the question whether a claim could, as a matter of conflict of laws rules, be made under English law notwithstanding that French law, if it applied, provided no remedy, and in particular whether the lex fori governs the position in relation to bank balances now representing the sums collected by Mr Morris or Mora UK. That question, I note, was being asked in the context of the relevant English law claim being restitutionary. Before me, however, there has been considerable argument about whether, in fact, such a restitutionary claim would be available assuming that English law does apply, an aspect I shall come to later in the judgment.
- With that rather lengthy introduction, I turn to the provisions of the Contract of Mandate and the Factoring Agreement.
The Contract of Mandate
- The Contract of Mandate is dated 7 September 1999; it is made between Mora UK (then Mora Mouldamatic) and Mora International, the former being stated (correctly) to be a 100% subsidiary of the latter.
- It provides (according to the English version) that
a. Mora UK "gives a mandate to [Mora International] to ensure on its behalf, the follow-up of the customers orders, deliveries, invoicing follow-up letters and relationships with COFACE". Coface is a state-owned insurance company in France as an umbrella for other concerns, including Cofacredit as a subsidiary.
b. Mora International "undertakes to deal with these operations which will be made in the frame of a factoring contract signed with [Cofacredit]".
c. Mora UK "confirms that it was made acquainted with the terms of the factoring contract and that a copy of the general and specific conditions of this contract was transmitted to it". There can be little doubt that the factoring contract referred to in this and the preceding provision is the Factoring Agreement (signed later, on 6 October)
d. Mora UK "gives a mandate to [Mora International] to substitute COFACREDIT in all the rights it owes towards its buyers in accordance with general and specific conditions of this contract". The "contract" is a reference to is the Factoring Agreement and "it" and "its" are references to Mora UK. Further, the reference to "the rights it owes towards its buyers" is clearly meant to be to the obligations owed by Mora UK's customers to Mora UK ie principally, if not exclusively, the right to receive payment.
e. Mora UK was "kept informed that a specific current sub-account was opened. Funds will be directly paid by COFACREDIT to [Mora International]".
The Factoring Agreement
- This document is in French. I shall, however, refer mainly to the English translation, referring only to the most important parts of the French text. It is, as I have already noted, divided into General Terms and Conditions and Particular Conditions (or special conditions as they are referred to in the Contract of Mandate). Each of them is dated 6 October 1999.
- The General Terms and Conditions seem to comprise a printed form in which have been added some details. They are headed with the name "Factoric Export" followed by "Département de Cofacredit" and then with "Conditions générales du contrat d'affacturage export no" with the number 004353 added. These general terms and conditions are "concluded with Mora International" (whose name and certain of its details have been inserted on the printed form). I mention some of those general conditions (and then some of the particular conditions) before attempting to explain how the Factoring Agreement was intended to operate:
a. Article 1: This is headed "Object of the contract – Exclusivity" and provides:
"We shall pay you your export debts [vos créances nées d'exportations] on your foreign customers [sur vos clients étrangers], hereinafter referred to as your "Purchasers", thus taking on the risk of their insolvency within the limit of our prior approvals. We shall take responsibility for collecting your invoices. You undertake to entrust us with the factoring of all your debts on the said Purchasers and to give us exclusive rights in these transactions. It is specified that this contract does not cover exchange risks."
b. Article 2: The General Conditions envisage that insurance will be effected with Coface designed, as I understand it, to insure against default by the debtor. It is headed "COFACE policy, area or application – exclusion" and then provides
"Before any transaction, you will give us:
a copy of the policy which you have taken out with Coface together with its endorsement and appendices
………………
You guarantee to us that the debts, the ownership of which you transfer to us, are of a commercial nature and correspond, on delivery of subrogated discharges [la remise des quittances subrogatives], either to firm sales which have already been delivered or services carried out."
c. Article 3: It is headed "Generating event of the cover/prior approvals" and provides:
"The generating event of the cover provided by this contract shall be that providing entitlement to Coface's cover within the framework of your policy [ie a link is established between the Coface insurance policy and the debts to be factored so that such debts must be covered by the policy]
You shall ask us for prior approval in respect of each of your Purchasers. This prior approval shall be of a global nature, as it will be given purchaser by purchaser, and "revolving" nature insofar as any payment received from Purchaser shall be set against the approved portion of the outstanding debt, as a priority, thereby entailing cover for any debts exceeding the amount of the approved outstanding debt at that time.
When you subrogate us to your rights in respect of a Purchaser, you shall, within the limit of our prior approval, enjoy full cover against the risk of non-payment as a result of the insolvency of your Purchasers, to the exclusion of any other reasons. The validity of our approvals is subject to your declaration of all outstanding debts and late payments in respect of debts arising prior to the contract.
Furthermore, you shall not receive the benefit of our cover in respect of any invoicing to a Purchaser who has suspended payments, is in receivership or being wound up by Court order where you were aware of this situation before delivery of the subrogated discharge….."
d. Article 4: This is headed "Absence of approval or exceeding the limits of the approval" and provides:
"If we agree to pay you against subrogation of the debts of a given Purchaser, in respect of amounts not approved or exceeding our prior approval, you shall automatically be joint and several guarantor of that Purchaser in respect of all our debts on him, but only up to the amount in excess of our prior approval or the portion covered by Coface if that is greater. These amounts must be reimbursed to us by you on the due date at the latest or on the debtor's default if this occurs before the due date……."
e. Article 6: This is headed "Transfer of your debts" and provides:
"In return for our payment you concomitantly and expressly subrogate us to all the rights, actions, liens, mortgages, pledges or sureties that you may have on your Purchasers in accordance with the provisions of Article 1250 para.1 of the Civil Code."
f. Article 7: This is headed "Notice to Purchasers" and provides:
"You will notify your purchasers of the existence of our factoring contract in a letter the draft of which will be submitted to us before being sent out.
You undertake to mention our subrogation and where payment has to be made in the body of all invoices, the ownership of which you transfer to us."
g. Article 8: This is headed "Current account agreement" and provides:
"The sums we pay you under this contract and those you owe us shall be put into a current account such that our reciprocal, related and indivisible debts shall be converted into credit and debit instruments and, by express agreement, shall be offset against each other.
This current account shall not have any overdraft facility: if it were to show a debit balance in exceptional circumstances that balance would be immediately repayable.
Your current account shall be credited with the amount of the invoices, the ownership of which is transferred to us, as well as any sums which you may receive in settlement of invoices not taken over that we shall then be deemed to have collected as agent. It shall be debited with your drawings of all sums you may owe us, our remuneration and any present or future taxes as well as the monies used to set up the guarantee fund." [The guarantee fund is dealt with in Clause 9, but I do not think I need to say anything about it.]
h. Article 11: This is headed "Recovery" and provides, among other things, as follows:
"We shall take all reasonable steps in respect of your Purchasers for the collection of the debts transferred to us by subrogation.
………
If payments corresponding to invoices, the ownership of which you have transferred to us, are improperly made to you [la propriété sont indûment effectués - possibly "incorrectly" or "inappropriately" would be a better translation than "improperly"], you shall then be deemed to have received them on our behalf as agent and you undertake to remit the means of payment you have received to us immediately……."
i. Article 15: This is headed "Remuneration of Cofacredit" and provides among other matters:
"Any drawings you may make on the available funds on your current account in advance of the average due date of your Purchasers' payments shall result in Cofacredit charging a special financing commission …………"
j. The General Terms and Conditions are executed by Mora International, described as the Exporter (L'Exportateur) and Cofacredit.
- The Particular Conditions, like the General Conditions, are headed with the name "Factoric Export" followed by "Département de Cofacredit" and then "Conditions particulière du contrat d'affacturage export no 004353". These particular conditions also are "concluded with Mora International". It provides in its recitals that Mora UK
"Has authorised [Mora International] to sign and manage a factoring contract on their behalf within the framework of Group financing about which it acknowledges having been made perfectly aware. [The relevant Group financing arrangements were made in October 1999. I will need to return to the relevant agreement in due course.]
The inception of the contract is subject to delivery to Cofacredit of a copy of the contract of mandate duly signed….and a copy of the financing agreement.
1. In application of the provisions of this contract and the above mentioned contract of mandate, Article 8 of the General Terms and Conditions is amended and supplemented by the following provisions:
A sub-account No 6002 is set up for the above mentioned company [ie Mora UK] in order to isolate and record the transactions relating to the mandate given.
This sub-account shall form an indivisible whole with account No 4353 of [Moral International] [ie the account referred to in the General Terms and Conditions].
It is the general balance of this single account, after offsetting debits and credits, which shall be taken into consideration at any given time and in particular when our operations shall come to an end."
- The following substantive provisions are of relevance:
a. Article 1 headed "Exclusion" and listing one country, Algeria.
b. Article 6 headed "Factoring commission" which is set at 1% of invoice value (although Article 8 provides for a minimum annual commission of FRF 140,000).
c. Article 12 is headed "Financing". It provides:
"Only debts satisfying the provisions of this contract and the conditions laid down by your credit insurance policy and likely to be the subject of an indemnity if unpaid, may be eligible for our financing. Invoices raised on customers deemed to be in default in the eyes of your credit insurance policy shall be excluded from financing.
Notwithstanding any provisions of the Particular Conditions, you may only apply for early payment of the invoices relating to the purchasers located in the countries appearing on the attached list….."
There is, unhelpfully, in fact no list attached.
d. Article 13 is headed "Financial Ceiling". It provides:
"Notwithstanding Article 1 of the General Terms and Conditions of the factoring contract, we agree to finance your debts within a limit of FrF 1,500,000 per purchase without however exceeding 30% of the overall outstanding debts and without the outstanding debts financed per purchaser exceeding the value of the approval given."
e. Article 15 is headed "Guarantor Promise". It contains a guarantee by Mora International of Mora UK's compliance with "the obligations entered into vis-à-vis Cofacredit within the framework of this contract".
f. Article 16 is headed "Other Undertakings of Mora International". In the text of the Clause it refers to Mora International as "You".
g. The Particular Conditions, like the General Terms and Conditions, are executed by Mora International, described again as the Exporter (L'Exportateur) and Cofacredit.
- The Financial Management Agreement (a French document governed by French law) was made in October 1999 between Mora International of the one part and a number of group companies, including Mora UK, of the other part. Each of the companies was represented by M Lacroix. It was recited that each company was willing to place any surplus cash flow at the disposal of the other companies, that each company had agreed to authorise Mora International to organise cash-flow in their names and for their account and that Mora International had developed a system for centralising cash-flow. Accordingly, Mora International was appointed to manage the cash flow surpluses and deficits acting as agent for the companies participating in the arrangements.
- In giving effect to the factoring arrangements, Cofacredit operated two accounts, a factoring account (compte affacturage) and a current account (compte courant). Upon factoring a debt owing to Mora UK, the amount of the debt (payable at some time the future) is shown as a debit item in the factoring account. When debts are paid, the amount of the payment is shown as a credit in the same account. At the same time, an amount equal to the face value of the debt is shown as a credit item on the current account and advances to Mora UK (or in some cases to Mora International), fees and expenses are shown as debit items. The current account is a running account showing credits and debits in relation to all the factored debts. It should be noted that each transaction is assigned a reference number so that the reference number appears against the initial debit item in the factoring account and against each receipt from a debtor of a factored debt. Similarly, the same reference number is shown against the corresponding credit in the current account.
- I have been taken to a small number of typical quittances. Although the proportions of quittance which relate to UK domestic debts and other debts is not known, it is sufficient for present purposes to note that it is common ground that there were debts of each type which were subject to a quittance. Each quittance identifies a debt, or series of debts, owing by a particular debtor of Mora UK specifying the total amount subject to the quittance. It contains a number of provisions designed to comply with the Civil Code relating to the subrogation of debts and which I will need to consider in due course. The quittance contains a box headed "Mode de paiement". One example contains in the box "100% virement Mora Mouldamatic Royal Bank of Scotland": it is not the case that 100% of the amount which was dealt with by the quittance was immediately sent to the named bank account, although, as I have said, it is the case that 100% is shown as a credit entry in the current account. Another quittance shows in the box "100% virement BPDA". Mr Morris says that he has been unable to identify this account as a Mora UK account.
- There is one further factual aspect I should mention. Mr Morris wrote to some, at least, of Mora UK's creditors in May 2002. Its material parts read:
"[relating to pre-administration invoices]…please ensure that any payments to be made are paid to Mora UK Limited in Administration and not to Cofa Credit as previously instructed.
As Administrator, I undertake to keep any such monies in a separate account for the time being until the position with Cofa is clarified and will forward these monies to Cofa in due course if it transpires that Cofa are due them.
Any invoices from 24 April 2002 onwards should already clearly state that payment should be made to the Administrators."
The "export debts" issue
- One of the issues I am asked to decide is whether the UK domestic debts fall, as a matter of construction, within the Factoring Agreement. Whether or not they do, Cofacredit and Mora International have purported to factor, by way of various quittances, some UK domestic debts. If they do not fall within the Factoring Agreement, a further question arises whether they have, nonetheless, been validly factored. It is submitted on behalf of Mr Morris that they have not been so factored.
- In answering the first of those questions, it is necessary to consider the approach of French law to matters of construction.
French law – interpretation of contracts
- As in English law, the exercise of interpretation has as its objective the ascertainment of the common intention of the parties. The French judge's approach, according to Maitre Bourdeaux, is not to stick to the letter of the contract but to search for the manifestations of the parties' intentions. He states that
"about this point, the specialists of comparative law classically oppose the French legal system and the English Law….., even if this opposition is probably an excessive one".
Given the modern approach of the English courts to construction, there is even more reason for thinking that this contrast may be exaggerated. There is, however, an express provision of the Civil Code, Article 1156 of which provide that
"One must in agreements seek what the common intention of the contracting parties was, rather than pay attention to the literal meaning of the terms".
And in Article 1162 is reflected our contra preferentem rule. In his supplemental report, Maitre Bourdeaux says this in relation to Article 1156:
"This article is considered the cornerstone of the French system of subjective interpretation…..In French law, in case of discordance between the intention expressed in writing and the true intention of the parties, the judge must consider the second one. Furthermore, this search for the common intention of the parties is made 'in concreto' and not 'in abstracto'. So the interpreter must search for the intention of the parties themselves and not the intention of reasonable persons in similar context".
Maitre Thomas agrees with the first and last sentences of that quote; and agrees with the second sentence to some extent. Maitre Bourdeaux says that it is permissible, in carrying out this exercise of interpretation, to take evidence of what the parties intended: since no evidence of the intention of the parties has been placed before me, I do not need to say anything about that proposition. In any event, I did not understand either expert to say that a judge could construe an agreement in a way which the language does not, even stretching it to its limit, admit.
- Maitre Bourdeaux states that the parties' subsequent conduct is "also useful, in French law, to interpret the contract". He cites A. Benabent among others. This conduct can be taken into account even in relation to the interpretation of written contracts – "the parties' conduct is the most reliable reflection of their intention, especially in the way the contract is executed, analysed as the living interpretation of the contract".
- Maitre Thomas says that, if the meaning is clear and precise, you do not, under the pretext of interpretation, look for ambiguities in order to reach a conclusion which goes against the clear meaning. In relation to subsequent conduct, he says, similarly, that if the wording is clear and precise, you cannot look at subsequent conduct to interpret the contract. That approach is not unlike our approach to statutory construction: if the meaning is clear, you cannot look at statutory antecedents, but in the case of genuine ambiguity you can do so. But there has to be a genuine ambiguity: you cannot look at the statutory antecedents in order to create the ambiguity.
- I do not think that there is much, if anything between the experts on the correct approach to be applied. I conclude that if the meaning of the words is clear and precise, that meaning will be adopted and it is not correct to look for the meaning elsewhere, for instance by reference to subsequent conduct. In contrast, if there is a real ambiguity, then subsequent conduct can be looked at to ascertain the parties' intentions and thus to interpret the contract.
- In the light of the approach of French law to construction, I turn now to the "export debts" issue.
The "export debts" issue
- Although the true meaning of the Factoring Contract is a matter for me, albeit applying, with the assistance of expert evidence, the correct approach to interpretation as a matter of French law, both experts have expressed views which I do not think I should simply, in this judgment, ignore.
- Maitre Thomas expresses the view that the Factoring Agreement does not include domestic debts of Mora UK but only its export debts ie a debt in relation to an export by Mora UK from the UK. The general framework of the contract (ie according to him the General Conditions) relate to "export debts" of "foreign customers" which, transposed by the Particular Conditions so as to apply to Mora UK, identifies "export debts" with the purchase price of exports from the UK not from France and "foreign customers" with non-UK customers.
- Maitre Bourdeaux reaches the opposite conclusion and expresses the opinion that the Factoring Contract "concerns not only export debts but also domestic debts, even if the literal meaning of the General Conditions of the Factoring Contract could have been clearer as to what debts precisely could be subrogated to Cofacredit".
- A number of detailed points are made by the parties in relation to the provisions of the General and Particular Conditions. I hope that, in expressing my conclusions, I pick up all of those points.
- One question which has been raised is whether the Particular Conditions, in referring to "this contract" (eg in Article 1 (first paragraph) and Article 12) is referring to the Particular Conditions alone or to the General Conditions and Particular Conditions together. A related question is whether the Particular Conditions, in referring to "you" or "your", is referring to Mora International or to Mora UK. The answers to those questions are, it is suggested, relevant to resolving the meaning of "export debts on your foreign customers" as applied to factoring of Mora UK's debts.
- Two things are clear:
a. First, that read in isolation, the General Conditions appear to relate only to Mora International and have nothing to do with Mora UK. Accordingly, "export debts on your foreign customers" could apply only to Mora International's non-French customers.
b. Secondly, the effect of the Particular Conditions read with the General Conditions is that some, at least, of Mora UK's debts, call them the Factored Debts, are made subject to the factoring arrangements.
- What is in dispute is precisely how the General Conditions and Particular Conditions are to be read together so as to identify the Factored Debts. It would not, I think, be right simply to ignore the phrase "export debts on your foreign customers" by saying that it can only be given a sensible meaning in the context of Mora International's creditors and customers and therefore that all of Mora UK's debts, whether foreign or domestic, fall within the Factoring Agreement; the concept encapsulated in the phrase has to be given some meaning.
- There are, it seems to me, really only two choices:
a. First, the focus is on Mora UK and the fact that it is a UK company: in relation to a UK company "export" and "foreign" refer to non-domestic customers. Accordingly, Mora UK's domestic debts and customers are not within the contemplation of the Factoring Agreement.
b. Secondly, the focus is on Mora International (or perhaps on it, together with Mora UK as a subsidiary) and the fact that it is a French company and on the fact that the Factoring Agreement is a French document governed by French law. On that approach, "your export debts" (vos creances nees d'exportation) does not mean export, in the sense of goods manufactured in one country being sent to another country, at all but means debts arising outside France and "foreign" means non-French. Accordingly, Mora UK's domestic debts would be within the contemplation of the Factoring Agreement.
- This issue might have been easily resolved by reference to the List referred to in Article 12 of the Special Conditions. If the UK (or France) had appeared on the List, it would have been clear that debtors in the UK (or in France) would have been within the contemplation of the Factoring Agreement and that "export debts on your foreign purchasers" would have taken its meaning from that clearly displayed intention, although I am bound to say that if the UK had appeared on the List, it would be necessary to reject the description in the General Conditions of the relevant debt as an export debt. Unfortunately, there is no List, at least none is attached to the copy of the Factoring Agreement in evidence.
- There might also have been assistance in resolution of the issue if it were possible to detect a clear policy in the reason for the factoring being restricted to "export debts" in the first place. Counsel have speculated why this might be so; but I cannot determine this point of construction on the basis of such speculation.
- Assistance could be found in Article 2 of the General Conditions which refers to the policy taken out with Coface. As can be seen from Article 3 ("The generating event of the cover provided by this contract shall be that providing entitlement to Coface's cover within the framework of your policy"), there is intended to be a match between Cofacredit's factoring obligations and the insurance provided by the policy.
- I was shown a copy of the Particular Conditions (but not the General Conditions) of a policy dated 16 August 1999 between Coface and Mora International as the assured. The policy was made by the Assured (Mora International) for the account of Mora UK (referred to as "le beneficiaire"). It applies to transactions effected by Mora UK. Both Articles 5 and 6 relate to countries in relation to which the policy applies. Those countries include major trading nations in Europe, North America and the Far East (together with Australia and New Zealand). The UK is included but not France. If this is the policy referred to in the General Conditions, then the inclusion of the UK but the exclusion of France, lends some support to the argument that "exports" relate to sales outside France and include sales within the UK. However, it is not clear that this is the policy referred to; and it may be dangerous in any event to draw any conclusions without seeing the General Conditions and particularly dangerous for me to do so in the absence of an English translation. I propose to ignore it.
- The General Conditions and the Particular Conditions must be read together; and they must be read together with the Contract of Mandate and in the context of the group financing arrangements both of which are referred to in the Particular Conditions. It would not be right, I consider, to construe the General Conditions and then to construe the Particular Conditions in a way which is constrained by the construction already arrived at of the General Conditions. In this context, I note that there is, in any case, no evidence that there has, in fact, been any factoring of debts owed to Mora International by reference to a contract which incorporates these particular General Conditions signed by Mora International; indeed, if there has been any such factoring, one might expect to see also some other Particular Conditions relating expressly to Mora International (just as the actual Particular Conditions relate to Mora UK).
- As I see it, the General Conditions read with the Particular Conditions, create a contract which relates to the factoring of certain debts owing to Mora UK; it is a contract which is made by Mora International pursuant to the Contract of Mandate and is clearly intended to govern the factoring arrangement between Cofacredit and Mora UK. The substance of the arrangements is to be found, I consider, in the Particular Conditions, with the General Conditions providing the framework within which those Particular Conditions operate; the General Conditions must be made to operate in the context of the specific provisions found in the Particular Conditions and directed at the special position of Mora UK.
- The Particular Conditions use, in a number of places, the words (in English translation) "you" or "your". In some places that is clearly a reference to Mora International for itself: for instance, Article 16 contains an undertaking by "you" and a reference to "your subsidiary" (the subsidiary clearly being Mora UK) so that "you" is clearly Mora International. In other places, "you" or "your" is being used to identify matters relating to Mora UK: for instance (i) Article 12 is obviously dealing with a credit insurance policy relating to Mora UK debts and with early payment of debts owing to Mora UK and (ii) Article 13 is referring to Cofacredit's agreement to finance Mora UK's debts. But since Mora International is the signatory to the Particular Conditions (as well as to the General Conditions) it may not be that "you" and "your" are direct references to Moral UK but rather they are references to Mora International acting under the Contract of Mandate for Mora UK. It makes no difference to the effect of the relevant Articles.
- The critical question is how the General Conditions fall to be interpreted in the context of a contract relating to Mora UK which is governed by the General Conditions and the Particular Conditions read together. Just as the "you" and "your" in the Particular Conditions are, in certain Articles, to be read as relating to the position of Mora UK (I deliberately refrain from saying that they are references to Mora UK in the light of the approach I have explained above), so too some, at least, of the provisions of the General Conditions must be read as relating to the position of Mora UK when those General Conditions are applied to the factoring arrangements concerning Mora UK's debts. In particular, in Article 1 of the General Conditions the reference to "your export debts" is clearly, in the context of the contract as a whole insofar as it relates to Mora UK, referring to debts owing to Mora UK so that "your" is to be taken as a reference either to Mora UK or to Mora International in its capacity under the Contract of Mandate acting for Mora UK. And just as "your export debts" are debts owing to Mora UK, so "your foreign customers" are Mora UK's customers.
- In my judgment, this analysis takes one further; it leads to the inevitable conclusion that what is an export debt and who is a foreign customer are to be ascertained by reference to Mora UK, not by reference to Mora International. Accordingly, Mora UK's domestic debts are not, as a matter of the language of the General and Particular Conditions, within the scope of the factoring arrangements. It might be possible to interpret this French contract as describing a UK domestic debt of Mora UK as a debt owing by a foreign (ie non-French) customer. But it is not possible to see how the transaction giving rise to that debt can be described as an export debt since nothing is exported at all, whether from the UK or from France.
- It is, nonetheless, said on behalf of Cofacredit that at best, from the point of view of Mr Morris and Mora UK, the meaning of the Factoring Agreement is not clear and precise and that, accordingly, the subsequent conduct of the parties is to be taken into account. It is then said that the parties have in fact proceeded on the basis that Mora UK's domestic debts are within the Factoring Agreement.
- As to that, it is accepted by Mr Morris and Mora UK that some domestic debts have purportedly been factored; but it is not accepted that a majority of Mora UK's domestic debts were factored or that a majority of all the debts actually factored were UK domestic debts.
- However, subsequent conduct can be looked at, as I have said, only if the meaning of the words is not clear and precise. It is not permissible to look at subsequent conduct and to say that, because the parties have operated their contract in a way which is inconsistent with the clear and precise wording, the contract means something different from that which the clear and precise wording provides. In my judgment, the wording of the Factoring Agreement is clear and precise. Although the drafting of the General Conditions is imperfect in the sense that it does not expressly contemplate or deal with the meaning of "export debts on your foreign customers" where Particular Conditions introduce a foreign subsidiary of Mora International, it admits, for the reasons I have given, only one meaning. It may be that the parties wanted to factor some, at least, of Mora UK's domestic debts; and they may have thought that the Factoring Agreement covered the position. But that does not mean that the Factoring Agreement, on its true construction, covered the position.
- Compare the position in English law. Suppose that a factoring agreement governed by English law had been entered into by Mora UK and a UK factor. Suppose that, as a matter of construction, it clearly covered only export debts and not domestic debts. Suppose then that the parties proceed to factor some domestic debts either by agreeing orally to treat the factoring agreement as extending to domestic debts or mistakenly thinking that it already did so. Now, it may well be that, as a matter of English law, the factoring will be perfectly effective; that might be, for instance, on the basis of a collateral contract or on the basis of a conventional estoppel. But in neither case would the construction of the factoring agreement itself be affected.
- In the present case, I am, at the moment simply addressing a point of construction. It does not follow, in French law any more than in English law, that the purported factoring of Mora UK's domestic debts is invalid simply because the Factoring Agreement does not, as a matter of interpretation, cover them. As it happens, I have received further expert evidence on the effect of the purported factoring if, as I have held, the Factoring Agreement does not cover Mora UK's domestic debts, evidence which I will deal with in due course.
French law relating to factoring
- As I understand the position, certain non-UK debts owing to Mora UK were factored pursuant to the Factoring Agreement, debts which on any view are "export debts on your foreign purchasers". Accordingly, it is necessary to address the effect of such factoring. Also, in the light of my decision in relation to Mora UK's domestic debts, it is necessary to establish the effect of any purported factoring of those debts. And in each case, it needs to be established what claims, if any, Cofacredit might have against Mr Morris or Mora UK in respect of monies collected from relevant debtors in apparent payment of such debts.
- Because of the difficulty of complying with the formalities relating to assignments, it has proved commercially inexpedient to undertake a factoring business in France utilising the legal mechanism of assignment of debts as would be done in England. Instead, provisions of the French Civil Code relating to subrogation are used to produce the same result as assignment in England, that is to say the transfer of entitlement to the debt to the factor. Both experts are of the opinion that a debt which has been properly factored in accordance with the Factoring Agreement becomes the property of Cofacredit and that it is Cofacredit which has the right to sue the debtor on the debt. As Maitre Thomas puts it, the subrogation transfers the rights in and the full ownership of the subrogated debt. To all intents and purposes, Cofacredit's rights in relation to a debt which is effectively factored are indistinguishable from a debt which, in English law, has been effectively assigned and notice of the assignment given to the debtor.
- According to Article 1250 of the Civil Code, subrogation is conventional where a creditor receiving his payment from a third person subrogates him to his rights, actions, prior charges, or mortgages against the debts: that subrogation must be express and made at the same time as the payment. Maitre Thomas explains that as giving rise to three conditions which need to be fulfilled for there to be a valid subrogation:
a. Acceptance of the creditor: the creditor must agree to the subrogation.
b. Express statement by the creditor: subrogation must be express, and cannot be tacit or implicit.
c. Concomitance with the payment by the subrogated creditor: subrogation must take place at the same time as the payment is made by the subrogated creditor (here Cofacredit).
- Maitre Bourdeaux puts it slightly differently, examining what different authors say, some of whom identify the conditions thus (and this is the formulation he prefers):
a. Subrogation shall be made expressly.
b. It must be the consequence of a payment.
c. It must be made by the creditor at the same time as he makes his payment.
- Other authors put the conditions slightly differently but they do not really diverge and nor do the experts really diverge. One can say, I conclude, that:
a. The subrogation must be the result of a payment.
b. This payment must be made by a third party (such as Cofacredit in the present case),
c. The subrogation must be made at the same time as the payment.
d. The subrogation must be accepted by the creditor (Mora UK in the present case).
e. The subrogation must be express.
- Part of the process of an effective factoring of a debt which falls within the Factoring Agreement is the completion of the accounting entries in Mora International's accounts (including Mora UK's sub-account) with Cofacredit. When payment is made under the Factoring Agreement, those accounting entries are made. These entries are, it is common ground, adequate to represent payment for the purposes of these conditions. Accordingly, the Factoring Agreement together with the execution of the procedures contemplated by it, are effective to ensure compliance with the requirement of the Civil Code and to bring about an effective subrogation of the debts subject to it. Conditions a. and b. are clearly fulfilled (given that the accounting entries amount to payment). Condition c. is fulfilled as a result of the signing of the quittance singed by Mora International enumerating the relevant debts. Conditions d. and e. are fulfilled for debts which fall within the Factoring Agreement.
- An issue then arises whether the quittances taken by themselves give rise to an effective factoring. This is not an issue which is currently on the pleadings; there is before me a draft Re-Amended-Reply which does so but Mr McDonnell has not asked for permission to effect this re-amendment. To put it shortly, it is denied that Cofacredit is precluded from factoring debts which were not included within the Factoring Agreement so that, if on its true construction, UK domestic debts were not covered, nonetheless such debts could be, and were, factored. It is then said, in reliance on the expert report of Maitre Bourdeaux, that the actual factoring arrangements in relation to UK domestic debts were effective to transfer ownership to Cofacredit even if they did not fall within the Factoring Agreement. That, it seems to me does raise a new case which ought to be pleaded by further re-amendment to the Re-Amended Particulars of Claim. At present the positive pleaded case only claims in respect of factored debts which do fall within the Factoring Agreement.
- The experts, unfortunately, disagree on whether a debt which falls outside the Factoring Agreement (eg according to my holding, a UK domestic debt owing to Mora UK) but which has purportedly been factored according to the same procedure as applies to a debt which does fall within that agreement, has been validly factored or not. Maitre Bourdeaux says that the debt has been effectively factored. Maitre Thomas says it has not.
- Maitre Thomas' reasoning is to this effect: Mora UK has accepted, according to the Contract of Mandate, "to substitute Cofacredit in all the rights it owes towards its buyers in accordance with general and specific conditions of this contract". The reference to "this contract" is a reference to "a factoring contract signed with the company Cofacredit". The Contract of Mandate shows that the terms of the factoring contract and a copy of the general and specific conditions had been transmitted to Mora UK. There can be no doubt that this contract is what became the Factoring Contract and that the Contract of Mandate only covers the debts which become subject to the Factoring Agreement. Accordingly, according to Maitre Thomas, conditions d. and e. above have not been fulfilled. The consequence, he says, is that although Cofacredit has a claim against Mora UK as such (I assume by that he means a claim for monies actually paid to Mora UK or to Mora International as its authorised agent if that can be established), Cofacredit cannot, in the absence of subrogation, be considered as a direct creditor of Mora UK's customers. On that basis, Cofacredit could have, I add, no claim against Mr Morris or Mora UK other than as an unsecured creditor in the winding-up of Mora UK for monies actually advanced to it.
- Maitre Bourdeaux says this:
"In my opinion, these two conditions are fulfilled in the present case. The intention of the parties to work with the conventional subrogation of the French Law is clear. It appears, expressly, in the contract of factoring, and, above all, in the "quittances subrogatives".
Furthermore, in my opinion, the consent of Mora UK to the assignment of its UK debts to Cofacredit exists for two main reasons:
First, because the interpretation of the factoring contract in its context shows that the parties did not want to exclude the debts due to Mora UK by its United Kingdom customers, as I have demonstrated above.
Second, and above all, because the "quittances subrogatives" signed by Mora International expressly enumerated the debts due to Mora UK by its United Kingdom customers.
I observe that these "quittances subrogatives" are essential to a proper understanding of the situation here. Subrogation can occur without any contract of factoring. If a "quittance subrogative" mentioning the subrogation is signed, and if payment is made by a third party at the same time, the debts are transferred to the third party. Now, the intention of Mora International to sign the "quittances subrogatives" and to transfer to Cofacredit both export debts and domestic debts as described in the "quittances subrogatives" is clear.
In addition it is not possible, in my view, to hold that Mora International has exceeded its authority and that Mora UK is not bound by the actions of Mora International. The reason is that Mora UK has tacitly ratified the actions of Mora International……
……..
Concerning the agency given by Mora UK to Mora International, the absence of protestations during a long period of time by Mora UK shows, in my opinion, that Mora UK has tacitly ratified the actions of Mora International. So the "quittances subrogatives" which proceed to the subrogation of Cofacredit are valid, binding and enforceable."
- As to what Maitre Bourdeaux says, I have rejected his construction of the Factoring Agreement so that his first reason, in the third paragraph from his opinion quoted above, falls away. His second reason depends critically on whether the actions of Mora International are binding on Mora UK. In the light of my findings in relation to the Factoring Agreement and the Contract of Mandate, express authority for Mora International to factor Mora UK's domestic debts cannot be found in those documents; and there is no suggestion that there is any other express (or even implied) authority. Instead, Maitre Bourdeaux relies on ratification as a result of conduct over a long period.
- Maitre Thomas did not, unfortunately, prepare a responsive opinion following receipt of the opinion of Maitre Bourdeaux form which I have quoted. Mr McDonnell cross-examined him at some length on the topic. Maitre Thomas' position, as I have just explained, was that ratification was not really to the point. Rather, the parties had intended that their positions should be governed by the documents (ie the Contract of Mandate and the Factoring Agreement) and that any quittances were signed in the context of those documents. If the debt in question did not fall within the scope of those documents, then the quittances did not fall to be treated as free-standing transactions but were of no effect at all. I do not see the logic of that: and Maitre Bourdeaux clearly disagrees. There surely can be no objection in principle to Mora UK factoring its UK domestic debts with Cofacredit even if that is not done by the Factoring Agreement. I reject this argument for saying that the quittances were ineffective.
- However, there is another reason for saying that the quittances were ineffective. Maitre Thomas points out that the quittances were not signed by Mora UK but only by Mora International. Accordingly, the requirements of French law which I have already discussed are not complied with. Maitre Bourdeaux' response is that Mora UK has ratified the quittances. Mr McDonnell cross-examined Maitre Thomas on this aspect also. Whilst Maitre Thomas accepted that ratification might be possible, he was unable to say, on the facts as they were known to him, whether or not there had been ratification in relation to any particular quittance. Moreover, Mr McDonnell's questioning proceeded on the basis that the factored invoices all had on them a notice to the debtor saying that the debt had been assigned. But there was no evidence about how the notice came to be placed onto the invoice or with what authority and the notices are not in any case signed. It does not seem to me, even if the pleadings were to be amended, that I can decide, in the context of the preliminary issues before me, whether or not Mora International's actions in signing quittances in respect of Mora UK's domestic debts have, on the facts, been ratified as the result of a course of conduct. It seems to me that questions of that sort can only be answered in the context of clearly established facts and clearly established legal principles: it is a matter for a judge who is in possession of all the relevant facts and expert evidence – or all the facts which the parties are able and wish to put before the judge – to deal with.
- Further, although Maitre Bourdeaux states a conclusion, he does not explain the principles which apply in determining whether a course of conduct should give rise to a tacit ratification or the length of time for which it must subsist (essentially, I imagine, a fact-dependant issue) before ratification occurs. Nor did he explain the conditions in which a tacit ratification can result in an express acceptance of the subrogation as French law requires.
- I do not, therefore, think that I ought to say anything about the French law of agency or ratification. I do not have an adquate legal foundation on which to base any conclusions; and there is no clearly defined legal issue which I have been asked to answer on this aspect. Quite apart from that, even the legal questions ought to be answered against a clear factual background. I would only add these two observations:
a. First, whilst I can see that a course of conduct might (adopting an English analysis) give rise to an estoppel/implied authority binding on the principal, I have a problem seeing why a course of conduct should retrospectively validate something which had in fact taken place without authority before the course of conduct had been enough to establish the authority.
b. Secondly, ratification would simply ratify the effect of the quittances taken as free-standing transactions: it would not, so far as I can see, incorporate into the relationship all the terms and conditions of the Factoring Agreement. That may be a relevant consideration in determining whether Mora UK should be bound since it might be argued that Mora UK cannot possibly have intended to become bound by anything other than a subrogation according to the terms of the Factoring Agreement and that a course of conduct should not lead to that result.
These are no doubt aspects which the French experts can consider in due course.
- I now turn to consider, from a French law perspective, the recovery by a factor from a third party who has received payment of debts already factored to him. This will cover Mora UK's non-domestic debts and also domestic debts to the extent that the quittances were effective (as a result of possible ratification) to bring about subrogation. Unlike in cases of assignment, the Civil Code imposes no particular formality of notification to the debtor. And because no formality is imposed, the subrogation takes place automatically as soon as payment is made by the factor: the acceptance of the debtor is not required and, as Maitre Bourdeaux puts it, the "transmission of rights is done, and is opposable to the debtor". However, since a debtor who has no knowledge of the subrogation may, if he acts in good faith, nonetheless discharge the debt by paying the original creditor, factors often proceed to give written notification of the subrogation (which was the practice in the present case).
- There is a divergence of opinion between the experts on the right under French law of Cofacredit to obtain payment of subrogated debts from Mr Morris as administrator and then liquidator of Mora UK. Both experts have addressed this question on the basis, of course, that it is French law which governs that question. However, since it is English law which governs the administration and then liquidation of Mora UK, it may be that French law is not relevant to establishing Cofacredit's rights against Mr Morris or against Mora UK other than possibly as an unsecured creditor proving in the liquidation. But even in relation to that last possibility, Mr Cogley contends that there is no claim; all that Cofacredit has is a claim against the various debtors as a result of the subrogation and there is no separate claim against Mora UK (or indeed Mr Morris). For the moment, however, I stay with the position under French law.
- Maitre Thomas is of the opinion that Cofacredit has no claim. He relies on two decisions, one of the Cour de Cassation and one of the Tribunal of Commerce of Paris.
- The first of those cases, Credit Commercial de France v Ste de Banque Occidentale, was decided on 4 July 1995. A bank to which debts were assigned by the original creditor, in the framework of a refinancing operation (known as Dailly in France) could not claim payment from the bank of the original creditor which had received payment from the debtors whose debts had been assigned. The original creditor which had assigned the debt was in receivership and clients of the company paid invoices to the original bank of the company (the first bank). The second bank which had refinanced the company sued the first bank claiming that it had to repay the debts directly paid by the debtors of the company because such debts had been assigned to the second bank within the refinancing scheme. The claim was rejected.
- The second of those cases, SA Banque Sofirec v SA Banque Nationale de Paris, was decided on 13 June 1996. The Tribunal of Commerce of Paris applied this case law to the conflict between a factor and the bank of a company in liquidation, which had received payment from subrogated debtors and denied to the factor repayment by the bank of the monies it received. The sums in dispute were paid to the receiving bank prior to its receiving notice of the subrogation and were regularly paid into the current account of its customer. The court said that it was accepted case-law that a bank which is the recipient of funds and which has received them in good faith on behalf of its customer (and thus has been able to proceed normally to the various transactions normally performed on a current account) cannot be constrained to redirect those funds to the substituted creditor (ie the assignee of subrogated creditor).
- Maitre Thomas considers, although there is no relevant case law on the position as between a factor and a liquidator, that the position of a liquidator is similar to that derived from these two cases. Accordingly, if the liquidator acts bona fide, he cannot be held personally responsible to reimburse the factor the debts directly paid to him (the liquidator). The basis is that the receiving bank, in the case of the banking case, in its capacity as both agent of the original creditor and the depositary of the funds received, acts for and on behalf of that creditor and has no legal link with the second bank; it therefore has, according to Maitre Thomas, no liability whatsoever to the second bank which is barred from claiming payment by the receiving bank of the funds which it has received. He also considers that the legal principles are the same in the case of a factor and a liquidator of the original creditor, the result being one "of a long expected evolution of the Cour de Cassation towards the protection of the depository of funds in a receivership or a liquidation".
- Maitre Bourdeaux does not consider that this case law applies to the position between Cofacredit and Mr Morris or Mora UK itself. He says that the decision on the first case relates to Articles 1937 and 1993. The former states that a depositary must return the thing deposited only to the one who has entrusted it to him or to the one in whose name the deposit was made; and the latter states that every agent is bound to account for his management, and to return to the principal the whole of what he receives by virtue of his power of attorney even if what he received was not owed to the principal. He therefore considers that these Articles require the receiving bank to repay funds only to its own client, the original creditor. He draws attention to the fact that these decisions deal with opposition between, on the one hand, the second bank or factoring company (as assignee of the debt) and on the other hand a second bank which receives payment from the debtors. They did not address a conflict between the assignee and the liquidator of the assignor.
- Maitre Bourdeaux also relies on legal texts including Stoufflet, although, as Stoufflet says (in translation) in relation to a case where the bank acts in good faith, that a transferee of a debt "cannot bring an action for restitution against the banker who credited the account but can only act against the transferor who received the money which was not due to it, possibly by seizing the balance of the account". Another author (P Crocq) distinguishes the payments made to the assignor and the payments made to another bank. In the first case, the assignee could obtain repayment since the assignor has acted as an agent of the assignee.
- Maitre Bourdeaux expresses the opinion that Mr Morris is not a third party who received funds from the debts as in the case before the Cour de Cassation and "is not in the position of a banker who gets the account of the assignor and who received funds from debtors". In reaching those conclusions, he considers the position of a French liquidator. The present case does not concern a French liquidation. It concerns an English liquidation and Mr Morris' position as liquidator according to the provisions of English law which affect him in that office (and previously as administrator). I do not consider that the position of Cofacredit vis a vis Mora UK had it been a French company subject to a French liquidation is in any way conclusive of Cofacredit's actual position vis a vis Mr Morris or Mora UK itself.
- Nonetheless, Maitre Bourdeaux' reasons for distinguishing the position of a hypothetical French liquidator inform his view of French law as I must apply it (if it is relevant at all) to the position of an English liquidator. In French law, he explains, a liquidator is not the agent of the company; he is called by statute "mandataire judiciaries a la liquidation des enterprises et experts en diagnostic d'enterprise" or judicial agent for the liquidation of companies. He obtains his authority from statute law and not from contract. Reference is made by him to Article L.622-9 1 of the Commercial Code which removes the debtor from the administration and disposal of assets, his rights being exercisable by the liquidator. He therefore views the liquidator as the company itself.
- In reaching the opposite conclusion, Maitre Thomas has drawn an analogy between the position of a banker (the receiving bank in the case before the Cour de Cassation) and Mr Morris as a liquidator. Like Maitre Bourdeaux, he has really considered that question in the context of a French liquidation. He points out that, in French law, the liquidator is an agent – the very name "mandataire judiciaire" shows that this is so. "…it seems" says Maitre Thomas "obvious that in the discharge of his duties he is acting on behalf of the company although he does not become the company". He sets out four reasons why the liquidator is necessarily a third party with regard to the company:
a. A company and its management are distinct legal entities.
b. The managers' assets and the company's assets are distinct: the managers are not (save in cases of fraud) personally responsible for the company's debts. The liquidators may, as Maitre Bourdeaux put it, replace the manager, but he does not become the company.
c. There is no confusion between the company and its managers [I am not sure why this is a separate point from a.]
d. If the liquidator replaces the manager, he cannot be confused at the same time with [I think Maitre Thomas uses this in the sense "treated at the same time as"] the company itself.
- For my part, I note another conclusion of Stoufflet where, commenting on the case in the Cour de Cassation, he says this: "It should be reiterated that the banker who received the funds has not claimed any right to the debt assigned. It received the sum of money to be deposited, a sum of money which it holds in execution of an order for payment (in the case of this judgment, by means of a bank transfer or cheque)."
- Subject to the issue of good faith, I prefer Maitre Thomas' opinion on the question whether a liquidator in French law can be made liable to a factor for receipts from debtors of the company which had previously been factored to the factor. Like the banker, the liquidator (and the same goes for an administrator) does not receive assets for himself, he receives them only in his capacity as an officer of the court to deal with in accordance with the relevant rules in the winding-up of the company. There is no policy reason for treating him any differently from the banker: neither of them receive assets for their own benefit or other than for the benefit of the company to deal with in accordance with the law for the benefit of creditors.
- I feel confident that each of Maitre Bourdeaux and Maitre Thomas would have seen no difference in principle between the positions of a liquidator in an English liquidation and a liquidator in a French liquidation. The factors relied on by each of them find a counterpart in an English liquidation although the detailed provisions are, of course, different. Accordingly, if it were relevant, I would hold that, as a matter of French law, a factor could not recover from an English liquidator (or administrator) of an English company who, in good faith, had received payment in the liquidation or administration of a debt which had been factored by the company. In context, Cofacredit cannot, under French law, recover from Mr Morris personally, provided that he has acted in good faith (according to French law).
- But what is the position if payment is made by a debtor to a company in liquidation in circumstances where the liquidator knows that the debt has been assigned or factored to a third party? Having already noted that there is no French authority on the question whether a liquidator is in the same position as a bank insofar as receipts from debtors are concerned, it is not surprising to find that there is no French authority which deals directly with this point either. The experts did not deal with this in their reports; the question had not been raised in their instructions and, in any case, Maitre Bourdeaux did not think that a liquidator was to be treated in the same way as a banker, so that the question for him would not have arisen at all.
- Mr McDonnell cross-examined Maitre Thomas on this, referring him in particular to Stoufflet who had this to say: "…the transferee may, however, implement the civil liability of its fellow-banker if it acted knowingly i.e. if it agreed to receive a sum and cause it to be credited to the account of a customer, knowing that such sum represented a debt assigned to another bank". Maitre Thomas was not sure that he agreed with that conclusion: he was certainly correct in saying that it did not necessarily follow from the decision in Cour de Cassation which was the subject matter of Stoufflet's discussion.
- The cross-examination did not, however, probe all the possibilities. It proceeded on the basis that the hypothetical payment had been made to the liquidator whereas, at least in an English liquidation, the assets of the company remain vested in it and there is no reason to think that the liquidator would himself receive assets. In any event, in the case before the Cour de Cassation (and the same may be so in relation to the case Tribunal of Commerce of Paris) the debtor did not know of the assignment when it paid its debt. Although an assignment or subrogation is effective as soon as it is made so as to give the assignee rights against the debtor, French law, according to Maitre Bourdeaux' first opinion, like English law, allows the debtor to obtain a good discharge if he pays the original creditor without knowledge of the assignment. It may be that there is a world of difference between the position of a French liquidator who receives a sum of money from a debtor in the two different situations ie depending on whether the debtor has, or has not, had notice of the assignment. If he has not had notice, the payment discharges the debt and the assignee can no longer recover from the debtor; if he has no claim against the liquidator (or the company) he has no claim at all. In contrast, if the debtor does have notice, the payment does not discharge his debt and the assignee can still recover from him. If anyone has a cause of action against the liquidator, perhaps it should be the debtor to recover what he had paid rather than the assignee.
- If there is no cause of action against the banker who credited the original creditor's account, Stoufflet notes that the assignee "can only act against the transferor who received money not due to it, possibly by seizing the balance of the account". There is a hint here that there would be a proprietary claim. However, I received no evidence at all about how French law treats the claim to recover payment from the person who receives it and have only the passage in Stoufflet to inform me at all.
The "revolving" nature of the factoring accounts
- There has been a certain amount of discussion about precisely how the factoring accounts actually operated in practice. Article 3 of the General Conditions of the Factoring Agreement contains opaque provisions containing the following paragraph:
"You shall ask us for approval in respect of each of your Purchasers. This prior approval shall be of a global nature, as it will be given purchaser by purchaser, and a "revolving" nature insofar as any payment received from a Purchaser shall be set against the approved portion of the outstanding debt, as a priority, thereby entailing cover for any debts exceeding the amount of the approved outstanding debt at that time."
- Mr Cogley explained to me, by reference to an example of some complexity, that the operation of the running account between Cofacredit and Mora International, including Mora UK's sub-account, could result in a credit balance, possibly a substantial balance, owing to Mora UK if Cofacredit were in fact to collect all the debts which had been factored to it. Indeed, as I mentioned in paragraph 13 above, Mora UK's position is that the effect of the Factoring Agreement is to create a revolving credit, the balance on which, far from showing monies owing to Cofacredit, shows a significant sum owing to Mora UK. Mr McDonnell also made an attempt in his closing submissions at explaining how the accounts worked. He had to disappear to catch a flight to Hong Kong after which his junior, Mr Norris, took the opportunity to explain to me that Mr McDonnell had got it wrong and gave me another explanation. Neither of the French law experts gave any evidence about how this French contract operated. I have to say that this is another issue which I find it entirely inappropriate to resolve on inadequate evidence with inadequate explanation on a preliminary issue the scope of which had not been resolved even by the end of the hearing. I am prepared to proceed only on the basis that there is a real dispute about the effect of, and the state of the account under, the Factoring Agreement.
Further discussion of governing law
- It is tolerably clear that the mutual obligations of assignor and assignee under a voluntary assignment of a debt are governed by the law which applies to the contract between them: Dicey & Morris The Conflict of Laws (13th ed) para 24R-046 Rule 118(1)(a). Assignability of a debt is, so far as English conflicts of law rules are concerned, governed by the law governing the right to which the assignment relates, as are the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any question whether the debtor's obligations have been discharged: see ibid Rule 118(1)(b).
- I see no reason to think that a factoring agreement effected under French law as a subrogation but having, under that law, the effect of transferring full ownership of the factored debts to the factor is to be treated other than as an assignment for the purposes of those rules. Accordingly:
a. Whether a particular debt owing to Mora UK will be recognised as having been effectively assigned will depend on its assignability pursuant to the law which governs the debt. In relation to UK domestic debts that will, I make the assumption, be English law. So far as Mora UK's exports are concerned, it may be that the sale contracts in relation to all or most of them are governed by English law.
b. Effective assignment will also require compliance with any necessary formalities of the governing law. Insofar as English law is the governing law, there can be no doubt that English law will recognise the Factoring Agreement as an effective assignment.
c. The mutual rights and obligations of Mora UK and Cofacredit under the Factoring Agreement are governed by French law. Although the Factoring Agreement was made by Mora International, it did so pursuant to the Contract of Mandate. There can be no doubt that Mora UK is in the same position, for the purposes of Rule 118(1)(a), as if it had entered into the Factoring Agreement itself.
- In order to establish whether Mr Morris or Mora UK are under any liability to Cofacredit in respect of payments received from debtors of Mora UK whose debts had been effectively factored to Cofacredit, I wish to consider some examples.
- Example 1: Suppose first that Mora UK had, whilst still solvent, received payment from a debtor. The debt having effectively already been transferred to Cofacredit, what law governs Cofacredit's rights, if any, to recover payment from Mora UK? Let us start with the situation where the debtor had no notice of the transfer. As a matter of English conflicts of law rules, the question is whether the position as between the debtor and Cofacredit is a matter for the law governing the debt (which I shall assume to be English law). As it happens, both under French law (according to the unchallenged evidence of Maitre Bourdeaux) and English law, the debtor (being without notice of the transfer) would obtain a good discharge of his debt. The payment to Mora UK in the example therefore represents, in a very real and practical sense, the debt itself.
- As I have already noted (see 94 to 96 above), the nature of this claim, if French law applies, is not entirely clear. Some sort of proprietary claim is hinted at by Stoufflet (assuming the facts support it) but, apart from that, I can only assume that the claim would be restitutionary in nature. If English law applied, it is possible to see arguments in favour of a proprietary claim (again assuming that the facts support it) one of which might be based on the existence of a constructive trust, or it may be restitutionary in nature or, again depending on the facts, some sort of tortious claim may be available (compare International Factors Ltd v Rodriguez [1979] 1 QB 351 where a claim was made in conversion of cheques given in payment of debts which had been factored). But in the present case such non-restitutionary claims have not been formulated (in either French or English law) and no expert evidence on French law in relation to them has been presented. Nor has any claim based on Article 11 (see 28h. above) of the General Conditions been asserted.
- It is clear to my mind that, in a case where the debtor did not know of the transfer of the debt which he owed to Mora UK, the right of Cofacredit to recover from the transferor, however it is formulated, can be seen to be connected with the contract governing the transfer ie the Factoring Agreement. It is entirely artificial to view the payment to Mora UK as something wholly divorced from that contract. The right, if there is one at all as there must be, of Cofacredit to recover the payment, or an amount equal to the payment, from Mora UK arises only because of the contract: without it, there would be no such right. Accordingly, I perceive any personal right to recover from Mora UK as one arising from the contract so that it is the law which governs the contract (ie French law) which should also govern the right to recover the payment. I think that that is reasonably clear in relation to a claim which can, or would under English law, be described as restitutionary. It may be that the position is different where the claim is proprietary and not simply personal. However, such a claim is not pleaded (in either French or English law), I have received no French law evidence from the experts on this aspect and I have heard no argument concerning the governing law of such a claim.
- Example 2: The facts are the same as Example 1, except that the debtor knows of the transfer before he makes payment to Mora UK. The debtor (under English law as the governing law) does not obtain a good discharge of his debt and Cofacredit's rights against the debtor are unaffected. (The same position probably obtains under French law too.) It seems to me that, as in Example 1, Cofacredit's claims, if any against Mora UK arise out of the Factoring Agreement and fall, as before, to be dealt with under French law.
- In relation to Example 2, it might be arguable that Cofacredit has no claim against Mora UK at all, on the basis that (i) the debtor remains liable to Cofacredit (ii) the payment to Mora UK is not payment of the debt at all but a voluntary payment by the debtor which he did not need to make (iii) the debtor may have a claim against Mora UK to recover his payment (eg as money paid under a mistake) and (iv) to give Cofacredit a remedy against Mora UK would be to expose Mora UK to a double claim. Whether such an argument is open under French law I simply do not know.
- Example 3: the facts are as in Example 2 except that Mora UK is, at the time of the payment by the debtor, in liquidation with Mr Morris as the liquidator. Any claim against Mora UK is, as before, to be dealt with under French law. Such claims could perhaps be based on receipt by Mr Morris as officeholder as much as a receipt by Moro UK itself. That will give rise at most to a debt which will be recognised by the English court. It will then be for the English court, applying English rules relating to the distribution of assets in the winding-up of a company, to determine what, if any, part of the debt Cofacredit should recover. I have heard no argument as to whether, at one extreme, this debt, arising as it does after the commencement of the winding-up, gives rise to no provable debt or whether, at the other extreme, it is to be treated in the same way as an expense of the winding-up and effectively recoverable in priority to the debts of ordinary unsecured creditors.
- That leaves the position of Mr Morris under Example 3 to be considered. Cofacredit would assert that he is liable for the whole of the debt, it being a matter of indifference to it whether he can then recoup himself from Mora UK's assets. Mr Morris himself would assert that he is not liable at all (save for his obligation, as liquidator, to comply with his duties as liquidator and to pay to Cofacredit whatever is due to it according to the rules of distribution in the winding- up).
- The question then is what law governs Mr Morris' obligations (if any) to Cofacredit, as the result of having, in Example 3, procured payment of the debt to Mora UK or as a result of his having himself received (which I do not understand to be the case on the actual facts of the present case) payment in his capacity as liquidator. There is a material difference between the position of Mr Morris and Mora UK itself which is that Mora UK has entered into contractual relations with Cofacredit but Mr Morris has not. Insofar as it is sought to make him personally liable (in contrast with making Mora UK liable, or the estate subject to claims) by reason of his actions as its liquidator Mr Morris is not, in my judgment, to be treated as having such a connection with the contract (the Factoring Agreement) as to result in the governing law of the obligation as between him and Cofacredit being the law of the contract. Instead, the governing law is in my judgment English law on the assumption that it is England where payment has been received from the debtor, and when it comes to applying English law, the fact that Mr Morris acted only in his capacity as office-holder may mean he has no personal liability at all. I say nothing at this stage about what law might govern any proprietary claim in relation to the bank balances representing payment.
- I note again, here, that Cofacredit has acknowledged that it claims against Mr Morris only in his capacity as officeholder. If, as is in my judgment the case, his personal liability is governed by English law then, a fortiori, so is his liability in his capacity as an officeholder whatever that phrase may mean. As to that, Mr Morris has only one legal personality. He is either liable to Cofacredit or he is not. To say that he liable in his capacity as officeholder must mean that he has incurred liability carrying out his functions as officeholder. Quite what Cofacredit's acknowledgement means is not entirely clear to me but it must go at least this far: Mr Morris can only be liable to the extent that he would have a right of indemnity against the assets of Mora UK and to the extent that there are assets available to meet that indemnity since, otherwise he would, in fact, be personally liable. Accordingly, on that footing he is only liable to the extent that English law would permit him to pay Cofacredit out of the assets under his control. For instance, English law would permit him to make payment out of assets under his control (i) to the extent that Cofacredit had a valid right of proof or (ii) to the extent that Mr Morris' liability could be seen as an expense of the liquidation or (iii) to the extent that Cofacredit had a proprietary interest (including a valid security interest) over assets under Mr Morris's control. I have heard no argument about the extent to which Mr Morris would be entitled to an indemnity in respect of his liability, if any, under English law to Cofacredit.
- Applying this analysis to the facts of the present case, any personal liability of Mora UK to Cofacredit is a matter for French law. As to that, the expert evidence is inadequate for me to determine whether there is in fact a claim at all in circumstances where the debtors knew (as they did) of the transfer of their debts to Cofacredit and where their payments do not discharge them. If there is a claim in principle, the revolving nature of the factoring arrangements may, I say no more than that, result in Cofacredit having a personal claim against Mora UK only for the ultimate balance struck and not for the amount of each factored debt in respect of which payment has been made to Mora UK. Distibution will be a matter to be decided according to rules of English law.
- So far as Mr Morris personally is concerned, his obligations to Cofacredit, if any, are governed by English law. It is therefore strictly unnecessary for me to consider (as I have done) the French law in relation to the liability of third party recipients such as bankers and liquidators. I have thought it sensible to do so in case my view of the governing law of Mr Morris' obligations, if any, to Cofacredit is wrong and French law governs. If French law does, contrary to my view, govern, then I have to say that the expert evidence adduced was not adequate to allow me to form an informed view of the position of a person in Mr Morris' position in the context of (i) payment made by debtor who knows that his debt has been transferred to a third party and (ii) where the receipt is not by Mr Morris personally but by the company of which he is liquidator. I do not know whether French law would equate knowledge of the subrogation as necessarily amounting to an absence of good faith. One might think that an absence of good faith is a factual matter which could only be resolved after hearing evidence from Mr Morris.
- Before I leave the subject of French law, I reiterate that the preliminary issues formulated before the Master and as reformulated by Mr Cogley and Mr Norris, proceeded on the basis of the only pleaded claim by Cofacredit, a claim firmly based in restitution. Mr McDonnell adumbrated other claims which might be made, for instance proprietary claims and constructive trust claims. He did not, however, explain them at any great length nor were any submissions made about what the governing law of these sorts of claim would be. It is at least possible that some might be governed by English law (eg proprietary claims) whilst others might be governed by French law (eg claims (if any) corresponding to constructive trust claims which could be viewed as more akin to restitutionary claims for the purposes of classification).
- Mr McDonnell also produced draft amendments to the existing Reply (although he did not actually seek to amend) which assert a conventional estoppel under English law precluding Mr Morris and Mora UK from denying (a) the validity of the assignment of all debts in fact made (b) Cofacredit's right to claim payment by the debtors in respect of all such debts and (c) Cofacredit's right to recover from Mr Morris and Mora UK the monies paid to or collected by them. This is clearly an entirely new case on the part of Cofacredit. To put it at its lowest, these issues might fall to be determined under French law.
- Mr Morris has kept the payments received from debtors, or at least some of those payments, in a separate bank account. The balances can, at least in English law, be said to represent the payments, and Cofacredit might assert a proprietary claim in respect of balances representing debts which were validly factored under the Factoring Agreement. Mr McDonnell has suggested that such a claim would be governed by English law as the lex fori. I can see that English law might be appropriate in the case of factored debts arising under contracts governed by English law and where the payment was made in England although the reason may not be because it is the lex fori which governs. But even here, it can be argued that French law applies on the footing that the balances are held, not by some unconnected third party, but by (or as part of the estate of) Mora UK. The relationship between Cofacredit and Mora UK is governed by the Factoring Agreement (governed by French law) so that French law should govern, as between them, all disputes arising out of the factoring including rights in the bank balances. There are difficult questions. I have heard no argument on them. I say no more about them.
- Given that preliminary issues have been ordered, and now been dealt with by me, on the basis of extensive, and no doubt costly, expert evidence on French law in relation to the points which were thought to be live, it is entirely unsatisfactory that Cofacredit might, years after commencement of proceedings, be contemplating changing its case in such a radical ways. The significant changes, or extensions, along the lines which Mr McDonnell has indicated might be sought to be made could result in the need for another round of expert evidence. This is clearly a matter which must be taken into account if permission is sought to introduce these aspects of the claim.
- There is one other aspect of the case which was dealt with at some length before me. This is the extent to which, looking at the matter from a purely English law context, Cofacredit actually does have any restitutionary claim against Mr Morris or Mora UK. For reasons already explained, I do not think that either the Master or counsel thought, when formulating the preliminary issues, that the court would be asked to go any further than to decide, in relation to the restitutionary claim as then formulated, whether English law applied if the Court had decided that Cofacredit was not entitled to recover under French law. What the second preliminary issue sought to raise was, I think, a short question: assuming Cofacredit cannot recover under French law can it in principle recover under English law assuming that, if English law applied, it would provide a restitutionary remedy.
- A number of submissions were made to me at the hearing. Mr Cogley submitted that there was no restitutionary claim at all for a number of reasons which I summarise:
a. The debtors who made payment to Mora UK were all aware of the transfer of their debts to Cofacredit; they would not therefore get a good discharge by payment to Mora UK. Accordingly, Cofacredit's rights against the debtors were unaffected by any payment to Mora UK. If anyone has a claim against Mora UK/Mr Morris in respect of the payment, it is the debtor and to the extent that such a claim exists there is clearly no enrichment.
b. In the light of the revolving nature of the transactions, it is only the running balance owing between the parties which is of relevance. Even if strictly speaking Cofacredit was entitled to collect the debts, that balance is nowhere near the total amount of the debts which Cofacredit claims in respect of. A tender has been made of the balance owing. It cannot be said that Mora UK has been unjustly enriched.
c. In relation to the restitutionary head (money had and received by Mr Morris and Mora UK to Cofacredit's use and benefit) relied on by Cofacredit, there is no valid claim.
d. Mr Morris, if he received payment at all or is to be treated as though he had, has not been enriched in any way since the payment falls to be dealt with an asset in the winding-up and not for his benefit at all.
- Mr Cogley also emphasised, quite correctly, that the preliminary issues were formulated in the context of the pleaded case in relation to restitution and that it was that case on restitution which he had come prepared to meet. He resisted attempts by Mr McDonnell to extend the range of the debate. However, during the course of the hearing, reference was made to Chapter 29 of Goff & Jones: The Law of Restitution (6th ed) a short chapter running to only four pages and titled "Cases where the Defendant without right intervenes between the plaintiff and a third party". Mr McDonnell had made some brief references to this chapter; at the end of the hearing I asked for some additional written submissions from both parties for clarification. This, unfortunately from my point of view, resulted in supplemental written arguments running to 25 pages together with a large file of additional authorities.
- I have reflected long and hard on whether I should make any decision in relation to these questions concerning restitution. I have decided that I should not do so for the following reasons:
a. I am dealing with preliminary issues where not all the facts are known or established. It is undesirable, in my view, to decide what, at least in relation to Chapter 29 of Goff & Jones are novel questions, other than in the context of all relevant facts.
b. In particular, the following are not clear:
i. The precise state of account between Mora UK and Cofacredit in relation to factored debts. Before me it was not known, of course, whether UK domestic debts were to be included or not: but the state of account was not known on either basis.
ii. The consequences of the revolving nature of the factoring transactions (this may be no more than one aspect of i).
iii. Whether the tender made by Mora UK was sufficient since, if it was, that may have an impact on what Cofacredit can now claim.
iv. Payment by debtors to Mora UK may not precisely match particular invoices: the link which it would be necessary to show, even if a restitutionary claim of this nature is admissible in principle, between the receipts by Mora UK and factored debts may be absent.
c. Since it may be, on the facts, that the running balance favours Mora UK and not Cofacredit or, if it does favour Cofacredit, it does not do so to anything like the extent of the amount of the factored debts in dispute, it may prove unnecessary to resolve the questions raised in relation to Chapter 29 of Goff & Jones.
d. I do not consider that it is appropriate to resolve some only of the issues concerning restitution. Apparently different aspects are not, I think, likely to prove as easily separable as might appear and a decision on one aspect now could unduly tie the hands of another judge later.
e. The submission in relation to the absence of a discharge of the debtors in paying Mora UK is inextricably intertwined with the submissions concerning restitution and cannot sensibly be dealt with separately.
f. Further, it has always been, and so far as I am aware it remains, part of Mr Morris' and Mora UK's case that the Factoring Agreement and the relevant quittance create charges over book debts which are void for want of registration. The fact that that the Factoring Agreement transfers, under French law, full ownership to Cofacredit does not answer the question whether, under English law, the transaction is or is not a security transaction. Conventional English security transactions frequently involve an assignment of assets to a lender as security; not all securities are created by way of charges. Without a full understanding (which I do not have) of how the Factoring Agreement and the factoring and current accounts operate, it is not possible to assess whether the nature of the transactions is (a) a transfer of absolute ownership for a consideration in money or (b) a loan transaction on the security of the subrogated debts with something akin to what, in English law, is recognised as an equity of redemption. If the factoring transactions are void for want of registration, then clearly neither Mr Morris nor Mora UK can be obliged to account for payment received from relevant debtors and the question whether there would otherwise be a restitutionary claim is academic. The decision in Lloyds & Scottish Fincnace Ltd v Cyril Lord Carpets Sales Ltd [1992] BCLC 609 on which Mr McDonnell relies does not provide an answer to the correct categorisation of the arrangements in the present case since, in that case, it was held on the facts that there was an out-and-out sale of the debts concerned.
- Mr Cogley suggests, in effect, that I should deal with the original restitution point (ie whether there is a claim for money had and received) including the submissions made in relation to the absence of discharge of debtors; and that I should reject the submissions based on the residual category discussed in chapter 29 of Goff & Jones, on the grounds that it comes too late. The whole difficulty, he says, arises from the failure by Cofacredit, to plead or make any recognisable cause of action in its pleadings; it has had ample time over a number of years to get its case right and should not be granted any further indulgence by the court. I do not think that it would be right to take that course, particularly given what I perceive to have been the original purpose of the order for these preliminary issues.
- I am afraid that this hearing has therefore turned out to be yet another example of the undesirability of preliminary issues unless they are very clearly formulated and very clearly focused on the resolution of self-contained areas of the case. I will hear counsel further on the form of any order which they would wish me to make. It may be that no order is necessary and that this judgment is sufficient for their purposes.
Conclusion
- I answer the three preliminary issues in the following way:
a. The first issue is the export debts issue. Mora UK's domestic debts are not subject to the Factoring Agreement.
The related question raised at the hearing, but not the subject of the order for preliminary issues, is whether the quittances, taken by themselves, give rise to a valid factoring. My conclusion is that they do not but subject to the issue of ratification. On ratification, I had no adequate evidence from the French experts to enable me to decide this as a matter of French law. In any event, the facts against which such a question fall to be decided are not adequately shown in any agreed statement of facts. Accordingly, I can give no answer to this question.
b. In the light of my decision on the first issue, the second issue comes to this: whether Cofacredit is entitled in accordance with French law to recover from Mr Morris and/or Mora UK monies paid to them by Mora UK's debtors in respect debts which had been validly factored in accordance with the Factoring Agreement in respect of pre-24 April 2002 assignments. My answers are as follows:
i. Cofacredit's rights against Mora UK are governed by French law. The expert French evidence was not sufficient to enable me to determine what, if any, rights Cofacredit has in respect of factored debts in the light of the revolving nature of the Factoring Agreement. To the extent that there is a claim, Cofacredit's rights to share in the assets of Mora UK are governed by English insolvency law. English law will also determine whether the Factoring Agreement is to be viewed as a security transaction in addressing whether it creates a charge over book debts which is void for want of registration.
ii. Cofacredit's rights, as relied on by Cofacredit, against Mr Morris are restitutionary in nature and are governed by English law.
c. The third issue, in the light of those conclusions, relates only to Mr Morris and comes to this: whether Cofacredit is entitled under English law to recover the monies paid. My conclusion is that English law applies, at least in respect of payments received in England, but, for reasons given, I am not willing to determine whether in fact any such restitutionary claim subsists.
In dealing with these issues, no claim other than a restitutionary claim was relied on, although, as I have mentioned, Mr McDonnell may seek to raise other heads of claim. I would only add that I have ignored those claims in reaching my conclusions. In one sense that is unsatisfactory in itself because the very existence of the alternative claim may show that the restitutionary claim is not available. If Cofacredit is hereafter to be allowed to amend its pleading to introduce alternative claims, Mr Morris and Mora UK should not, I consider, be precluded from arguing that the restitutionary claim is rendered unavailable if other claims do subsist.
