General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd & Ors, Court of Appeal - Civil Division, October 31, 2018, [2018] EWCA Civ 2416

Resolution Date:October 31, 2018
Issuing Organization:Civil Division
Actores:General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd & Ors
 
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Neutral Citation Number: [2018] EWCA Civ 2416

Case No: A2/2017/1867

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

Sir David Eady

[2017] EWHC 1409 (QB)

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 31/10/2018

Before :

LORD JUSTICE LEWISON

LORD JUSTICE NEWEY

and

MR JUSTICE HENRY CARR

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Between :

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Mr Richard Spearman QC (instructed by EHL Commercial Law) for the Claimant/Respondent

Mr Richard Gillis QC (instructed by CharlesRussell Speechlys) for the Defendants/Appellants

Hearing date: 9 October 2018

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Lord Justice Newey:

1. Where a creditor has taken two guarantees for a debt, it is well established that his release of one surety may operate to discharge the other, either wholly or in part. In a similar way, a creditor's release or surrender of a security that he holds is capable of discharging a surety. It is clear law, too, that a creditor has an equitable obligation to perfect any security and that, if he fails to do so, a surety can be discharged, at least to some degree.

2. The present appeal raises issues as to the extent of a creditor's obligations in relation to security. The respondent, General Mediterranean Holding SA SPF (``GMH''), has brought proceedings to recover loans it made to the first appellant, QucomHaps Holdings Limited (``QucomHaps''), which the second appellant, Mr Billy Harkin, guaranteed. The appellants, however, maintain that GMH failed to take steps to protect security it had been granted and that, as a result, neither appellant has any liability to GMH.

3. GMH lent QucomHaps sums totalling US$4,000,000 in 2005-2006 to enable it to purchase a Czech aircraft manufacturer called Moravan AS (``Moravan'') in accordance with a letter from QucomHaps dated 15 November 2005 (``the Finance Letter''). On 20 July 2007, GMH and QucomHaps entered into a written loan agreement (``the July Agreement'') formalising the terms of the loan. This recorded, among other things, that repayment had been secured by a pledge of the shares of Moravan Aviation s.r.o. (``SRO''), a wholly-owned subsidiary of QucomHaps that by then owned Moravan, and a personal guarantee from Mr Harkin, QucomHaps' managing director. It also provided for QucomHaps to procure SRO to grant a first fixed and floating charge over land, buildings and fixed assets that SRO had acquired from Moravan.

4. Mr Harkin in fact gave GMH two guarantees at about this time. By the first, dated 13 July 2007, he guaranteed ``the obligation of the Principal [i.e. QucomHaps] to make payment or discharge of monies advanced in terms of the Finance Letter, any repayment sums and any applicable interest or `rental' payments which the Principal is obliged to make to the Lender''. By the second, made on the same day as the July Agreement, he guaranteed ``the obligation of the Principal [i.e. QucomHaps] to make payment or discharge of monies advanced in terms of the Loan Agreement [i.e. the July Agreement], any repayment sums and any applicable interest payments which the Principal is obliged to make to the Lender''. For present purposes, it is the second guarantee that matters.

5. Later in the year, by a written agreement dated 7 December 2007, GMH agreed to lend QucomHaps a further US$2,000,000, which it subsequently did. Mr Harkin agreed to guarantee this loan, too.

6. On about 17 January 2008, SRO granted GMH a charge over its assets. According to the appellants, however, SRO fell victim to a ``tunnelling'' fraud in late 2008 or early 2009. Such a fraud typically involves, I gather, a ``trusted company `insider''' causing the company to enter into one or more secret loans with a person outside the company; an announcement at short notice that the company is insolvent; the company in consequence entering into a bankruptcy process; and the supposed lender, as the company's only or main creditor, then procuring the sale at an undervalue of some or all of the company's assets to an entity that it controls. In the case of SRO, the fraud is said to have involved a Czech businessman and an ex-manager of SRO ``fraudulently obtaining security over the Assets belonging to [SRO] which they then sought to enforce with a view to forcing the company into insolvency and then buying the Assets back out of the administration at a fraction of their true value'' (to quote from the appellants' defence). The chronology agreed between the parties records that, in the event, SRO went into administration in about 2009.

7. The appellants' defence said this about what ensued:

``As a result of the `tunnelling' fraud, [SRO] went into administration in the Czech Republic. The Creditors' Committee in the administration was controlled directly or indirectly by the `tunnellers' because of the Claimant's failure to exercise its rights and honour its obligations in relation to the Security ....

The Defendants repeatedly advised the Claimant that under Czech law the Claimant was required to take certain actions by 30 March 2010 in order to maintain its rights in respect of the Security and that if it did not do so the Security would be negated and the Assets would be lost to the `tunnellers'. However, the Claimant failed and/or refused to take the required steps by that time or at all; and the Assets were indeed then lost to the `tunnellers'.''

8. In the same vein, the defence alleged that ``the Security was rendered worthless and/or unenforceable'' as a result of, among other things, GMH's ``failure to take any steps to protect its rights and the rights of the Defendants in respect of the Security''. GMH's ``failure to take the necessary steps by 30 March 2010 to preserve its rights in respect of the Security in the administration of [SRO]'' was said to mean that neither QucomHaps nor Mr Harkin has any liability to GMH.

9. GMH applied for the defence and counterclaim to be struck out and summary judgment to be entered in its favour. The application was supported by a witness statement made by its chief financial officer, Mr Arif Husain. In the course of this statement, Mr Husain observed of the alleged ``tunnelling'' fraud that it was ``no more than an assertion by [the appellants] that such a fraud occurred'' and that it ``remains mysterious and doubtful''. He also said that, after SRO had gone into administration, the appellants had ``asked [GMH] to take or suggested to [GMH] that it should take certain steps including ... filing a creditor claim with the Czech court as a secured creditor of [SRO] on the basis of the purported fixed and floating charge...

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