Kazeminy & Ors v Siddiqi & Ors [2009] EWHC 3207 (Comm)

[2009] EWHC 3207 (Comm)Case No CLAIM NO.2009 FOLIO 1078
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 09/12/2009
Before
MR. JUSTICE TEARE
Between
(1) Mr. Nasser KazeminyClaimants(2) Triomphe Investments I, LLCClaimant(3) Triomphe Investments II, LLCClaimant(4) Triomphe Investments III, LLCClaimant(5) Triomphe Investments IV, LLCClaimantMr. Kamal SiddiqiDefendantsFraver-Nash Technology Limited (in liquidation)DefendantFrazer-Nash Research LimitedDefendantMetrocab Limited (in liquidation)DefendantMetrail Holdings AGDefendantKamkorp LimitedDefendantKamkorp Investments LimitedDefendant
Neil Kitchener QC and David Caplan (instructed by Pinsent Masons LLP) for ClaimantJoe Smouha QC and Richard Hill (instructed by Herbert Smith LLP) for DefendantHearing Hearing dates: 25 and 26 November 2009
JudgmentMr. Justice Teare:
[1]This is an application by the Claimants for summary judgment against the Defendants “in respect of a part of the claim contained in Part A of the Particulars of Claim for the recovery of loans made by the Claimants to the Defendants and payment of the promissory notes delivered by the Defendants to the Claimants.”[2]The First Claimant is a businessman who invests in, amongst other things, software and technology companies. The Second to Fifth Claimants are investment vehicles owned by trusts set up by the First Claimant for the benefit of his children and grandchildren.[3]The First Defendant is an automotive engineer, technologist and entrepreneur in the field of innovative design and development of, amongst other things, electric and hybrid electric transportation technology. He has close connections with the other Defendants. Thus he is the chairman of the Third Defendant which is involved in the research, design and engineering of environmentally friendly and energy efficient systems for the transportation and industrial markets. It is wholly owned by the Sixth Defendant, 90% of which is owned by the First Defendant and 10% of which is owned by a business associate Lim Ho-Kee. The Sixth Defendant also owns the Second Defendant (which is now in liquidation and is said to provide engineering services to the Third Defendant) and the Seventh Defendant. The Fourth Defendant is owned as to 90% by the First Defendant and as to 10% by Kamkorp Europe Limited. It too is in liquidation. The Fifth Defendant is wholly owned by the First Defendant. Summary judgment is not sought against the Fifth Defendant.[4]The loans which are the subject of Part A of the Particulars of Claim and of this application exceed US$25m. It is common ground that the loans were made to enable the First Defendant and the companies with which he is associated to develop one or more environmentally friendly forms of transport (“the Technology”).[5]There are attached to this judgment two schedules showing(i) the Promissory Notes in respect of which claims are made,(ii) against which Defendants the claims are made,(iii) the Loans for which no notes were issued in respect of which claims are made and(iv) against which Defendants the claims are made. The schedules also show that the notes were issued on various dates between 20 September 2006 and 4 May 2007 and provided for payment on various dates between 27 January 2008 and 16 April 2009. One is said to be repayable on demand. The loans not covered by a note were made on various dates between 8 June 2007 and 26 February 2008. According to the Particulars of Claim these are claimed to be repayable “immediately, alternatively on demand, alternatively after a reasonable time.”[6]The First Defendant and his family have also provided substantial sums (said to be of the order of £82m.) by way of loans or investments to the corporate Defendants to develop the Technology.[7]The primary defence advanced by the Defendants is that notwithstanding the terms of the promissory notes it was orally agreed, between the First Claimant, on behalf of the Claimants, and the First Defendant, on behalf of the Defendants, that none of the notes or loans were to be repaid until profits began to flow from the Technology. This defence is supported by a witness statement made by the First Defendant. He has stated that an oral agreement was made between him and the First Claimant “in around September 2006” that the First Claimant would fund the “commercialisation” of the Technology “all the way through until launch” and that the loans would not be repayable until the Technology was launched and it started to generate profits. This was “the overarching agreement” between them. He said that the idea of issuing promissory notes was the First Claimant’s. They were intended “purely for housekeeping purposes” to record the loans. The First Claimant said that “eventually all the loans will be transferred to the holding company and you and me will be repaid out of profits. These notes aren’t worth the paper they are written on.”[8]This defence is said by the Claimants to be without any foundation, fanciful and fabricated. It is said to be a defence without any real prospect of success such that summary judgment should be given. It is accepted that the court cannot on an application of this nature conduct a trial. What is said however is that the court can be sure that there is no real substance in the factual assertions made by the First Defendant because they are contradicted by contemporary documents so that the outcome of any later trial is inevitable; see ED&F Man Liquid Products Ltd. v Patel [2003] EWCA 472 at paragraph 10. The Claimants put their case very high. The defence is “completely inconsistent with all the contemporaneous documentary evidence”; the suggested agreement would be “commercial lunacy for Mr. Kazeminy.” The evidence of the First Claimant and the submissions made by counsel on behalf of the Claimants make it clear that the Claimants say that the defence put up is a lie. In any event, it is said that evidence as to the suggested oral agreement is inadmissible when a promissory note is sued upon.

The contemporary documentary evidence

[9]Since it is not said that the alleged overarching agreement was made until September 2006 it is unnecessary to have regard to documents which came into existence before that date.[10]A written agreement dated 20 September 2006 was made by the First Claimant and several of the Defendants (including the First Defendant) and also by Mr. Joseph Grano and his company Centurion. It recited that the parties had previously entered into agreements relating to the extension of credit by the First Defendant and Mr. Grano to the Third Defendant and that the parties wished to “memorialise these various prior agreements.” Clause 2 states that the combined liability of the Group Companies (companies owned or controlled by the First Defendant with an interest in the Technology) is not more than US$35m. Clause 3 provides:
“Siddiqi hereby agrees, on behalf of himself and on behalf of each Group Company, that no Group Company shall sell or offer to sell any equity securities ……….or borrow any money without first offering such right to lend money to Siddiqi, Kazeminy, Grano and Centurion in the same proportions as that in which they are equity owners of (or lenders to, in the case of a loan) the Group Companies as of the date of such sale or offer. Kazeminy shall match any loans made by Siddiqi to, or equity invested by Siddiqi into, any Group Company, or on a pro rata basis in the same proportion as that in which they are equity owners of (or lenders to, in the case of loan) the Group Companies at the date of he loan or equity investment by Siddiqi.”
[11]This clause does not sit comfortably with the suggested obligation upon the First Claimant to fund the commercialisation of the Technology all the way through until launch. It contemplates that others might lend money to the Group Companies and obliges the First Claimant to match any loans made by the First Defendant.[12]Clauses 5 and 6 provide:
“5. Siddiqi hereby agrees, on behalf of himself and on behalf of each Group Company, that no Group Company shall repay any debt owed by any of them to any of Siddiqi, Kazeminy, Grano or Centurion or any party affiliated with or elated to any of them except as follows: the first £20 million ……will be paid by the Group Companies to Kazeminy, Grano, Centurion and Siddiqi pro rata in the same proportion as the Group Companies’ indebtedness on such date to such parties, thereafter all such repayments shall be made to Siddiqi, until he is paid in full, and then to Kazeminy, Grano and Centurion, pro rata, until they are paid in full. 6. The parties acknowledge that, for the purposes of Sections 3 and 5: (a) as of the date hereof, the Group Companies owe Kazeminy $4,750,000 plus accrued interest in the amount of $695,704.98, Grano $2,000,000 plus accrued interest and (b) the amount of indebtedness of any Group Company to Siddiqi, and the amount of any equity investment by Siddiqi in any Group Company, shall be as determined by reference to the audited financial statement of the Group Companies. The obligations in clause (a) shall be evidenced by promissory notes in the forms attached hereto as Exhibits A,B and C.”
[13]It was submitted on behalf of the Defendants that these clauses were more consistent with the Defendants’ case than with the Claimants’ case. Several points were made in this regard: i) Clause 5 indicates that the parties were not treating the promissory notes as repayable in accordance with their terms. ii) Clause 6 indicates that the purpose of the notes was merely to evidence the loans. iii) The scheme of repayment in clause 5 is consistent with the suggested oral agreement. It contemplates that the Claimant would only receive a pro rata percentage of the first £20m. available to the Group Companies and that the balance would only be paid after the loans made to the companies by the First Defendant himself had been repaid. This scheme therefore contemplates repayment being made after substantial profits had begun to flow from the Technology. The scheme does not sit happily with repayment being contemplated in January 2008.[14]These submissions were forcefully resisted by the Claimants. I was referred to a statement by Mr. Grano who states that he was unaware of any arrangement by which loans would only be repaid from profits following the commercialisation of the Technology. He further states that as and when investments were made by new investors the funds would be used (together with any future profits) to repay the loans made by the Claimants, Mr. Grano and the First Defendant. Clause 5 was to be understood in that sense. It was submitted that nothing in the clause purported to vary the terms of the promissory notes by postponing the date for repayment. All that clause 5 did was to impose an obligation on the Defendants not to prefer the First Defendant in the event that funds were available for repayment of loans. Thus, far from postponing repayment of the promissory notes, clause 5 provided for an acceleration of repayment.[15]It was also said on behalf of the Claimants that if the suggested oral agreement had been reached in September 2006 this agreement would have been the obvious place to find it expressed. Yet it is not. Moreover, the form of the promissory notes exhibited to the agreement bear the First Defendant’s manuscript alteration to the governing law provision. Had there been an agreement that the notes were repayable in accordance with their terms one would have expected a manuscript amendment to that effect. But there is no such amendment. Moreover, the manuscript amendment is inconsistent with the suggestion that the notes were for “housekeeping” purposes only.[16]Clause 6 acknowledges that a debt is owed to the First Claimant in the total sum of $5,445,704.98. That debt is evidenced by the promissory note exhibited to the agreement which provides for repayment on 27 January 2008. The natural construction of clause 6 is therefore that the makers of the promissory note are obliged to repay the amount of the note on 27 January 2008. There are no express words in clause 5 which purport to vary or amend that obligation. Rather, clause 5 imposes an obligation upon the debtors not to repay the loan save in the pro rata proportions and sequence described in that clause.[17]It is not said that clause 5 provides the Defendants with a defence to the claim on the note. All that is suggested is that clause 5 is consistent with the alleged oral agreement. That seems to me to require, at the very least, that the obligation to repay the loan on 27 January 2008 is impliedly varied by the obligation imposed by clause 5. This may be a possible construction given that clause 5 deals with repayment. I do not consider that this application is the appropriate time for the court to determine the true construction of clause 5. The court does not have before it all of the background material which would be available at trial. If the construction of clauses 5 and 6 read together in the context of the agreement as a whole were a simple exercise with a clear conclusion the court could perhaps safely construe those clauses on this application. But I do not find it at all easy to read clauses 5 and 6 together. The Claimants’ submission that clause 5 provides for an accelerated payment, that is, prior to 27 January 2008, may be the correct way of reading the clauses together but I do not consider that I can safely construe those clauses in that way without having the benefit of the background material which would be available at trial. I am therefore unable to exclude the possibility that clauses 5 and 6 are consistent with the alleged oral agreement.[18]The next agreement to which specific reference was made is dated 4 October 2006. It provides by clause 1 for equity interests in certain of the companies associated with the First Defendant to be provided to the Claimants. Clause 5 is in similar terms to clause 5 of the 20 September 2006 agreement.[19]Attention was drawn to a manuscript note also dated 4 October 2006 which recorded the First Claimant as stating that the Business Plan should assume no sales for the first 18 months. It was suggested that at that time the First Claimant cannot have contemplated that any promissory note would be repaid by January 2008. However, the circumstance that no sales, and therefore no profits, could be expected for 18 months does not necessarily mean that the parties cannot have contemplated the repayment of the promissory notes in accordance with their terms. Funds could have been obtained from other investors to repay the loans. This very possibility is mentioned in the next agreement.[20]A letter dated 23 January 2007 purported to reflect understandings reached between the parties. Clauses 1-2 provide for certain loans to be made by the First Claimant and for him to be given a share in the equity of a holding company which was to be formed and would own the other Frazer Nash entities. Clause 3 provides that the First Claimant would be Vice Chairman and President of the holding company. Clause 4 provides for the loans referred to in clause 1 to be repaid in the event that the holding company receives funds in excess of $15m. from sources other than the Claimants, including borrowed money. Clauses 5 and 6 provide for loans to be made by the First Defendant and the First Claimant in the event that the holding company does not receive other funds or requires additional funds. Interest rates and repayment dates are set out. Clause 7 provides for loans made by the First Claimant to be repaid in the event of a breach of the terms of the agreement by the First Defendant.[21]It was said that such terms were inconsistent with the suggested agreement that the First Claimant would fund the Technology through to launch. Further, the terms provided for the notes to be paid at the stated times.[22]Clause 8 provides as follows: “Any profits of the holding company and its subordinate entities, and any funds received by any of them in exchange for any equity interest in any such entity, shall be used and applied in the following[23]This clause was said to reflect the oral agreement reached in September 2006 that the loans would be paid out of profits rather than in accordance with the terms of the notes because it specifically refers to profits being used to repay debts by the First Claimant. The First Defendant has stated that there was a further telephone conversation on or before 23 January 2007 when he discussed with the First Claimant that the 23 January 2007 agreement “would put into writing our overarching agreement that the loans would only be repayable out of profits of the holding company”. However, it was submitted on behalf of the Claimants that clause 8 does not expressly restrict vary or limit the right to sue on the promissory notes. Like the agreement dated 20 September 2006 it provided for accelerated payment in the event that the profits were forthcoming.[24]As with the agreement dated 20 September 2006 it is difficult to read together clauses 1, 5 and 6, which oblige the Defendants to repay the loans by certain dates, with clause 8. These clauses should therefore only be construed at trial when all the relevant background material will be available. It follows that I am unable to exclude the possibility that clause 8 is consistent with that part of the alleged oral agreement concerning repayment out of profits. It does appear to be inconsistent with the other part of the alleged oral agreement to the effect that the First Claimant would fund the Technology through to launch.[25]There then followed an agreement dated 11 April 2007. It amended the agreement dated 23 January 2007. In addition, by the latter part of clause 7, it provided for the First Defendant to be relieved of personal liability in the event that the holding company has delivered to the First Claimant a valid certificate for 10% of its stock.[26]The final agreement is dated 4 May 2007. Its object is to “clarify” the parties “prior intentions”. Clauses 1 and 2 state:
“1. Each of the Borrowers is jointly and severally liable for each of the Advances in Exhibit A, repayable in accordance with the payment terms set out in the promissory notes reflecting the Advances, and each promissory note is hereby deemed amended to reflect the same. 2. Nothing herein is intended to modify the liability of Siddiqi with respect to the $5,445,704.98 promissory note dated September 20, 2006.”
[27]This agreement was said to be inconsistent with the suggested oral agreement because it expressly states that the notes are repayable in accordance with their terms. It was pointed out that the definition of Borrowers did not appear to include the First Defendant. However, the definition did include the Second – Fourth and Sixth Defendants and clause 2 plainly referred to the First Defendant.[28]This agreement was heavily relied upon by the Claimants. Clauses 1 and 2 are contrary to the alleged oral agreement. Exhibit A lists a number of promissory notes many of which are the subject of claim in this action. It was also observed with understandable force that the First Defendant in his witness statement of 47 pages makes no reference to this agreement. There is therefore no explanation from the First Defendant as to how he came to sign this agreement.[29]By a letter dated 21 December 2007 to Sir Charles Masefield the First Claimant outlined his wishes with regard to the management and direction of the Defendants’ affairs. If they proved acceptable to the First Defendant the First Claimant was willing to “extend the due date on the loans”.[30]By an e-mail dated 2 January 2008 the First Claimant informed the First Defendant that he had loaned his company $24m. and complained that the First Defendant was not returning his calls.[31]The Defendants rely strongly on the fact that no demands for repayment were made on the dates on which repayment was due in accordance with the terms of the promissory notes. The first notes were stated to be due on 27 January 2008.[32]By a Term Sheet dated 28 January 2008 William Chia of the Defendant companies set out certain proposals with regard to the management of the Defendant companies and to debt. The loans made by the Claimants were described as “presently outstanding debt”.[33]By a further e-mail dated 26 June 2008 and headed “Outstanding Loans” the First Claimant wrote to the First Defendant to “document” a conversation they had had. Reference was made to an oral agreement on 5 March 2008 in which the First Claimant had agreed that the First Defendant would have 90 days in which to pay off “all the outstanding loans” in return for which the First Claimant would accept a lesser equity interest than had been promised. He extended that 90 days until 5 July 2008 and added:
“If you do not exercise this option to repay all my loans and interest by July 5 2008 this offer will be null and void and I will retain my ownership at 15.5% as is specified in our original agreements signed and dated January 23 2007. ”
[34]It was observed on behalf of the Defendants that the First Claimant did not say that certain of the sums were already due and payable and that he must pay them now. I am not persuaded that that omission is significant or that it materially assists the Defendants. The communication was in respect of “outstanding loans” and can be interpreted as the First Claimant making an offer which he hoped would persuade the First Defendant to pay the sums due.[35]On 28 August 2008 the First Claimant wrote a long email to the First Defendant. He stated that he was “having a difficult time understanding your inability to honor past agreements”. Reference was made to a failed commitment to issue equity to the First Claimant but no reference was made to loans being due and remaining unpaid. He said:
“I had intended to continue my financial support of the business until we raised sufficient funds to sustain our operations and to commercialise our products. I had to stop funding because you were not fulfilling your commitments and you have been unwilling to cede operational authority to me. The lack of funding, capital raising and operational focus have delayed commercialisation by a full year. Those shortfalls can be fixed before it is too late. I just hope it is not too late to fix the lack of trust and respect. As your friend, I implore you to try. As my friend I commit to you that I will try. But, Kamal, for this to succeed you need to live by your commitments – issue the company stocks to all partners, as you committed, and give me operational control.”
[36]On behalf of the Defendants it was submitted that this email, by not referring to the debts being due, was consistent with the alleged oral agreement. That is perhaps so when viewed in isolation. But when viewed in the context of the email dated 26 June 2008 the significance of the omission is limited.[37]On 6 September 2008 the First Defendant replied. At the end of paragraph 5 he referred to the loans and said:
“We had agreed that all loans would be transferred to the holding company and only when we make a profit that these loans would be paid pro rata.”
[38]Counsel for the Defendants observed that this statement was made before the first formal demand for repayment of the loans which was not made until 9 January 2009.[39]The First Claimant replied on 11 September 2008. At the end of the first page he referred to loans he had made at low interest rates which had gone into “default”. However, that reference may well be to the loans which fell due before September 2006 (because the interest rate was increased thereafter) and which had been rolled up in the restructuring evidenced by the agreement dated 20 September 2006. Later in the email he returned to the complaint that the First Defendant’s commitment to issue shares had not been fulfilled. A proposal was made, point 3 of which was that “all our respective debt be assumed by the holding company.” He did not in terms deny the agreement alleged by the First Defendant in his email dated 6 September 2006.[40]On 1 October 2008 a meeting took place and on 2 October 2008 Sir Charles Masefield summarised the proposals made and agreements reached regarding the loans made by the Claimants to the Defendants. A procedure was to be agreed whereby a difference as to the quantum of the loans could be resolved after which the First Claimant and First Defendant could negotiate and agree a repayment schedule. Again there is no reference to loans being then and there due and payable. However, discussion of a repayment schedule is not out of place in circumstances where loans already due have not been paid. Moreover, the reference to a proposed repayment schedule does not sit comfortably with the alleged oral agreement that nothing was repayable until profits began to flow.[41]A meeting took place on 22 January 2009 between the First Claimant, the First Defendant, Mr. Grano and Lord Slynn. By an emailed letter dated 9 February 2009 to the First Defendant the First Claimant noted that the amount he had loaned was now accepted (at any rate by the First Claimant) in the sum of $36,001,324. He said that at the meeting he wanted those loans to be repaid and had offered to relinquish his equity interest. He went to say that at the meeting that offer had been rejected but that the First Defendant had insisted that he would repay the indebtedness. There was no reply to this letter. The First Defendant accepted that he received the email but said that he was unable to open the attached letter. Although the email said or implied that the attached letter documented the parties’ meeting and asked if there was anything in the letter which was inconsistent with the First Defendant’s understanding, it does not appear that the First Defendant replied to the First Claimant asking for the letter to be sent in another form which he could open.[42]Having reviewed the main parts of the correspondence on which the parties rely the following observations can be made: i) During the period from September 2006 to May 2007, when the parties signed several written agreements recording their agreements, the alleged overarching agreement was not put into writing. ii) It is said that the alleged agreement (that the Defendants were only to repay the debts out of profits) is consistent with the agreement dated 20 September 2006 and is reflected in the agreement dated 23 January 2007. This is an important submission because the Claimants’ counsel has submitted that the suggested oral agreement is “completely inconsistent with all the contemporaneous documentary evidence”. For the reasons I have given I am unable to exclude the possibility that when those two agreements are construed in the light of the relevant background they may be shown to be consistent with the alleged agreement. iii) The other part of the alleged oral agreement (that the First Claimant would fund the Technology through to launch) is not consistent with the agreements dated 20 September 2006 and 23 January 2007. iv) The final agreement dated 4 May 2007 is not consistent with the alleged oral agreement that the loans would only be repaid out of profits. v) The First Defendant does not mention the final agreement in his statement or explain how he came to sign it in circumstances where there was a binding oral agreement stemming from September 2006 that the loans would only be repaid out of profits. vi) The loans were not demanded on their due dates. vii) In his letter dated 6 September 2008 (before any demand for payment was made) the First Defendant stated that he and the First Claimant had agreed that the loans would only be paid pro rata when a profit was made. That allegation was not denied in the First Claimant’s letter dated 11 September 2008.

The prospects of a successful defence

[43]I have to decide whether the Defendants have a real as opposed to a fanciful prospect of establishing at trial the alleged oral agreement. The First Defendant has provided a long statement which supports the alleged oral agreement. The Claimants’ case is that the First Defendant’s evidence with regard to the suggested defence has been fabricated. They therefore have to say and do say that the court trying this case will inevitably find at trial that that is so. This is a high hurdle to surmount. The court has to be confident that if the First Defendant gives at trial the evidence he has set out in his witness statement the court will reject the material parts of that evidence as untrue.[44]In my judgment the most cogent part of the Claimants’ case on this application is that the First Defendant signed the final agreement dated 4 May 2007 which is inconsistent with the suggested oral agreement that the loans would only be repaid out of profits. The written agreement dated 4 May 2007 contains no terms to the same or similar effect as clause 5 of the 20 September 2006 agreement or clause 8 of the 23 September 2007 agreement which may prove to be consistent with the alleged oral agreement. Moreover, the First Defendant has not mentioned this agreement in his statement or sought to explain it. I cannot regard this omission as a slip. The First Defendant has put in a very long statement dealing with the other written agreements. Counsel for the Claimants said in his opening submissions that the First Defendant had given no explanation for this agreement and had not mentioned it in his statement. Counsel for the First Defendant did not say in response that it had not been mentioned by reason of a slip or say that there was further evidence to be given dealing with this agreement.[45]The second most cogent part of the Claimants’ case on this application is the improbability of the alleged oral agreement in circumstances where the First Defendant, when signing a written agreement or a promissory note, makes no written record of the alleged oral agreement. If the alleged oral agreement was made it must have been an agreement of considerable importance to him and yet he signed the agreements and notes without making a reference to it.[46]The third most cogent part of the Claimants’ case is that the other part of the alleged oral agreement (the funding obligation) is inconsistent with the written agreements dated 20 September 2006 and 23 January 2006.[47]These are very cogent points. What support is there for the First Defendant’s evidence ? Firstly, the written agreements of 20 September 2006, 4 October 2006 and 23 January 2007 may be consistent with the alleged oral agreement that the loans would be repaid out of profits. Secondly, the emails from the First Claimant in January 2008, June 2008 and August 2008 contained no demand for repayment of the loans in accordance with the terms of the notes. Thirdly, the First Defendant in his email dated 6 September 2008 articulated the alleged oral agreement and the First Claimant in his response dated 11 September 2008 did not deny the alleged agreement.[48]I consider these points to be much less cogent than the points in favour of the Claimants’ case. Indeed it seems to me probable, if one has regard to the documentary evidence and the absence of any evidence from the First Defendant as to the written agreement dated 4 May 2007, that the Defendants will not establish the alleged oral agreement. But can the Court properly and fairly say that it is inevitable that the Court, having heard the First Defendant’s evidence tested under cross-examination, will find that he has lied, as is the Claimants’ case ? I have concluded that the Court cannot properly and fairly say that. The Court does not know what answers he will give to the many questions which can fairly and forcefully be put to him. The prospect of the Defendants establishing the alleged oral agreement at trial may be very weak indeed but I cannot say, in circumstances where the First Defendant articulated the alleged oral agreement three months before a demand was made on the promissory notes without challenge from the First Claimant, that the prospect of the oral agreement being established is unreal or fanciful.[49]The Claimants relied upon other matters in support of their case but I do not consider that they enable me to dismiss the suggested defence. i) It is said that it would have been commercial lunacy for the First Claimant to have made the suggested oral agreement. It would amount to an open-ended commitment to fund a group of companies entirely under someone’s control and a right to receive repayment if and when that other person chooses to market the product and make a profit. This is supported by the First Claimant’s second witness statement. However, whilst the suggested agreement does indeed appear to be unwise from his point of view I know very little about the First Claimant save that he must be a very wealthy man who is willing to take risks with his money. Whether the loans made by him on the terms suggested by the First Defendant would be so unwise that it is unrealistic to suggest that he would have agreed to those terms is something which can only properly assessed at trial when the Court will know more of the First Claimant and of the relevant background to his investment in the Defendants. ii) It was also said that terms such as “commercialisation” and “profits” are so hopelessly vague that there is no prospect of them possibly constituting a viable defence. However, “commercialisation” is a term used by the First Claimant himself in his email dated 28 August 2008 and “profits” is used in clause 5 of the agreement dated 23 January 2007. I do not therefore consider that this point is particularly strong in the context of this application. iii) It was said that the First Defendant had been caught out in a lie about a particular promissory note, namely, the only one of which he was the sole maker. This allegation led to the First Defendant making a fourth witness statement during the hearing in which he both explained and maintained his evidence. I am unable on a hearing of this nature to say that his evidence is fanciful. iv) The Claimants said that the First Defendant had said in the past that apparent obligations were not what they appeared to be because of a “wider agreement”. It was said that if he told the truth on that occasion then it is inconceivable that he would have been content in the present case to rely upon an oral overarching agreement that was not recorded in writing. If proved this would support the Claimants’ case but not, in my judgment, to the extent of the Court being able to hold that the suggested defence in this case was fanciful.

Inadmissibility of evidence as to the alleged oral agreement

[50]There is long standing authority that a contemporaneous oral agreement cannot be set up to contradict the terms of a promissory note; see Chitty on Contracts 30th.ed. at para.12-101, Young v Austen (1868-69) LR 4 CP 553, New London Credit Syndicate Limited v Neale [1898] 2 QB 487 and Hitchings v Northern Leather Company [1914] 3 KB 907. It was submitted on behalf of the Claimants that the defence based upon the alleged overarching agreement is therefore inadmissible and would inevitably fail as a matter of law.[51]On behalf of the Defendants it was submitted that the reasoning in such cases was based on the parol evidence rule, that that rule has been subject to restrictions since the nineteenth century and that the courts are in fact prepared to admit extrinsic evidence if it is shown that the written instrument was not intended to express the entire agreement between the parties; see Chitty at paras. 12-096 – 12-100. It was further submitted that no special rule applied to bills of exchange or promissory notes. In the present case the Defendants will seek to use the evidence as to the alleged oral agreement in one or more different ways including a wider agreement going beyond the terms of the written notes, a collateral contract and an estoppel by convention.[52]Bills of exchange and promissory notes have always been treated as analogous to the payment of cash. Unliquidated cross-claims cannot be set-off against them. Such is the importance of bills of exchange and promissory notes as a means of payment in commerce that the courts are reluctant to allow “any erosion of the certainties of the application by our Courts of the law merchant relating to bills of exchange”; see Cebora SNC v SIP (Industrial Products) Ltd. [1976] 1 Lloyd’s Rep. 271 at p.278. It is to be expected therefore that the Defendants will encounter difficulty in persuading the Commercial Court that the long established principle relied upon by the Claimants is not what it seems and is subject to exceptions.[53]However, there is support for the proposition that the principle in question is based upon the parol evidence rule rather than upon any provision of the Bills of Exchange Act 1882; see New London Credit Syndicate Limited v Neale [1898] 2 QB 487 at p.490. There is also support for the proposition that the parol evidence rule does not prevent a party from adducing evidence to prove that a written document is not a complete record of the parties’ agreement; see Chitty at the paragraphs mentioned above. It is therefore arguable that the basis of the principle has been eroded and that the principle may not be as absolute as the cases suggest. I am told that no modern case has examined the application of the parol evidence rule to bills of exchange or promissory notes. In those circumstances there appears to me some scope for arguing that where there is evidence that the note does not contain the parties’ entire agreement extrinsic evidence is admissible to establish the parties’ entire agreement. The contrary argument is that the effect of the requirement in the Bills of Exchange Act 1882 that bills of exchange and promissory notes must be in writing is that they cannot be varied by an oral agreement; see Chitty at para.12-101. However, this was not said to be the basis of the principle in any of the cases to which reference has been made. Those cases suggest that the basis of the principle was the parol evidence rule. It is to be noted that in Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes 17th.ed. the following is stated at para.2-157:
“Exceptions to the parol evidence rule. There are a number of exceptions to the parol evidence rule, or, more accurately, situations where the parol evidence rule will not be applied. The dividing line between the rule and the “exceptions” is often subtle, and it is not particularly useful to try to reconcile apparently conflicting decisions. In the result, the scope of application of the rule is an area of difficulty and uncertainty for the practitioner. That difficulty and uncertainty is exacerbated by the fact that, in relation to bills and notes, the majority of the decisions on the application or non-application of the rule date from the nineteenth century and do not necessarily reflect the somewhat more relaxed approach which is adopted by the courts in respect of contracts generally. Where the exceptions apply, even oral evidence may be admitted to qualify the ostensible contract of a party on the instrument. However, a person to whom a bill or note is negotiated or delivered is entitled to assume that each party’s promise is absolute and unqualified unless it is otherwise indicated on the instrument itself. In most cases, therefore, extrinsic evidence will be admissible only as between immediate parties, or as regard a remote party who took the instrument with knowledge of the qualification.”
[54]The present dispute is between the immediate parties to the promissory notes. I find myself unable to dismiss the Defendants’ argument on the law as one which is bound to fail. This hearing is not the appropriate occasion on which to determine whether that argument is correct. If there are relevant exceptions to the principle relied upon by the Claimants they are likely to be fact sensitive. The appropriate time to decide this important question of law is at trial when the court has heard all the evidence. This is particularly so in the present case where, on the Defendants’ case, the terms of the promissory notes are affected by the provisions of the written agreements dated 20 September 2006 and 23 January 2007 which agreements are in turn said to be supplemented by an oral agreement.

Alternative basis of claim

[55]Counsel for the Claimants stated in his oral submissions that the loans were repayable not only in accordance with the terms of the notes but also pursuant to a clause in the written agreement of 11 April 2007 which provided that loans were repayable in the event of a breach of that agreement.[56]This argument, as the basis of a claim for summary judgment, had not been set out in the Application Notice. That referred to Part A of the Particulars of Claim which contained the claim pursuant to the terms of the notes. The claim based on breach of the 11 April 2007 agreement was pleaded in Part B at paragraphs 51(h) and 55-56. Counsel for the Defendants objected to this alternative basis for summary judgment being put forward. It had not been put forward specifically as a basis for summary judgment in the skeleton argument of counsel for the Claimants though it was in fact mentioned at para.7.4.9 in response to a defence advanced by the First Defendant based on the 11 April 2007 agreement.[57]This is a claim for over US$25m. It is not appropriate that alternative bases for summary judgment not advanced in the application notice be introduced in oral submissions. It is apparent from the note of counsel for the Defendants put in on the second day of the hearing in response to this alternative basis of claim that neither the evidence adduced by First Defendant nor counsel’s skeleton argument had been prepared with this alternative basis of claim in mind. For this reason I do not consider it appropriate to permit the Claimants to rely upon this alternative basis of claim for seeking summary judgment.

Other defences

[58]It is necessary briefly to mention these before considering the appropriate order to make on this application for summary judgment.[59]The First Defendant has stated that save where his signature was expressly stated to be on his own behalf he did not believe that he was assuming a personal liability to pay the loans. The First Claimant assured him that he would not be personally liable.[60]This assurance is not evidenced by or reflected in any contemporaneous or later document. The prospects of this defence succeeding are no greater than in the case of the primary defence.[61]The First Defendant also relied upon clause 7 of the April 2007 agreement which provided that he would be relieved of personal liability for the loans in the event that the First Claimant received a certificate for 10% of the stock of the holding company. However, his evidence is that the First Claimant was issued with 8% of the stock. Since there is no evidence that this condition for release from liability was satisfied I do not understand why this argument has any prospect of success.[62]Finally, the First Defendant has said that William Chia who signed certain of the promissory notes on behalf of the Defendant companies had no authority to bind them and that he signed the notes because the First Claimant explained that they were required for housekeeping purposes. A statement from Mr. Chia supports this evidence. However, the notes signed by Mr. Chia feature in the list of notes exhibited to the May 2007 agreement which records, by clause 1, that the borrowers are jointly and severally liable for the loans and that they are repayable in accordance with the payment terms set out in the promissory notes. The evidence of the First Defendant and Mr. Chia is therefore inconsistent with the May 2007 agreement. This argument has no greater prospect of success than the primary defence.

The appropriate order

[63]The court’s powers on a summary judgment application are not limited to granting or dismissing the application. The court may make a conditional order where although it is possible that the defence will succeed it is improbable that it will do so. Such a conditional order may provide for judgment to be entered if the defendant does not pay into court a sum of money; see CPR Part 24 PD paragraphs 4 and 5 and Anglo-Eastern Trust Limited v Kermanshahchi [2002] EWCA 198.[64]I have concluded that whilst it is possible that the primary defence may succeed that is improbable. None of the other defences have any greater prospect of success. The present case is therefore one where the court has power to make a conditional order.[65]The Claimants gave notice to the Defendants on 13 November 2009 that they would be asking for a conditional order as an alternative to summary judgment. They have sought an order for payment of an amount equal to the claim, namely, a sum in excess of $25m.[66]The First Defendant dealt with this matter in his third witness statement dated 23 November 2009. He stated that he does not have the means to pay $25m. into court and that a minimum of £500,000 per month is required to keep the group companies as going concerns and to continue the development and launch of the Technology. He pointed out that the Second and Fourth Defendants were in liquidation and that although there was an application to take them out of liquidation they would not have the funds to pay the sum demanded by the Claimants. He said that the Third and Sixth Defendants had negative net assets. He said that the Seventh Defendant had net assets of £467,906 as at 30 June 2008. None of the Defendants, he said, was in a position to pay the sums claimed into court.[67]It is, however, plain that the First Defendant is a wealthy man, or at any rate has access to considerable sums of money. He said in his first witness statement dated 6 November 2009 that he and his family had provided £82m. by way of loans and investments to his group of companies as at the date of the statement. Since he refers to £66m. in loans and equity having been provided by himself and his family as at April 2007 it would appear to follow that he and his family continued to fund the companies to a very considerable extent between April 2007 and 6 November 2009, namely, a further £16m. in about two and half years. That is consistent with his third statement which refers to his funding of the day to day cash requirements of the Third and Sixth Defendants and to £500,000 being required per month.[68]I consider that it is appropriate, where it is improbable that the defence will succeed, to order a payment into court. A trial, which it is probable that the Claimants will win, will delay recovery by the Claimants of their loans and will be expensive. In such circumstances a court may order payment of the sum claimed into court. That is particularly appropriate in the context of claims on promissory notes. However, the sum ordered to be paid into court should not be one which the Defendants cannot pay either themselves or from resources available to them because that would have the effect of stifling the defence. The onus is upon the Defendants to put sufficient and proper evidence before the court and to make full and frank disclosure; see M.V.Yorke Motors v Edwards [1982] 1 WLR 444 at p.449 and Anglo-Eastern Trust Limited v Kermanshahchi [2002] EWCA 198.[69]The First Defendant has not given any details of his assets or of the resources available to him. He has not given full or frank disclosure. But what he has said enables the court to infer that he must have very considerable resources available to him. In the last two and half years he and his family have provided about £16m. to his companies and he expects to continue funding them at the rate of about £500,000 per month. In total he has provided some £82m. to his companies. The ability to provide such sums suggests that the Defendant has or has available to him very considerable assets. He has not volunteered what those assets are or what their value is.[70]In these circumstances, although the First Defendant has said that he is unable to pay $25m. into court, I am not able to accept that that is so. The history of his or his family’s loans to the companies and the fact that he is to continue funding the companies at about £500,000 per month suggests that a payment of $25m. may very well be within his abilities. I am therefore minded to make an order that the Defendants collectively pay into court the sum claimed of $25m. Since not each Defendant is alleged to owe that sum it will be necessary to structure the order so that no Defendant is ordered to pay more than the sum claimed against him or it. I shall ask counsel to prepare an order to that effect.[71]Although the corporate defendants are said to have no means themselves it seems plain on the evidence of the First Defendant that they have access to his resources. Their own lack of resources is therefore no bar to the making of a conditional order.[72]After the hearing of this application counsel for the Defendants requested an opportunity to adduce further evidence as to means. This was resisted by the Claimants. I have noted that in Anglo-Eastern Trust Limited v Kermanshahchi [2002] EWCA 198 Brooke LJ said, at para.70:
“What is important is that if a claimant is seeking a conditional order that is out of the ordinary if a summary judgment application fails – and an order that a defendant should pay £1 million into court falls into that category – the judge should not allow any order of that kind to be perfected immediately if the defendant seeks an opportunity to place evidence before him to the effect that the order will stifle its defence completely because it does not have the means to pay.”
[73]Although notice of the application for a conditional order was given as a result of which some evidence as to means was tendered, unlike the position in Anglo-Eastern Trust Limited v Kermanshahchi, it seems to me that I should follow that guidance. The order I propose can fairly be regarded as out of the ordinary. The sum of $25m. is very large and the order I propose to make will stifle the defence if payment of such sum is beyond the means of the Defendants. Accordingly, if, after seeing this judgment in draft, the First Defendant considers that the order I propose to make is one which will stifle the defence and wishes to provide evidence of his assets and those available to him I will consider his application and evidence after formally handing down judgment. The conditional order I propose to make will not be made and perfected before any such application has been heard. If that application is granted and the further evidence makes clear that a lesser sum is the appropriate sum to be ordered to be paid into court then the conditional order will be made on the basis of that lesser sum.

order

to repay, pro rata, to Kazeminy and Siddiqi, any of the loans contemplated by clauses 1,5 and 6 (ie up to $15,000,000 in aggregate principal amount) made by them; (b) to repay, in pro rata amount, all loans previously made by Kazeminy, the Kazeminy Trusts, Centurion and Grano to the holding company or any other entity in which Siddiqi had or has direct or indirect interest; and (c ) to repay all loans made by Siddiqi to such entities. Any profits in excess of the amounts necessary to repay the foregoing amounts shall be distributed to the shareholders of the holding company in accordance with their then respective proportionate interest in the holding company.”

Cited in 6 later judgments