Bulletins | October 16, 2023

Lemos v Church Bay Trust Company Limited

Joanne Wicks KC’s judgment in Lemos & Ors v Church Bay Trust Company Ltd & Ors [2023] EWHC 2384 (Ch) deals with a claim under s 423 Insolvency Act 1986 and again shows how difficult it can be to make such a claim good.

Section 423 gives the court the power to grant relief in respect of transactions entered into for the purpose of putting assets out of the reach of, or otherwise prejudicing, creditors (commonly called transactions defrauding creditors). The transactions in issue in this case took place in 1994 and involved Christos Lemos and his wife, Kalliopi. They related to a substantial property, 27 Bracknell Gardens, Hampstead, which had been purchased by a Liberian corporation, Panagia. The neighbouring property, 27A Bracknell Gardens, was later purchased by Panagia from another Liberian company associated with the Lemos family, Nandina SA, and the two properties were combined and underwent refurbishment, which included creating an art studio for Mrs Lemos.

Mr Lemos went bankrupt on his own petition in March 2015 as a result of judgment having been taken against him in Jersey for some $18 million by Joanna Lemos, his sister. She was the original s 423 claimant, but Mr Lemos’s joint trustees in bankruptcy subsequently joined in her claim.

The central issue in the proceedings was whether, in 1994, Mr Lemos had had a beneficial interest in Panagia. The claimants’ case was that he had been the sole beneficial owner of the shares in Panagia, or at least a joint (or 50%) beneficial owner with Mrs Lemos. Mrs Lemos contended that she had been the sole beneficial owner of Panagia, alternatively that, in any event, Mr Lemos had never had a beneficial interest in the company at any material time. In support of her case Mrs Lemos relied, among other things, on a declaration of trust dated 22 June 1994 by which Mr Lemos had confirmed that at all times since 24 June 1981 he had held his right, title and interest in a share previously transferred to him and in all (if any) other shares in Panagia on trust for his wife and had exercised, and would at all times in the future exercise, at her direction all powers in connection with any shares. The declaration was supported by a board minute of the same date.

The claimants did not dispute that the effect of those events was that Mr Lemos had no legal or beneficial interest in Panagia; it was common ground that the declaration of trust was effective to make him a trustee of any interest for his wife; it was also common ground that Mr Lemos had received no consideration for making the declaration of trust. The claimants’ case was that, by making the declaration of trust, Mr Lemos had made a gift of his interest in Panagia to Mrs Lemos, the purpose of which had been to put his interest in Panagia beyond the reach of his future creditors. Mrs Lemos’s case was that the declaration of trust had properly declared that any interest her husband may have had in Panagia had been held in trust for her since 1981; the purpose of the 1994 transactions had simply been to create clear lines of demarcation between her assets and those of her husband.

Joanne Wicks KC, sitting as a deputy High Court judge, found on the evidence that the shares in Panagia had always been held on express trust for Mrs Lemos, and that her husband had not transacted in 1994 with the intention of defeating the interests of his creditors. The purposes in s 423 were not satisfied, and the claim was dismissed.

Of greater interest than the result itself, which rested mainly on factual findings, are considerations connected with the length of the proceedings, the passage of time and the role of the documentary evidence. The deputy judge herself remarked,

“It is an unfortunate feature of this dispute that it has taken a long time to come to trial. As I have said, Joanna obtained a judgment against Christos in Jersey on 16 January 2015.”

The s 423 claim itself appears to have been brought the following year, so took seven or eight years to come to trial. This increased the attention that the court had to pay to issues of documentary evidence. The judge identified three main categories: family correspondence and diaries; solicitors’ correspondence, and notes relating to relevant transactions in the corporate records of Panagia. She found the latter unhelpful because, as she put it, “the directors of Panagia from time to time attached little importance to corporate decision-making. Minutes of meetings were prepared by solicitors whenever that was necessary for the purposes of a particular transaction involving Panagia; some were signed, some were not, but I very much doubt that any meeting was anything more formal than a quick discussion between family members wherever they happened to be.”

The authenticity of some of the documents was in issue. The claimants had served two notices to prove documents pursuant to CPR 32.19. CPR 32.19 says nothing about setting out the grounds on which the authenticity of a document is to be challenged: it is satisfied if notice is given merely stating that the party giving it wishes the document in issue to be proved. At trial there was a further issue as to whether service of the notices to prove (whether taken by themselves or with the parties’ pleaded cases and/or correspondence) were sufficient to permit counsel for the claimants to put to the claimants’ own witnesses in cross-examination an allegation that certain of the challenged documents had been forged, although a pragmatic solution to the problem was agreed on; and in any event, the judge ultimately concluded that the documents had not been forged. The judgment contains a comprehensive review of CPR 32.19 on the authenticity of documents and on the major authority, Redstone Mortgages Ltd v B Legal Ltd in which Norris J held that requiring a party to prove a document meant that the party relying on it had to lead “apparently credible evidence of sufficient weight that the document is what it purports to be.” He went on:

“The question… is whether (in light of that evidence and in the absence of any evidence to the contrary effect being adduced by the party challenging the document) the party bearing the burden of proof in the action has established its case on the balance of probabilities. Redstone cannot (by a refusal to admit the authenticity of a document) transfer the overall burden of proof onto B Legal, any more than it could do so simply by refusing to admit a fact.”

He also held that mere service of a notice under r 32.19 was not sufficient if a party intended to allege deliberate forgery.

The deputy judge followed Norris J:

“Norris J’s approach is in my view consistent with the overriding objective that cases must be dealt with justly, which includes ensuring that the parties are on an equal footing and that witnesses can give their best evidence (CPR 1.1(2)(a)) and that cases are dealt with fairly (CPR 1.1(2)(d)). It is a principle of pleading that a party who wishes to advance a positive case as to a particular fact must set that out and must give reasons for the denial of any allegation (see Chancery Guide, para. 4.2(g)): this is to ensure that the other parties may know the case they have to meet and can address evidence to it accordingly. A challenge to the authenticity of a document involves a challenge to particular facts about that document, such as by whom it was created or signed and when. It would in my view be inconsistent with the approach taken to pleaded facts not to require a party who wishes to advance a positive case about facts relevant to authenticity to set out that case in advance, so that the opposing party can call evidence, including if appropriate expert evidence, to meet that case. That is particularly so where the positive case which is to be made is one involving an allegation of dishonesty, as an allegation of forgery does.”