JUDGMENT
Henderson (Respondent) v Foxworth Investments
Limited and another (Appellants) (Scotland)
before
Lord Kerr
Lord Sumption
Lord Reed
Lord Carnwath
Lord Toulson
JUDGMENT GIVEN ON
2 July 2014
Heard on 14 May 2014
Appellant Respondent
Craig Sandison QC
Usman Tariq
(Instructed by Halliday
Campbell WS)
Lord Davidson of Glen Clova QC
David Thomson
(Instructed by Burness Paull &
Williamsons)
LORD REED (with whom Lord Kerr, Lord Sumption, Lord Carnwath and
Lord Toulson agree)
Introduction
1. Letham Grange is a neoclassical mansion built in the 1820s, with extensive
landscaped grounds. In modern times the house was converted into a hotel, and the
grounds were laid out as two golf courses. The hotel became popular with golfers,
and was also used by judges sitting on circuit in the nearby town of Forfar. The hotel
closed in 2011, but remains known to Scottish judges as the subject-matter of a longrunning legal dispute. That dispute has now made its second appearance in the
United Kingdom’s highest court.
2. The hotel and its golf courses (“the subjects”) were bought in November 1994
by Letham Grange Development Company Ltd (“LGDC”) for slightly over £2m.
On 12 February 2001 LGDC sold them to the second appellant, 3052775 Nova
Scotia Ltd (“NSL”), a company based in Canada. The consideration recorded in the
disposition was £248,100. In December 2002 LGDC went into liquidation, and the
respondent, Mr Henderson, was appointed as its liquidator. The value of the subjects
at that time was estimated at about £1.8m. In January 2003 NSL granted a standard
security (ie a charge) over the subjects in favour of the first appellant, Foxworth
Investments Ltd (“Foxworth”), another company based in Canada. Later that year
the liquidator began proceedings against NSL in the Court of Session, in which he
sought the reduction (ie setting aside) of the 2001 disposition on the grounds that
the sale was a gratuitous alienation, an unfair preference or a fraudulent preference.
The action had a lengthy history. Ultimately, the liquidator obtained decree by
default in 2009, when NSL failed to be represented at the hearing fixed for the proof
(ie trial). It is not argued that that decree gives rise to any plea of res judicata in the
present proceedings.
3. The liquidator then began these proceedings, in which he seeks the reduction
of Foxworth’s standard security. His action is brought on the basis that the
disposition to NSL was a gratuitous alienation susceptible to reduction under section
242 of the Insolvency Act 1986 (“the 1986 Act”). That section, so far as material,
provides that an alienation made by a company within two years of the
commencement of its winding up is challengeable by the liquidator, and that on such
a challenge being brought, the court shall grant decree of reduction unless, in
particular, “the alienation was made for adequate consideration”: section 242(4)(b).
Although a proviso to section 242(4) preserves “any right or interest acquired in
good faith and for value from or through the transferee in the alienation”, the
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liquidator argues that Foxworth cannot bring itself within the scope of that proviso,
since it knew, at the time when it obtained the standard security, that LGDC was in
liquidation and that the sale by LGDC to NSL was open to challenge under section
242. In that regard, reliance is placed on the fact that the relevant decisions of all
three companies – LGDC, NSL and Foxworth – were made by their common
director, Mr Liu, who was their directing mind and had full knowledge of all the
material circumstances.
4. The proceedings are defended primarily on the basis that the sale by LGDC
to NSL was made for adequate consideration: in addition to the sale price of
£248,100 recorded in the disposition, NSL had, it is claimed, also assumed debts of
£1.85m owed by LGDC to Mr Liu and members of his family. On that basis, it is
argued, Foxworth fell within the scope of the proviso to section 242(4): it had
obtained the standard security in good faith and for value.
5. The Lord Ordinary, Lord Glennie, held after a nine day proof that the sale of
the subjects by LGDC to NSL had been made for adequate consideration. Although
the price recorded in the disposition was far below the value of the subjects, that
price had not, he held, been the entire consideration for the sale: NSL had in addition
assumed liability for debts of £1.85m owed by LGDC to Mr Liu and members of
his family. The disposition had not therefore been susceptible to reduction under
section 242. It followed that Foxworth had obtained its rights under the standard
security in good faith. There was no live issue as to whether the standard security
had been obtained for value. The standard security was therefore not liable to
reduction: [2011] CSOH 66; 2011 SLT 1152.
6. On the liquidator’s appeal against that decision, an Extra Division of the Inner
House held, after a hearing which lasted six days, that the Lord Ordinary had erred
in law: he had not made a finding that the assumption of any debts by NSL had
occurred at the time of the sale, and had therefore formed part of the consideration
for the sale. In the absence of such a finding, it was held, the Lord Ordinary had not
been entitled to hold that the alienation of LGDC’s property had been made for
adequate consideration or, given Mr Liu’s knowledge of the circumstances, that
Foxworth had obtained the standard security in good faith.
7. Furthermore, the Extra Division considered that the Lord Ordinary had in any
event failed to give satisfactory reasons for the factual conclusions which he had
reached on the evidence before him, and that the matter was therefore at large for
the appellate court. On the basis of the material which it considered, the Extra
Division held that the sale by LGDC to NSL had been a gratuitous alienation, and
that Foxworth had not obtained its rights under the standard security in good faith
or for value. Decree was therefore granted for the reduction of the standard security:
[2013] CSIH 13; 2013 SLT 445. The Extra Division did not require to deal with a
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cross-appeal by Foxworth and NSL against the Lord Ordinary’s decision in relation
to expenses ([2011] CSOH 104).
8. Foxworth and NSL now appeal to this court against the decision of the Extra
Division, and also against the Lord Ordinary’s decision in relation to expenses.
An outline of the evidence
9. It may be helpful at this stage to summarise the principal aspects of the
evidence.
10. In his evidence, Mr Liu explained that LGDC had been established as a
special purchase vehicle for the acquisition of the subjects in 1994. He was its sole
shareholder. The purchase was financed out of loans of over £2.3m made to LGDC
by himself, his wife and his parents. The loans came from accounts held with Sanwa
Bank in Canada. £200,000 was borrowed from the bank, the borrowing being
guaranteed by another family company, Coquihalla.
11. A contemporary letter dated 4 November 1994 from Mr Gardner, a partner
in MacRoberts, the solicitors acting for LGDC in connection with the purchase,
confirmed that he had received a transfer of £1.9m from Sanwa Bank in Canada and
a further £350,000 from Mr Liu’s father. Mr Liu also produced letters sent by
himself, as a director of LGDC, to his wife and his parents, setting out the amounts
which each of them had lent to LGDC and the terms as to repayment. A similar letter
to Coquihalla was also produced. The letters purport to have been signed by Mr Liu
and the recipients on various dates in December 1994. A fax dated 2 December
1994, containing the same details as to the loans, was also produced, which Mr Liu
said had been sent to Mr Gardner after he had requested such details.
12. The borrowing from Sanwa was due to be repaid in October 2000. By then it
amounted to £248,100 inclusive of interest. In his evidence, Mr Liu said that LGDC
was at that time in dispute with its former accountants, and did not have accountants
who could properly record an injection of funding into the company. In those
circumstances he decided that the easiest way to repay Sanwa would be for LGDC
to sell the subjects to another vehicle company for the amount required. The new
vehicle company was NSL.
13. In relation to this evidence, the Lord Ordinary observed that Mr Liu did not
explain in detail, perhaps because he was never asked, why the sum could not have
been advanced to LGDC as a loan. The absence of accountants did not appear to
him to be a credible explanation, given the lack of formality surrounding the initial
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family loans to LGDC. The Lord Ordinary commented that the reason for the
transaction remained a mystery.
14. According to Mr Liu, he was told by Mr Gardner that the proposed price was
not enough, since it did not reflect the value of the subjects. Mr Liu responded that,
if the cash price was not enough, he would have NSL assume the liability to repay
part of the sums lent by himself and his family to LGDC. After Mr Gardner
confirmed in writing that £248,100 was not enough, Mr Liu agreed with his wife
and parents that NSL would assume LGDC’s liability to the extent of £1.85m. He
did not tell Mr Gardner that the assumption of liability had occurred. Mr Liu gave
unchallenged evidence that, following the sale to NSL, the sums due to Sanwa in
respect of the Coquihalla loan were repaid.
15. Mr Liu accepted in cross-examination that he and his wife and parents made
claims in February 2003 in the liquidation of LGDC, in respect of the loans
described in the letters dated December 1994, which were excessive if, as he
claimed, liability for £1.85m of the debts had been assumed by NSL. He stated that
a mistake had been made by Brodies, the solicitors acting on his behalf. He had not
corrected the mistake when he signed his claim form. The claims were subsequently
adjusted so as to exclude the part of the loans which was said to have been assumed
by NSL. The adjusted claims were rejected by the liquidator in their entirety, with
the consequence that Brodies were unable to move a motion that a new liquidator
should be appointed. Mr MacPherson, the solicitor at Brodies who prepared the
claims, was not called as a witness, and in those circumstances the Lord Ordinary
did not accept that the claims had been the result of a mistake on his part.
16. A letter from Mr Gardner dated 7 February 2001 was produced. In the letter,
Mr Gardner noted that LGDC was “between accountants”, and advised that if the
transfer of the subjects was at a figure under its true value, “then such a transfer
could be attacked in the future by any liquidator of [LGDC]”. The disposition was
executed by MacRoberts, as the company secretaries of LGDC, on 12 February
2001. A letter from NSL to LGDC, dated 28 February 2001, was also produced. It
acknowledged that, in addition to the purchase price, NSL would also assume
£1.85m of debt owed by LGDC to the Liu family. The letter was signed by Mr Liu
using the name “J Michael Colby”. He explained in evidence that he had decided to
use a western name when conducting business in the West, as he felt that he was at
risk of discrimination as an ethnic Chinese. Resolutions of NSL dated 26 January
and 7 February were also produced. The former stated that NSL would purchase the
assets of LGDC for £248,100. The latter stated that NSL would “further assume
£1,850,000 UK Pound Sterling of extra other debt liability of [LGDC] to the Liu
family”.
Page 5
17. According to Mr Liu’s evidence, NSL’s acquisition of the subjects was
financed by a loan of £300,000 advanced to it by Foxworth. A standard security in
respect of the loan was executed but was not registered. In 2003 Foxworth assumed
liability for debts totalling £1.7m owed by NSL to the Liu family. A fresh standard
security was then executed and registered in respect of a personal bond for £2m,
comprising the £1.7m of debt and the earlier loan of £300,000. That is the standard
security challenged in the present proceedings.
18. Evidence was also given on behalf of Foxworth and NSL by a number of
other witnesses. Mr Liu’s son, who had been involved in running the family
business, was called to answer allegations that he had destroyed records relating to
LGDC and NSL. The Lord Ordinary records that “he struck me as an honest witness
and on these matters I accept his evidence”. Another director of NSL gave evidence,
but her recollection of that company’s taking over loans from LGDC was uncertain,
and the Lord Ordinary did not feel able to place reliance upon it. Mr Liu’s wife and
parents gave evidence that they left the running of the family’s business interests to
him. They confirmed that they had lent money for the purpose of LGDC acquiring
the subjects, and that they had been told about, and had agreed to, NSL assuming
responsibility for their loans. In relation to those events, however, the Lord Ordinary
did not regard their evidence as providing independent support for Mr Liu’s account.
19. Mr Gardner also gave evidence. In relation to the purchase of the subjects by
LGDC, he confirmed sending the letter dated 4 November 1994. There was never
any doubt in his mind that the £2m or so that he received was provided by or on
behalf of members of the Liu family. He had written to Mr Liu on 7 November 1994,
requesting details of the breakdown of the funds. He said that he had not received a
response. He had no recollection of receiving the fax dated 2 December 1994 or the
letters from LGDC to Mr Liu and his wife and parents dated December 1994. The
Lord Ordinary commented that it would be surprising if Mr Gardner had received
no response to his request: it was not consistent with his general approach to this
matter for him simply to let the matter drop.
20. Mr Gardner also spoke to a fax which he had received from Mr Liu dated 23
February 1995 in which Mr Liu said that the split of the loans was to be between
eight members of his family. Mr Liu had described this as a thought which was never
implemented. Mr Gardner was not aware of anything happening which suggested
otherwise than that the arrangements described in the 1994 letters were entered into
and remained in operation. In relation to the sale of the subjects by LGDC to NSL,
Mr Gardner confirmed having sent the letter dated 7 February 2001, warning of the
risk which would result from a sale at an undervalue, following a discussion of that
risk with Mr Liu. There had been mention of the loans during his discussions with
Mr Liu in February 2001, but he had not been told that the consideration included
the assumption of the loans.
Page 6
21. Evidence was also given by the liquidator and members of his staff. The
letters dated December 1994, recording the loans made to LGDC by members of the
Liu family, did not feature in the files of LGDC. Nor did the letter dated 28 February
2001 from NSL to LGDC, relating to the assumption of the loan.
Error of law?
22. As I have explained, the critical issue under section 242(4)(b) is whether “the
alienation was made for adequate consideration”. That was clearly understood by
the Lord Ordinary. He summarised the liquidator’s case as being that “the
disposition of the subjects by [LGDC] to NSL was not made for adequate
consideration”: in particular, “the consideration of £248,100 referred to in the
disposition … was not adequate consideration having regard to the value of the
subjects”. He summarised the case advanced on behalf of Foxworth and NSL as
being that “the disposition … was not at an undervalue because the price of £248,100
stated in the disposition did not represent the whole consideration”: in particular,
“the consideration for the disposition included the assumption of debt”, namely
£1.85m owed by LGDC to members of Mr Liu’s family. He summarised the
liquidator’s response as being that he challenged the assertions made by Mr Liu
about the 1994 loans, and challenged “the defenders’ case that in 2001, as part of
the consideration for the subjects, NSL assumed the debt which the company owed
to the Liu family”. The liquidator sought to establish, in particular, that the
documentation relating to the assumption of the loan had not been prepared on the
dates which it bore, but had been produced subsequently in order to support a false
case.
23. In relation to this matter, the critical paragraph in the Lord Ordinary’s opinion
is in the following terms:
“It is not clear to me on the evidence when the documentation
purporting to evidence the assumption of the loan by NSL was created,
or indeed when the decision was made that the amount of debt
assumed would be £1. 85 million rather than some other figure. Mr
Liu acted for both LGDC and NSL (albeit under different names) and
also took the necessary decisions so far as concerned the loans from
members of his family. To that extent, once the decision was made,
the documentation could follow later. It was not suggested in
argument that the subsequent creation of documents to record the
assumption of the loan as part of the consideration for the sale in any
way invalidated what had occurred if the decision had in fact been
made to assume part of the loan as part of the consideration. I find that
that decision had been made.” (para 90)
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The Lord Ordinary accordingly concluded “that the sale from LGDC to NSL was
made for adequate consideration and was not a gratuitous alienation.” (para 92)
24. There was no argument before the Lord Ordinary to the effect that, even if
the debt assumption had taken place, that had occurred at a point in time which was
too late for it to qualify as consideration. Before the Inner House, however, that
argument was advanced by the counsel and solicitors newly instructed on behalf of
the liquidator. It was accepted by the court. In relation to para 90 of the Lord
Ordinary’s opinion, Lady Paton, with whose reasoning the other members of the
court agreed, stated at paras 75-76:
“The consideration allegedly given in exchange for the granting of the
disposition of Letham Grange to NSL required to be enforceable (ie
able to be vindicated) at the time when the disposition was granted on
12 February 2001. On the Lord Ordinary’s own findings, however,
there was no enforceable obligation binding NSL to repay Liu family
loans as at that date. Taken in context, I am quite unable to read the
words ‘part of the loan’ in the penultimate line of para 90 of the Lord
Ordinary’s opinion as being referable to the precise or calculated
figure of £1.85 million but, even if they were so read, I doubt whether,
in the absence of any documentation whatsoever, the ‘decision’ in
question could properly be regarded as any more than a statement of
intent on the part of Mr Liu. … It was not open to the Lord Ordinary
to accept that consideration was given in exchange for the disposition
granted in the form of some vague obligation undertaken by NSL to
repay Liu family debt.”
25. In relation to the first point made by Lady Paton, the Lord Ordinary was
aware that an obligation on the part of NSL could only constitute part of the
consideration for the sale if it was undertaken as the counterpart of the obligations
undertaken by LGDC in relation to the sale. He distinguished at para 90 between the
question, on which those then acting for the liquidator had focused, whether the
documents evidencing the obligation existed at the time of the sale or were created
subsequently, and the question whether “the decision had in fact been made to
assume part of the loan as part of the consideration”. He answered the latter question
in the affirmative. It is possible that, when he referred to “part of the loan”, he meant
some wholly indeterminate amount, but only if he had failed to realise that a decision
to assume liability for an amount which was entirely unquantified, and incapable of
quantification, would not give rise to an enforceable obligation. I would decline to
attribute an elementary error to an experienced judge if his words can reasonably be
understood in a different sense, as they can in the present case, where the £1.85m
was indeed “part of the loan”.
Page 8
26. It might be said that the Lord Ordinary could have dealt with this matter more
clearly, but it is understandable that his opinion should have dealt in greatest detail
with the points on which the parties had joined issue: in particular, whether the
documents had been created on the dates that they bore, and whether, rather than
when, any obligation was undertaken.
27. In relation to Lady Paton’s second point, Mr Liu gave evidence to the effect
that a decision to assume the indebtedness had been taken on behalf of NSL, with
the agreement of the relevant members of his family, before the sale was completed.
Subject to the separate criticism that he failed to deal adequately with the evidence,
to which I shall turn next, the Lord Ordinary was entitled to accept that evidence
and, on that basis, to find that an enforceable obligation had been undertaken, rather
than a mere statement of intent.
Failure to deal adequately with the evidence?
28. Lady Paton described the way in which the Lord Ordinary had erred in his
approach to the evidence at para 78 of her opinion:
“He did not take the final step of (i) clearly recognising that there was
a significant circumstantial case pointing to a network of transactions
entered into with the purpose of keeping Letham Grange (valued at
£1.8 million) out of the control of the liquidator, and (ii) explaining
why, nevertheless, he was not persuaded that the liquidator should
succeed. Rather the Lord Ordinary dismissed or neutralised individual
pieces of evidence without, in my view, giving satisfactory reasons for
doing so, thus dismantling the component parts of any circumstantial
case which was emerging from the evidence, but without first having
acknowledged the existence and strength of that circumstantial case,
and then explaining why he rejected it.”
Her Ladyship then gave five examples of this erroneous approach.
29. I shall discuss those examples shortly. It may however be helpful to preface
that discussion with some general observations. The Lord Ordinary was correct to
approach the evidence as a whole with an open mind, rather than beginning with a
presumptive conclusion in favour of the liquidator’s case, and then explaining why
he was nevertheless persuaded that the liquidator should not succeed. He understood
what the liquidator’s case was, as I have already indicated, and he set out the matters
advanced on behalf of the liquidator in support of that case, as I shall explain. The
fact that he found the liquidator’s circumstantial case less impressive than the Extra
Page 9
Division reflected a careful and nuanced assessment of the evidence, and an
understanding of the commercial realities of the situation with which the case was
concerned.
30. The circumstantial case which impressed the Extra Division was superficially
attractive, if one important circumstance, which I shall shortly come to, was
disregarded. LGDC, a company owned and controlled by Mr Liu, went into
liquidation. Less than two years earlier, at a time when it was in financial difficulties,
all its fixed assets were transferred to another company, NSL, owned and controlled
by the same individual. Lady Paton stated at para 85 that the evidence viewed as a
whole gave rise to the inference which the liquidator contended for, that is to say,
that “the transactions in 2001 and 2003 were carried out neither in good faith nor for
value, with a view to placing the valuable heritable property beyond the reach of the
liquidator, thus defeating the claims of LGDC’s creditors” (para 77).
31. One difficulty with this analysis is that it is not clear from the evidence that
LGDC was in financial difficulties in 2001, as Lady Paton states at paras 2 and 16.
Although, as with many companies, a balance sheet would have shown that its
liabilities exceeded its assets, there was no evidence that it was in trading difficulties
at that time, and Mr Liu gave unchallenged evidence that the winding-up occurred
as a result of subsequent events.
32. There is however a more fundamental difficulty. If LGDC was heavily
indebted to Mr Liu and his family, that circumstance would cast an entirely different
complexion upon the inherent likelihood of the liquidator’s case. In that situation, it
would make little commercial sense for the indebtedness to remain entirely with
LGDC after its fixed assets had been transferred to NSL. If the assets were to be
shifted to NSL, the obvious step was to ensure that a substantial part of the
indebtedness was also transferred to that company. When one further considers (1)
that Mr Liu was specifically advised that a transfer of the assets to NSL at an
undervalue would be open to challenge, (2) that the assumption of the debt by NSL
cost Mr Liu and his family nothing, and (3) that Mr Liu was found by the Lord
Ordinary to have an acute business intelligence, it would if anything be surprising if
the consideration for the sale to NSL had not included the assumption of debts owed
to the Liu family.
33. The Lord Ordinary’s opinion demonstrates an awareness of this point, which
appears to have eluded the Extra Division. At para 83 of his opinion, the Lord
Ordinary said:
“Although there are questions as to the timing of the letters of 5
December 1994 evidencing the Liu family loan, and equally of the 8
Page 10
December 1994 letter evidencing the Coquihalla loan, the fact of the
loan itself was not challenged. This is of the utmost importance in
assessing much of the other evidence in the case. It is clear that there
was a loan from the Liu family in the total amount shown by the
December 1994 letters. This is consistent with Mr Gardner’s
correspondence at the time. He may not have known of the breakdown
of the loan between the various family members – and it is clear that
he did not – but he knew that the loan to LGDC to enable it to purchase
Letham Grange had been arranged by Mr Liu and came principally
from Liu family sources.” (emphasis supplied)
He later observed:
“There is no doubt that he [Mr Liu] has an acute business intelligence.
If Mr Gardner pointed out a possible problem with the sale, why would
he not try to address that problem? Procuring that NSL, a family
company, relieved LGDC, another family company, of part of its
liability to repay loans to members of the family, cost him nothing.”
(para 88)
34. Those passages might be contrasted with para 101 of Lady Paton’s opinion:
“I should add that it is possible that the Lord Ordinary was influenced
to some extent by his understanding that the original £2 million which
was paid for Letham Grange in 1994 was said to be Liu family money.
Nevertheless such a consideration, if well founded (and on the state of
the evidence I reserve my position on that matter) does not affect the
need to recognise the strong circumstantial case referred to in this
opinion.”
It appears from this passage that the Extra Division not only declined to accept the
unchallenged evidence of the loans to LGDC (loans whose existence was also
accepted on behalf of the liquidator before this court), but also failed to grasp its
relevance to the case, including the question whether there was in fact a “strong
circumstantial case”.
The reason for the sale
35. As I have mentioned, Lady Paton gave five examples of the Lord Ordinary’s
dismissing or neutralising the parts of the evidence which constituted the component
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parts of the circumstantial case advanced on behalf of the liquidator, without giving
satisfactory reasons for doing so.
36. First, in relation to the reason for LGDC’s selling the subjects to NSL rather
than, for example, obtaining a further loan from the Liu family, Lady Paton was
critical of a passage in the Lord Ordinary’s opinion in which he stated:
“I find the reason for the sale in 2001 to NSL somewhat elusive. As I
have said, according to Mr Liu it was because the Coquihalla loan
required to be repaid and LGDC did not have any money or the means
of raising it. A loan from a family member or a third party might have
been the answer, but without accountants Mr Liu could not properly
record a loan in the books of the company. Therefore it was agreed to
raise the money by selling the subjects to NSL. I find this explanation
difficult to believe. The 1994 loans were not properly recorded
originally, and there was no reason why an informal arrangement
could not have been made. But ultimately this does not matter. The
fact is that LGDC did sell the subjects to NSL, whatever might have
been the true reasons for that. So the elusiveness of the reasons for the
transaction do not impact upon this part of the story. A sale was
arranged to NSL.” (para 86)
Lady Paton comments (para 80):
“On the contrary, the lack of a sound reason for the sale in 2001 was
a highly significant piece of evidence which should have been kept in
mind when assessing the overall picture (including credibility), rather
than being dismissed at an early stage as unimportant.”
37. I am unable to agree with this criticism of the Lord Ordinary. He began his
discussion of the case by stating that it “turns on the credibility of Mr Liu” (para 81).
He then listed a number of criticisms of Mr Liu’s credibility which “were well made
and, in an ordinary case (if there is such a thing) would likely be regarded as fatal to
the defenders’ case”. These included “difficulty in seeking to understand the
underlying purpose of the sale to NSL”. This was one of a number of matters which
were “formidable obstacles for the defenders to overcome” (para 82). It is clear,
therefore, that he appreciated the significance of the absence of a clear explanation
for the sale when assessing credibility.
38. The Lord Ordinary then considered the significance of the unchallenged and
“overwhelming” evidence that there had been a loan from the Liu family to LGDC
Page 12
in the total amount shown in the December 1994 letters. This he rightly described
as being as “of the utmost importance in assessing much of the other evidence in the
case” (para 83). That was so for a number of reasons. First, since that evidence was
not in doubt, it provided a sound foundation for the assessment of the evidence
which was disputed, in so far as it bore upon it. Secondly, as I have explained, it
affected the inherent probability of Mr Liu’s claim that part of the indebtedness of
LGDC to the Liu family had been assumed by NSL at the time when the fixed assets
of the former company were sold to the latter. Thirdly, it was also relevant to an
assessment of the demeanour of Mr Liu and the manner in which he answered
questions put to him by counsel for the liquidator: put shortly, if the loans were
genuine, it followed that Mr Liu had a genuine grievance against the liquidator (who
had previously declined to accept the Liu family’s claims in the liquidation, and had
in consequence avoided being removed from office), which could explain a reluctant
and almost truculent manner.
39. In the light of his finding that the loans had been made in the amounts shown
in the 1994 letters, and the implications of that finding which I have explained, the
Lord Ordinary concluded his assessment of credibility by finding that Mr Liu was
“endeavouring to tell the truth, so far as concerned the essentials of his case, and
that the parts of his evidence that concerned those essentials could be relied on”
(para 84).
40. Having made that crucial finding – after, as I have explained, taking account
of the lack of a clear explanation for the sale to NSL – the Lord Ordinary then went
through the history of events in chronological order. It is in that context that he again
discussed the sale to NSL, in the passage which was criticised by Lady Paton. He
had previously discussed in some detail the various questions which arose in relation
to the reason for the sale (paras 77-79). He noted that Mr Liu was not cross-examined
in depth on the rationale for the sale to NSL or on other ways in which the debt to
Sanwa might have been repaid: Mr Liu “was not directly challenged along the lines
that there was no commercial purpose” (para 76), “was never asked why [the
£1.85m] could not have been advanced by way of a loan” (para 77), and “was not
asked about this [‘why NSL was introduced if it did not have the money to pay
LGDC’] in any detail” (para 78). He also noted that “the reasons behind it [the fact
that Foxworth did not assume the £1.85m debt] were not explored in evidence” (para
79).
41. In the context in which the passage in question appeared in his opinion, the
Lord Ordinary was correct to say in para 86 that the reason for the sale did not matter.
He had by then decided that the Liu family had lent over £2m to LGDC in 1994, and
there was no doubt that LGDC had sold the subjects to NSL in 2001. What was
important at that stage of the analysis was the amount of the consideration for the
sale, and in particular whether it included the assumption of £1.85m of the loan. The
answer to that question did not depend upon the reason for the sale, but essentially
Page 13
upon the credibility of Mr Liu. In so far as the elusiveness of the reason for the sale
bore upon Mr Liu’s credibility, it had already been taken into account.
The claims in the liquidation
42. Lady Paton’s second example of the neutralising of a piece of evidence was
a comment made by the Lord Ordinary in relation to the claims submitted on behalf
of the Liu family in the liquidation of LGDC, which did not initially take account of
the assumption of part of the loan by NSL:
“It seems to me to be perfectly possible that Mr Liu, in instructing his
lawyers in that case, did not at that moment put two and two together
so as to realise that the assumption of £1.85 million of the loan by NSL
had the effect of reducing the debt due by LGDC to the family
members.” (para 91)
Lady Paton observed that Mr Liu had not himself put forward that explanation, and
stated:
“In my view, it is significant that Mr Liu … failed to discount the Liu
family claims … This strand of evidence was important, and tended
to suggest that the consideration given for Letham Grange had indeed
been £248,100.” (para 81)
43. The Lord Ordinary did not overlook the significance of this evidence. In his
discussion of the matters adverse to Mr Liu’s credibility, he said:
“Most damning of all, perhaps, is the fact that when presenting a claim
in the winding up and pressing his case in the sheriff court proceedings
in 2003, Mr Liu instructed his lawyers as to the amount of the family
loan outstanding to date without any hint of there having been an
assumption of part of this debt by NSL. This was a crucial element in
the calculation of the sums claimed in the winding up. If NSL had
assumed part of the debt, the sums owing by LGDC would have been
pro tanto reduced.” (para 82)
44. When the Lord Ordinary referred to this matter again in the passage criticised
by Lady Paton, he had by then concluded, after taking this matter into account, that
Mr Liu was nevertheless a credible witness on the essential matters in dispute. The
Lord Ordinary had also concluded, by that stage, that the assumption of the debt
Page 14
formed part of the consideration for the sale. He then stated, in the earlier part of the
paragraph criticised by the Extra Division:
“In coming to this conclusion I have taken account of all the various
criticisms of Mr Liu’s evidence, including in particular his failure to
take account of the assumption of the loan when first presenting his
case … in the sheriff court proceedings” (para 91).
He need not have gone on to suggest a possible explanation for Mr Liu’s failure to
tell his lawyers about the assumption of the debt until 2003: at that stage of his
analysis of the case, it did not matter. The fact that he suggested an explanation –
one not entirely unrelated to Mr Liu’s evidence that he was a busy man with business
interests around the world (para 74) – does not vitiate his conclusion.
Changes in Mr Liu’s position
45. Lady Paton’s third example of the dismissal of a significant piece of evidence
concerned changes in Mr Liu’s account of what he had told Mr Gardner about the
consideration for the sale. The Lord Ordinary, it was said, did not expressly refer to
these changes, and appeared to take no account of Mr Liu’s ultimate position that he
deliberately did not tell Mr Gardner about the enhanced consideration (para 82).
46. I am unable to agree with this criticism. The Lord Ordinary set out in full the
explanation given by Mr Liu in his witness statement, which he adopted as part of
his evidence in chief. That included the statement:
“It was agreed with each of my family members that liability to repay
£1,850,000 of the total sum lent would be assumed by [NSL] and I
told Dan Gardner that.” (para 42)
The Lord Ordinary emphasised the final phrase. He then noted that, in crossexamination, Mr Liu gave evidence that he told Mr Gardner that NSL would assume
responsibility for the loans, but did not tell Mr Gardner the amount of the loans or
that the assumption of liability had already occurred. The Lord Ordinary noted that,
in re-examination, Mr Liu said that what he had told Mr Gardner was that he would
adjust the price to what was necessary. The Lord Ordinary returned to the point in
his discussion of credibility, noting as one of the points made by counsel for the
liquidator that Mr Liu “did not tell Mr Gardner in terms that the consideration for
the sale included an assumption by NSL of £1.85 million of the Liu family debt
owed by LGDC” (para 82). As I have mentioned, he later said that in coming to his
conclusion he had taken account of all the criticisms of Mr Liu’s evidence (para 91).
Page 15
47. The Lord Ordinary was therefore aware that Mr Liu’s position in relation to
what he had told Mr Gardner changed during his evidence, and he took that into
account. He clearly regarded it as significant that Mr Liu finally accepted that he
had not told Mr Gardner that the loan had been assumed as part of the consideration.
The changes in position were of course relevant to the credibility and reliability of
Mr Liu’s evidence. The Lord Ordinary discussed that matter fully, and
acknowledged the strength of the points made. Nevertheless, as he said, “having
seen Mr Liu over a considerable period in the witness box, and having heard him at
length under persistent and skilful cross-examination”, he formed the view that his
evidence was credible and reliable so far as concerned the essentials of the case (para
84).
48. It is true that the Lord Ordinary did not refer expressly to a passage during
Mr Liu’s cross-examination, quoted by Lady Paton, in which he gave what appears
to have been a rather emotional answer to the effect that the reason he had not told
Mr Gardner that the debt had been assumed was because the deeds had already been
prepared by then, and he felt that he would look like a fool if he asked for them to
be corrected at that stage. There is however no reason to suppose that this passage
in the evidence was overlooked, merely because it was not expressly mentioned. An
appellate court is bound, unless there is compelling reason to the contrary, to assume
that the trial judge has taken the whole of the evidence into his consideration:
Thomas v Thomas 1947 SC (HL) 45, 61; [1947] AC 484, 492, per Lord Simonds;
see also Housen v Nikolaisen [2002] 2 SCR 235, para 72.
The discrepancy between the 1994 and 1995 correspondence
49. Lady Paton’s fourth example of the dismissal of significant evidence was the
Lord Ordinary’s treatment of the discrepancy between the letters of December 1994,
attributing the loan to LGDC to four members of the Liu family, and the fax of 23
February 1995, where eight members of the family were mentioned. Lady Paton
commented that the Lord Ordinary did not draw the “obvious” inference that the
letters did not exist in 1994 or 1995, when the letters were not shown to Mr Gardner,
or in 2002, when the letters were not found by the liquidator in the records of LGDC,
but were compiled by Mr Liu for his own purposes. The Lord Ordinary “chose in
effect to dismiss the potentially significant discrepancy” by “making the assumption
that the money lent was all ‘Liu family’ money”, and taking the view that nothing
turned on whether the letters were written in 1994 or some time later (para 83).
50. The Lord Ordinary discussed at length the evidence relating to the December
1994 documents and the fax of 23 February 1995 (paras 35-37 and 54-56). I have
already summarised some of that evidence. He noted fully the points made by
counsel for the liquidator:
Page 16
“The originals of such letters had not been produced. No explanation
had been given for this. Being written in English, they cannot have
been intended primarily for the benefit of the members of the family,
whose native language was Chinese and who had very little English.
They must have been intended as a record of the loans to LGDC. Yet
they were not passed to MacRoberts (who acted as company secretary)
in 1994. They were not found in the books and records of the company
at the commencement of the liquidation. Nor were they shown to Mr
Gardner when he asked about the loans. Even when he asked for
particulars of the loans, he was not told of these details. Indeed, in the
early months of 1995 Mr Gardner was being told that the funds made
available to LGDC had come from different lenders (including the
family members) and in different amounts.” (para 67)
51. The Lord Ordinary discussed the issue again when he considered the
credibility of Mr Liu’s evidence, stating that he accepted that there was some doubt
about when the 1994 letters were produced, since they were not shown to Mr
Gardner at the time of LGDC’s purchase of Letham Grange in circumstances where
one would one have expected them to have been shown to him had they been in
existence at that time (para 82). But he also observed:
“On the other hand, although there are questions as to the timing of
the letters of 5 December 1994 evidencing the Liu family loan, and
equally of the 8 December 1994 letter evidencing the Coquihalla loan,
the fact of the loan itself was not challenged.” (para 83)
52. The Lord Ordinary was correct to take the doubt about the date of the letters
into account when assessing Mr Liu’s credibility, as he plainly did: it was one of the
“formidable obstacles” to be overcome. But he was also correct to identify as the
central question whether the loan had been made, rather than whether particular
evidence vouching the loan was all that it bore to be. In relation to that question, in
the critical paragraph of his opinion, the Lord Ordinary observed that although there
were questions as to the timing of the letters evidencing the Liu family loan, the fact
of the loan itself was not challenged. It was clear that there was a loan from the Liu
family in the total amount shown by the letters. As the Lord Ordinary explained, that
was consistent with Mr Gardner’s evidence and his correspondence of that time
(para 83). The Lord Ordinary concluded, in relation to this chapter of the evidence:
“I am satisfied that the loans were made by members of the Liu family
to LGDC, in the amounts evidenced in the December 1994 letters, for
the acquisition of Letham Grange. It is clear from the evidence that all
decisions about this were effectively taken by Mr Liu. His family
members relied on his advice. I am not persuaded that the split
Page 17
between the family members was necessarily decided upon by the
time of the transaction (it will be recalled that different splits and,
indeed, different lenders were mentioned at various times) and it may,
therefore, be that the letters of 5 and 8 December 1994 were written
and signed some time later. But nothing turns on this. The loans were
made to LGDC and were enforceable according to the terms of the
letters – the fact that letters are back dated does not invalidate them in
so far as they purport to be a record of a transaction.” (para 85)
53. Against the background I have described, the criticisms levelled at the Lord
Ordinary in relation to this matter appear to me to miss their target. He considered
the timing of the letters with care, particularly for the impact it might have upon the
credibility of Mr Liu’s evidence. The “obvious” inferences which he is criticised for
failing to draw do not appear to me to be obvious. His “assumption” that LGDC’s
purchase of the subjects had been financed by loans from the Liu family reflected
unchallenged evidence, which for some unexplained reason the Extra Division
declined to accept. His conclusion that nothing turned on the date when the letters
were written was one he was entitled to reach. In essence, his doubts as to the date
of the loan letters, in a situation where the existence of the loans themselves was not
challenged, did not cause him to conclude that the consideration for the subsequent
sale of the subjects had not included the assumption of part of the debt resulting
from those loans.
Brevity
54. Lady Paton’s final example of the neutralising of a potentially significant
strand of evidence is “the Lord Ordinary’s brief reference to Mr Gardner’s evidence
about the disposition from LGDC to NSL”. In the passage in question, the Lord
Ordinary stated:
“Mr Gardner gave evidence in detail about the disposition from LGDC
to NSL in February 2001. The matter is covered in paras 15-27 of his
witness statement upon which he elaborated in his oral evidence both
in chief and in cross-examination. I do not need to set out that part of
his evidence verbatim here.” (para 57)
Lady Paton commented:
“I consider, however, that the content of Mr Gardner’s evidence
relating to the 2001 disposition was significant and at times startling,
painting a picture of a client (Mr Liu) who was not being
Page 18
straightforward with his own solicitor. While there might be no need
to set out Mr Gardner’s evidence verbatim, an indication of the content
of his evidence would have presented a more balanced picture.” (para
84)
55. Although the Lord Ordinary did not set out Mr Gardner’s evidence relating
to the disposition verbatim, he nevertheless gave not merely an indication of its
content, but a detailed account of it, in paras 58-64 of his opinion. That account
covered the aspects of this chapter of Mr Gardner’s evidence which were most
damaging to Mr Liu. These included (1) his not having told Mr Gardner that “J
Michael Colby”, whose signature appeared on the acceptance of the offer of sale,
was himself; (2) his not having told Mr Gardner that liability for the £1.85m debt
had been assumed as part of the consideration for the sale, and (3) his having in
consequence misled Mr Gardner as to the amount of stamp duty payable (a matter
which was subsequently rectified).
56. In the circumstances, I cannot see any substance in this criticism of the Lord
Ordinary. His treatment of this chapter of evidence was not unbalanced, and did not
indicate any failure to understand it or to take it into account. More generally, he
gave careful consideration to the arguments and evidence adduced on behalf of the
liquidator, and explained why he nevertheless concluded that the liquidator’s case
should be rejected.
57. I would add that, in any event, the validity of the findings of fact made by a
trial judge is not aptly tested by considering whether the judgment presents a
balanced account of the evidence. The trial judge must of course consider all the
material evidence (although, as I have explained, it need not all be discussed in his
judgment). The weight which he gives to it is however pre-eminently a matter for
him, subject only to the requirement, as I shall shortly explain, that his findings be
such as might reasonably be made. An appellate court could therefore set aside a
judgment on the basis that the judge failed to give the evidence a balanced
consideration only if the judge’s conclusion was rationally insupportable.
Additional observations
58. The principles governing the review of findings of fact by appellate courts
were recently discussed by this court in McGraddie v McGraddie [2013] UKSC 58;
[2013] 1 WLR 2477; 2013 SLT 1212. There is no need to repeat what was said there.
There may however be value in developing some of the points which were made in
that judgment.
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59. In the present case, the Extra Division cited earlier authorities of the highest
standing. Lady Paton referred in particular to the well-known dictum of Lord
Thankerton in Thomas v Thomas 1947 SC (HL) 45, 54; [1947] AC 484, 488:
“The appellate court, either because the reasons given by the trial
judge are not satisfactory, or because it unmistakably so appears from
the evidence, may be satisfied that he has not taken proper advantage
of his having seen and heard the witnesses, and the matter will then
become at large for the appellate court.”
As I have explained, Lady Paton found the reasons given by the trial judge to be
unsatisfactory; and I have also explained why I take a different view.
60. Her Ladyship also cited a dictum from the opinion of Lord President
Hamilton in Hamilton v Allied Domecq plc [2005] CSIH 74; 2006 SC 221, para 85,
concerned with the situation where “findings of fact are unsupported by the evidence
and are critical to the decision of the case”. She considered that that test also was
met in the present case (para 89). As this court explained in McGraddie at para 31,
however, that dictum was concerned with the situation where a critical finding has
been made which is unsupported by any evidence, rather than the situation where
the appellate court disagrees with the overall conclusion reached by the Lord
Ordinary upon the evidence. It was therefore not in point in the present case.
61. Lady Paton also cited the dictum of Lord Macmillan in Thomas v Thomas
1947 SC (HL) 45, 59; [1947] AC 484, 491, where, after mentioning some specific
errors which might justify the intervention of an appellate court, his Lordship added
that the trial judge may be shown “otherwise to have gone plainly wrong”. As Lady
Paton noted, that dictum was cited by Lord Hope of Craighead in Thomson v
Kvaerner Govan Ltd [2003] UKHL 45; 2004 SC (HL) 1, para 16, where he also
cited Lord Shaw of Dunfermline’s statement in Clarke v Edinburgh and District
Tramways Co Ltd 1919 SC (HL) 35, 37 that the duty of the appellate court was to
ask itself whether it was in a position to come to a clear conclusion that the trial
judge was “plainly wrong”. Lady Paton considered that that test also was met in the
present case (para 89).
62. Given that the Extra Division correctly identified that an appellate court can
interfere where it is satisfied that the trial judge has gone “plainly wrong”, and
considered that that criterion was met in the present case, there may be some value
in considering the meaning of that phrase. There is a risk that it may be
misunderstood. The adverb “plainly” does not refer to the degree of confidence felt
by the appellate court that it would not have reached the same conclusion as the trial
judge. It does not matter, with whatever degree of certainty, that the appellate court
Page 20
considers that it would have reached a different conclusion. What matters is whether
the decision under appeal is one that no reasonable judge could have reached.
63. In Thomas itself, Lord Thankerton, with whose reasoning Lord Macmillan,
Lord Simonds and Lord du Parcq agreed, said that in the absence of a misdirection
of himself by the trial judge, an appellate court which was disposed to come to a
different conclusion on the evidence should not do so “unless it is satisfied that any
advantage enjoyed by the trial judge by reason of having seen and heard the
witnesses could not be sufficient to explain or justify the trial judge’s conclusion”:
1947 SC (HL) 45, 54; [1947] AC 484, 487-488.
64. Lord du Parcq’s speech is to similar effect. Distinguishing the instant case
from “those very rare occasions” on which an appellate court would be justified in
finding that the trial judge had formed a wrong opinion, he said:
“There are, no doubt, cases in which it is proper to say, after reading
the printed record, that, after making allowance for possible
exaggeration and giving full weight to the judge’s estimate of the
witnesses, no conclusion is possible except that his decision was
wrong.” (1947 SC (HL) 45, 63; [1947] AC 484, 493)
65. Viscount Simon, while disagreeing as to the result of the appeal, also
emphasised the need for the appellate court to consider whether the trial judge’s
decision could reasonably be regarded as justified:
“If there is no evidence to support a particular conclusion (and this is
really a question of law), the appellate court will not hesitate so to
decide. But if the evidence as a whole can reasonably be regarded as
justifying the conclusion arrived at at the trial, and especially if that
conclusion has been arrived at on conflicting testimony by a tribunal
which saw and heard the witnesses, the appellate court will bear in
mind that it has not enjoyed this opportunity and that the view of the
trial judge as to where credibility lies is entitled to great weight.”
(1947 SC (HL) 45, 47; [1947] AC 484, 486).
66. These dicta are couched in different language, but they are to the same
general effect, and assist in understanding what Lord Macmillan is likely to have
intended when he said that the trial judge might be shown “otherwise to have gone
plainly wrong”. Consistently with the approach adopted by Lord Thankerton in
particular, the phrase can be understood as signifying that the decision of the trial
judge cannot reasonably be explained or justified.
Page 21
67. It follows that, in the absence of some other identifiable error, such as
(without attempting an exhaustive account) a material error of law, or the making of
a critical finding of fact which has no basis in the evidence, or a demonstrable
misunderstanding of relevant evidence, or a demonstrable failure to consider
relevant evidence, an appellate court will interfere with the findings of fact made by
a trial judge only if it is satisfied that his decision cannot reasonably be explained or
justified.
68. This approach is consistent, as I have explained, with the Scottish authorities,
and also with more recent authority in this court and in the Judicial Committee of
the Privy Council (see, for example, In re B (A Child) (Care Proceedings: Threshold
Criteria) [2013] UKSC 33; [2013] 1 WLR 1911, paras 52-53, per Lord Neuberger).
A similar approach has also been adopted by the Supreme Court of Canada (see HL
v Canada (Attorney General) 2005 SCC 25; [2005] 1 SCR 401, paras 55-56) and by
the United States Supreme Court (see Anderson v Bessemer 470 US 564 (1985),
573-574).
69. In the circumstances of the present case, in my opinion the Extra Division
had no proper basis for concluding that the Lord Ordinary had misdirected himself
or had failed to give satisfactory reasons for the factual conclusions which he
reached on the evidence, or for concluding that he had gone plainly wrong. It follows
that the appeal must be allowed.
Expenses
70. As I have explained, Foxworth and NSL had a cross-appeal which the Extra
Division did not find it necessary to determine. The Lord Ordinary found the
liquidator liable to Foxworth and NSL in the expenses of the action, but added a
proviso that the order for expenses was not to be enforced without a further order of
the court. In his opinion, the Lord Ordinary explained that the liquidator had been
awarded expenses in the previous proceedings against NSL, and that the award had
not been met. He was concerned that it might be unjust to allow Foxworth and NSL
to enforce an order for expenses against the liquidator when the latter held an
unsatisfied order for expenses in his favour in respect of the earlier action. It was
unclear to the Lord Ordinary, at the time when he considered the matter, whether
Foxworth and NSL were under the same control or beneficial ownership. The
solution which he adopted was to add the proviso. He stated in his opinion that, at
the hearing of any motion for an order allowing enforcement of the award, he would
expect to be provided with information as to (a) whether the order for expenses in
the first action had been satisfied, and if not, why not, (b) the ownership and control
of the two companies, (c) whether there were any creditors of Foxworth with an
interest to support or oppose the motion and, if so, the extent of their claims and the
extent of the assets available to meet those claims, (d) whether any such creditors
Page 22
supported or opposed the motion, and (e) anything else of relevance. The Lord
Ordinary’s order in relation to expenses was recalled by the Extra Division.
71. In the present appeal, counsel for Foxworth and NSL argued that, in the event
that the Lord Ordinary’s decision on the substantive issue were to be restored, his
decision on expenses nevertheless should not be in so far as it contained the proviso.
The question whether the payment of an award of expenses in favour of Foxworth
could be withheld on account of NSL’s failure to pay another award of expenses
was governed by the law of compensation – which answered the question in the
negative – and was not a matter of judicial discretion.
72. Questions in relation to awards of expenses in the Court of Session are
generally best determined by that court. In discussion, it was accepted that no
prejudice would be occasioned by remitting the question of the expenses of the
proceedings in the Outer House to the Lord Ordinary. It was accepted that the nonpayment by NSL of the award made in the previous proceedings can be considered
and taken into account, along with all other circumstances relevant to the court’s
exercise of its discretion, at the stage when an award is made, obviating the potential
difficulty raised in the cross-appeal.
Conclusion
73. I would accordingly allow the appeal and invite parties to make submissions
as to the appropriate form of order.
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