In a very recent decision in the Civil Appeal 347/2008 MARFIN POPULAR BANK -v- MICHAEL -Decision dated 23/1/2012, the full bench of the Cyprus Supreme Court, held by a majority that a hire purchase transaction, was a sham and consequently void ab initio and the Appellant bank was not entitled to receive, or collect the funds advanced to the Respondent, pursuant to such sham transaction.
According to the facts of the case, the Bank entered into a hire purchase agreement, with the Respondent, which provided for the purchase by the Bank, of certain movable items, the delivery of the said movables to the Respondent for his own use, the obligation of the Respondent to pay to the Bank certain lease installments, and the right of the Respondent to acquire the ownership of the movables, when the agreed lease installments were paid in full.
When the Respondent, failed to meet the agreed timeframe of payments of the lease installments, the Bank terminated the hire purchase agreement, and claimed the balance of the outstanding installment, payable under the hire purchase agreement.
The Respondent pleaded in his defense, that the hire purchase agreement, was a sham transaction, structured by the Bank, in order to cover a credit facility, granted by the Bank to the Respondent, in order to acquire shares from the Cyprus Stock Exchange, and that the movables allegedly covered by the hire purchase agreement in question, did not in reality exist at all.
The First Instance Court decided on the basis of the evidence presented, that the hire purchase agreement, was a sham transaction, and that the Bank was not entitled to be repaid all the outstanding amounts payable, pursuant to the alleged hire purchase agreement.
The Cyprus Supreme Court approved the decision of the First Instance Court and rejected the appeal of the Bank.
The approach of the Cyprus Courts towards sham transactions, is in line with the position of English Courts.
In the English case BRIDGE -v- CAMPBELL DISCOUNT CO. LTD (1962) AC 600, Lord Derlin said that:
"... when a court law finds the words which the parties have used in a written agreement are not genuine, and are not designed to express the real nature of the transaction but for some ulterior purpose to disguise it, the court will go behind the sham front and get at the reality..."
The concept of a sham was further refined by Diplock LJ in SNOOK -v- LONDON AND WEST RIDING INVESTMENTS LTD (1967) 2 QB 786 at 802, where he said that:
"if it has any meaning in law, [sham] means acts done or documents executed by the parties to the sham which are intended by them to give to third parties, or to the court the appearance of creating between the parties, legal rights and obligations, different from the actual legal rights and obligations (if any), which the parties intend to create... for acts or documents to be a sham, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a shammer affect the rights of a party whom he deceived..."
The doctrine of sham is attached only where, parties intended to create rights and obligations, different from those appearing in their documents.
The classic sham transactions, exhibit the following three main elements:
- There must be a deceit of third parties;
- There must be two transactions, namely an ostensible and a concealed one; and
- There must be a common intention, that the acts or documents are not to create the legal rights and obligations, which they give the appearance of creating.
The sham doctrine has been inter alia applied by courts to lift the corporate veil of a limited liability company, to declare agreements as void ab initio, to determine whether a trust is a sham etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.