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A bank’s creditor claim was rejected by the High Court in an unusual case, having been accepted by the Trustee In Bankruptcy. This was a remarkable tale about signatures on a guarantee that the Court it seems said never happened.

A creditor claim rejected by the Court in Lynch v Cadwallader & Anor [2021] EWHC 328 (Ch) (23), arose after the Trustee in Bankruptcy accepted a bank’s creditor claim.

The bank’s claim was rooted in a guarantee provided in relation to a Limited company that was insolvent and went into Creditors Voluntary Liquidation.

The bankrupt put the Trustee on notice that he rejected the bank’s claim as a creditor having never signed the guarantee.

The Court had this to say:

The proof of debt

In 2015, the Trustee came to consider the proofs of debt. He turned first to Mr Lynch who acknowledged a number of debts as “genuine”. The process continued and by late 2015 and early 2016 it became apparent that the proof of debt submitted by the Bank was disputed. Solicitors acting for Mr Lynch (DWFM) wrote “to put you on notice” that the Bank’s “standing as a creditor” is disputed, inviting the Trustee to reject the proof of debt. More detail was provided in a later response:

1. Mr Lynch himself categorically denies signing the Guarantee, and has given evidence to this effect in a number of witness statements bearing statements of truth.

2. Miss Hughes, Ruskin’s financial controller, and the person alleged to have witnessed Mr Lynch’s signature on the Guarantee, has given evidence under a statement of truth that she neither saw, signed nor witnessed the purported guarantee.

3. Mr Trevor Dartford, the independent broker who introduced Ruskin to Aldermore, assisted Ruskin in negotiating the facility with the Bank and who was copied into most, if not all, emails between the Bank and Ruskin, has given evidence under a statement of truth that there was never any discussion with the Bank about Mr Lynch having to sign an unlimited Guarantee and of his firm belief that the Bank never presented a draft guarantee (whether limited or unlimited) to Mr Lynch for signature.

4. Both Miss Hughes and Mr Dartford also give evidence that had such a guarantee been presented to Mr Lynch to sign, they would have cautioned him against doing so.
At the relevant time, September 2011 Miss Hughes occupied the position of financial controller at Ruskin. At some point in time prior to that, Mr Lynch was her partner. They have one son. Miss Hughes gave evidence at trial. I shall deal with her evidence later in this judgment. Mr Dartford was a broker at a company known as Kalinsure and responsible for introducing Mr Lynch to the Bank. He did not provide evidence at trial.

There was argument as to why he had not given evidence: Mr Lynch arguing that Mr Dartford had been “knobbled”: payment due to him from the Bank had been stopped. The Bank arguing that as Ruskin had gone into default Mr Dartford was not entitled to commission. This is a dispute I need not determine. Mr Dartford’s evidence has little weight but that does not mean it has no value.

The Trustee obtained advice from counsel and admitted the Bank’s proof of debt in full.

In summarising the Trustee’s four page letter I do not intend either to criticise or reduce the value of the serious consideration given to the DWFM letter. It needs to be read in full. In summary, his reasoning may be divided into three. First, the claim that the signature on the Guarantee is not the signature of Mr Lynch necessarily meant that a person at the Bank had forged his signature: an allegation of fraud is serious. Secondly, in her judgment dated 12 March 2014, Judge Barber had “recorded that Arnold J (at the change of carriage hearing dated 2 May 2014) must have been satisfied that Aldermore was a creditor in order to make the change of carriage order, and that the issue is therefore res judicata.” Lastly, the burden of proof lay with Mr Lynch, on the balance of probabilities, to prove that the Guarantee was not executed in accordance with its terms: “the mere fact that Mr Lynch and Miss Hughes deny having signed the Guarantee does not establish in and of itself that he did not in fact do so.” The Trustee highlighted some evidential factors to support his view that the proof should be admitted, namely: the Bank’s credit committee proposal form referred to Mr Lynch as having provided a guarantee; there is no document to evidence Mr Lynch’s resistance to providing a guarantee; the documents support the Bank’s requirement of a personal guarantee as a pre-requisite to obtaining a finance facility; and no expert evidence had been advanced to disprove the authenticity of the signature on the Guarantee. The Trustee thought that Mr Lynch’s position was inherently implausible as he did not state, in his first witness statement in support of the application to set aside the statutory demand, that he had not signed the Guarantee.

As is apparent from the foregoing, although this application concerns an appeal against a proof of debt submitted by the Bank, its substance concerns the validity of the Guarantee.

The Guarantee

The Guarantee is expressed to be executed as a deed and bears a signature which purports to be that of Mr Lynch. It is witnessed or purports to be witnessed by Ms Marion Hughes carrying a signature and an address.
A joint expert report has been obtained from Dr Robert Radley. All parties agree that the opinion of Dr Radley is not determinative of whether Mr Lynch signed the Guarantee, but the court may lend evidential weight, even significant evidential weight to his findings due to his great experience and qualifications. He has been an independent forensic handwriting and document examination expert for over 40 years. He holds the Diploma in Document Examination awarded by the Chartered Society of Forensic Sciences, and is a Registered Forensic Practitioner, regulated by the Council for the Registration of Forensic Practitioners.

Using a technique known as “speculative reflection” he was able to determine that the signatures had been applied to the document after the print: the pages were not blank when signed. He established through another technique that the signatures were not applied while resting on top of the Guarantee, and likewise he found no evidence that tracing had been used to pen the signatures. He concludes:

1. there is strong evidence to support the proposition that the signature was not written by Mr Lynch. It is a simulation (freehand copy) or possibly a tracing of his general signature style;

2. there is strong evidence to support the view that Miss Hughes’s signature was written by her. His examination was restricted due to the limited number of comparison signatures he had seen;

3. there is no evidence to assist in identifying when the signatures were added to the Guarantee; and

4. the evidence as to when the Guarantee was created is inconclusive.

A detailed examination of the documentation and a consideration of the live evidence is required to determine, with the help of Dr Radley’s opinion whether the signatures on the Guarantee are those of Mr Lynch and Miss Hughes.

I have been cited numerous authorities by both parties on the proof of debt. The burden of proof lies with the Bank. In McCarthy v Tann [2015] EWHC 2049 (Ch), [2015] BPIR 1224, I found that applications such as these are not appeals proper: it was not for the court to review a decision of the office-holder to decide if the decision was correct, rather the court had to determine, on the evidence before it, whether the claims should be admitted. The burden of proof falls on the creditor to make out their debt on the balance of probabilities.

The Bank has failed to prove that the Guarantee was conveyed to Mr Lynch on 12 September 2011 or later, failed to prove on the balance of probabilities that it was signed by Mr Lynch and failed to prove that it was collected or sent back to the Bank. In my judgment the evidence points, as Mr Knight argued, to a busy but chaotic few days at the Bank, between 12 September and 15 September 2011, where there were mixed feelings about the prospect of “taking-on” Ruskin, reservations and excitement, many people involved but no one individual having proper oversight. Mr Lynch did not agree to the provision of the Guarantee because he never saw its terms nor indeed did he have an opportunity to take legal advice. The Bank does not contend that there was more than one discussion between an officer of the Bank and Mr Lynch in respect of the provision of a personal guarantee. The Bank has provided no witness evidence to contradict the version of events as advanced by Mr Lynch. I accept his account.

The situation regarding the Guarantee may readily be contrasted with the facility to be advanced to Ruskin. There is no doubt that Mr Lynch, in his capacity as director of Ruskin, received the suite of documents, accepted the terms of the facility, signed the necessary papers and these were returned to the Bank by Mr Adcock.

As the Guarantee was never produced to Mr Lynch the issue of who signed it in his stead is live. In closing, the Bank raised an argument that Mr Lynch gave actual authority to Miss Hughes to sign it on his behalf, binding him to the contract. The Bank accepted, however, that Mr Lynch was never asked if he provided actual authority and Miss Hughes was not asked if she signed it with his authority. Mr Knight thought the point abandoned. Mr Mills rightly in my view, recognised the weakness of the argument. For the sake of completeness there is a lack of evidence to support the contention. I find on the balance of probabilities that Miss Hughes did not sign the Guarantee on the instruction of or with the actual authority of Mr Lynch or at all. She could not have signed it if the Guarantee had not been produced to her: there is no suggestion that the Guarantee had been sent separately to Miss Hughes. These conclusions logically lead to two further findings. First the signature was signed by a person at the Bank and secondly Miss Hughes did not witness the signature.

On this application the Bank bears the burden of proof to demonstrate on the balance of probabilities that it is a creditor of Mr Lynch. It seeks to do so by relying on the Guarantee. In my judgment it cannot do so. The first-hand evidence of Mr Lynch and Miss Hughes is to be preferred over those called to give evidence for the Bank. The key personnel at the Bank who are said to have dealt with the formalities and documentation for the financial facility advanced to Ruskin, did not give evidence. Mr Adcock, who did give evidence, was not able to recall if he saw the Guarantee and not able to say that he personally took it to the offices of Ruskin. There is no evidence that it was posted or e-mailed (the Bank’s usual practice) to Mr Lynch. I have found that the Guarantee was never produced to Mr Lynch. He had never seen the Guarantee before the Bank made demand. It follows that he had never seen or read its terms. He understood from a conversation with the regional managing director that if a personal guarantee was required it would be in the same or similar form to the personal guarantee he had provided to a previous lender: RBSIF. That was the only conversation he had with a member of the Bank about the provision of a personal guarantee. As Mr Lynch had not seen the Guarantee he did not execute it. As the Guarantee was not produced to Ruskin or Mr Lynch it is more likely than not that Miss Hughes did not see the Guarantee prior to the facility being advanced. It follows that Miss Hughes did not witness the signature of Mr Lynch. This conclusion is consistent with the first witness statement of Mr Dartford (see paragraph 5.3 above). There is no evidence to support the contention that Mr Lynch provided actual authority to Miss Hughes to sign the Guarantee on his behalf. The alternative arguments of res judicata, agreement by offer and estoppel fail in law and on the facts.

I allow the appeal against the Trustee’s decision to accept the proof of debt.

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Elliot Green

Licensed Insolvency Practitioner & Chartered Accountant. We Know Insolvency Inside Out.

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