E-Clear (UK) Plc v Elia & Ors

The Court of Appeal allowed the appeal by Mrs Mili Petrou Elia against a Part 24 summary judgment declaring that E-Clear (UK) plc was the beneficial owner of 35.5% of a flat and ordering its sale. The court held that there were real and substantial disputes of fact which could not properly be resolved on a summary application: principally whether the payments used to purchase the flat were company monies or payments in discharge of pre-existing debts, whether the director (Mr Elia) knew or ought to have known of the company’s insolvency (bringing ss.170–177 Companies Act 2006 into play), and whether, even if there was a breach of fiduciary duty, a proprietary tracing remedy was available.

The court also held that the trustee in bankruptcy’s consent to a declaration was not conclusive against the appellant so as to defeat her right to litigate the issues on the merits.

Background and parties: E-Clear (UK) plc (in liquidation) brought proceedings alleging that various payments totalling about £4.206m (including amounts applied to the purchase of a flat at 29 Rutland Court) were made by the company for the benefit of its director, Mr Elias Elia, in breach of fiduciary duties owed to the company. The company sought a declaration that it was the beneficial owner of 35.5% of the flat and an order for sale. The flat had been registered in Mr Elia’s name and subsequently an assignment from Mr Elia to his mother, Mrs Mili Petrou Elia (the appellant), was executed.

Procedural posture: At first instance HH Judge Mackie QC granted summary judgment under CPR Part 24 declaring the company beneficial owner of 35.5% of the flat and ordering its sale. The trustee in bankruptcy of Mr Elia consented to a declaration. Mrs Elia appealed against the summary determination.

Nature of the claim / relief sought: The claimant sought recovery of monies paid and, in respect of the flat, asserted a proprietary claim by contending that sums paid from the company traced into the purchase and that Mr Elia held the interest on constructive trust for the company. The remedies sought included a declaratory order and sale of the property.

Issues framed by the court: (i) Whether the payments used to acquire the flat were company funds or payments discharging pre-existing debts owed to Mr Elia or to a related company; (ii) whether any such payments amounted to a breach of fiduciary duty under ss.170–177 Companies Act 2006, which requires consideration of the company's solvency and the director's knowledge of it; (iii) whether repayment of the company's own debts by the company can give rise to a proprietary tracing remedy in the hands of the recipient; and (iv) whether the trustee’s consent was binding on the appellant.

Court’s reasoning and outcome on those issues: The Court of Appeal concluded that there was sufficient evidence (including disputed ledger entries and evidence about loans said to have been made by third parties such as Mr Zolotas and Mr Tullett) to raise triable issues on whether the company in fact owed sums to Mr Elia and whether the disputed payments discharged such debts. The judge at first instance was wrong to conclude the company’s insolvency and Mr Elia’s knowledge of it were beyond reasonable doubt on a Part 24 application. The court also accepted that, although repayment of company debts can involve fiduciary breaches and may be capable of amounting to a fraudulent preference, the availability of a proprietary remedy when company monies are applied to pay the company’s own debts is a complex question that should be determined after factual findings at trial (see reference to Re Washington Diamond Mining Co and Sinclair Investments). The trustee’s consent did not preclude Mrs Elia from contesting the claim. The appeal was allowed, the summary judgment set aside and the matter remitted for trial with directions invited.

Appeal allowed. The Court of Appeal held that the judge was not entitled to determine complex and contested factual and legal issues on a Part 24 application. There were realistic and serious disputes about whether the payments were actually repayments of debts (including contested loan entries and third‑party loan evidence), about the company’s solvency and the director’s knowledge, and about whether a proprietary tracing remedy was available; those issues require trial. The trustee’s consent to a declaration was not binding on the appellant so as to prevent her defending the claim.

Appeal from the High Court of Justice, Chancery Division (His Honour Judge Mackie QC), HC10C02405; first instance order dated 25 April 2012 (summary judgment under CPR Part 24). Permission to appeal was given by Aikens LJ. The Court of Appeal heard the appeal on 12 June 2013 and handed down judgment on 6 September 2013 ([2013] EWCA Civ 1114).