Brampton Manor (Leisure) Ltd v MclEan & Ors

A debenture holder may rely at trial on a circumstance existing when receivers were appointed, even if it was not expressly relied upon at the time, provided the opposing party had adequate notice and an opportunity to meet it. Transactions intended to create legal rights are not shams merely because they were entered into for tax-avoidance purposes. A party who deliberately created and relied on such transactions cannot later deny their legal effect. An unpaid term-loan instalment remains unpaid merely because an overdraft facility could have been used to create another repayable debt.

The claimant company challenged the Bank’s demand for repayment and appointment of administrative receivers under its loan agreements and debenture. It alleged that the Bank’s conduct had caused the company to lack sufficient funds to meet loan instalments. The Bank relied alternatively on breaches arising from transactions implementing a VAT-avoidance scheme and the diversion of trading receipts to another account. The central issues were whether those transactions were effective, whether they constituted events of default, and whether the Bank’s other alleged acts affected the company’s indebtedness.

1. The claim failed. The Bank was entitled to rely on the company’s breaches of the Loan Master Agreement and Debenture arising from the 2001 VAT Scheme Dispositions. Those breaches constituted events of default which justified the demand and appointment of receivers, even though the Bank had not expressly relied on them when making the demand. The principle in Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232 applied because the claimant had adequate notice and a proper opportunity to adduce evidence.

2. The dispositions were not shams. Applying the definition in Snook v London & West Riding Investments Ltd [1967] 2 QB 786, the documents were intended to create the rights and obligations appearing on their face. The claimant could not contend that the transactions were ineffective after relying on the lease to resist the receivers’ possession claim. The reasoning was supported by Tinker v Tinker [1970] Probate Div p 136.

3. Alternatively, the court considered the claimant’s seven complaints. The November 2000 loan documents, signed subject to the claimant’s letter, preserved the less onerous May 2000 terms where they conflicted, resulting in a £15,563 adjustment. That adjustment did not repay the July and August instalments.

4. The evidence did not establish an established banking practice requiring the Bank to accept payments to Fitness through Leisure’s accounts, nor measurable loss from the Bank’s refusal to do so. The valuation fee was properly debited, the PDQ machine had not been deactivated by the Bank, and the settlement agreement did not require contribution to police-investigation costs.

The action therefore failed notwithstanding the £15,563 account adjustment.