Shepherd Construction Ltd v Berners (BVI) Ltd & Anor [2010] EWHC 763 (TCC)

[2010] EWHC 763 (TCC)Case No HT-09-477
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Date Thursday, 25 th March 2010
St. Dunstan’s House
133-137 Fleet Street
London EC4A 1HD
Before
MR. JUSTICE COULSON
Between
SHEPHERD CONSTRUCTION LTDClaimant(1) BERNERS (BVI) LTDDefendants(2) JJW LTDDefendant
MS. FINOLA O’FARRELL QC (instructed by Messrs. Wragge & Co.) for ClaimantMR. OLIVER WHITE (instructed by Messrs. Trinity Solicitors LLP) for Defendants
Judgment
[1]On 18th March 2010, I granted a freezing order against the defendants in relation to their assets, up to the value of £1.75 million. The order was made on an application without notice. Today is the return day. The defendants seek to discharge the order. There is no issue as to whether the claimant can demonstrate a good arguable case against the defendants; the only basis on which the defendants seek that discharge is, they say, the absence of “a good and arguable case for a risk of dissipation” (see Customs & Excise v. Anchor Foods Limited [1999] 1 WLR 1139).[2]The underlying dispute arises out of work done by the claimant for the first defendant (whom I shall call “Berners”) at the Berners Hotel, 6-9 Berners Street, London W1. There were repeated failures by Berners to pay on interim applications and on three separate occasions the claimant suspended work. In October 2009 the claimant started an adjudication in relation to the non-payment of Interim Application 11. During that adjudication Berners delivered a cheque to the claimant for £1.15 million, but that cheque was dishonoured by the bank. A further cheque in relation to Applications 11 and 12 was similarly dishonoured[3]The adjudicator decided that Berners must pay the claimant just over £1 million plus VAT plus interest. Berners failed to pay. Court proceedings were then issued. Judgment was entered against Berners in default on 23rd December 2009, in the sum of £1,534,518.44. There has never been any attempt to set aside that judgment. On 9th February 2010, the claimant obtained a judgment in default against the second defendant, JJW, who had provided a parent company guarantee in favour of Berners, in the sum of £1,183,107.28.[4]The claimant commenced winding up proceedings against Berners, and those proceedings were compromised by a Tomlin order dated 15th February 2010. That provided for payment by Berners of the outstanding sums in relation to Applications 11, 12, 13 and 14 in the following sequence:(a) the payment of £500,000 on 16th February;(b) the payment of another £500,000 on 23rd February; and(c) the payment of £1,242,984.66 on 5th March 2010. The first payment was made, but the second and third payments were not. On 12th March 2010, Shepherd obtained judgment in default against Berners in the sum of £1,742,982.66 together with interest and costs, as a consequence of the failure to comply with the terms of the Tomlin order.[5]The events following the non-payment of the sums set out in the Tomlin orderare the subject of a separate dispute this afternoon, and I deal with that first. When I made the order on 18th March, there was a good deal of evidence of communications between Mr Salfiti, a representative of the defendants (who describes himself as a consultant, and whose precise relationship with the defendants is unclear), and the claimant’s solicitors. In those communications, some of which were by telephone and some of which were by e-mail, and which were largely over a period of a week or so in early March, Mr. Salfiti made repeated promises to the effect that payment of the outstanding sums was imminent. There were, for example, references to the imminent transfer of funds to the relevant bank, and other similar statements intended to show that the outstanding sums were on the brink of being paid. Those broken promises were part of the material relied on by the claimant in support of their application for a freezing order. On behalf of the defendants, Mr. White now submits that I cannot have regard to that material because those communications were ‘without prejudice’ and therefore privileged.[6]I have been taken to the relevant e-mails and it appears that some (although by no means all) of the e-mails from Mr. Salfiti were labelled “Without Prejudice”. There is no clear record of anything similar being said in the telephone calls. In my judgment, the label is meaningless, because these communications were not negotiations. These were not matters on which the parties were hoping to reach agreement in order, in some way, to compromise outstanding claims. These were requests for information by the claimant’s solicitors as to when the agreed and outstanding sums would be paid, and responses to those requests by Mr. Salfiti. The exchanges were simple:
“When is the money going to be paid?”; “It is going to be paid tomorrow.”
In those circumstances I do not see how, as a matter of principle, a ‘without prejudice’ label can attach to such communications.[7]I note that this point was considered by the House of Lords in the case of Bradford & Bingley PLC v. Rashid [2006] UKHL 37, [2006] 1 WLR 2066. The communications in that case were similar to those here, although, as Mr. White rightly points out, in Rashid they were not labelled as ‘without prejudice’. It was argued that they were in fact without prejudice communications. There are three paragraphs in which this point was dealt with, and rejected, in three separate speeches by their Lordships: paragraphs 33, 73 and 83. I take paragraph 73, which is from the speech of Lord Brown of Eaton-under-Heywood, as being representative of their Lordships’ approach to this point. He said this:
“In my opinion the without prejudice rule has no application to apparently open communications, such as those here, designed only to discuss the repayment of an admitted liability rather than to negotiate and compromise a disputed liability. I find it impossible to regard the correspondence here as constituting ‘negotiations genuinely aimed at settlement’ (Lord Griffiths in Rush & Tompkins v GLC [1989] AC 1280 at 1299) or ‘an attempt to compromise actual or impending litigation’ (Sir Robert Megarry V-C in Chocoladenfabriken Lindt & Sprungli AG v Nestlé Co Ltd. [1978] RPC 287). Nor does the underlying public policy justification for the rule appear to have any application in circumstances such as these. That justification, as Oliver LJ observed in Cutts v Head [1984] Ch 290 at 306 ‘essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability’. No ‘statements or offers’ were made here with a view to settling a dispute. Since the debt was admitted, there was no dispute. As Mr Fenwick aptly put it in argument, Mr Rashid was simply asking for a concession; he was not giving one.”
[8]It seems to me that those observations are directly applicable here. The communications, in which payment of the agreed and overdue sums was repeatedly promised, were not offers; neither were they made in the course of negotiations for settlement. There was nothing to settle. They are certainly not being relied on by the claimant as an admission of liability, since there already was a full admission of liability, both by way of the Tomlin order and as a result of the subsequent judgment. These communications were being relied on by the claimant because they demonstrated the ongoing failure on the part of these defendants to pay the sums otherwise due, despite promises to the contrary. In those circumstances, it seems to me that these communications are not ‘without prejudice’ and are properly before the court.[9]That finding leads on to the next point. At the original hearing on 18th March, these communications were being relied on as demonstrating the defendants’ broken promises, and were therefore part of a pattern that stretched right back to the claimant’s suspensions of the work due to non-payment. But these communications are now important for another reason. Although they show that imminent payment was being promised by Mr Salfiti on a regular basis at the end of February and the first part of March 2010, it now transpires, according to paragraph 10 of the second of three affidavits with which I have been provided by Mr. Youssef, the second defendant’s Chief Financial Officer, that since 12th February 2010 (i.e. the Tomlin order), the defendants have been unable to make payment because of what he calls “profound cash flow difficulties”. He states that those cash flow difficulties are expected to continue until “a group financing which will be completed in the near future”. In other words, on Mr. Youssef’s evidence, the defendants were not and will not be able to pay these sums until the group financing is in place. That has never been suggested until the making of the freezing order.[10]Of course, that evidence contrasts starkly with what was being said by Mr. Salfiti, who was promising payment within the next day or two days and referring to bank transfers and the like. It seems to me that, in the light of Mr Youssef’s evidence, I can properly infer, either that those promises to pay were made in circumstances where the maker knew that they were not going to be complied with, or that the money was genuinely available, but has been spent on something which the defendants regard as more important. That would be an unjustified dissipation of assets.[11]The defendants cannot have it both ways. If cash flow problems were the reason for non-payment, then that could and should have been said, and the failure to make any mention of it entitles me to infer that the promises to pay were being made by Mr. Salfiti in circumstances where he knew or should have known that the promises to pay would simply not be kept. If, on the other hand, the promises were genuine, then the money intended for the claimant has gone elsewhere, and the defendants’ assets are being dissipated.[12]Either way, it seems to me that those communications are relevant to the issue before me today. They are part of the material which has led me to conclude that there is, in this case, a real risk of dissipation.[13]The evidence that a claimant needs to identify on an application of this kind has been called “solid evidence of dissipation”: see Ninemia Maritime Corporation v. Trave Schiffahrtsgellschaft MbH[1983] 2 Lloyd’s Reports 600. In my judgment, in the present case, there are three particular elements of the evidence which indicate a real risk of dissipation. The first involves the broken promises (and the appropriate inferences to be drawn) set out at paragraphs 9-11 above. The second is the nature of the defendant companies and the inferences that can be drawn from their payment history.[14]For this analysis, I take as my starting point the judgment of Ramsey J in Chorus Group v. Berners (BVI) Ltd. & JJW Ltd. [2006] EWHC 3622 (TCC). That was a judgment that set out his reasons for making a freezing order against these same two defendants, arising out of this very hotel project, as a result of the non-payment of a contractor. Again, the issue in that case was the risk or otherwise of dissipation. Ramsey J concluded, having set out the relevant tests, that there was clear evidence as to the risk of dissipation. He identifies it at paragraph 23 of his judgment:
“In my judgment, in this case, there are the following factors which are relevant: (1) The First Respondent is a British Virgin Islands company and the Second Respondent is a Guernsey company and they are therefore based in jurisdictions where disclosure about those companies is less easily obtained. They are obviously based there so as to avoid consequences which would otherwise apply to a company which is within the jurisdiction. (2) As Mr Brook accepts, the First Respondent is a single purpose vehicle. Also, as I find, it only has one asset, the Berners Hotel, which has been charged to the Bank of Scotland and has a charge of about £37.7 million against it. I do not accept that the Scottish bank accounts show that there is any asset in Scotland, even if that were within the jurisdiction. The Berners Hotel was bought for £48 million but it is being refurbished. Although it may be worth £73 million if refurbished, it is not in that state now. At most the equity is limited to the value over the £37.7 million charge. Therefore, the only asset is the extent of the equity in excess of that figure. The Second Respondent is a company which holds shares in other companies and apart from its shareholding in various companies in the UK, does not appear to have assets which are in the jurisdiction. (3) There are clearly funding difficulties, about which I have little information. These difficulties may or may not be able to be resolved at a meeting with the Bank. It is not entirely clear when these difficulties arose, how they arose or what is the underlying cause of them. Certainly, from the conduct of the Respondents in respect of payment under the Settlement Agreement and of the cheque, there is no indication that these problems of funding were caused by a failure to sign a building contract. (4) Sums have been certified and not paid. The dispute over those sums then went to adjudication and a decision was obtained. It seems that jurisdiction arguments were raised but there are now no serious grounds of challenge to that adjudication Decision. That Decision then led to a Settlement Agreement which should have achieved payment on 18 October 2006 of sums which were due at the end of May, the end of June and the end of July 2006. It was first said that there were administrative problems and that the payment would not therefore be by bank transfer. It is difficult to see what the administrative problems were or why a bank transfer could not have been made by those who apparently were present in Paris on the 18 October 2006. It does not seem that any serious attempts were made to make that bank transfer. Apparently therefore, "administrative problems" is being used as a cover for the fact that the Respondents were not making payment. A cheque was signed on the 19 October 2006 (dated 18 October 2006) but it only arrived in London on 23 October 2006. It was passed to Chorus on the 24 October 2006 and, as I have said, when presented for special collection, it was returned unpaid. It is now said there are funding difficulties which may be resolved and that if the cheque is re-presented, it may be paid. I consider that the conduct of the First Respondent, in first suggesting that there were administrative problems and then in producing a cheque which it is apparent from the evidence of Mr Brook would not be paid, is conduct which is sufficient for the court to draw the necessary inferences of an intention to avoid payment of a judgment and falls within the category of conduct which makes it unnecessary for further specific evidence on risk of dissipation.” (1) The First Respondent is a British Virgin Islands company and the Second Respondent is a Guernsey company and they are therefore based in jurisdictions where disclosure about those companies is less easily obtained. They are obviously based there so as to avoid consequences which would otherwise apply to a company which is within the jurisdiction. (2) As Mr Brook accepts, the First Respondent is a single purpose vehicle. Also, as I find, it only has one asset, the Berners Hotel, which has been charged to the Bank of Scotland and has a charge of about £37.7 million against it. I do not accept that the Scottish bank accounts show that there is any asset in Scotland, even if that were within the jurisdiction. The Berners Hotel was bought for £48 million but it is being refurbished. Although it may be worth £73 million if refurbished, it is not in that state now. At most the equity is limited to the value over the £37.7 million charge. Therefore, the only asset is the extent of the equity in excess of that figure. The Second Respondent is a company which holds shares in other companies and apart from its shareholding in various companies in the UK, does not appear to have assets which are in the jurisdiction. (3) There are clearly funding difficulties, about which I have little information. These difficulties may or may not be able to be resolved at a meeting with the Bank. It is not entirely clear when these difficulties arose, how they arose or what is the underlying cause of them. Certainly, from the conduct of the Respondents in respect of payment under the Settlement Agreement and of the cheque, there is no indication that these problems of funding were caused by a failure to sign a building contract. (4) Sums have been certified and not paid. The dispute over those sums then went to adjudication and a decision was obtained. It seems that jurisdiction arguments were raised but there are now no serious grounds of challenge to that adjudication Decision. That Decision then led to a Settlement Agreement which should have achieved payment on 18 October 2006 of sums which were due at the end of May, the end of June and the end of July 2006. It was first said that there were administrative problems and that the payment would not therefore be by bank transfer. It is difficult to see what the administrative problems were or why a bank transfer could not have been made by those who apparently were present in Paris on the 18 October 2006. It does not seem that any serious attempts were made to make that bank transfer. Apparently therefore, "administrative problems" is being used as a cover for the fact that the Respondents were not making payment. A cheque was signed on the 19 October 2006 (dated 18 October 2006) but it only arrived in London on 23 October 2006. It was passed to Chorus on the 24 October 2006 and, as I have said, when presented for special collection, it was returned unpaid. It is now said there are funding difficulties which may be resolved and that if the cheque is re-presented, it may be paid. I consider that the conduct of the First Respondent, in first suggesting that there were administrative problems and then in producing a cheque which it is apparent from the evidence of Mr Brook would not be paid, is conduct which is sufficient for the court to draw the necessary inferences of an intention to avoid payment of a judgment and falls within the category of conduct which makes it unnecessary for further specific evidence on risk of dissipation.”
[15]Ramsey J concluded in that case that these defendants were:
“… companies outside of the jurisdiction; where they have the ability to create complex mechanisms which are not transparent; where they have created this single purpose vehicle specifically to avoid financial exposure; where the only asset is equity in the Berners Hotel and where the Respondents' behaviour in response to the claims by Chorus shows a pattern of evasiveness, I consider it proper to draw the inference that, as was set out in The Niedersachsen [1983] 2 Lloyd’s Rep 600, the refusal of an injunction would involve a real risk that a judgment awarded in favour of Chorus would remain unsatisfied.”
[16]It seems to me that, on the startlingly similar facts of this case, I must reach the same conclusion. In the present case, as we have seen, there is the same history of non-payment of interim applications; there are the same promises of payment which have not been met; the same failure to pay on an adjudicator’s Decision; and there is the same pattern of dishonoured cheques. The facts here are stronger, because there has been a failure to satisfy three separate judgments of the court. All of those factors, so it seems to me, more than justify the conclusion that there is a serious risk of dissipation of the defendants’ assets.[17]The third area of the evidence that shows a real risk of dissipation concerns the evidence as to the defendants’ assets. I consider, on the material before me that, whilst Mr. Youssef claims that the second defendant, JJW Ltd., is a company with extensive worldwide assets said to run to hundreds of millions of pounds, it is a factor against the defendants that, notwithstanding that alleged value, these comparatively modest sums have simply not been paid to the claimant. Again, that disparity suggests a very real risk of dissipation so as to avoid payment altogether.[18]I ought to add that there are difficulties in relation to the evidence as to the assets of these companies. The first defendant’s asset position is as unclear as it was before Ramsey J. The second defendant company claims to have extensive assets but has not revealed all of the relevant financial information. I deal with that point in greater detail in paragraphs 23-27 below.[19]For those three reasons, therefore, I conclude that there is a risk of dissipation and that there is solid evidence of that risk. Thus the claimant’s entitlement to the order is made out. However, it seems to me that I can reach precisely the same conclusion by an entirely different route. I do that by reference to paragraphs 13 and 14 of Mr. White’s helpful skeleton. There he says this:
“13. It is submitted that the court should be guided by a series of considerations applied and approved in the case of O’Regan v. Iambic Productions (1989) 139 NLG when assessing risk. These guidelines, adopted by Sir Peter Pain, are set out in Mareva Injunctions, First Edition at page 51. They include the following: 1. The nature of the assets and the ease with which they can be dissipated. 2. The nature and financial standing of the defendant business. 3. The length of time the defendant has been in business for. 4. Any express or implied statement of intent made by the defendant in respect of dissipating assets. 5. Whether the substantive claim relates to dishonesty. 6. Previous compliance with Court orders. 14. It is submitted that the defendant does not fall foul of any of these considerations. Moreover, the entirety of all assets in excess of £1.75 million is neither liquid nor readily transferable but held in property. The defendants have an untarnished business reputation which is neither challenged nor contested by the claimant.”
[20]It seems to me that it is simply untenable for the defendants to submit that they do not fall foul of any of these considerations. On the contrary, they fall foul of almost all of them. Dealing with each of these six points in turn:(1) The nature of the assets owned by the defendants appears to be property, but without any evidence as to the loans, mortgages or bank arrangements in relation to each of these properties, it is not possible to say whether they can be quickly dissipated or otherwise.(2) The first defendant is a BVI company; the second defendant is based in Guernsey. Ramsey J expressly took into account the effect of those arrangements when making the order in the Chorus case, and it seems to me that that was an entirely proper course.(3) I have no evidence as to the length of time either of these companies have been in business. It seems to me that the first defendant, Berners, being a single purpose vehicle, cannot have been in business for very long, since the hotel was newly purchased at the time of the Chorus case, and is the subject of extensive building works which have now been suspended.(4) As to the express or implied statements of intent, this is an unusual case because there is no evidence before me from a director of either the first or the second defendant. Usually on applications of this sort there is such evidence. Mr. Youssef, the Chief Financial Officer of JJW, is an employee. Mr. Salfiti’s status is unclear. There is no express or implied statement from either of them in relation to dissipation of assets.(5) The substantive claim does not relate to dishonesty. It is a straightforward claim to be paid for the value of work done many, many months ago. The inference of dishonesty arises more recently, as a result of the specific promises to pay which, so it now appears, could never have been fulfilled.(6) It is plain that the defendants have failed to comply with numerous court orders, both in relation to the Chorus claim in 2006, and in relation to this case. What is more, those failures to comply are ongoing.[21]Therefore, it seems to me that if I adopted Mr White’s test, I would reach the same conclusion: namely that the risk of dissipation, and all the other circumstances, means that a freezing order is justified.[22]I make it clear that I reach that conclusion without taking into account the events surrounding Mr. Youssef’s third affidavit. However, it is important to note that in that third affidavit (provided shortly before this hearing began), Mr. Youssef said, “Neither defendant has ever been made the subject of a freezing order”. Of course, that statement was wholly incorrect. The order made by Ramsey J four years ago is the clearest possible evidence of a freezing order against both of the defendants. The explanation which I sought, and which I accept from Mr. White, is that Mr. Youssef has only been at JJW Ltd. since 2008, and was unaware of what had happened prior to his employment. Whilst, as I have said, I accept that explanation, the fact that this important affidavit contained a statement that was so obviously untrue gave rise to considerable concerns about the reliability of the material provided by the defendants for the purposes of this application. A witness such as Mr. Youssef is obliged to ensure that every word of what he says is demonstrably true. It is very unusual for an affidavit to be provided which contains an important statement which the judge knows, at a glance, to be untrue.[23]The remaining issue concerns the extent of the freezing order, and whether it should be confined to the UK or continue to operate worldwide. It seems to me that potentially different considerations apply to the different defendants. As far as Berners, the first defendant, is concerned, the only material that I have in relation to their financial position is the statement in Mr. Youssef’s first affidavit that the hotel has a net book value of £65.4 million and is subject to a charge in favour of the Allied Irish Bank in an amount of £61.8 million.[24]The first point is that the net book value is not the appropriate figure for the court to consider when considering whether or not there are assets, as Christopher Clarke J made plain in Linsen International Ltd. v. Humpuss Sea Transport PTE[2010] EWHC 303 (Comm). The greater difficulty, however, is that there is no evidence to support either figure. They are simply asserted by Mr. Youssef and not supported by any documents at all.[25]That becomes more than a technical point when those figures are compared with the figures set out in the judgment of Ramsey J, which were very different. Then, the charge was only £37.7 million and the hotel was valued at £48 million. This demonstrates the volatility of the commercial property market, with these figures capable of significant adjustment up or down. On the current figures, the differential between the asserted value and the loan is small, and even a modest adjustment would wipe out the whole of the residual equity. Accordingly, it does not seem to me that I should make any amendment in relation to the freezing order in respect of Berners.[26]In relation to JJW, it is plain that they may have far greater assets, as set out in the Schedule attached to Mr Youseff’s statement. At the moment the difficulty is that there is no independent evidence of value, and there are no figures for bank charges, mortgages or other loans which could give the court some idea of the net value of their UK assets. One side of the balance sheet would appear to suggest something like £31 million in assets. But, depending on the charges and loans, that figure may be reduced considerably; it may even be extinguished. On the other hand, depending on the mortgages etc., it may well be that there are significant assets available to JJW within this jurisdiction.[27]Accordingly, it seems to me that what I should do in relation to JJW is this. I should order them to provide evidence of the claimed values, and details of the mortgages, loans and other charges in respect of: the Academy Town House Hotel in London, the Colonnade Town House Hotel in London, the Glasshouse Hotel in Edinburgh, the Quebec Town House Hotel in Leeds and the Threadneedle Town House Hotel in London. If that evidence demonstrates a significant gap between the value of these hotels and the charges, loans etc. applicable to them, then I would consider it appropriate to amend the order so that the freezing order applied only to JJW’s assets in the UK.[28]Accordingly, what I would propose to do is to keep the order in place as things presently stand, but to give JJW liberty to apply, once they have the necessary material, and if that demonstrates a significant gap between value and borrowings then I would amend the order so that the freezing order in relation to JJW related only to the UK.