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Judgments -Henderson (Respondent) v. 3052775 Nova Scotia Limited (Appellants) (Scotland)


SESSION 2005-06


([2006] UKHL 21)



Henderson (Respondent)


3052775 Nova Scotia Limited (Appellants) (Scotland)


Ordered to be printed 10 May 2006


    (HL Paper 175)


from the Appellate Committee

10 MAY 2006

Henderson (Respondent) v. 3052775 Nova Scotia Limited (Appellants) (Scotland)


    The Committee (Lord Bingham of Cornhill, Lord Hoffmann, Lord Hope of Craighead, Lord Rodger of Earlsferry, Lord Mance) have met and considered the cause Henderson (Respondent) v. 3052775 Nova Scotia Limited (Appellants) (Scotland). We have heard counsel on behalf of the appellants and respondent.

    1.  This is the considered opinion of the Committee.

    2.  The appellants are 3052775 Nova Scotia Ltd ("Nova Scotia"), a company incorporated under the Companies Acts of the Province of Nova Scotia, Canada. On 12 February 2001 Letham Grange Co Ltd ("Letham Grange") executed a disposition in favour of Nova Scotia of heritable property known as the Letham Grange Country Club and Resort in Angus ("the subjects"). The subjects comprise a hotel and two golf courses. The disposition narrated that the consideration in respect of which it had been granted was £248,100.

    3.  One striking feature of the case is that the same individual was very much involved in the affairs of both Letham Grange and Nova Scotia. That individual, who is Taiwanese by birth, is variously known as Dong-Guang Liu, J Michael Colby, Peter Liu and (in Japan) Tong Kuang Liu. So some of the documents in the case are written to and from the same individual, acting in different capacities and under different names. For convenience, we shall generally refer to him as Mr Liu.

    4.  On 15 November 2002 Letham Grange went into provisional liquidation. On 14 February 2003 the respondent, Matthew Purdon Henderson, was appointed its liquidator ("the liquidator").

    5.  Thereafter the liquidator raised an action against the appellants, seeking reduction of the disposition on the ground that it represented a gratuitous alienation in terms of section 242 of the Insolvency Act 1986. Section 242(1) provides that, where the subsection applies and the winding up of a company has commenced, an alienation by the company is challengeable by the liquidator. It is common ground that subsection (1) applies. Section 242(4) provides inter alia:

    "On a challenge being brought under subsection (1), the court shall grant decree of reduction … or other redress as may be appropriate; but the court shall not grant such a decree if the person seeking to uphold the alienation establishes -

    (b) that the alienation was made for adequate consideration …"

    6.  As the liquidator averred, Letham Grange had bought the subjects in 1994 for £2,105,000. In November 2002 the hotel and golf courses were valued as a going concern at approximately £1,800,000. After his appointment as liquidator, in order to preserve the value of the subjects for the creditors, the liquidator continued to trade, but Mr Woolman QC, who appeared for the liquidator, informed us that the hotel eventually closed in October 2004 while the bar and golf courses have continued to trade. In these circumstances the liquidator sought reduction of the disposition of the subjects on the ground that the consideration of £248,100 for the alienation of the subjects had not been adequate.

    7.  In their defences the appellants admitted that Letham Grange had acquired the subjects in 1994 for £2,105,000 and that they had been valued at approximately £1,800,000 in November 2002. The appellants explained that Letham Grange had financed the purchase of the subjects in 1994 by borrowing from various members of Mr Liu's family and from the Coquihalla Development Co Ltd and the Sanwa Bank. The appellants also admitted that Letham Grange had granted a disposition of the subjects in their favour but, in broad outline, they averred that in fact the sum of £248,000, which was the purchase price in the missives and disposition, represented only part of the consideration. In addition, the appellants had assumed £1.85 million of debt which Letham Grange had owed to the Liu family as a result of the loans made in 1994.

    8.  It is accepted that Letham Grange was insolvent in February 2001. Therefore, what the appellants are in effect saying is that Nova Scotia obtained title to the only substantial asset of Letham Grange and that asset was then available to pay off the Liu family creditors in preference to Letham Grange's other creditors. But the liquidator founds no argument on that aspect of the case and so we say no more about it.

    9.  We should record that, in the course of his submissions before the House, Mr Woolman sought leave to argue that it was not open to the appellants to lead evidence which was designed to contradict the terms of the disposition by showing that the consideration had not simply been the purchase price shown in the disposition, but had included the debt of Letham Grange which the appellants say that they had assumed. We refused counsel leave to introduce this point since it had not been argued below and since it would seem to raise potentially far-reaching legal issues which, as we shall explain, would not be suitable for resolution on a motion for summary decree.

    10.  After the record closed, in November 2003 the pursuer enrolled a motion for summary decree in terms of rule 21.2 of the Rules of the Court of Session. Rule 21.2(1) is in these terms:

    "Subject to paragraphs (2) to (5) of this rule, a pursuer may, at any time after a defender has lodged defences while the action is depending before the court, apply by motion for summary decree against that defender on the ground that there is no defence to the action, or a part of it, disclosed in the defences."

    Rule 21.2(4) provides:

    "On a motion under paragraph (1), the court may -

    (a)  if satisfied that there is no defence to the action disclosed or to any part of it to which the motion relates, grant the motion for summary decree in whole or in part, as the case may be; or

    (b)  ordain any party, or a partner, director, officer or office-bearer of, any party -

    (i)  to produce any relevant document or article;

    (ii)  to lodge an affidavit in support of any assertion of fact made in the pleadings or at the bar.

    11.  On 27 November 2003, of consent, the Lord Ordinary continued the cause until the following week. On 2 December Lord Carloway heard counsel on the liquidator's motion for summary decree and on 9 December he granted the motion. He subsequently granted leave to reclaim. On 5 March 2004 the Inner House allowed a minute of amendment for the appellants to be received and the pleadings to be adjusted. On 17 March the Inner House recalled the summary decree and remitted the case to the Outer House for a further hearing in light of the amended pleadings. That hearing also took place before Lord Carloway, who again granted summary decree of reduction of the disposition. Once more he granted leave to reclaim and, eventually, on 18February 2005 an Extra Division (Lord MacLean, Lord Philip and Lord Hardie) refused the reclaiming motion and adhered to the Lord Ordinary's interlocutor: 2005 1 SC 325. The overall view of the Extra Division can be gauged from a sentence towards the end of the opinion of the court given by Lord Hardie, at p 334, para 17: "Having considered the pleadings and the documents lodged in process we have concluded that the defence is neither genuine nor authentic."

    12.  The appellants appealed to this House against the interlocutor of the Extra Division. We have come to the conclusion that, as Mr Sandison submitted in the course of his well presented submissions on behalf of the appellants, the decision of the Extra Division cannot be supported.

    13.  It is common knowledge that rule 21.2 was inserted into the Rules of Court in 1985 to tackle what was widely perceived to be an abuse of the pre-existing procedure. Put shortly, a defender could lodge skeleton defences denying the pursuer's averments, but either not making any positive case of his own or making a factual case which was relevant but demonstrably unfounded. When faced with skeleton defences, pursuers could ask for the record to be closed early, but they were still liable to have difficulty in obtaining decree without going to proof since a defender could rest on his denials of the pursuer's averments and insist on putting the pursuer to proof. This meant that a pursuer who actually had an unanswerable case might experience a delay of years before he obtained decree. While judges sometimes felt able to help pursuers in this predicament by taking a robust view of skeleton defences of this kind, the position overall was uncertain and unsatisfactory. What is now rule 21.2 was intended to provide a way of tackling abuses of this kind.

    14.  The first point to notice is that a motion for summary decree under the rule can be made at any time after defences are lodged. This means that, in an appropriate case, the court can deal with a potential abuse at an early stage without waiting for the record to close. Rule 21.2(4) gives the court a power to grant the motion, but does not require it to do so where it would not be appropriate in all the circumstances: Frew v Field Packaging Scotland Ltd 1994 SLT 1193, 1195F per Lord Prosser. Next, what the pursuer is entitled to seek is summary decree. The very description "summary" decree indicates that the procedure is intended to be used where the matter can be determined in a summary fashion, without there being any need for a prolonged examination of matters of fact or law. Of course, in practice motions of this kind are likely to take longer than more routine motions: we were told, for instance, that the hearing before the Lord Ordinary had taken the greater part of a day, while the hearing before the Extra Division had taken about a morning. The length of the hearing is likely to depend on such factors as the amount of material to be considered, its nature and how much of it is in dispute.

    15.  Rule 21.2 applies where the court is satisfied that there is no defence to the action disclosed in the defences. One reason why a court may be so satisfied is because the defences, taken pro veritate, are legally irrelevant. In such a case the court may sustain the pursuer's plea to the relevancy of the defences and grant decree de plano. But, as Lord Prosser recognised in P & M Sinclair v The Bamber Gray Partnership 1987 SC 203, 207, a motion for summary decree is not intended to replace a hearing on the procedure roll which is designed for the disposal of legal questions requiring more detailed and extensive legal debate. A motion for summary decree will be appropriate where the pursuer anticipates being able to satisfy the court, without the need for any prolonged legal debate, that there is no defence to the whole or part of the action because the defender's averments are irrelevant.

    16.  The test of the relevancy of a defender's averments must mirror the test of the relevancy of a pursuer's averments. That test was laid down by the House in Jamieson v Jamieson 1952 SC (HL) 44. Lord Normand said, at p 50, that the test of relevance is the same for all actions: "The true proposition is that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuer's averments are proved." Similarly, Lord Reid said, at p 63, that "If it can be shown that, even if the pursuer succeeds in proving all that he avers, still his case must fail, it appears to me to be highly advantageous that time and money should not be spent on fruitless inquiry into the facts…." Similarly, defences will not be dismissed as irrelevant unless they must necessarily fail even if all the defender's averments are proved. So a pursuer may be granted summary decree on the ground that the defences are irrelevant if the judge can be satisfied, without the need for prolonged legal debate, that there is no defence to the whole or part of the action because, even if the defender succeeds in proving all that he avers, still his case must fail.

    17.  In the present case the liquidator did not suggest that the defences were irrelevant. And indeed a pursuer who seeks summary decree does not need to advance such an argument since rule 21.2 is not confined to questions of relevancy. Otherwise, the rule would not provide a means of tackling the situation where a defender puts forward a defence which is legally relevant but demonstrably unfounded in fact. While, under the rule, the court is concerned with whether any defence is disclosed in the defences, it is not confined to considering the defender's averments and any documents which he may have incorporated into his pleadings by reference. The judge may order either party to produce a relevant document or article or to lodge an affidavit in support of any assertion of fact made in the pleadings or at the bar. So the rule envisages that the court may look beyond the pleadings and consider what, in substance, each of the parties and, more particularly, the defender is saying. It is this power which allows the court to deal with a party who tries to use his written pleadings not to present a real defence but to throw up a smokescreen of supposed fact behind which he can delay the progress of an action, or part of an action, which he is bound to lose.

    18.  A rule of this kind serves the interests of justice and helps to make the legal system work more efficiently. The rule must be interpreted and applied in a manner which promotes those ends and does not create injustice for defenders. As we have seen, in a motion for summary decree a judge can clarify matters of fact by having documents or articles produced or affidavits lodged. But all this takes place within a system where disputed matters of fact are generally resolved by a judge who sees and hears witnesses giving oral evidence at a proof. So where there are actually disputed issues of fact to be resolved, the appropriate person to resolve them is the judge who hears the proof, not a judge who hears a motion for summary decree. Therefore rule 21.2 must not be applied in a way that would cause injustice by denying a defender the opportunity to prove averments which could provide a defence to the whole or any part of the claim against him. This means that, in a motion for summary decree, "The court is not concerned with forecasting the outcome of a proof": Keppie v The Marshall Food Group Ltd 1997 SLT 305, 308F per Lord Hamilton. Lord Hutton made much the same point in Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2003] 2 AC 1, 278, when he said: "But at this stage in the proceedings a court is not concerned to try to assess which side will probably succeed if there is a trial: the question is whether there is material which shows that there are issues which should be investigated at a trial…"

    19.  In our view, therefore, a judge who is considering a motion for summary decree is entitled to proceed not merely on what is said in the defences, but on the basis of any facts which can be clarified, from documents, articles and affidavits, without trespassing on the role of the proof judge in resolving factual disputes after hearing the evidence. The judge can grant summary decree if he is satisfied, first, that there is no issue raised by the defender which can be properly resolved only at proof and, secondly, that, on the facts which have been clarified in this way, the defender has no defence to all, or any part, of the action. In other words, before he grants summary decree, the judge has to be satisfied that, even if the defender succeeds in proving the substance of his defence as it has been clarified, his case must fail. So, if the judge can say no more than that the defender is unlikely to succeed at proof, summary decree will not be appropriate: it is only appropriate where the judge can properly be satisfied on the available material that the defender is bound to fail and so there is nothing of relevance to be decided in a proof.

    20.  The pleadings in the present case were altered on more than one occasion in the Court of Session, but the version before the House was also the version on which Lord Carloway granted summary decree for the second time and on which the Extra Division refused the reclaiming motion. In that version answer 3 for the appellants includes averments in the following terms:

    "Explained and averred that the consideration narrated in the disposition condescended upon was only a small part of the overall consideration afforded by the defenders to Letham Grange Development Co Ltd for the transfer to them of the assets of that company. In addition to the cash sums paid and condescended upon in this and the fifth Article of Condescendence, the defenders assumed a liability to pay £1.85 million of debt owed by Letham Grange Development Co Ltd to various members of the Liu family. That debt reflected a loan made to Letham Grange Development Co Ltd by Shiau Cheng Tzu Liou, Jiah Jow Liou, Dong-Guang Liu, King Hsia Chou Liu and Coquihalla Development Co Ltd and Sanwa Bank (which loan is hereinafter referred to as 'the Liu family loan') in 1994, in order to enable the purchase of the Letham Grange Country Club and Resort. The original principal amount of the Liu family loan was £2,370,910, and compound interest was payable on it at the rate of 8.4% a year. Of the total principal amount of the Liu family loan, £200,000 was owed to Coquihalla Development Co Ltd and the Sanwa Bank, and this part of the loan had priority rights to repayment over the rest of the Liu family loan. This part of the loan was due to be repaid in full by 25 October 2000, at which point, together with accrued interest, it amounted to £248,000 or thereby. At the time this part of the loan was due to be repaid, Letham Grange Development Co Ltd lacked the liquid funds to do so. The affairs of that company were thus restructured by the sale of its assets to the defenders in return for the payment of the cash sums condescended upon and the assumption by the defenders of £1.85 million of the total Liu family debt (which debt at that stage amounted in total to £3,128,625 or thereby) and a leaseback of the premises to the defenders at a rent of £129,000 a year. In the circumstances condescended upon, any transfer of value from Letham Grange Development Co Ltd to the defenders was made for adequate consideration."

    21.  The appellants go on to aver that various documents vouch or confirm the existence of the Liu family loans and the transfer of part of the liability to repay those loans from Letham Grange to Nova Scotia as part of the transaction by which Nova Scotia acquired the subjects from Letham Grange. In particular, the appellants aver:

    "A written resolution of the defenders dated 7 February 2001, signed by Dong Guang Liu in the name used by him in Canada, 'J Michael Colby', confirms the assumption of £1.85m of the Liu family debt as part of the acquisition of the Resort by the defenders. A letter of 28 February 2001 from 'J Michael Colby' on behalf of the defenders to Dong-Guang Liu on behalf of Letham Grange Development Co confirms the arrangement."

    22.  In reply to these averments the liquidator avers that "the purported written resolution dated 7 February 2001 was first seen by the pursuer on 6 January 2004" and that "the letter of 28 February 2001 was delivered to the pursuer on 26 June 2003." The liquidator does not aver that the documents in question were forged or fraudulently produced. At the hearing before the House, Mr Woolman confirmed, for present purposes at least, that the liquidator made no such allegation and that we should approach the case on the basis that the documents are genuine.

    23.  What then is the defence which the defenders wish to advance? They start by saying that on 29 January 2001 Letham Grange decided to sell the subjects to Nova Scotia. It appears that the proposed consideration for the sale was £248,100. The defenders say that the sum is significant since Letham Grange needed to repay roughly £248,000, representing principal and accrued interest, to Coquihalla Development Co Ltd and the Sanwa Bank and the company had no liquid funds to do so. Sale of the subjects at that price would provide the necessary funds.

    24.  On 6 February Mr Liu telephoned Mr Gardner of the solicitors MacRoberts and discussed the proposed sale. The following day Mr Gardner faxed a message to Mr Liu telling him that he had prepared three documents, copies of which he was faxing to him. The first was a short contract of sale of the subjects for £248,100 with a date of entry of 29 January 2001. If the terms were acceptable, Mr Liu was to sign the acceptance docquet on behalf of Nova Scotia and fax it back to Mr Gardner. The second document was said to be a Letham Grange Board minute narrating the sale of Latham Grange and authorising MacRoberts as company secretaries to sign the conveyance. Mr Liu was asked to sign the minute and return it to Mr Gardner. The third document was a copy of the proposed conveyance of the subjects to Nova Scotia. Since MacRoberts were going to sign this, there was no need for Mr Liu to do anything other than send £2,485 by telegraphic transfer to pay the 1% stamp duty on the purchase price of £248,100 which was to be inserted in the disposition.

    25.  Mr Gardner went on, however, to list a number of points about which, in his view, MacRoberts really should have had more detailed information and where Letham Grange might have problems in the future. The first point was: "If the transfer of Letham Grange is at a figure under its true value then such a transfer could be attacked in the future by any liquidator of Letham Grange." Mr Gardner also pointed out that "A lease will require to be put in place between the Nova Scotia company and Letham Grange and I shall need details from you in due course of the proposed rent and the period of the lease."

    26.  According to the defenders, on receipt of the fax Mr Liu took steps to deal with these two points. They say that what he did can be seen from the Resolution of the Sole Director of Nova Scotia signed by J Michael Colby and dated 7 February 2001:


    1.  The company will further assume 1,850,000 pound (sic) sterling of extra other debt liability of Letham Grange Development Co Ltd to the Liu Family. We will pay an 8.5% annual interest rate on the debt and it is to be repaid in three years.

    2.  The company is in agreement for Letham Grange Development Co Ltd of Angus, Scotland to lease and continue in the running of the golf courses, restaurants, curling rink and related businesses on the grounds, and buildings owned by 3052775 Nova Scotia Ltd. in Angus, Scotland.

    3.  The yearly lease rate will be 129,000 pounds sterling for the grounds and buildings net, net, net. Letham Grange Development Co Ltd will be responsible for all expenses, taxes and all upkeep that is related with the businesses, grounds and the properties. The lease will be for a period of one year and can be renewed, subject to mutual consent.

    This resolution is a resolution in writing signed by the sole director of the company pursuant to section 91(1) of the Companies Act."

    27.  According to the resolution, Nova Scotia resolved that they would "further" assume £1,850,000 of the debt owed by Letham Grange to the Liu family. In other words, the defenders say, when warned that any sale of the subjects for too low a consideration could be attacked in the future by any liquidator of Letham Grange, Mr Liu took steps to ensure that Nova Scotia provided adequate consideration for the sale by assuming £1,850,000 of Letham Grange's debt. On this version, the use of the word "further" is said to show that Nova Scotia were providing consideration in addition to the price which had been included in the missive of sale which Mr Liu had just signed on their behalf.

    28.  Nova Scotia also decided on the terms of the lease under which Letham Grange would hold the subjects. There is a letter dated the following day, 8 February, from J Michael Colby, as Vice President of Nova Scotia, to himself as Mr Dong-Guang Liu of Letham Grange, confirming the terms of the lease. The letter bears a docquet accepting the terms, signed by Mr Dong-Guang Liu on behalf of Letham Grange.

    29.  The appellants also attach some significance to what is known about Mr Gardner's recollection of events. Although asked to do so by the appellants' agents, Mr Gardner has not provided an affidavit about his involvement in the transaction. He did, however, speak at some stage to a solicitor in Brodies, who were then acting for the appellants. The solicitor in Brodies made a note of the conversation on the file and this file note became available to Boyds, the appellants' present agents, when they took over the case. An affidavit from Mr Halliday of Boyds gives some information based on the file note and on a conversation which he had had with Mr Gardner at the end of 1993. He says in paras 4 and 5 of his affidavit dated 6 January 2004:

    "Mr Gardner had been concerned about acting on both sides of the transaction but had eventually agreed to do so. The file note continued that Mr Liu had explained that the price to be paid in 2001 was around £248,000. The file note continued that, given his knowledge of the price previously paid, Mr Gardner had expressed surprise in the drop in consideration. The note continued that Mr Liu had explained that the reasons for this were that the price previously paid had included good will and 'fixtures and fittings', that business at the Hotel had not been good and, in addition, that there was to be an assumption by the purchaser of debt due by Letham Grange to the Liu family. Mr Gardner confirmed that this file note accurately represented his recollection. He did stress that this last reason (the assumption of debt) was only mentioned very briefly and probably only on one occasion and that nothing precise was said. I specifically asked him whether, notwithstanding that, he could nevertheless clearly recollect that the matter was mentioned at this time, he confirmed that he did.

    5  I arranged with Mr Gardner that I would draft and affidavit for him to sign, confirming this. That was done and the affidavit was delivered by email to him around New Year [sc 2004]. He thereafter contacted me to say that he wanted to consult with his former partners at MacRoberts before signing it. I understand that he has consulted with them but the signed affidavit has not yet been returned to me. Mr Gardner telephoned me on 5 January (after consulting with his partners) to say that he could not be clear whether Mr Liu had mentioned the assumption of debt before or after Mr Gardner had drafted the disposition of the property. I explained to him that we would amend the affidavit to explain this if that would allow him to sign it. He has not yet confirmed to me whether he would be willing to sign such an amended affidavit."