Click here to reload this page into top frame

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand
London WC2 A 2LL

10 May 2001

v

KPMG (formerly KPMG Peat Marwick McLintock)
Defendant

Mr Geoffrey Vos QC and Mr Andrew Lenon (instructed by Messrs Stephenson Harwood, Solicitors) appeared on behalf of the Defendants
Mr John Brisby QC and Mr Christopher Harrison (instructed by Messrs White & Case, Solicitors) appeared on behalf of the claimant

JUDGMENT

Hearing: 27.02.2001 - 01.03.2001

Judgment: 10 .05.2001

	Mr Justice Hart
1.	By this application the defendants (KPMG) apply for an order that part of the re-amended Statement of Claim be struck out and/or summarily disposed of pursuant to the CPR Rules 3.4 and/or 24.2 and for an order that certain issues relating to loss be tried as preliminary issues.
	Background
2.	The claimant ("SFL") was a member of the Sasea group of companies, which was based in Switzerland, and was the wholly owned subsidiary of Sasea Holding SA ("Holding"), a publicly listed Swiss company. SFL itself is a company registered in England under the Companies Act 1985Acts. KPMG were at all material times SFL's auditors. The group collapsed with a large deficiency in 1992. SFL went into creditors' voluntary liquidation on 14 October 1992 and liquidators were appointed on 18 November 1992. Dominant figures in the group prior to its collapse were Florio Fiorini and his business partner Giancarlo Parretti. The affairs of the group have been the subject of criminal investigations in a number of jurisdictions. In June 1995 Fiorini pleaded guilty to certain charges of fraud in connection with the affairs of the group before the Criminal Court in Geneva and was sentenced to a term of 6 years imprisonment. Extradition proceedings at the instance of the French prosecuting authorities are pending against Parretti in the USA.
3.	These proceedings were commenced by a writ issued on the 26 June 1996 and relate primarily to KPMG's audit of SFL's accounts for the year ended 31 December 1989 ("the 1989 Accounts"). The audit of the 1989 Accounts was completed on or about 15 January 1991.
4.	The essence of SFL's case against KPMG is that:
	(1)   KPMG discovered or ought to have discovered in the course of the audit of the 1989 Accounts that those accounts did not give a true and fair view of SFL's affairs in that various transactions were recorded in the 1989 accounts which were fictitious and/or had the effect of falsely inflating SFL's profits or its assets; (2)   KPMG ought by 28 September 1990 (the date of the first of the separate allegedly loss making transactions on which SFL rely in support of their damages claim) or by 15 January 1991 (the date of completion of the audit of the 1989 accounts) to have reported their concerns or they ought at the conclusion of the audit to have ensured that appropriate provisions were included in the 1989 accounts and that appropriate qualifications were included in their report on the 1989 accounts; (3)   but for the negligence of KPMG the Sasea Group would have collapsed by 28 September 1990 or alternatively by no later than about January 1991, and the losses which were allegedly suffered by SFL on or after the postulated date of collapse would not have been sustained. It is also alleged (in the Reply) that but for that negligence those losses would have been recovered.
5.	Following service of the Statement of Claim on the 16 January 1998 KPMG applied to strike it out on the basis that it failed to disclose a reasonable cause of action. The focus of that strike-out application was SFL's claim for loss. The most substantial head of loss related to an alleged £24m dividend by SFL. KPMG contended that there was no evidence that any dividend was ever paid. On 9 July 1998 Andrew Collins J acceded to the application in relation to that element of loss, and SFL did not appeal that part of Collins J's Order. KPMG were also successful before Collins J in striking out two of the three remaining heads of loss alleged to have been caused by their alleged negligence. Each of these claims founded on the alleged non-receipt or non-retention by SFL of the proceeds of sales (1) of shares in companies in the Rivaud Group ("the Rivaud loss") and (2) of shares in a company called Renta SA ("the Renta loss"). KPMG's application in relation to the Renta and Rivaud losses was primarily based on the contention that there was no sufficient causative link between the alleged negligence and the alleged losses, relying on the decision in Galoo Ltd in liquidation v Bright Grahame Murray [1994] 1 WLR l360. Although Collins J acceded to KPMG's application, his judgment was reversed by the Court of Appeal on 2 December 1999. It held that the pleading that those losses had been caused by the alleged negligence was maintainable. The pleading had by that time been formally amended to allege that the proceeds of sale of the Rivaud and Renta shares had been "improperly diverted".
	The strike-out/summary judgment application
6.	The strike-out/summary judgment part of the application before me (which for convenience I will call the "strike-out application") relates to the Renta loss. In essence KPMG's case is that SFL did receive value for the proceeds of the Renta shares because the proceeds of sale of the Renta shares (which in fact found their way directly or indirectly to Holding) had been credited to SFL on an inter-company account between SFL and Holding, reducing the indebtedness of SFL to Holding on that inter-company account. Following further amendment of its case by SFL, it has become apparent that SFL's case is that that credit on the inter-company account was illusory, since SFL had no indebtedness to Holding on that account. There was therefore nothing against which to set off Holding's liability to SFL in respect of the proceeds of the Renta shares.
7.	On the face of the inter-company account SFL at the material time had an indebtedness to Holding of some £75m (sterling equivalent). SFL has, in its re-amended pleading, identified three transactions accounted for through the inter-company account, which (taken together) account for more than £75m indebtedness of SFL to Holding, and which SFL claims ought not to have been so accounted for on the ground that those transactions were "sham transactions". The transactions consist, as to £24m in respect of the dividend declared by the board of SFL on 27 June 1990 (but which was never paid), as to £11.9m in respect of dividends similarly declared in 1988 and 1989, and as to some £45m a liability said to arise as a result of a loan by Holding to SFL made on or about the 31 May 1989 in the sum of SF 115m.
8.	The proceeds of the Renta shares were (sterling equivalent) some £7.95m. Accordingly, if KPMG can show that SFL was genuinely indebted to Holding on the inter-company account in a sum in excess of £7.95m, it will have succeeded in showing that SFL received value for the Renta shares and did not, accordingly, suffer any loss in relation thereto whether as a result of KPMG's negligence or otherwise. This much is common ground. What KPMG seeks to establish by the strike-out application is that, on a consideration of the whole of SFL's re-amended Statement of Claim and Reply, SFL has no real prospect of succeeding in showing that it was not at the material time indebted to Holding in respect of the loan of SFR 115m. If KPMG are right about that, they will be left facing only the much smaller claims in respect of the Rivaud loss (some £2.3m) and the Fiorini losses (some £573,000). KPMG argue, and I accept, that if the point is determined in their favour the prospects of being able to dispose of the whole litigation by agreement will be materially improved.
9.	The test to be applied under Part 24.2 of the CPR is whether the claimant has a real prospect of succeeding on the claim or issue. As Lord Woolf MR said in Swain v Hillman [2001] 2 AER 91 "The words "no real prospect of being successful or succeeding" do not need any amplification, they speak for themselves. The word "real" distinguishes fanciful prospects of success or, as [Counsel] submits, they direct the Court to the need to see whether there is a "realistic" as opposed to a "fanciful" prospect of success". Under CPR Part 3.4 (1) (A) the Court has power to strike out a Statement of Case (in whole or in part) if it "discloses no reasonable grounds for bringing ..... the claim". So far as the present application is concerned I do not consider that there is any practical difference whether it is viewed as an application under Part 3.4 or under Part 24. I remind myself also of what Lord Woolf MR said in Swain v Hillman, ibid at in the following passage:
	"It is important that a judge in appropriate cases should make use of the powers contained in Part 24. In doing so he or she gives effect to the overriding objectives contained in Part 1. It saves expense; it achieves expedition; it avoids the Courts' resources being used up on cases where this serves no purpose, and I would add, generally, that it is in the interests of justice. If a claimant has a case which is bound to fail, then it is in the claimant's interests to know as soon as possible that that is the position".
10.	The critical passage in the re-amended Statement of Claim is to be found in paragraph 166 (4) (ii) to the end of paragraph 166 which, I set out in full below:
	"(ii)   The said proceeds of sale, of which the total sterling equivalent was approximately £7,950,000, were not received by SFL but instead were received by, respectively, Pan Ass Holding BV and Sasea Holding. The proceeds received by Pan Ass Holding BV were paid on to Sasea Holding, with the relevant movement of funds being reflected by accounting entries to the inter-company accounts of Pan Ass Holding BV, SFL and Sasea Holding such that at the end of the day the inter-company account between SFL and Sasea Holding recorded that the purported balance in Sasea Holding's favour had been reduced by an equivalent amount. (iii)   Such proceeds in both cases were improperly diverted away from SFL to Sasea Holding in that such proceeds were diverted by or at the direction of Mr. Fiorini (who had no authority to deal with the same) to Pan Ass Holding BV and/or Sasea Holding for no valid commercial reason and without the authority of a resolution of SFL's board of directors. (iv)   To the extent that KPMG may seek to place reliance on the fact that such improper diversion of the proceeds of sale was categorised as loans and/or reflected in accounting terms by entries on inter-company accounts with Sasea Holding in purported reduction of amounts purportedly owing by SFL to Sasea Holding:    (A)   such loans were never authorised by SFL's board; (B)   such entries on the accounts were never authorised by SFL's board; and (C)   SFL received no benefit in respect of such entries, because there were no corresponding entries from Sasea Holding which could be set off against the entries. (v)   As to (iv)(C) above:    (A)   Although immediately prior to the proceeds of the Renta SA shares received by Sasea Holding being credited to the inter-company account between SFL and Sasea Holding in February 1991, the net inter-company balance between SFL and Sasea Holding (taking into account the various balances denominated in a number of currencies) purported to be (sterling equivalent) some £75m owed by SFL to Sasea Holding, in fact the true net inter-company position was that SFL did not owe anything to Sasea Holding, as more than £75m of that purported indebtedness had arisen as a result of sham transactions. In this regard:    (a)   £24m of the amount purportedly owed by SFL to Sasea Holding was in respect of the June 1990 purported dividend referred to in paragraphs 144 to 160 above. As pleaded therein, such purported dividend could not lawfully have been declared and paid and hence could not have given rise to any genuine or enforceable indebtedness owing by SFL to Sasea Holding. (b)   £11.9m of the amount purportedly owed by SFL to Sasea Holding was in respect of a purported interim dividend of £1.4m declared by SFL in 1988 and a purported final dividend of £10.5m declared by SFL in June 1989 in respect of its financial year ended 31 December 1988. Although SFL's accounts for the year ended 31 December 1988 purported to show a total accumulated profit of £12,447,425 available for distribution, such purported dividends could not lawfully have been declared and paid, in that:    (1)   by reason of the matters pleaded in paragraph 41(2) above, a purported profit of £8m in relation to an investment in La Semaroise had been anticipated and should instead have been recorded (if at all) in the accounts for the following year; and (2)   by reason of the matters pleaded in paragraphs 90 to 93 above, a provision should have been made in respect of a debt of £8,131,307 purportedly due from Comfinance Panama and which KPMG knew had been "window-dressed" at the year end.    Accordingly such accounts ought to have shown an accumulated loss, with the consequence that no dividend could lawfully have been declared and paid and hence no such genuine or enforceable indebtedness owing by SFL to Sasea Holding could have arisen. (c)   As to some £45m, being the sterling equivalent of SFR 115m, which was reflected on the inter-company account as a loan from Sasea Holding to SFL made on or about 31 May 1989:    (1)   A loan in that amount was not in fact required by SFL and the purported borrowing was not authorised by SFL's board. (2)   The purported loan was used by SFL to pay (also on or about 31 May 1989):    (I)   sums of SFR 18.8m, SFR 12.3m and SFR 23m respectively to Transmarine; (II)   SFR 32.8m to Comfinance Luxembourg; and (III)   SFR 34m to L&Z. (3)   None of the above payments was authorised by SFL's board and SFL received no value or benefit in respect of the same. Rather, the payments were used in a circular transaction via Transmarine, Comfinance Luxembourg and L&Z to seek to create the illusion that Transmarine (a shareholder in Sasea Holding) had properly subscribed and paid for shares in Sasea Holding and hence contributed real capital to the Sasea group when this was not in fact the case. (4)   Immediately following the payments by SFL to Transmarine, Comfinance Luxembourg and L&Z (that is, also on or about 31 May 1989):    (I)   Comfinance Luxembourg paid on to Transmarine the SFR 32.8m it had received from SFL (ostensibly as the purchase price of some 2,761,627 shares in PCC then held by Transmarine); (II)   L&Z paid on to Transmarine the SFR 34m it had received from SFL; and (III)   Transmarine paid some SFR 113.7m to its bank to repay a loan it had taken out on or about 25 May 1989 for the purpose of subscribing for shares of that amount in a capital issue by Sasea Holding. (5)   Hence the net effect of the aforementioned transactions beginning with the loan of SFR 115m by Sasea Holding to SFL and ending with the repayment by Transmarine of the aforementioned bank loan was that Sasea Holding had paid for its own share capital. (6)   Various expedients were devised in order to create the false impression that the payments made by SFL on or about 31 May 1989 and set out in sub-paragraph (2) above were ones for which SFL received value, when this was not in fact the case:    (I)   The payment of SFR 18.8m to Transmarine purported to be in respect of a purchase by SFL of 140,000 shares in Sasea Holding. In fact such shares were received by Sasea Industrial Holding NV rather than SFL and in any event such shares were worthless and/or subject to liens or charges (as to which SFL refers to paragraphs 122, 133(3) and 140(4) above). (II)   The payment of SFR 12.3m to Transmarine on or about 31 May 1989 was purportedly justified by reference to a purported loan agreement purportedly dated 18 March 1988 between SFL and Hawkins & Mills Holding SA (a company associated with Transmarine) under which SFL had purportedly agreed to lend Hawkins & Mills Holding SA LIT 10 billion without security for a period of 6 months in order to enable it to finance the construction of a ship. This "loan" was never repaid. Indeed, in the context of the 1989 Audit KPMG questioned the recoverability of the "loan". (III)   The payment of SFR 23m to Transmarine on or about 31 May 1989 was effected pursuant to instructions to Credit Lyonnais Rotterdam contained in a telex dated 26 May 1989 which stated that the payment was by order of Sasea Industrial Holding. SFL received no benefit from that payment. (IV)   The payment of SFR 32.8m to Comfinance Luxembourg purported to be in respect of a purchase of 2,761,627 shares in PCC, which Comfinance Luxembourg in turn had purportedly purchased from Transmarine the same day (as pleaded in sub-paragraph (4)(I) above). In fact SFL did not receive such shares. In any event, the price purportedly paid by SFL for the shares was some $8.1 per share whereas the quoted market price at that time fluctuated between some $3.2 and $4.6 per share (which would not in fact have been achievable in an arm's length sale for a block of shares of that size). (V)   The payment of SFR 34m to L&Z was purportedly justified by the agreement of 31 May 1989 referred to in paragraph 137(4) above. In fact there was no valid reason why SFL should have agreed to reimburse L&Z with any part of the purported profit of SFR 51m ostensibly made by SFL on the disposal of the shares in Prefim SpA on 25 November 1988 referred to in paragraph 137(2) above. (B)   There were no genuine transactions between SFL and Sasea Holding after 1 February 1991 by which any part of the amount due to SFL by Sasea Holding in respect of the proceeds of the Renta shares was repaid. (C)   Although at the time of the liquidation of SFL there was still a net balance purportedly owing by SFL to Sasea Holding on the various inter-company accounts, the liquidator of Sasea Holding withdrew the proof of debt lodged in SFL's liquidation in respect of such amount, as a result of the absence of evidence to suggest that the purported indebtedness had arisen as a result of genuine transactions leading to a real debt."
11.	Stripped to the bare essentials there are two claims being made. The first is that the payment of SF 115m made by Holding to SFL was employed by SFL to make various payments which were of no benefit to SFL but which were in fact used in a circular transaction the object of which was to create the illusion that there had been a genuine subscription for cash for new shares issued by Holding. The second claim is that all of this took place without the authority of the Board of SFL.
12.	The players in the circular transaction were the companies defined in the pleading as Transmarine, Comfinance Luxembourg, L&Z, SFL and Holding, all of them part of the Sasea Group. The steps taken by the players can be summarised for the purposes of this judgment as follows:
	(1)   22-25.5.89. Transmarine borrows SFR 113.7m from its bank and subscribes for SFR 115m worth of shares in Holding, paying Holding accordingly; (2)   26.5.89 SFL instructs its bank to make the payments at (4) below; (3)   31.5.89 Holding pays SFR 115m into SFL's bank account; (4)   31.5.89 Payments are made out of SFL's bank as follows:    (i)   Three sums totalling SFR 54.1m paid to Transmarine; (ii)   SFR 32.8m is paid to Comfinance Luxembourg. That sum is then paid on by Comfinance Luxembourg to Transmarine; (iii)   SFR 34m is paid to L&Z. That sum is paid on by L&Z to Transmarine. (5)   Circa 31.5.89: Transmarine (which as a result of the above payments has now received SFR 120.9m directly or indirectly from SFL) repays the bank borrowing at Step (1).
	Each of the payments at Step (3) above was, according to the tested telex instructions pursuant to which it was made, made for some ostensible purpose as listed (6) (I) - (V) of the pleading. It is unnecessary for me to consider these in detail. It is accepted by Mr Vos QC on behalf of KPMG that he must accept for the purpose of the strike-out application that the allegation that SFL received no benefit from these payments might be made good at the trial.
13.	The claim that all this happened without the authority of SFL's board is made in (5) (A) (c) (1) in relation to the loan and in (5) (c) (3) in relation to the payments. The pleading does not in terms explain either who caused the payments at Step 3 to be made out of SFL's bank account, or how that was done without SFL's authority. All that the available documentation shows is that instructions were given for each of the payments to SFL's bankers by tested telex, and that bank statements recording the payments were sent by those bankers to SFL "Attention Mr Jean Bellemans at SFL's offices in Geneva". Mr Bellemans was at the material times a director of SFL. Nor does the pleading tell us who is alleged to have made the relevant entries on the inter-company account with Holding. What is clear, and is common ground, is that the sum of SF 115m (sterling equivalent £45m) was included in the sum of £63.9m (creditors) shown in SFL's audited accounts for the year ended 31 December 1989 as owing to Holding. Those accounts were approved by SFL's board of directors on 19 November 1990.
14.	One infers that the case which SFL will seek to make at trial is that all the steps in the circular transaction were orchestrated by Mr Fiorini without the authority of the board of SFL. Mr Fiorini's involvement is expressly pleaded at the later stage, in 1991, in relation to the proceeds of sale of the Renta shares (see paragraph 166 (4) (iii) of the re-amended Statement of Claim). The allegation (or inference) that it was Mr Fiorini who orchestrated the circular transaction comes as no surprise in the light of what had earlier been pleaded in the re-amended statement of claim. That pleads (by paragraph 5) that the management and control of SFL was exercised abroad, principally in Switzerland and (by paragraph 11) that SFL (in common with other companies in the Sasea group) was at all material times controlled by Mr Fiorini, either alone or jointly with Mr Parretti. Specifically in relation to SFL, it is pleaded that KPMG knew that the company was at all material times controlled by Mr Fiorini not withstanding his resignation as a recorded director on 18 April 1988: see paragraph 12. There is, however, a considerable degree of tension between that part of the pleading which alleges in terms that SFL's affairs were controlled by Mr Fiorini, and that part of the pleading which seeks to assert that particular transactions effected on behalf of SFL by Mr Fiorini were done without the authority of SFL. This is a point to which I shall have to return.
15.	The tension is in no way lessened by the fact that, so far as the payment of SF 115m is concerned (step (3) above), no claim is made against KPMG as the auditors of the 1989 Accounts for having reported without qualification on this aspect of those accounts which, of course, were drawn on the assumption that SFL was under a liability to pay Holding that sum.
16.	One additional feature of the claim remains to be mentioned. That is the allegation, made for the first time in the Reply, that
	"SFL was at the material times insolvent and neither [Holding] nor Mr Fiorini purportedly on behalf of [Holding] could properly consent to such transactions."
	(See para. 106 of the Reply)
17.	That allegation was made in response to allegations in the Defence that the entries in the accounting records (semble in respect of the Renta share proceeds), the "borrowing" at step (3) above, and the payments at step (4) above, were made with the consent of Holding, the sole shareholder in SFL. In the course of argument, Mr Brisby QC submitted that the allegation should be read also as saying, or as being capable of reasonable amendment so as to say, that the board of SFL was also not in a position properly to consent to the transactions. He also indicated a desire, if necessary, to amend the reply so as to add the allegation that the board knew, or ought to have known, that SFL was insolvent. These additional allegations in relation to the insolvency of SFL assumed an importance in Mr Brisby's oral argument which had not been immediately apparent either from the pleadings or from his skeleton argument.
18.	In outline Mr Vos argued in his opening that there was no basis for SFL's assertion that the transaction at step (3) was a sham; that it had plainly been authorised by SFL; that the payments at step (4) had equally plainly been authorised by SFL, and that even if they had not been, they were irrelevant to the question of the enforceability of the loan at step (3); and that there was no warrant on the pleadings, on the evidence or as a matter of legal principle for saying that the loan was irrecoverable on grounds of illegality under Swiss law or English law or as a matter of public policy. SFL's claim was, he submitted, counter-intuitive in two respects. First, in so far as it rested on the allegation that the purpose of the transaction as a whole had been to create the illusion that Transmarine's subscription for new shares in Holding had been for cash, it would be bizarre for the court to penalise Holding (and its creditors) by depriving Holding of its right to the return of the subscription monies. Secondly, the claim sought to "rewrite history" on the false premise that SFL was not Holding's group finance company, and that all inter-company transactions were invalid.
19.	Mr Brisby, on behalf of SFL, emphasised that it was only necessary for him to demonstrate that, on the pleadings and on the evidence, there was a triable issue that SFL had suffered loss. He submitted, first, that there was a triable issue as to whether there had ever been a contract of loan between Holding and SFL, and that any purported ratification of such a contract by the board of SFL in approving the accounts could not be, or have been, relied on by Holding. This was either because it had not been demonstrated that the SFL board had sufficient knowledge of its rights to make such a ratification effective, or because any such ratification was plainly improper having regard to SFL's insolvency. Secondly, he submitted that any such contract of loan would have been unenforceable because of the improper or illegal purpose for which it had been made (creating a false market in Holding's shares), or, alternatively, because the underlying transactions were in fact "sham" transactions. Thirdly, he submitted that there was no basis on which Holding could assert that it had a restitutionary claim to the monies advanced to SFL since SFL had not been unjustly enriched by the transaction (having derived no benefit from it), alternatively because SFL had changed its position by paying the money away..
20.	These submissions did not, in contrast to the pleadings, give a central importance to the allegation that the transactions were shams. That allegation itself appeared to assume that the transactions had been effected by SFL but to assert that they did not in reality have the character which they ostensibly bore. The principal focus of Mr Brisby's oral submissions, however, was that the transactions were not binding on SFL at all. The picture which Mr Brisby sought to paint was that SFL had never intended to borrow the SF 115m at all. It had derived no benefit from the supposed borrowing: the monies had simply been routed through its bank account. There was, he submitted, no evidence that the board of SFL had any contemporary knowledge of the transaction, or had authorised or approved of it. The only evidence of the board's knowledge of the transaction consisted of evidence that Mr Bellemans had received a bank statement which showed the credit. However, since he was also a director of Holding, this did not suffice to show that the SFL board had intended to bind SFL to the transaction.
21.	On this question, Mr Vos' submissions were that the suggestion that the SFL board had not approved the transaction was fanciful. The evidence is that the transaction had been orchestrated by Fiorini, and it was a premise of SFL's case that Fiorini controlled both SFL and Holding, scilicet with the knowledge and approval of their respective boards. Moreover, the tested telexes instructing the bank as to the onward transmission of the monies had undoubtedly emanated from SFL, and Mr Bellemans at least had been aware of the receipt of the payment. Mr Vos submitted that it was unrealistic for me to suppose that at trial SFL would seek to lead any evidence from board members of SFL as to their ignorance, or non-approval, of the transaction or of their not having authorised Fiorini to act in SFL's name in relation to such a transaction. There was, in any event, the undoubted fact that the board had approved SFL's accounts which had reflected the financial consequences of the transaction.
22.	All these points seem to me to be powerful ones. I do not, however, consider that they go so far as to enable me to say that the prospects of Mr Brisby succeeding against them at trial are merely fanciful. I cannot exclude the possibility that at trial SFL will succeed in showing that its bank account was used by Holding for the purposes of this transaction without it having, by any of its proper organs, participated in any way in the transaction. It seems to me that in relation to this there is, just, a triable issue.
23.	That remains the case notwithstanding the alleged ratification of the transaction by the approval of the accounts. For ratification to be effective, the party ratifying must have "full knowledge of all the essential facts": see Halsbury's Laws, 4th edition Re-issue, Vol 1(2) at para 81. Mr Vos argued that, having regard to the duties of company directors in preparing and signing accounts under Section 226 of the Companies Act 1985Acts, the directors simply could not be heard to say that they lacked the requisite knowledge as to the nature of the underlying transactions reflected in those accounts. He did not, however, succeed in persuading me that any such general principle, for which no authority was cited, exists in English law. The mere fact that directors approve accounts which are drawn so as to reflect the existence of a contract with another party does not, without more, amount to a ratification of that contract quoad the other party. It is not, in any event, clear from the accounts themselves that the relevant liability was recognised as having its source in a contractual obligation to repay. If, as Mr Vos alternatively argued, the basis of liability being recognised was purely restitutionary, the board's approval of the accounts on that basis would not, ex hypothesi, have been of a ratificatory nature.
24.	I acknowledge that all this may be thought somewhat theoretical. The probability is that, at trial, the circumstances will be seen to be such that the transaction was indeed contemporaneously authorised by the SFL board and, if not then authorised, subsequently ratified by it. If that does turn out to be the case, the important question will arise as to the extent to which it was ever or is now open to SFL to disown the transaction on the ground that it was manifestly improper. Mr Brisby's grounds for alleging that it was improper were that the transaction was one under which SFL obtained no benefit, and that SFL was, to the knowledge of Holding (and its own board of directors), insolvent at all material times. Holding must, therefore, have known that, in accepting the loan and immediately applying it in transactions for which there was no commercial justification, the SFL directors were acting in breach of their duties to SFL. The same analysis held good if SFL was in fact under no apparent liability prior to the approval of the accounts, and that approval amounted to ratification: the "ratification" would equally have been, to the knowledge of Holding, a breach by the SFL directors of their duties.
25.	This provoked a contest of rival propositions on the part of Mr Vos and Mr Brisby, each characterised as elementary and axiomatic. Mr Vos submitted that there was simply no general doctrine in English company or insolvency law which enabled an attack to be made on a transaction simply because it was disadvantageous to the company or its creditors - where there is an admitted transaction by a company, it can only be set aside, rescinded, or otherwise ignored by invoking the relevant statutory jurisdiction. Mr Vos argued that to posit the existence of a general doctrine invalidating transactions entered into by a limited company which are actually or potentially detrimental to the interests of its creditors is to render otiose and unnecessary the elaborate statutory machinery which exists to deal with such situations, in particular Section 423 (with its long history) and Sections 238 and 239 Insolvency Act 1986Acts. In the present case, he argued, the borrowing of the SF 115m was clearly within SFL's corporate capacity and was done with the full consent of Holding its only shareholder. The transaction was, therefore, binding on SFL unless and until it was set aside by the invocation of the specialist insolvency machinery.
26.	In my judgment these propositions are too sweeping. It is true that "the clear general principle is that any act which falls within the corporate capacity of a company will bind if it is done with the unanimous consent of all shareholders or is subsequently ratified by such consent": see per Slade LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation & Ors [1986] 1 Ch 246 at 296. The principle does, however, require some qualification. In particular, as Slade LJ pointed out in the immediately following sentence:
	"it will not enable the shareholders of a company to bind the company itself to a transaction which constitutes a fraud on its creditors: see, for example In re-Halt Garage (1964) Ltd [1982] 3 All ER 1016, 1037, per Oliver J."
	That was a reference to Oliver J's citation in the latter case of In Re George Newman [1895] 1 Ch 674. Both cases are instructive, but the analysis by Oliver J in Re Halt Garage (1964) Ltd of the intervening case law is particularly helpful.
27.	Re Halt Garage concerned a claim by a liquidator to recover from former directors remuneration which had been paid to the directors under the authority of the company in general meeting under an express power to award directors' remuneration. The remuneration had allegedly been paid at a time when the company was known by its directors to be making losses and to be unable to pay its debts without forbearance from its creditors, but there was no allegation of fraud. The claim advanced by the liquidator was simply that, in the circumstances, the company had no power to award the remuneration. The proposition was that, where there were no profits available for distribution as dividends, the power of the company to award remuneration could not be validly exercised unless it fulfilled the three tests set out in the judgment of Eve J in Re Lee, Behrens & Co Ltd [1932] 2 Ch 46 at 51-52 ("(i) is the transaction reasonably incidental to the carrying on of the company's business? (ii) is it a bona fide transaction? and (iii) is it done for the benefit and to promote the prosperity of the company?"). Oliver J (at [1982] 3 AER p. 1034) rejected that proposition. He held that the second and third tests were appropriate, not for testing the capacity of the company, but only to the question of the propriety of a particular exercise. He held further that it was necessary to distinguish cases where the issue was the power of a majority to bind a dissentient minority from those where the question was the validity of an exercise by the directors of their powers (ibid at p 1035). Having reviewed the cases, he asked (at p 1036):
	"On what ground, in the absence of fraud or any consideration of minority interests, are the votes of shareholders in general meeting to be treated as if they were, like the powers of directors, exercisable in a fiduciary capacity? The shareholder is under no fiduciary duty to the company as to the manner in which he exercises his vote ......"
	The limitations on the shareholders' powers were only, he concluded, that they must act honestly ("shareholders are required to be honest but ... there is no requirement that they must be wise" (see p 1039c)), and that they must not use an admitted power (such as voting remuneration) as a cloak for doing that which they have no power to do (e.g. returning money to shareholders out of capital). So far as the latter was concerned he concluded that the "real test must, I think, be whether the transaction in question was a genuine exercise of the power. The motive is more important than the label" (see p 1039F). He also said, at p 1043 d-e:
	"I agree with counsel for the liquidator that it cannot be right that shareholder directors acting in unison can draw any sum they like out of the Company's capital and leave the liquidator and the company's creditors without remedy in the absence of proof of intent to defraud merely because they choose to dignify the drawing with a particular description. The cases show, I think, that the mere fact that the company is in low financial water does not prevent the payment of a proper director's remuneration even though it may be technically a gratuity. But equally, the court is not, in my judgment, precluded from examining the true nature of the payments merely because the members choose to call them remuneration."
28.	Can it be said that here Holding, as sole shareholder in SFL, was causing it to do something which it had no power to do under the cloak of an apparently intra vires transaction of borrowing? I have to confess to some difficulty in the notion of a 'dressing-up' of a transaction in this way which is not at the same time dishonest. In Halt Garage itself Oliver J, while not finding any dishonest intent on the part of the shareholders, in fact found that part of the remuneration paid to one of the directors (Mrs Charlesworth) did contravene the principle which he had enunciated. Her services to the company had been so slight that he felt unable to hold that the whole of the remuneration could reasonably be regarded as a genuine reward for services. "In the absence of any evidence of actual motive, the court must, I think, look at the matter objectively and apply the standard of reasonableness" (See p 1044 f).
29.	The question of what is implied in the notion, in this context, of dishonesty or "fraud on the creditors" is not discussed in any of the authorities which were cited to me. It is simply accepted that 'fraud on the creditors' constitutes a general exception to the general principle that the shareholders can bind the company to a particular transaction. It must mean something more than the obvious proposition that the shareholders cannot bind the company to a transaction (such as a return of capital to themselves) which is ultra vires. But even if that is all that it means it severely dents Mr Vos's submission that, outside of the specialist insolvency enactments, there is no general doctrine of fraud on creditors in English company law.
30.	Mr Vos recognised the case he had to meet in this respect by his submission (I quote from his opening skeleton argument) that
	"The borrowing from Holding was not a fraud on creditors and it did not entail any misappropriation of company assets. On the contrary, it involved a payment into SFL's bank account. Accordingly, no exception to the rule that shareholders may authorise or ratify any act of a director within the capacity of the company has any application. The transaction was capable of being authorised, and was validly authorised, by Holding."
	It seems to me, however, that this is to take an altogether too narrow view of the transaction which Holding was not only authorising, but orchestrating. It was not simply paying money to SFL by way of a loan. It was causing that money to move in a circle for a purpose of its own. If the factual allegations in the pleadings are made good at trial, the purpose was to enable Holding to create the illusion that a demand existed for its shares, and the means (or part of the means) by which that was achieved was by lending the SF 115m to SFL on terms that the loan would be applied by SFL in transactions which were of no commercial benefit to SFL, but which were of commercial benefit (or at least suited the illusionist requirements) of Holding. Once account is taken of the fact that the transaction, taken as a whole, required the money to be spent by SFL in a manner which was of no commercial benefit to SFL, I see no real difficulty in concluding that SFL would have had a defence to an action by Holding for repayment of the loan. If a 100% shareholder sells an asset to his company at a gross overvalue, leaving the purchase price outstanding as a debt from the company, the company can, as it seems to me, resist payment of the debt on precisely the ground identified by Oliver J in Halt Garage. It is not that it is not a genuine sale, in the sense that it is a sham in the Snook sense, but that it is not a genuine exercise by the company of its admitted power of sale. Echoing Oliver J's words, if, in the absence of evidence of actual motive, the consideration given by the company is excessive by any objective standard, the inference that can be drawn is that the creation of the liability is merely a cloak for an unlawful return of capital. The shareholder cannot simply rely on his own approval of the transaction as curing the vice.
31.	Analysing the transaction in this way also, in my judgment, puts paid to any argument that Holding has or ever had an independent restitutionary claim to the monies advanced. Since those monies were, at Holding's behest, mis-spent by SFL it cannot be said that SFL was in any real sense enriched by the advance: alternatively, to the extent to which it was momentarily so enriched, the fact that Holding caused it thereafter to impoverish itself allows SFL to assert that it has changed its position in such a way as to debar Holding from asserting any restitutionary claim it might otherwise have had.
32.	For these reasons I conclude that SFL has an arguable case that it suffered loss as a result of the transaction. It is therefore unnecessary for me to consider Mr Brisby's alternative submission that any contract of loan was unenforceable because of the improper or illegal purpose for which it had been made or because the underlying transactions were shams in the Snook sense.
	The application for trial of preliminary issues
33.	KPMG seeks an order for the trial of preliminary issues as to loss raised by paragraphs 166(1) to (4) of the re-amended Statement of Claim and paragraphs 235-237, 239 and 245-264 of the Defence. Those issues may be summarised as follows:-
	(1)   The Rivaud loss.    By paragraph 166(1) of the re-amended Statement of Claim it is pleaded that on 29 September 1990 SFL sold its holding of shares in the Rivaud group together with certain options, but that the proceeds of sale, which were either not received by SFL or not retained, were improperly diverted to other companies in the Sasea Group. The value of the shares and options is alleged to have been some £2.3m. as at 31 December 1989. The Defence denies the improper diversion alleged and asserts a positive case that, as a result of the transaction, SFL in fact both received and retained the Fr.F. equivalent of some £19,049,805, i.e. "far more than the alleged value of the shares and options in the Rivaud group allegedly owned by SFL prior to the sale." (2)   The Fiorini losses    It is alleged that on about 25 October 1990 Mr Fiorini procured SFL to pay him LIT 253m. (sterling equivalent £113,861) for no justification, and on 13 November 1990 LIT 1 billion. (sterling equivalent £458,715) again for no justification. The allegation in each case is that Mr Fiorini in effect stole the monies. The Defence alleges that the monies were paid with SFL board authority, and were reimbursement of expenses incurred by Mr Fiorini on behalf of SFL. The expenses are alleged to have been incurred in advancing money to Melia International NV in order to finance an increase by Melia of its shareholding in an Italian television network. As at 31 December 1990 LIT 153m. and the LIT 1 billion were shown in SFL's books as part of a debt owed by Melia to SFL. A year later SFL transferred the benefit of that debt to Holding in reduction of the balance owing on the inter-company account. The balance of the LIT 253m. (i.e. LIT 100m.) is alleged to have been advanced by Mr Fiorini on SFL's behalf to a consultant, one Dr. Brancaccio, partly (as to LIT 60m.) by way of fees and as to LIT 40m. by way of loan subsequently repaid by Dr. Brancaccio to SFL. (3)   The Renta losses.    These have already been described in the course of dealing with the strike-out application. The Defence raises the issues raised by that application, additionally putting in issue all of the claims raised by the re-amended statement of claim in relation to the genuineness of the balances shown as owing by SFL to Holding on the inter-company account.
34.	The application is made on the basis that the trial of preliminary issues as to loss is likely to produce a very significant saving in costs and time. It is submitted on KPMG's behalf that these loss issues are discrete, and that their determination wholly or partially in KPMG's favour may avoid the need for a full trial on the question of liability and causation. In approaching that submission I have, of course, in mind paragraph 3.10 of the Chancery Guide (described by Morritt LJ in Morris v Bank of America [2000] 1 AER 954 at 972a as being of "great importance") which provides:-
	"Costs can sometimes be saved by identifying decisive issues, and ordering that they are tried first. The decision of one issue, although not itself decisive in law of the whole case, may enable parties to settle the remainder of the dispute. In such cases a preliminary issue may be appropriate."
35.	Mr Brisby opposed the application on the following grounds. He asserted, first, that the full trial was likely to last from two to three months of which 75% was likely to be occupied by the loss issues (i.e. 6 to 9 weeks). This should be contrasted with Mr Vos' estimate of four to 6 months for the full trial and some 4 weeks for the loss issues if tried as preliminary issues. Secondly Mr Brisby submitted that there was no clear demarcation between the issues of liability and the loss issues: there were significant overlaps, particularly in relation to the general question of SFL's solvency at material times, to certain aspects of the Rivaud loss, and to the question (relevant to the Renta losses) of whether the £24m. dividend was properly shown as a debt to Holding on the inter-company account. As to the last issue, Mr Vos indicated that he was content to accept that that question should not be tried as part of the preliminary issues as to loss. Thirdly, Mr Brisby submitted that there was the danger that recollections would deteriorate if a full trial were delayed. Fourthly, he submitted that, if a split trial were to be ordered at all, the horse of liability should come before the cart of loss (and that the Galoo causation issue might then conveniently be hived off to the loss section of the split trial). Finally he pointed out that KPMG's position on costs was protected since security had been given.
36.	Subject to one important qualification it does not seem to me that the degree of overlap between the questions of liability and loss is sufficient to rule out of court the possible advantages of the suggested preliminary issue. The allegations of negligence are founded on six specific sets of transactions (numbered IX to XIV in the re-amended Statement of Claim) alleged to have been wrongful, and the true nature of which allegedly should have been but was not appreciated and reported on by KPMG. Had that been appreciated, the 1989 Accounts ought to have shown a loss of some £130,899,878 instead of a profit of some £24.7m. (see XV paragraphs 142 to 143). On the basis of draft accounts showing a profit of £24.7m. SFL had on 27 June 1990 resolved to pay a dividend of £24m. to Holding (see XVI paragraphs 144 - 160) which, it is alleged, KPMG ought to have known was unlawful. The overlap consists principally of (1) in relation to the Rivaud loss, and the matters pleaded in defence to that allegation, an overlap with matters pleaded in paragraphs 79 to 83 of the Statement of Claim (X the Rivaud profit), (2) in relation to the Renta loss a number of matters relevant to the state of the Holding - SFL inter-company account, namely (i) the Comfinance Panama transactions (XII paragraphs 110 - 135) (ii) the L&Z transactions (XI paragraphs 90-93), (iii) the Mountleigh transactions (XIV paragraphs 136 - 141) and (iv) the 1990 dividend. The significance of the 1990 dividend is that investigation of its lawfulness requires in theory investigation of all six of the impugned transactions, thus making the transactional overlap total. It was to avoid this overlap that Mr Vos made the suggestion which I have recorded at paragraph 35 above that the question of whether the dividend was properly credited to Holding on the inter-company account should be excluded from the proposed preliminary issue. With that concession I was satisfied that the other matters which I have mentioned would not themselves so overload the preliminary issue as to make it pointless.
37.	The important qualification relates to Mr. Brisby's case on insolvency. This was a somewhat late starter both on the pleadings, and in argument on this application. Nevertheless there did seem to me force in his argument that, in relation to the Renta loss, it would be at the least open to him (if not strictly necessary) to lead evidence as to the true financial state of SFL both at the time the Renta loss transactions took place and when the 1989 accounts were approved. It is not strictly necessary since, on my analysis of the decision in Re Halt Garage, it is unnecessary to show insolvency in order to impugn the particular exercise by the company of its powers in accepting, and then dissipating, the proceeds of the SF 115m. loan. However, I do not think that there is any basis on which the court should prevent SFL from adducing such evidence in support of its case that no genuine exercise of a borrowing power took place. Accordingly, as it seems to me, there is a distinct possibility that, if the proposed preliminary issue is ordered, it will involve an examination of all six of the transactions.
38.	That would not mean that a preliminary issue would make no sense at all. It would remain the case that large numbers of witnesses relevant to the question of liability could be dispensed with at the first stage of the trial and might never be required. It would also mean that potentially difficult questions of audit law and practice could be deferred and possibly avoided altogether. But it would mean that there would be little room for economy at the putative preliminary stage in terms of the documentation (which is threatened to be massive); and it would also mean that in terms of timing Mr Brisby's gloomy prediction for the loss issues might prove to be nearer the mark than that of Mr Vos. In addition, while initially inclined to discount Mr Brisby's invocation of the risks of deteriorating memory on the assumption that the gap between the trial of the preliminary issue and the trial (if any) of liability and causation would be a relatively short one, allowance must be made for the possibility of the preliminary issue going to appeal. For all these reasons I have come to the conclusion that the attractive course of a preliminary issue might prove to be a dangerous short cut. With some reluctance, therefore, I refuse the application. I should add that the picture would look very different had I decided (or should the Court of Appeal decide) the strike-out application differently.