GML International and on demand repayments: fans of crime thrillers and pithy banking law disputes, read on...

GML International and on demand repayments: fans of crime thrillers and pithy banking law disputes, read on...

The return of preferential creditor status for HMRC

With one of the most interesting introductions seen in recent judgments, the case of GML International Ltd and others v Harfield throws up a lot for discussion.

Sadly, it is not the focus of the Banking & Finance team to delve into the “unusual evidential features” which include the alleged involvement of the Bulgarian mafia, Israeli intelligence services, Stockholm Syndrome and, perhaps best of all, “arguments about the dress code that would have applied to a disputed meeting at the Ritz Hotel”. It sounds like an excellent new series of McMafia.

We look instead at the case from a banking perspective (sorry – although we will touch on some of the background!), at the level of a dispute over whether the circa £850,000 (excluding interest) was due to be repaid as a number of loans (and if so, the terms of repayment), or was not repayable because it was made in performance of a compensation agreement.

The facts surrounding the dispute run from 2006, and with no loan or compensation agreements entered into, the court was required to rely on witness evidence and files of contemporaneous evidence to deduce what was originally intended by the parties.

A meeting at the Ritz?

The Defendant, Mr Harfield, alleged that in 2006, he met with the Second Claimant, Mr Pinter, at the Ritz and was promised that if he lost his position as CEO at a Bulgarian bank (in which Mr Pinter was a shareholder), he would be compensated and paid 5% of any gain made by the minority shareholders. Mr Pinter denied that this meeting ever took place, or that any such promise was made. Following later shareholder disputes and an injunction, the majority shareholders bought the minority shareholders out, at an excellent return.

Payments advanced to Mr Harfield

In December 2008, GML International made the first disputed payment to Mr Harfield of £275,000. All later payments which are under dispute (except for one, which was made by another GML entity and reimbursed by the Second Claimant), were made by either Mr Pinter from his own funds or by a trust at the request of Mr Pinter. The payments to the Defendant varied in size and timing and were made over a long period of time, during which the Defendant held, and lost, a number of positions at different firms. From 2012, GML International started to seek to recover some of the payments it had advanced to Mr Harfield. Proceedings between the parties began in 2017.

As a matter of law, it was for the Claimants to prove that each of the payments advanced was a loan. Mr Pinter maintained that any sums advanced were always a response to a request for money and would have been well understood by both parties to have been loans. He said that as the payments started as loans to a close colleague and thereafter to someone he considered a close friend, he did not consider the payments required formalisation. He always thought each request for money would be the last and thought that Mr Harfield would soon recover funds from some Cypriot accounts which would enable repayment in short order.

Was there a contract?

The court followed Blue v Ashley, in particular that a contract may be made orally and that the basic requirements of a contract are “(i) the parties have reached an agreement, which (ii) is intended to be legally binding, (iii) is supported by consideration, and (iv) is sufficiently certain and complete to be enforceable”.

Emails between the parties were key in identifying the facts of the case, given that all witnesses appeared credible in their differing accounts of events.  Mr Hermer QC, sitting as Deputy Judge, commented that the documentation was a useful forensic tool in assessing the veracity of witness evidence and was critical of the Defendant’s claims to remember minute details of events, without relying on documentary evidence.

Emails from GML International to its accountants referred to the 2008 payment as a loan, internal emails refer to Mr Harfield having “borrowed money from the company” and to when the loan would be repaid. A 2010 email from Mr Harfield to Mr Pinter refers to “repaying you (however and whenever) as part of [the healing] process” and others ask Mr Pinter to “lend” money and refer to “moneys that I already owe to you and GML International” and the need to agree how to “settle the remaining substantial obligations over time”.  The instances go on – but the tone of the evidence weighed heavily in favour of construing the payments as loan advances. In 2012, Mr Harfield made five small repayments to GML International after receiving emails seeking repayment, which further supports this view.

Mr Harfield’s claim for an ex gratia compensation payment

The tone of communications between Mr Pinter and Mr Harfield deteriorated significantly when Mr Harfield engaged a firm of private investigators and alleged that he had been unfairly deprived of an ‘ex gratia’ payment in connection with the sale of the minority shareholder stake (remember that?).

Three years later, Mr Pinter (astonishingly, in the authors’ opinion) extended an olive branch by inviting Mr Harfield to dinner and was rewarded with a letter before claim seeking damages in connection with the purported Ritz agreement. This letter, over time, evolved into the present dispute. The Judge noted that the letter before claim was the first mention of the purported agreement in any document and did not hesitate in concluding that there was no agreement to compensate Mr Harfield.

Were the payments held to be loans and, if so, on what terms?

The court held that the payments were loans made in a course of dealings between the parties and were repayable on demand, in light of the promises of repayment once the Defendant received funds from (for example) the Cypriot bank accounts and the tone of the requests for repayment by Mr Pinter.

The defence separately alleged that the payments, if loans, were governed by the Consumer Credit Act 1974 and would be unenforceable for their failure to meet various statutory requirements. Assessing the ad-hoc operation of the loans and the spirit in which they were advanced, it was held to be “abundantly clear that these were not loans made in the course of a business”.

It was held to be an implied term that the loans were repayable on demand and the parties agreed that an appropriate interest rate would be 2% above base rate, running from one month after the Claimants’ 2018 letter before action (which formally demanded repayment). The Claimants were awarded their costs on the indemnity basis, given the conduct and unreliable nature of the Defendant.

Jonathan Porteous, head of Banking & Finance at Stevens & Bolton comments:

The principal lesson here is that documenting your loan (or indeed, compensation) agreements is always a good idea and can save time and avoid costly disputes in the long term. An additional lesson is to be careful in deciding whether to advance a loan, particularly outside the normal course of lending business, at all. And gentlemen must (still) wear a tie when (allegedly) attending the Rivoli Bar and Cocktail Lounge at the Ritz, or be prepared to wear one the concierge lends them.

If you find yourself at a loose end in lockdown, the judgment is a fascinating read.

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