Sasea Finance Ltd v. KPMG

Factual and Procedural Background

The Plaintiff ("SFL") was a member of the Sasea group of companies, a Swiss-based group wholly owned by Company A ("Holding"), a publicly listed Swiss company. SFL was registered in England. The group collapsed with a large deficiency in 1992, leading SFL to enter creditors' voluntary liquidation in October 1992 and liquidators were appointed in November 1992. Key figures prior to the collapse were individuals referred to as Mr. Fiorini and his business partner. The group's affairs were subject to criminal investigations in multiple jurisdictions, with Mr. Fiorini pleading guilty to fraud charges in Geneva in 1995 and extradition proceedings pending against the business partner in the USA.

The present proceedings were initiated by a writ dated 26 June 1996, focusing primarily on the audit conducted by Defendant auditors ("KPMG") of the Plaintiff's accounts for the year ended 31 December 1989 ("the 1989 Accounts"), with the audit completed around 15 January 1991.

The Plaintiff's case against the Defendant alleges that the Defendant negligently failed to detect or report that the 1989 Accounts contained fictitious transactions or falsely inflated profits and assets; that the Defendant should have reported these concerns or qualified the audit report by the audit completion date; and that but for this negligence, the group would have collapsed earlier, preventing or allowing recovery of certain losses.

Following the Statement of Claim service in January 1998, the Defendant applied to strike out parts of the claim relating to losses, succeeding in striking out a major head of loss concerning an alleged dividend, which the Plaintiff did not appeal. The Defendant also succeeded before the trial judge on two other heads of loss, but the Court of Appeal reversed that decision in December 1999, holding that the pleading of losses caused by negligence was maintainable after amendments alleging improper diversion of proceeds.

The current strike-out/summary judgment application concerns the "Renta loss," involving the proceeds of sale of shares in a company called Renta SA. The Defendant contends that the Plaintiff received value for these proceeds through inter-company accounting with Holding, which the Plaintiff disputes, alleging that the inter-company account credit was illusory due to sham transactions inflating SFL's indebtedness to Holding.

The Plaintiff identifies three transactions allegedly accounting for over £75 million of the purported indebtedness, which it claims were sham: an unpaid dividend declared in June 1990, dividends declared in 1988 and 1989 which could not lawfully have been paid, and a loan from Holding to SFL in May 1989 of CHF 115 million. The Defendant argues that if it can establish genuine indebtedness exceeding the proceeds of the Renta shares, the Plaintiff suffered no loss on this head.

The Defendant seeks to strike out the claim on the basis that the Plaintiff has no real prospect of proving at trial that it was not indebted to Holding in respect of the loan. The Plaintiff disputes this, alleging sham transactions and lack of board authority for the transactions, and raises issues of insolvency and improper purpose.

The parties also dispute whether the transactions were authorized or ratified by the Plaintiff's board, with the Plaintiff contending there is a triable issue on this point, and the Defendant arguing that the board approved the accounts reflecting these transactions and that the suggestion of non-approval is fanciful.

Additional claims relate to losses involving shares in the Rivaud group and alleged misappropriations by Mr. Fiorini. The Defendant seeks to have preliminary issues relating to loss tried separately to save costs and time, but the Plaintiff opposes on grounds including overlap between liability and loss issues, and the risk of memory deterioration.

The court refused the application for trial of preliminary issues on loss, concluding that the overlap and complexity made the proposed shortcut potentially dangerous.

Legal Issues Presented

1. Whether the Plaintiff has a real prospect of succeeding in proving that the inter-company account indebtedness to Holding was illusory due to sham transactions and lack of board authority.
2. Whether the transactions constituting the loan and related payments were authorized or ratified by the Plaintiff's board and whether ratification requires full knowledge of essential facts.
3. Whether the loan transaction was unenforceable due to improper or illegal purpose, including allegations of fraud on creditors and sham transactions.
4. The extent to which insolvency of the Plaintiff affects the validity and enforceability of the transactions and the ability to recover losses.
5. Whether trial of preliminary issues on loss is appropriate given overlap with liability issues and potential cost and delay considerations.

Arguments of the Parties

Defendant's Arguments

• The Plaintiff received value for the Renta share proceeds via a genuine credit on the inter-company account with Holding, evidencing indebtedness exceeding the proceeds.
• The transactions constituting the loan and payments were authorized by the Plaintiff, as evidenced by board approval of accounts reflecting these transactions.
• There is no basis to assert that the loan was unenforceable due to illegality or public policy under Swiss or English law.
• The Plaintiff's claim that the transactions were shams or unauthorized is fanciful and unsupported by evidence.
• The loan was a valid, intra vires transaction with Holding's consent, binding the Plaintiff unless set aside by statutory insolvency provisions.
• The trial of preliminary issues on loss would save costs and expedite resolution.

Plaintiff's Arguments

• There is a triable issue that the Plaintiff was not genuinely indebted to Holding, as the inter-company account credits arose from sham transactions lacking board authority.
• The loan and related payments were unauthorized by the Plaintiff's board and were used in a circular transaction designed to create a false appearance of share subscription.
• Any ratification by board approval of accounts is ineffective without full knowledge of essential facts.
• The loan contract would be unenforceable due to improper or illegal purpose, including fraud on creditors and sham transactions.
• The Plaintiff was insolvent at material times, and neither Holding nor the Plaintiff's board could properly consent to the transactions.
• Holding was not unjustly enriched, and restitutionary claims are barred by the Plaintiff's changed position.
• The trial of preliminary issues on loss is inappropriate due to significant overlap with liability issues and risk of prejudice.

Table of Precedents Cited

Court's Reasoning and Analysis

The court applied the test from Swain v Hillman to determine whether the Plaintiff had a real prospect of succeeding in proving that the inter-company indebtedness was illusory and arose from sham transactions lacking board authority. The court examined the Plaintiff's detailed allegations concerning unpaid dividends, unauthorized loans, and circular transactions designed to create a false appearance of share subscription.

The court acknowledged the Defendant's strong arguments that the transactions were authorized and reflected in approved accounts, but found that these did not conclusively negate the Plaintiff's case. The possibility that the Plaintiff's bank account was used without the board's knowledge or approval created a triable issue.

On ratification, the court held that board approval of accounts does not necessarily amount to ratification of underlying contracts without full knowledge of essential facts. The court rejected the Defendant's broad assertion that directors cannot claim ignorance of the nature of transactions reflected in accounts.

The court further considered company law principles, particularly the general rule that shareholders can bind the company if acting within capacity and with consent, but subject to the exception of fraud on creditors. It relied on Re Halt Garage and related authorities to explain that transactions constituting a fraud on creditors cannot be validated merely by shareholder approval.

The court found the Plaintiff's case that the loan was used in a circular transaction benefiting Holding but not SFL, and that SFL was insolvent at material times, to be sufficiently arguable to survive strike-out. The court rejected the Defendant's narrow view that the loan was not a fraud on creditors simply because money was paid into SFL's account.

Regarding restitution, the court accepted the Plaintiff's argument that it was not unjustly enriched, or had changed its position, thus barring any restitutionary claim by Holding.

On the application for trial of preliminary issues on loss, the court found significant overlap between loss and liability issues, particularly given the insolvency allegations and the interconnected nature of the transactions. The court concluded that the proposed preliminary issue would not achieve meaningful cost or time savings and might risk unfairness or delay, leading to refusal of the application.

Holding and Implications

The court REFUSED the Defendant's application to strike out the Plaintiff's claim relating to the Renta loss on the basis that the Plaintiff has a real prospect of succeeding in demonstrating that the inter-company indebtedness was illusory and arose from sham transactions lacking board authority.

The court also REFUSED the Defendant's application to order a trial of preliminary issues on loss, finding that the overlap with liability issues and the complexity of the matters made such a split trial inappropriate.

As a direct effect, the Plaintiff's claim on the Renta loss will proceed to trial on the merits, preserving the opportunity to establish loss and causation. No new legal precedent was established; the decision applies existing principles of company law and procedural rules to the facts before the court.