Downtex v Flatley

Lord Justice Potter:

Introduction

“3. the Defendants shall not do or say anything which alleges or might reasonably be taken to infer:

(a) that the first Defendant is or might be in financial difficulties or might be unable to pay its creditors or that its directors have been guilty of misconduct in the management of its affairs or anything else to the like effect; or

(b) any other similar words harmful to the reputation of the first Claimant and/or which might lead a person to cease to deal with the first Claimant on substantially equivalent terms to those previously offered or at all.”

Background

“I do not know if you are dealing with Downtex Plc of 48 George Street, Manchester.

I received an anonymous letter recently and after some days of research I have decided that it would be appropriate to call a creditors’ meeting.

I suggest that this meeting should be held in Manchester or Chester which ever is more suitable and that we engage a solicitor to monitor it, and the possibility of engaging a receiver to keep the company running.

This letter has been sent to the following companies, if you know of any suppliers outside of these please inform me.”

“Since receiving an anonymous letter regarding Downtex Plc and being sent a credit report on Downtex from another creditor who impelled me to take some action, I have spent professionally assisted hours looking into the affairs of Downtex Plc and believe …

The bank must take all the responsibility for the situation in which the company is in.

If they had left the directors personal guarantees in place I believe that these same directors would have behaved more responsibly.

They have allowed themselves to take impossible risks with other people’s money at the same time as they have taken out of the company more than 10 times their original investment discounting their introduction initially of tangible assets.

I am of the opinion that the bank are in a sueable position but clearly a suitable compromise must be sought in preference to a law suit.

The main points are can this business be salvaged and can we get our money?

…

Enclosed is a copy of a creditor’s report sent to me by another creditor who does not wish to be named as he is still struggling for his payment.

The Mond brothers have already informed me of my interest so we need to act quickly.”

“Further to my recent letter of 19^th June 2002 regarding Downtex.

I have been requested by one creditor to send them a copy of an anonymous letter I and some other creditors have received. I do not think we should pass on or even consider this letter; it is anonymous and abusive and reeks of rancour rather than fact which we should rely on.”

Qualified Privilege

“9.8 By reason of the breaches of the agreements detailed in paragraph 9.3 above, as set out in paragraphs 9.4 to 9.7 above, the First Claimant was indebted to the First Defendant for substantial sums in excess of £82,700.00. The First Defendant wrote to the Third Claimant on 19 and 26 October 2000, and on 1 November 2000, complaining about the Claimants’ conduct and requesting that he be reimbursed. The Claimants refused, denying that they had any outstanding liability to the First Defendant.

9.9 On or about the middle of June the First Defendant received the anonymous letter complained of in paragraph 4 of the Particulars of Claim by e-mail from a trade supplier. The First Defendant initially dismissed the letter. However, the First Defendant decided that, in view of the large sums owed to him by the First Claimant, and the First Defendant’s significant shareholding in that company, it would be as well to look into the financial health of the First Claimant in any event.

9.10 Accordingly, the First Defendant consulted the First Claimant’s Annual Report of 2001. The First Defendant was very concerned by what he saw, namely that despite producing more goods than ever to the extent of needing to contract out some of their manufacturing, the First Claimant:

9.10.1 had a retained deficit of £38,553.00 for the year in contrast to the year 2000 profit of £154,927.00;

9.10.2 turnover had fallen by almost £1,000,000.00;

9.10.3 operating expenses had risen by over £200,000.00, as had staff costs;

9.10.4 the Chairman’s report described trading conditions as ‘extremely difficult’;

9.10.5 had unclear loan conditions with its bank, from which it was impossible to ascertain who was liable to pay the cover interest, the Second and Third Claimants or the First Claimant.

9.11 Consequently, the First Defendant decided to inform other companies and individuals who were creditors of the First Claimant to support him in calling for a creditors’ meeting. The First Defendant, acting on behalf of the Second Defendant, therefore published the letter complained of to the persons listed in the letter.

9.12 In the premises, the Defendants and the said publishees had a common or corresponding interest in the subject-matter of the letter complained of and/or the Defendants published the letter complained of in the reasonable protection of their own legitimate interests to the said publishees, who had a like interest in receiving it.”

(1) The letters bore the defamatory meaning that (a) Downtex was insolvent in the sense of being unable to pay its creditors, or close to insolvency and (b) that the directors had dishonestly manipulated or distorted the financial figures of Downtex, had acted in an improper and impermissible way by taking “impossible risks with other people’s money”, and had engineered the release by the bank of their personal guarantees of the company’s credit facilities.

(2) Not only was that a fair reading of the letters; there was no plea of justification and the defendants themselves conceded that the letters of 17 and 18 July were defamatory, albeit they did not make clear on what precise basis that concession was made.

(3) That being so, the claimants were entitled to summary relief and, in particular, an injunction against repetition unless an arguable defence of qualified privilege existed. In this connection it was recognised that the judge should not be asked to make any findings in relation to the issue of malice raised by the pleadings in the summary proceedings which were before him. However, the judge could and should have regard to the dispute between the parties and the indignation of the defendants revealed by the evidence and correspondence filed in support of the claim as demonstrating that the occasion for the publication and the defendants’ real interest was not that Downtex might not be solvent or able to meet the defendants’ claims if good, but lay in trying to obtain payment by means of collective pressure short of legal action. Such an interest was not one which could legitimise circulating allegations questioning the solvency of Downtex if there was no objective justification for doing so.

(4) So far as the defence of qualified privilege was concerned, the claimants relied upon two well-known formulations of the circumstances in which such a defence may successfully be raised. The first was that of Parke B in Toogood v Spyring (1834) 1 CM&R 181 at 193 in which it was made clear that the defence arises where the statement in question

“… is fairly made by a person in the discharge of some public or private duty, whether legal or moral, or in the conduct of his own affairs, in matters where his interest is concerned … If fairly warranted by any reasonable occasion or exigency, and honestly made, such communications are protected for the common convenience and welfare of society; and the law has not restricted the right to make them within any narrow limits.” (emphasis added)

The second was the statement of Lord Atkinson in Adam v Wall[1917] AC 309 at 334 that:

“ … a privileged occasion is … an occasion where the person who makes a communication had an interest or a duty, legal, social or moral, to make it to the person to whom it is made and the person to whom it is so made has a corresponding interest or duty to receive it. This reciprocity is essential.”

(5) It was submitted that in this case there could be no suggestion that the defendants had any duty to write the letters. The defence put forward was one of reciprocity of interest.

(6) There was in fact no reciprocity of interest. Mr Flatley had no relevant interest in communicating the letters to Downtex’ suppliers nor did those suppliers have an interest in receiving them. So far as the defendants were concerned Downtex had not failed to pay any debt which was indisputably due and it was not reasonably necessary for the defendants to seek the assistance of other potential creditors (let alone ‘suppliers’, who might not be creditors at all) in order to protect the defendants’ interest. Nor was there any evidence that Downtex had failed to pay, or were contemplating failing to pay, any of its suppliers or creditors. The defendants could have protected their financial interests in other ways, such as by suing in law or making a statutory demand which, if not met, could lead to the appointment of a liquidator. The failure to take these steps demonstrated that the real interest of the defendants was the grievance of Mr Flatley as to the performance or non-performance of the sale contract by the claimants.

(7) Even if there were a sufficient reciprocity of interest to justify some communication with creditors, it did not warrant the particular statements made. The letters of 17 and 18 June plainly suggested that Downtex was on the point of insolvency and this was not warranted by the factual information which the first defendant had gleaned from his investigation into the affairs of the company and which was relied upon in the pleadings and affidavit before the court. The fact that the letters exaggerated the financial problems facing Downtex was material to the question whether the defence of qualified privilege was applicable at all (and not simply to the question of malice). Given the lack of a reasonable and proper basis for the letters, they could not attract the qualified privileged defence.

(8) The content of the pleading and the evidence before the court was amply sufficient to demonstrate the hopelessness of proving insolvency or near insolvency on the part of Downtex or any good reason for the defendants to assert or suspect it.

“Useful though the power is under Pt 24, it is important that it is kept to its proper role. It is not meant to dispense with the need for a trial where there are issues which should be investigated at the trial … The proper disposal of an issue under Pt 24 does not involve the judge conducting a mini-trial, that is not the object of the provisions; it is to enable cases, where there is no real prospect of success either way, to be disposed of summarily.”

She submitted that the test to be applied to the question of summary disposal under s.8 of the Defamation Act 1996 was the same as that under CPR Part 24: see the decision of Eady J in James Gilbert Ltd v MGN Ltd[2000] EMLR 681.

“After careful consideration, I have reached the conclusion that it would not be right to dispose of the claim at this stage. I recognise that the question whether the circumstances give rise to the defence of qualified privilege is for the judge to determine. However, as Mr Boggis-Rolfe fairly accepted, it is a question which is highly fact sensitive i.e. it depends on the particular facts of the individual case. I recognise the force in his submission that the communication was not “fairly warranted by the occasion”, and that even if communications to creditors or potential creditors could in principal be justified, even then the letters had been too widely targeted here. Nonetheless it seems to me that this is an issue that can only be resolved after a careful analysis of the particular facts in issue. I do not consider that I can with confidence say at this stage that the defence of qualified privilege has no real prospects of success. Moreover, to the extent that the letters do indeed exaggerate the financial difficulties facing the claimant company, (and the extent of any exaggeration will itself be dependent on the facts that are ultimately found at trial), I accept the submission of Miss Addy that any such exaggeration would go to the question of whether or not the defendants were motivated by malice but will not necessarily deprive them of the defence of qualified privilege itself. On any view, the point is strongly arguable. Plainly the question of malice can only be determined at trial.”

“There is no reference in the letter of 17 June to either of the individual defendants, but in the letter the following day there is a reference to the Mond brothers, and one of them is specifically identified as a director in the credit report which was attached to that letter. However, it is arguably not wholly clear which defendants are being referred to in that letter. There is, for example, no specific evidence from suppliers to the effect that they would have understood the critical comments to refer to the two individuals, and I do not think it would be right at this stage that I should make the assumption that the evidence will inevitably bear that out, albeit that it seems very likely that it will. This is a matter best left to trial.”

In those circumstances the judge concluded that it would be premature to dispose of the claims at that stage and accordingly the application under CPR 53 failed.

“The argument, as it seems to me, has been much bedevilled by the use of the terms “common interest” and “duty-interest” for all the world as if these are clear-cut categories and any particular case is instantly recognisable as falling within one or other of them. It also seems to me surprising and unsatisfactory that privilege should be thought to attach more readily to communications made in the service of one’s own interests than in the discharge of a duty – as at first blush this distinction would suggest. To my mind an altogether more helpful categorisation is to be found by distinguishing between on the one hand cases where the communicator and the communicatee are in an existing and established relationship (irrespective of whether within that relationship the communications between them relate to reciprocal interests or reciprocal duties or a mixture of both) and on the other hand cases where no such relationship has been established and the communication is between strangers (or at any rate is volunteered otherwise than by reference to their relationship … Once the distinction is made in this way, moreover, it becomes to my mind understandable that the law should attach privilege more readily to communications within an existing relationship than to those between strangers. The latter present particular problems.”

“Counsel for the defendants drew an analogy with the recent case of Kearns v General Counsel of the Bar … That too was primarily a common interest case, but it turned upon the well-established relationship between the Bar Council and members of the Bar … The issue was not fact sensitive therefore, in the sense that it would become necessary to investigate the particular circumstances surrounding each individual publication. Here, by contrast, the common and corresponding interest contended for is not, so to speak, “off the peg” and is being tailored to the individual circumstances and people involved. There is more room, therefore, for factual inquiry at trial before it can be finally determined that the common interest alleged would be classified as ‘legitimate’ by the law of defamation.”

“ … do not need any amplification, they speak for themselves … they direct the court to the need to see whether there is a ‘realistic’ as opposed to a ‘fanciful’ prospect of success.”

“The defendant cannot create a privilege for himself because of honest belief on his part that the person to whom he made a slanderous communication had an interest or duty in respect of the subject matter of such statement”: see Hebditch v MacIlwaine[1894] 2 QB 54, 59 per Lord Esher MR.

“In this case the defendant submits that it had a keen interest in protecting its financial position, as did the suppliers to whom it communicated the relevant information. True it is that the first letter was communicated to suppliers rather than creditors as such, but the actual creditors would not be known, and the suppliers were, after all, either creditors or potential creditors of Downtex. It was therefore reasonable in the circumstances to contact the suppliers. Accordingly, there was both the necessary interest in the first defendant and the reciprocity of interest between the defendant and those to whom it communicated the correspondence, to attract the protection.” (emphasis added).

40. The position throughout has been that set out in the witness statement of the claimants’ solicitor which was before the judge:

“So far as damages are concerned, the Claimants would be content with judgment in their favour and the protection of a permanent injunction together with the relatively modest award and other relief which the Defamation Act 1996 permits on a summary basis; this would be preferable to the expense and hassle of continued proceedings seeking larger rewards, special damages and further damages for the disputed publication. … I believe that such a result would be consistent with CPR objectives of proportionality.”

41. In such a case, the words of Lord Woolf MR in Swain v Hillman at 94a-c have particular application.

“It is important that a judge in appropriate cases should make use of the powers contained in Pt 24. In doing so he or she gives effect to the overriding objectives contained in Pt 1. It saves expense; it achieves expedition; it avoids the court’s 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. Likewise, if a claim is bound to succeed, a claimant should know that as soon as possible.”

42. I accept the submissions of Mr Boggis-Rolfe, which I have sufficiently set out at paragraph 16 above. In my view, the plea of qualified privilege is unsustainable for the reasons advanced by him.

43. It is plain that the two letters which are admitted to be defamatory carry the meaning that Downtex was insolvent or close to insolvency and that the directors had distorted and manipulated the financial figures of Downtex and/or taken “impossible risks with other peoples’ money”. Neither Miss Addy below, nor Mr Flatley before us, argued to the contrary and it is plain from Mr Flatley’s submissions to us that he remains of that opinion. At the same time Miss Addy admitted that insolvency could not be demonstrated and, indeed, that it was not alleged in the sense that Downtex was unable to pay its debts or that circumstances existed which in fact justified the calling of a creditors’ meeting. Nor, finally, was it argued that an inference of insolvency or near insolvency arose on the basis of the particular matters pleaded as founding Mr Flatley’s ‘concern’. All that was done was to assert cause for that concern on a basis which was not precisely specified but broadly asserted to be an unhealthy financial position.

44. It is also important to appreciate that, while it was conceded for the claimants that they could not rely on the anonymous letter for the purposes of their application, the defendants, (by Miss Addy before the judge and Mr Flatley before us), likewise did not seek to rely upon it. Mr Flatley was plainly concerned to distance himself from it. Neither in the defendants’ pleading, nor in the evidence filed by Mr Flatley, nor in argument before us, has he sought to assert reliance upon the matters therein contained. The Defence, at paragraphs 9.9 and 9.10, expressly based his concern upon his own study of the Downtex Annual Report for 2001. The letter of 19 July expressly dismissed the anonymous letter as ‘anonymous and abusive and reeking of rancour rather than fact’. Finally, Mr Flatley’s witness statement stated:

“I cannot say that I believe what the letter had to say, but I was intrigued and I [was] concerned enough to look into Downtex. I wanted to ascertain the likely future value of my own shareholding and prospects of recovering the shortfall in stock value that was still owed to me. This caused me to look at Downtex’s Annual Report of 200l.”

45. The basis of Mr Flatley’s concern was dealt with shortly as follows:

“…I saw that the retained deficit for 2001 was £38,553.00 in sharp contrast to the profit of 2000 of £154 , 927.00. I also noticed that the turnover had fallen by very nearly £1m, operating expenses had increased by over £200,000 and at page 15 of the balance sheet … staff costs had increased by some £200.000. I know that the Chairman’s statement refers to the fact that ‘trading had been extremely difficult’. However, because of my knowledge of the Seventy Four division of Downtex’s business I was aware that in fact they were producing more goods than ever, to the point of having to out-source some of their manufacturing needs. Consequently, I was not convinced by the statements in the balance sheets. I was also concerned at the loan conditions which the Mond brothers took out with the Bank as to whether the cover interest was coming from - the firm or the brothers? I found all the above alarming and for this reason wished to bring about the calling of the Creditors’ meeting. I therefore sent the letter dated 17^th June 2002 to suppliers of Downtex. (I recognise that as suppliers, they would be almost certain to be creditors of Downtex, particularly as Downtex tended to insist on 90-day credit terms. I do not see that being creditors ‘in the normal course of trading’, as argued in the Reply, made or makes any difference to the suppliers’ obvious interest in being informed of the company’s financial standing).’

The statement then went on to say that as Mr Flatley had had ‘minimal reaction’ to his letters, he decided not to go on with his suggestion that the creditors should call a creditors’ meeting. He continued:

“I wrote what I did in the protection of my own interests and to inform other creditors who had similar interests in knowing Downtex’s financial position.”

46. Mr Flatley’s witness statement did not condescend to deal with, and did not contradict those parts of Mr Mond’s witness statement which dealt in detail with the financial situation of Downtex. In that statement, Mr Mond disputed the assertion in the anonymous letter that the profits had dropped from £216,000 to losses of £39,000 in 2001 and pointed out the profits before tax fell from £257,871 in 2000 to £10,046 in 2001. As at 31 December 2001 Downtex had total net assets of £1,437,243, the director’s emoluments totalling £151,309. Although the anonymous letter made reference to the value of stock being worth less than £300,000, the figures certified by PriceWaterhouseCoopers in the Annual Report 2001 were £1,632,450. Finally, Mr Mond exhibited a bundle of suppliers’ status reports in respect of all the suppliers referred to in the letter of 17 June. These demonstrated that the majority of those suppliers were owed no money at all and that, where there was money due to suppliers, the sums outstanding fell within the credit period agreed and within the ‘Creditor Payment Policy’ referred to in the Directors’ Report, and accounts for 2001.

47. Summarising the position, therefore, it does not appear to me that, objectively, any imputation of insolvency or near insolvency could be objectively justified from the material which the defendants themselves relied upon as founding the plea of qualified privilege. With respect to the judge, it seems to me that, having rightly identified the necessity for the statement to be ‘fairly warranted by the occasion’, and having indicated that he understood the strength of the arguments of the claimants to the effect that it was not so warranted, he should have gone further. For the defendants simply to express subjective ‘concern’ that the company was insolvent was insufficient. It appears clear from her skeleton argument below, and from paragraph 16 of the judgment, that Miss Addy was effectively accepting that references in the letters went further than simply to suggest that Downtex was in poor financial health and imputed insolvency or imminent danger of insolvency. In those circumstances, it seems to me that the judge should have grasped the nettle and dealt with the question of whether or not Mr Flatley’s concerns were objectively justified by the material on which he relied.

48. So far as ‘reciprocal’ interest in the suppliers was concerned, again there was no reason pleaded or relied upon as to why the suppliers might be concerned or should concern themselves with the company’s position, the financial figures relied upon by the defendants in the published Report and Accounts being equally available to such suppliers and there being no reason to suppose that they were not being properly paid in due time. In those circumstances, it seems to me that this was an appropriate case for the judge to decide the issue of qualified privilege on the material before him. It is my view that on that basis there was no realistic prospect that the defendants would succeed upon the issue, and the judge should have ruled in favour of the claimants in that respect.

The Directors’ Claims

49. Permission to appeal on the issue of qualified privilege was granted by Lord Justice Sedley in writing on 13 February 2003, the time for appeal being enlarged for that purpose. Permission was not granted in respect of the Judge’s holding that there was no sufficiently unambiguous reference to the second and third claimants in the letters of 17 and 18 June: see paragraph 25 above.

50. Mr Boggis-Rolfe has renewed the application for permission to appeal before us. On this aspect I would not be prepared to disturb the reasoning of the judge.

51. Mr Boggis-Rolfe relies upon

(a) the reference to ‘the Mond Brothers’ in the last line of the letter of 18 June and the fact that the ‘creditor’s report’ enclosed refers to the third claimant as a director, which the judge regarded as insufficient evidence that either or both of the claimants were the individuals referred to by the letters;

(b) the inference he invites us to draw that the suppliers would have known the identity of the directors of Downtex,

(c) the assertion of the claimant’s solicitor of her belief that the letters were understood as reflecting on the second and third claimants who are ‘well known in their position’.

52. Mr Boggis-Rolfe accepts that, in the absence of the express naming of the subject of the libel, extrinsic evidence is required to connect the libel and the claimant: see generally Gatley at paras 26.25 and 32.16. It is clear that, in such a case, a claimant’s damages claim is limited to damage suffered in the eyes of those persons who can actually be shown to have had the relevant understanding. However, no third party evidence was adduced from the suppliers or anyone else in that respect. In those circumstances, it seems to me that there was room for the judge’s view that the evidence of identity was insufficient and that, although it was likely that such evidence would be forthcoming, the matter should properly be left to trial. I would therefore refuse the permission sought.

53. I would only add that, if (as is now the case) the claimants have the benefit of the permanent injunction against repetition granted by Gray J. and, following success in this appeal, Downtex’s right to damages for libel as well as breach of contract is made out, the claims of Downtex are now susceptible of final adjudication without the need for a trial on liability. The principal purpose of the litigation has thus been achieved, subject only to resolution of the separate claims of the second and third claimants which, as Mr Boggis Rolfe made clear, have always been regarded as subsidiary to the claims of Downtex and amenable to a modest assessment of damages, if pursued.

Conclusion

Application to cross-appeal

“In the event that Lord Chief Justice Sedley [sic] decides to allow the appeal to go ahead I beg leave to enter further evidence. That includes the balance sheets for 1998 to 2003. Five letters and 3 court decisions from my former solicitor.

The DTI files on the records of the three directors of Downtex plus the original statement of director David Mond which differs from the one in the applicant’s bundle.

A letter from the applicant’s solicitor requesting me to itemise the amounts I was claiming from the applicants for money they owed me. A summary from myself on the applicant’s 2003 balance sheets. A letter sent by the applicants to former trading clients of mine suggesting they had won the case against me in the Manchester court had a similar statement in the 2003 balance sheets in regard to the Lord Chief Justices decision before it has been made. The balance sheet will confirm all the above and that my plea for a privileged state is fully justified”.

Lord Justice Chadwick:

Mr Justice Cresswell:

Order:

(Order does not form part of the approved judgment)