Vickers v Jackson [2010] EWHC 2213 (Ch)

A bit off our usual patch this one, but not too far and frankly I couldn’t resist. Not least because I get to use the word ‘Snook’ without people pointing at me and laughing.

Mr Vickers brought a claim in the High Court asking that a charge held by Mr Jackson, into which he had entered, be set aside as a sham or declared void. Mr Jackson counterclaimed for possession of the charged property and payment of the sums due under the charge.

The background was murky and (deliberately) complicated. Mr V owned a vineyard. He also had a business, Halfpenny Green Vineyards Limited, which ran the vineyard. Halfpenny was in trouble. Mr V was approached by Mr Jackson, who ran a debt reduction business. There was an agreement that Mr J would be paid 20% of any debts of Halfpenny that he managed to reduce. Mr J came to give advice in relation to the business over and above the reduction in indebtedness.

Halfpenny went into liquidation, on the advice of Mr J. Later, a company called Goform Ltd was set up to run the vineyard. Mr J was a shareholder in Goform, via his son as nominee. He made unsuccessful attempts to refinance the vineyard business and find investors. A letter appeared to record that in return for Mr J’s:

efforts to restructure the funding, both the land and buildings — those were the land and buildings to be operated by Goform Limited and its associates — he would take a percentage, 20%, in the new company which would ultimately own the assets, the value being equal to the amount owned, which he put at £430,000. What that suggests, therefore, is that his extended activities were in return for a shareholding in the new company, which became Goform Limited.

The only asset Goform actually owned was an option to purchase an option agreement to purchase the vineyard land from Mr V. Mr J later attempted to argue that this was of no value, but the court found it was a valuable option at the time. There were attempts to enter into an option to purchase adjoining land operated as a kennels by Mr V’s mother.

A year later, in 1997, Mr J and Mr V entered a memorandum of charge, which purported to give Mr J a charge of some £48,078 in respect of ‘invoiced professional services’ and £50,000 for services to be rendered, expressed as a 6 month loan.

After relations between Mr V and Mr J broke down, and Mr J pursued payment of the charge Mr V sought to have the charge declared void or a sham. Mr J counterclaimed for possession of the charged property – the vineyard itself.

Mr V’s evidence effectively meant confessing the illicit purpose of the charge. He said that the charge was never intended to be acted upon. The purpose of the charge was to ring fence the land of the vineyard, already subject to a bank charge, so that his creditors would not see it as an asset worth moving against, effectively defrauding them.

Mr V’s evidence was supported in some respects by that of his son and a Mr Potts, a former associate of Mr J. Mr J himself insisted that the arrangement had always been that he would be paid for the work he did, that the shareholding in Goform was pretty much valueless and that the charge was in respect of his work billed (and to be billed) at £62.50 per hour.

The trouble for Mr J was that there was no documentary evidence that he had ever raised payment for his services (other than the 20% in respect of debt reduction) at any point prior to the memorandum of charge. The charges appeared to have been constructed retrospectively from Mr J’s diary entries. There was also no indication of the supposed monthly invoices for work done after that memorandum. The Court followed the principle that in considering the question of sham, the court is not limited to events before the sham agreement.

In respect of Mr J’s evidence on cross-exam, it was ‘excitable’, ‘evasive’ and ‘over-defensive’, attributable to his awareness that this was indeed a sham transaction that he was seeking to take advantage of. The doubts about Mr J’s evidence even extended to his knowledge of English:

Mr. Jackson told me he would not have used the word or even understood it because he did not know what it meant. He knew what a scam was, but not what a sham was. As I have said, “sham” is an ordinary English word and I cannot accept that evidence. I find that Mr. Jackson did acknowledge that the transactions were shams.

Further, Mr J was found to have later deducted significant sums from sums supposedly passing through his business to be distributed to Goform, which were only explainable as unilaterally taking payment for his services, without the agreement of Goform or Mr V. Mr J didn’t assert that these sums were due under the charge agreement.

A couple of years after entering the charge agreement, Mr J began demanding payment:

In May 1999 a solicitor, Mr. Ian Halstead, came on the scene for Mr. Jackson, and on 7th June 1999 gave appropriate notice, as it was called, under the charge of 28 days demanding repayment of the two sums of £48,078 and £50,000 respectively. As I have said, on any view £50,000 was not due. There were no invoices for £50,000. Even in the defence and counterclaim, as now amended, the sums are said to be sums which could be invoiced, even though they have not been, and do not add up to anything like £50,000. This demand must have been made on Mr. Jackson’s instructions, and the fact that he felt able, relying upon the charge, to claim £50,000 demonstrates to me that he is the sort of person who will seek repayment of monies even though he knows that they are not due. I should also say that I have no real or reliable evidence of the work done later on. I am mindful also of the fact that Mr. Jackson has received substantial sums, including sums after the charge, from one or more of the companies, or the property sale to which I have referred, which he took for himself. It never occurred to him at the time, or subsequently, to give credit against the sums due under the charge, which suggests to me that he never regarded the charge as governing the relationship between the parties.

Mr J’s return to this demand some 5 years later, with interest, triggered the present proceedings.

So, if the charge did not secure a genuine debt and was entered into for the purpose of defrauding Mr V’s creditors, it was a sham in the sense set out in Snook v London and West Riding Investments Ltd [1967] 2 QB 786. The Court was satisfied that it met the test set by Neuberger J in National Westminster Bank v Jones [2001] 1BLC 98

before the court could reach such a conclusion it must be satisfied that the purported agreement is no more than the piece of paper which the parties have signed with no intention of it having any effect, save that of deceiving a third party and/or the court into believing that the purported agreement is genuine.

Mr J argued that Mr V was barred by illegality from asserting that the agreement was a sham, as the purpose was to deceive his creditors. However, as legal and beneficial owner of the land, Mr V was entitles to assert that interest against Mr J. Further, Mr J was demanding amounts as due on illusory or non-existent invoices he was seeking the court’s assistance in enforcing a charge based on a fictional indebtedness. Contra Mr J’s argument based on Tinsley v Milligan [1994] 1 AC 340 that he was not relying on the charge as a sham, there has to be an obligation that the charge secures, and there was none here. Mr J in relying on documents he knew to be incorrect, also faced an illegality defence. Giving effect to the charge would be to perpetuate the fraud upon Mr V’s creditors.

Charge declared void and of no effect. Mr J fought to the end, refusing to agree an order that allowed for removal of the registered charge prior to appeal to the Court of Appeal, for which permission was refused, but it didn’t get him anywhere.

Comment
This is one of the rare sham/Snook cases and it shows why they are rare. Given that the purpose of a sham is to deceive or possibly defraud a third party, it will take a falling out amongst the conspirators and for one – the burdened one – to be prepared to be open and gather evidence on the fraudulent/deceptive purpose of the sham. It is a difficult test to satisfy, but this case suggests that a simple assertion of the existence debt is not necessarily going to be enough to defeat an allegation of sham which is better supported by the evidence.