Ultraframe (UK) Ltd v Fielding & Ors

The issue on the main appeal before us relates to the ownership of certain design rights in components used to make conservatories. That issue was decided amongst others on a hearing of preliminary issues in very complex litigation by Laddie J in a judgment handed down on 3^rd October 2002, supplemented by a judgment on 12^th December 2002. Having given judgment on the issues the judge then dealt with costs and by a judgment given on 14^th February 2003 he reserved the question of costs to the judge hearing the other facets of the litigation. It is because that order too is the subject of an appeal (to be dealt with in the judgment of Longmore LJ) that somewhat more of the background needs setting out than might otherwise be necessary.

Ultraframe (UK)Limited (Ultraframe) is a major supplier of conservatory roofs in the United Kingdom. Burnden Group Plc (Burnden) is a major competitor and is a company controlled by Mr and Mrs Fielding through their majority shareholding. In multifaceted litigation involving a number of different actions the two are fighting to establish which has succeeded in obtaining the business developed through various companies under the control of Mr Gerald Howard Davies (Mr Davies). The background to the litigation and the extent of the litigation as it now is, can be seen more fully from a note prepared recently for a case management conference, attached hereto [see schedule 1].

It will be seen that one of the main points of the litigation is to establish who has obtained the design rights in various components many of which are made from extruded aluminium, and form a system which is known as the “Quickfit” system.

Mr Davis actually designed the relevant components. However he developed the “Quickfit” business through various companies (1) initially Noise Insulation Services (Manchester) Limited (NISL), (2) Quickfit Limited (QL), (3) Quickfit Conservatories Limited (QCL) and (4) Quickfit Windows Limited (QWL), in all of which he was the 100% shareholder. The Quickfit companies failed and the circumstances led Mr Davis to be convicted of offences under section 217 of the Insolvency Act 1986, so becoming personally liable for the debts of QCL and QWL, and on or about 30^th July 1997 being disqualified from acting as a director.

For a short period (called by Laddie J the interregnum) Mr Davies carried on business on his own account but soon formed a further company Northstar Systems Limited (Northstar) through which he conducted the business. The shares in Northstar were held through nominees, and a Mr Naden was installed as a director. By the time of the hearing before Laddie J it was common ground that Mr Davies continued to act as if he were a director and the controller of the business.

On 22^nd December 1997 Mr Davies was made bankrupt. Immediately thereafter he acquired Seaquest Systems Limited (Seaquest) and Mr Naden was again made a director and Mr Clayton and Mr Birkett were made shareholders, but before Laddie J it was common ground, as nominees. Purported ssignments of the designs material to the “Quickfit” system were executed by Northstar in favour of Seaquest by a document dated 13^th January 1998.

Trustees in bankruptcy were appointed on 5^th June 1998. They set about tracing and collecting Mr Davies’ assets. Actions known as the Leeds Actions were concerned to establish that the shares in Northstar and Seaquest were assets of Mr Davies. Mr Fielding claimed ownership of the shares asserting a purchase on 5^th May 1998 from Mr Clayton (held ultimately also to be Mr Davies’ nominee). Further during 1998 steps were taken by the Fieldings to transfer the business of Northstar and Seaquest to certain newly formed companies controlled by the Fieldings, Burnden Conservatory Products Limited (BCP) and The Burnden Group plc (TBG). As a fact the Quickfit business was run from the Burnden Works from 1998. A licence was purportedly executed in favour of BCP by Seaquest to reproduce the designs. The transactions which led to this transfer to the Burnden Group are the subject of serious challenge in a further action brought by the liquidators of Northstar and Seaquest in which serious allegations of impropriety are made against the Fieldings.

During 1999 Mr Davies’ trustee in bankruptcy assigned to Ultraframe the claims in the Leeds actions, certain design rights and other property of Mr Davies, and this assignment was sanctioned by His Honour Judge Maddocks on 20^th April 1999. Ultraframe replaced the trustee in the Leeds actions.

On 25^th February 2000 His Honour Judge Behrens declared Ultraframe as the sole beneficial owner of the shares in Northstar and Seaquest, and that further shares issued to Mr Fielding were invalid.

Northstar and Seaquest went respectively into creditors’ and members’ voluntary liquidation on 10^th April 2000. It is the liquidators funded by Ultraframe who make the challenge to the transactions in favour of the Burnden Group referred to above.

TBG appears to be the company now seeking to use the designs in the production of conservatories. It has purported to take a licence from BCP for 5 years from 23 November 1999 to 31 December 2004. It has further purported to take an assignment of the design rights in conservatory roofing systems and infringement claims (if any) from NISL, QL, QCL and QWL.

On 5^th December 2001 His Honour Judge Behrens gave the following directions for the trial of preliminary issues in the Leeds actions and the London actions:

“IT IS ORDERED that:

1.

The following issues be tried in both actions prior to the remaining issues:

(1)

whether or not design right subsists in any of the designs pleaded in 1 CH 00435;

(2)

ownership of any such design rights as are held to subsist;

(3)

the extent to which the components marketed by Northstar Systems Limited, Seaquest Systems Limited and The Burnden Group Plc are infringing copies of the said designs and consequently infringing articles within the meaning of the CDPA 1988;

(4)

to what extent The Burnden Group Plc, Alumax Extrusions Limited, Alcoa Extruded Products (UK) Limited, Northstar Systems Limited and/or Seaquest Systems Limited and each of them are liable to the Claimant for infringement of such design rights;

(5)

the relief (if any) consequential on the determination of (1)-(4).

The following questions shall not be considered with the preliminary issue set out above and shall be tried with the remaining issues:

(a)

whether Mr & Mrs Fielding, Mr Naden or Mr Clayton are liable for the infringements of any persons or companies concerned in the alleged infringing activities;

(b)

Mr Fielding’s alleged dishonest participation in the scheme to divert the intellectual property rights away from Mr Davies’ trustees in bankruptcy (specifically the allegations contained in paragraphs 18 to 25 and paragraph 27 of the Re-Amended Statement of Claim in the consolidated action CH 1988 O/S Nos. 392 & 418.); and,

(c)

the question of the quantum of any damages, additional damages or profits to which the Claimant is entitled.”

Laddie J heard the trial of the preliminary issues over a number of days. He had to do so without the assistance of any evidence from Mr Davies who is now in Spain. Laddie J’s judgment resulted in so far as material the following order of 14^th February 2003:

“1.

Design right subsists in those designs identified in the table in the Schedule hereto.

2.

It is declared that the said design rights never belonged to Howard Davies or his trustee in bankruptcy and that Ultraframe (UK) Limited has no title to the same.

3.

The owner of such design rights is the person identified in the 2^nd column in the table in the said schedule.

4.

The components complained of in 1 CH 00435 and identified in the 3^rd column in the table in the said schedule are infringing articles within the meaning of the CDPA 1988.

5.

Paragraphs 3 and 4 above are without prejudice to the right of Gary John Fielding and Sally Ann Fielding and the Burnden Group Plc to seek to raise any defence of licence in any proceedings for infringement of design right brought against them by the liquidator of Northstar Limited or the liquidator of Seaquest Limited and without prejudice to the right of Ultraframe (UK) Limited, the liquidator of Northstar Limited and the liquidator of Seaquest Limited to seek to rely upon any point of estoppel or acquiescence or other argument that they are now precluded form (sic) raising such defence of licence.

6.

Action number HC 01 0435 be dismissed. …..

9.

The costs of determining the aforesaid preliminary issues and all the costs of action number HC 01 00435 be reserved to the Judge determining consolidated actions CH 1988 O/S No 392 and CH 1988 O/S No 418.”

Twenty three design rights were identified and the owners identified were Northstar as to twenty, NISL as to one, and QCL as to two.

Ultraframe have sought to challenge only one aspect of Laddie J’s judgment on the preliminary issues. They do not challenge the findings of primary facts, but assert that on those findings the judge’s conclusion, that Mr Davies’ trustee in bankruptcy never owned the design rights, based on the contention that Mr Davies was employed by the companies through which he conducted the business, was wrong. In other words they assert that the decision of the judge that by virtue of section 215(3) of the Copyright, Designs and Patents Act 1988 (the 1998 Act), that the companies owned the designs was wrong. The respondents refuted that challenge but relied in the alternative on two other grounds by reference to which they said the same result was reached. First they assert that if Mr Davies was not an employee, then because he was paid for the work he did, the proper inference to draw was that the designs were created in pursuance of a commissioning by the companies. They said that by virtue of section 215(2) of the 1988 Act, the companies were thus the owners of the design rights. In the further alternative they asserted that the facts found by the judge demonstrated that if not employed or not commissioned, at the very least Mr Davies held the design rights in trust for the companies and the companies were entitled to call on Mr Davies to vest legal title in those companies. These alternatives were not dealt with by the judge because of his decision on employment.

In addition to there being no challenge to the judge’s findings of primary fact, there was on the appeal little if any dispute about the correct principles of law to be applied. What was said by Mr Hochhauser QC who argued the employment aspect for Ultraframe on the appeal, was that in certain respects the judge had misdirected himself on the law, or misinterpreted submissions made on behalf of Ultraframe. Mr Hochhauser submitted further that in addition the judge failed to apply principles correctly set out by him, and in particular failed to address the position by reference to each company individually.

Despite Mr Oliver QC’s valiant attempts to rebut the criticisms, there was force in many of Mr Hochhauser’s submissions. I do not I should stress think any legitimate criticism can be made of the judge in not addressing the position of each company individually. There seems to have been no suggestion that things operated differently depending on which company Mr Davies was operating through. But of the other criticisms first the judge seems to have thought that the submission being made on behalf of Ultraframe was that in order to have a contract of employment, it was necessary to have a contract in writing [paragraph 31]. Whereas the submission was that where there was a 100% shareholder in a company, it was a fundamental weakness in the case if there was no employment contract in writing. Secondly he seems to have understood the submission on behalf of Ultraframe to have been that where a company is 100% owned by an individual who “solely owns and directs a company, he cannot be employed by it” [paragraph 35]. That does not appear to have been Ultraframe’s position. In dealing with the point the judge directed himself by reference to paragraph 27.2.4 in Gore Brown on Companies 44th edition which suggested that whether a director of a company is an “employee” may depend on the context, and the particular piece of legislation in which the term “employee” appears.

That that was at one time a possible view is supported in the employment context by Buchan & Ivey v SSE [1997] IRLR 80 (EAT) where Mummery J giving the judgment of the EAT held that in the context of unfair dismissal or redundancy a 100% shareholder could not be an employee of his company because he had the power to say whether the dismissal would take place or not. But in Bottrill v SSTI (unreported 5^th February 1998) a differently constituted EAT presided over by Morison J reached a different conclusion, and when that decision was considered by the Court of Appeal (see SSTI v Bottrill [1999] ICR 592 CA), Lord Woolf CJ giving the judgment of the court having illustrated the difficulties which flowed from Buchan said this:

“We mention this simply as an example of the difficulties which arise if the court seeks to imply into the definition of "employee" tests which Parliament has not seen fit to express. Further, as Mummery J. accepted through his attempted distinguishing of Lee v Lee’s Air Farming Ltd [1961] A.C. 12, the term "employee" would be given a special meaning for the employment protection legislation which it does not have in other contexts or indeed under the general law. For the reasons given by Morison J. which we find cogent the difference in context between Lee’s case and a case under the Act of 1996 does not justify the difference in result. The gloss sought to be given by Mummery J. to "employee" in the Act, based as it is on the ability of the controlling shareholder to prevent his dismissal, is all the more surprising when applied to a case such as the present when Mr. Bottrill was powerless to prevent his actual dismissal which triggered his claim.

We recognise the attractions of having in relation to the Act of 1996 a simple and clear test which will determine whether a shareholder or a director is an employee for the purposes of the Act or not. However, the Act does not provide such a test and it is far from obvious what Parliament would have intended the test to be. We do not find any justification for departing from the well established position in the law of employment generally. That is whether or not an employer and employee relationship exists can only be decided by having regard to all the relevant facts. If an individual has a controlling shareholding that is certainly a fact which is likely to be significant in all situations and in some cases it may prove to be decisive. However, it is only one of the factors which are relevant and certainly is not to be taken as determinative without considering all the relevant circumstances. ”

In Bottrill Lord Woolf considered the authorities relating to companies owned 100% by the person seeking to establish employment by the company, including the important decision of Lee v Lee’s Air Farming [1961] AC 12 on which Laddie J placed great reliance in this case [paragraphs 39 and 40]. Laddie J had at paragraph 32 of his judgment referred to the “irreducible core minimum of any contract of employment” as “the existence of mutuality of obligation and control” and to Montgomery v Johnson Underwood Ltd [2001] ICR 819, but reliance on substantial passages in the opinion in Lee, and an extract from Morison J’s judgment when Bottrill was before the EAT led him to say this in paragraphs 42 and 43:

“42.

Consistent with the latter passage, it is possible that a company in which the sole shareholder is the sole director and sole employee may be treated as a sham, at least for some purposes. But there is no suggestion in this case that any of the Quickfit companies or Northstar could be so described. They were substantial companies with significant workforces engaged in substantial business with a substantial (if largely hidden) turnover. They filed accounts, were registered for VAT, paid employees wages and so on.

43.

Although both Lee and Bottrill were cases involving different legislation to that which is in issue here, I think the approach is just as applicable. One purpose of s 216(2) and (3) of the 1988 Act is to vest design right in the person or company for whom it was created and who paid for it. Thus subsection (2) deals with commissioned designs, meaning designs ordered and paid for by the commissioner, and subsection (3) is concerned with designs created in the course of working as an employee for another. As a rough and ready rule of thumb, if designs are created and paid for by another, the statutory rights under the Act should belong to that other. I can see no reason when the other is a company, why there should be a different outcome simply because the designer is also the managing director of the company and majority or sole shareholder. I should make it clear that S 216(3) is not limited to cases in which the employee makes the designs “for” his employer. The subsection is broad enough to cover cases in which the employee does the design work within the scope of his employment, in his employer’s time and with his employer’s equipment and facilities, even if he, the designer, wants to keep the product for himself.”

The judge in these paragraphs misdirects himself in two ways. First he is wrong to suggest that the context of section 215 of the 1988 Act bears on the question whether there exists employment under a contract of service. Where Parliament has used language in its definitions well understood in other contexts it would take clear words to produce a result where those definitions did not retain their well understood meaning. The words of section 215 give absolutely no indication that “contract of service or apprenticeship” was intended to have other than its well understood meaning.

Second the judge has come close to saying that if the companies are not shams then a 100% shareholder working for those companies will be “employed under a contract of service by them” at least if they receive sums which can be described as wages. He has overlooked the guidance given by Lord Woolf in Bottrill at page 604 where he says:

“We are anxious not to lay down rigid guidelines for the factual inquiry which the tribunal of fact must undertake in the particular circumstances of each case, but we hope that the following comments may be of assistance.

The first question which the tribunal is likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder. In this context how and for what reasons the contract came into existence (for example, whether the contract was made at a time when insolvency loomed) and what each party actually did pursuant to the contract are likely to be relevant considerations.

If the tribunal concludes that the contract is not a sham, it is likely to wish to consider next whether the contract, which may well have been labelled a contract of employment, actually gave rise to an employer/employee relationship. In this context, of the various factors usually regarded as relevant (see, for example, Chitty on Contracts, 27^th ed. (1994), vol. 2, pp. 703-704, para. 37-008), the degree of control exercised by the company over the shareholder employee is always important. This is not the same question as that relating to whether there is a controlling shareholding. The tribunal may think it appropriate to consider whether there are directors other than or in addition to the shareholder employee and whether the constitution of the company gives that shareholder rights such that he is in reality answerable only to himself and incapable of being dismissed. If he is a director, it may be relevant to consider whether he is able under the articles of association to vote on matters in which he is personally interested, such as the termination of his contract of employment. Again, the actual conduct of the parties pursuant to the terms of the contract is likely to be relevant. It is for the tribunal as an industrial jury to take all relevant factors into account in reaching its conclusion, giving such weight to them as it considers appropriate.”

In my view a very good synopsis of the law to be applied in considering whether someone is employed under a contract of service is provided by Buckley J with whom Longmore and Brooke LJJ agreed in Montgomery v Johnson Underwood Limited [2001] ICR 819 at paragraphs 18-24.

“I consider the safest starting point to be the oft quoted passage of MacKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, 515:

"I must now consider what is meant by a contract of service. A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service."

MacKenna J made plain that provided (i) and (ii) are present (iii) requires that all the terms of the agreement are to be considered before the question as to the existence of a contract of service can be answered. As to (ii) he had well in mind that the early legal concept of control as including control over how the work should be done was relevant but not essential. Society has provided many examples, from masters of vessels and surgeons to research scientists and technology experts, where such direct control is absent. In many cases the employer or controlling management may have no more than a very general idea of how the work is done and no inclination directly to interfere with it. However, some sufficient framework of control must surely exist. A contractual relationship concerning work to be carried out in which the one party has no control over the other could not sensibly be called a contract of employment. MacKenna J cited a passage from the judgment of Dixon J in Humberstone v Northern Timber Mills (1949) 79 CLR 389, 404 from which I take the first few lines only:

"The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether any actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's order and directions."

In Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612 the court again considered what if any "mutual obligations" the law required for a contract of service to exist. It also discussed "control" in that context. Stephenson LJ, at p 623, cited a sentence from Stable J's judgment in Chadwick v Pioneer Private Telephone Co Ltd [1941] 1 All ER 522, 523D: "A contract of service implies an obligation to serve, and it comprises some degree of control by the master." He then cited the passage in Ready Mixed Concrete that I have given and continued, at p 623:

"There must, in my judgment, be an irreducible minimum of obligation on each side to create a contract of service. I doubt if it can be reduced any lower than in the sentences I have just quoted and I have doubted whether even that minimum can be discerned to be present in the facts as found by the industrial tribunal ..."

The sentences referred to were, of course, those from MacKenna J's judgment that I have quoted.

In Carmichael's case [1999] ICR 1226 the industrial tribunal had held that the applicant's case "founders on the rock of absence of mutuality". Lord Irvine LC said, at p 1230:

"If this appeal turned exclusively--and in my judgment it does not--on the true meaning and effect of the documentation of March 1989, then I would hold as a matter of construction that no obligation on the CEGB to provide casual work, nor on Mrs Leese and Mrs Carmichael to undertake it, was imposed. There would therefore be an absence of that irreducible minimum of mutual obligation necessary to create a contract of service."

He then cited the Nethermere case and Clark v Oxfordshire Health Authority [1998] IRLR 125, 128, paragraph 22, per Sir Christopher Slade. While it is true that control was not in issue in Carmichael, Lord Irvine LC's reference to Nethermere was to the judgment of Stephenson LJ at p 623C-G. That is the very passage that cites MacKenna J in Ready Mixed Concrete and concludes with Stephenson LJ's reference to "an irreducible minimum" which thus expressly included "control".

There can be no doubt Lord Irvine LC was approving that passage and I am easily persuaded we should follow it. It has been cited with at least apparent approval in several other recent decisions, including those in this court and the Privy Council.”

With that synopsis in mind and bearing in mind the guidance of Lord Woolf I turn to the facts in this case. There is no dispute as to the facts and I can set them out thus by reference to the judge’s judgment. The history is given in paragraphs 10-21:

“By the beginning of the 1990s Mr Davies, a joiner by training, was running a business making and supplying secondary glazing to houses. This business was incorporated under the name Noise Insulation Services (Manchester) Limited (“Noise Insulation”). Mr Davies owned the shares. Apparently he ran the business with his brother-in-law. As part of the business Mr Davies supplied conservatory roofs. He purchased the components for these from a number of suppliers including Ultraframe.

In late 1991 he decided to concentrate on supplying double-glazing rather than secondary glazing. He coined the name Quickfit for this business. Shortly afterwards he closed down Noise Insulation, selling the work in progress and goodwill of the business to his sister. He invested the proceeds in his new business for which he incorporated a company called Quickfit Limited. He had previously purchased an industrial plot at Groby Road, Audenshaw, Manchester and in about 1993 he constructed factory premises on it for the business. He owned both the land and the buildings until he was made bankrupt.

Mr Davies decided to enter the market for conservatory roofing systems with his own product which came onto the market in about 1992. This product was made primarily of GRP reinforced with wooden cores and was fairly crude. In March 1994, Quickfit Limited was ordered to be wound up on a creditor’s petition. However, before this order was made, on 19 January 1994, Mr Davies had incorporated two new companies Quickfit Windows Limited (“QWL”) and Quickfit Conservatories Limited (“QCL”). He appears simply to have carried on operating the business through these new companies without interruption as he had through the old.

Mr Davies decided that his first product needed improvement and set about designing a replacement product made of aluminium and uPVC. This was intended to be an engineered product, designed to be easily assembled and using common components wherever possible to keep down the costs of manufacture and assembly. The extent to which this redesign process involved Mr Clarke is a matter of dispute. Whatever Mr Clarke’s contribution, there is no doubt that the moving force behind the new design process was Mr Davies who appears to have wielded complete control over his companies and the majority of the employees and his acquaintances. In one memorable piece of oral evidence, Mr Stephen Ivison, who had been a director of Seaquest for a year, said that employees did not ask questions about ownership of rights to Mr Davies. He put it this way:

“… those were not really the sort of questions you asked Howard if you wanted to survive to the end of the week. This was sort of fait accompli. This was Howard’s system. This was it. Do as you are told or toast!”

Both QCL and QWL were wound up on creditors’ petitions. The winding up order in respect of QCL was made on 6 December 1995 and that in respect of QWL was made on 12 March 1996. It appears that trading under the companies stopped at about the end of the year. According to his then girlfriend, Sharon Owen, this did not change Mr Davies’ routine in any way. He carried on as before, now trading personally under a variety of names including Quickfit Roof Systems, Quickfit Fabrications and Quickfit Trims and Fixings. He continued to employ staff. In an affidavit sworn in May 1996, he claimed to employ 18 staff and said that he had a turnover of £1.5 million. Whatever the precise numbers, it appears that the business was substantial, both during the time it was being conducted by QCL and QWL and thereafter.

At the end of May 1996 Mr Davies caused Northstar to be incorporated to carry on the Quickfit business. It may well be that by this time Mr Davies appreciated that his somewhat cavalier attitude to the management of his companies was likely to lead him into trouble. In any event, the company was incorporated with a nominee shareholder and director, Mr Michael Pendragon, who held the shares on trust for Mr Davies. Mr Davies subsequently appointed Mr Jeffrey Naden as the sole director of the business. Mr Naden, however, was a front. He, like all the other members of staff, did whatever Mr Davies told him to do. As appears to have been the case throughout, much of the conservatory business was conducted in cash. Much of that was not put through the respective companies’ accounts. Northstar was no exception. There is little doubt that Mr Davies acted as a shadow director. His authoritarian approach to all appears not to have been diminished by the different formalities as to share ownership and directorships in Northstar.

The DTI had been investigating Mr Davies’ activities as a director of his earlier Quickfit companies. It brought proceedings against him and, on 30 July 1997, he was disqualified from acting as a director of a company for five years. As the press statement released by the DTI explains, the disqualification order prohibited Mr Davies from being a director of a company or in any way, whether directly or indirectly, being concerned in or taking part in the promotion, formation or management of a company. It appears to be common ground between the parties that he and those around him paid scant regard to this order since he continued to act as a shadow director, and the de facto managing director, of Northstar well after the disqualification order was made. The DTI press release records that Quickfit Limited was wound up with a deficiency of £17,472, QCL was wound up with a deficiency of £164,912 and QWL was wound up with a deficiency of £75,276. Among the grounds for Mr Davies’ disqualification was the finding that he allowed QWL to continue trading after January 1995 when he knew, or ought to have known, that it was likely to fail to the material detriment of creditors and to his own advantage.

By this time Mr Davies was having difficulties with another former girlfriend, Janice Bardsley. She had made a claim against him and had obtained an order in her favour for the payment of £30,000. Mr Davies refused to pay. On 14 November 1997, Miss Bardsley commenced bankruptcy proceedings against him. On 22 December of that year a bankruptcy order was made.

Towards the end of 1997, Mr Davies decided to try an additional method of making money out of the Quickfit system. He formulated a new licensed dealership arrangement under which conservatory fabricators would purchase licences for large sums of money giving them exclusive rights to supplies of products in particular geographical territories. There was a large presentation to interested dealers on 12 September 1997 which was attended by at least 50 invitees. At this presentation, documentation was distributed claiming that the designer and licensor (i.e. the owner of the design rights) of the system was “H D Systems”, a trading name for Mr Davies. The obvious advantage of this proposed scheme to Mr Davies is that it would allow him to continue deriving income from the Quickfit system without him doing so through a company under his control – something which was prohibited by reason of the disqualification order. It therefore suited Mr Davies’ interests at that moment, but not the interests of Northstar, to assert that he owned the rights in the Quickfit system personally.

In any event, this new venture failed. It was necessary for Northstar to continue to exploit the Quickfit system. Northstar could have been in a difficult position in this regard if the rights in the system belonged personally to Mr Davies. By the autumn of 1997 there was a real possibility that Mr Davies would be made bankrupt at the suit of Miss Bardsley. If that were to happen, and if Mr Davies really owned the rights in the system, those rights would pass to the trustee in bankruptcy and Northstar’s business might well be brought to an abrupt end. This appears to have been appreciated not only by Mr Davies but also by Mr Birkett, who had joined the business in June 1997 and subsequently was made a director of Northstar, and by two other senior employees, Mr Mike Whitby and Mr Ivison. In October 1997, a few weeks before the presentation of the bankruptcy petition, an agreement was prepared purporting to be a contract of employment between Mr Davies and Northstar. It was dated 1996. Everyone, including Mr Birkett who arranged for it to be drawn up and gave evidence before me, accepts that the date on it was false. The most likely reason for the creation of this document was to ensure that the Quickfit system was owned by Northstar in the event that Mr Davies was made bankrupt.

After he was made bankrupt, Mr Davies and the other senior employees of Northstar set about convincing Mr Davies’ trustee in bankruptcy and the DTI, that Northstar owned the rights in the Quickfit system. They were advised by Mr Christopher Hacking a solicitor who at that time was a partner in Philip Woods & Co., which later became part of Hill Dickinson. Acting on the information given to him by Mr Davies, Mr Naden, Mr Birkett, Mr Whitby and Mr Ivison, Mr Hacking produced documents which forcefully asserted that Northstar, not Mr Davies, owned the rights. At the time these documents were prepared, Mr Hacking had not been shown the ante-dated letter of employment referred to above. Mr Hacking gave oral evidence at the trial. He sought to downgrade the strength of the letters he had written to the trustee and the DTI as to ownership of the rights in the Quickfit system. As he put it in his witness statement:

“In summary, I was attempting to ensure that I took all points in Northstar’s favour and I considered that I was entitled and obliged to do this; Northstar was a client under what seemed to be an unjustified attack from an aggressive and much larger rival. I formed the view that the position I had taken was sustainable and then stuck to it.”

Mr Hacking’s assertion that Northstar owned the rights was dependent on the information fed to him by Mr Davies and others. It is not suggested that Mr Hacking had personal knowledge of the way in which Mr Davies and his companies ran their affairs which would have allowed him to offer an independent view of whether Mr Davies was an employee or whether he owned the rights personally.”

The critical findings appear in paragraph 44 as follows:

“Save in relation to two issues, namely whether Mr Davies was paid wages and whether he intended to own the designs personally, there is no real dispute as to the circumstances surrounding the creation of the designs in issue. Mr Davies threw his heart into his companies. He worked long hours for them. Insofar as he did design work, it was for the purpose of creating products which would be made and sold by the companies. They were also to be used for the creation of extrusion tools. Those tools were ordered and paid for the by the companies. The design drawings themselves and the drawings relating to the tools bore the relevant company name. When Mr Davies gave written approval for third party drawings for use in the making of tools, he did so expressly as a director of and on behalf of one or other of the companies. There appears to be no reason to doubt, and on a balance of probabilities I hold, that drawings were done on company paper, with company drawing utensils and normally in company time. In all relevant senses the companies paid for their creation. When designs were assessed and revised that was done with the help of other company employees, such as Mr Clarke, in company time. In all these respects, insofar as the designs were created by Mr Davies, they were created for and treated as assets of the company and Mr Davies was doing the design work for and on behalf of the company. He was working for the company.”

To the above must be added the findings of the judge in relation to the £250 a week in cash which Mr Davies drew. This was drawn at the same time as other persons who were undoubtedly employees drew their wages. The distinction between Mr Davies and others was first that he did not receive a pay slip nor were deductions made for PAYE or National Insurance; and second he appeared to withdraw cash on many other occasions at will. The arguments against the £250 being wages was founded on an assertion that the sums represented rent for the premises owned by Mr Davies and let to the companies, or alternatively repayment of loans. The judge rejected both explanations. As to rent, the evidence was that Mr Davies received the rent earlier in the week, and the judge accepted that evidence. [See paragraph 46.] As to repayment of loans the judge accepted the evidence of Mrs Patey which was to the effect that although the sums were entered in the books as repayment of loans, the sums were “in fact wages based on an annual salary” [paragraph 49], and so the judge found [paragraph 59]. The judge indeed rejected the notion that Mr Davies ever made any significant loans; “rather he helped himself to the cash proceeds of many of the companies’ contracts” [paragraph 55].

When paragraph 44 is examined it can be seen that the judge, possibly because of his view that context can make someone an employee for the purpose of section 215(3), even if they would not be an employee in other contexts, never distinguishes between Mr Davies acting for the company in producing the designs, because he was the company and the 100% shareholder, and thus benefiting in that way, and Mr Davies acting for the company because he was under an obligation to do so pursuant to a contract and in particular a contract of employment. If he was under an obligation to do so by virtue of a contract of employment, then the fact that he was a 100% shareholder, gave the orders, and exercised control, albeit of himself may not remove the other aspect of the “irreducible minimum control”. But the obligation on the part of the employee must exist. If the question were posed: Did Mr Davies as the 100% shareholder and director of the companies place himself under any obligation to be at work a certain number of hours per week, and any obligation to produce designs in return for the £250 a week? The proper inference from the findings of fact would in my view be a clear “no”.

I would thus hold that the judge was wrong in the conclusion he formed that Mr Davies was ever employed by any of the companies through whom he operated the business.

Section 215(2) of the 1988 Act provides:

“Where a design is created in pursuance of commission, the person commissioning the design is the first owner of any design right.”

By section 263(1) “commission” means a commission for money or money’s worth.

Mr Oliver in seeking to argue that section 215(2) applied, if section 215(3) did not, suggested that with the judge’s finding that Mr Davies drew a wage of £250 each week, this meant that he must be receiving the money for carrying out the design work. The proper inference according to Mr Oliver was therefore that as Mr Davies was the 100% shareholder, and the director, it must be inferred that he had instructed himself to produce the designs, and thus commission them in return for that regular payment.

The difficulty for Mr Oliver is that for a design to be created pursuant to a commission, there must be a contract involving mutual obligations prior to production of the relevant designs. We were referred by Mr Mortimore QC (who argued this aspect on behalf of Ultraframe) to various authorities dealing with the concept of “commissioning”. It is only necessary to refer to Applecore Limited v Cooper [1993] FRS 286 a decision of His Honour Judge Mickleham sitting as a High Court Judge in the Chancery Division. The case was concerned with the proper construction of section 4(3) of the Copyright Act 1956 and the wording of that subsection which provided so far as material:

“….. where a person commissions the taking of the photograph….. and pays or agrees to pay for it ….. and the work is made in pursuance of that commission, the person who so commissioned the work shall be entitled to any copyright subsisting therein……”

The judge at 298 quoted with approval the words of Pritchard J in a New Zealand case Plix Products Limited v Frank M Winstone (Merchants) & Ors [1986] NZLR 63 at page 86 where Pritchard J said:

“Without proof of a prior commissioning, payment for the work – in whatever form – is of no consequence. Commissioning means ordering. In this context it means more than the requesting or encouraging. It connotes an obligation to pay. Not just to pay for the finished products if and when they are purchased, but to pay for the very article in which the copyright resides irrespective of whether any of the finished products are purchased.”

The judge then said at 300:

“The object to which subsection (3) applies is a single negative regarded as an artistic work. What has to be shown to bring the work within the subsection is, first, that a person commissioned the taking of the photograph before the film was exposed and the negative made; secondly, that that person, the commissioner, agreed to pay for it – putting on one side for the moment precisely what the pronoun “it” stands for in the subsection – and agreed to pay for it before the film was exposed and the negative take; and thirdly; that the negative was taken in pursuance of the commission.”

In exactly the same way as when exploring whether Mr Davies was employed, and posing the question whether he ever placed himself under an obligation to the company to work as an employee certain hours, or produce designs, the answer was a clear “no”, so the answer as to whether he ever placed himself under an obligation at all to his company before he produced the designs to produce those designs is a clear “no”. If in relation to any of the designs the question was posed – if it had not been produced would the company have been entitled to sue for a breach of contract for the failure to produce the same, the answer would have been obvious. The plain inference from the judge’s findings of fact is that Mr Davies worked very hard for the companies and his business, but he made the designs when he considered it appropriate to do so, and he never placed himself under an obligation to produce those designs prior to their production.

There was again little between Mr Oliver for the respondents and Mr Mortimore who argued this aspect also for Ultraframe, as to the correct principles of law. Indeed although in their skeleton argument many paragraphs were taken up on the question whether Mr Davies owed a fiduciary duty in relation to the creation of the designs, Mr Mortimore ultimately did not shrink quite rightly from conceding that if the facts were as found by the judge in paragraph 44, and the case was not concerned with a company 100% owned by Mr Davies, the result would be that a director or de facto director acting as described by the judge in that paragraph, would hold the design rights in trust for the company. The reason why the concession was clearly right is that the focus should not simply be on the creation of the designs themselves, but on the use in the creation of those designs of all the assets of the company, including the confidential information that would be obtained in conducting the company’s business which would be utilised in creating the designs. Mr Davies was conducting his business through the companies and he used the company’s assets and his position as director or de facto director to create the designs.

Mr Davies did for a short while conduct the business on his own account, but he did not on the findings of the judge create any designs during this period. Thus the period of the interregnum is of no relevance to this point.

The position is exemplified in the context of design rights by Antocks Lairn Limited v I Bloohn [1971] FSR 490, where Graham J having concluded that the managing director of a company who had created certain drawings, was not employed by the company within the meaning of what was then section 4 of the Copyright Act 1956, went on as follows at 493 B-C:

“Such a managing director would, of course, hold the drawings he made in trust for his company and would have to assign the copyright in them to his company if and when called upon to do so. No such assignment was made here; and, as Mr Finlator is not a party to the action, drawings Nos. 10, 15 and 16 must be excluded from consideration. I may say that I do not think that this makes any difference to the final conclusion in the matter, as the drawings in question are not vital to the decision.”

Mr Mortimore suggested that this comment by the judge was made after a concession. It certainly does not seem that the proposition was contentious, but nor as I understand it was Mr Mortimore saying that in the context of that case the concession if made was not properly made.

Mr Mortimore contrasts that decision with the decision of Whitford J in Wilden Pump & Engineering & Anor v Fusfield & Ors [1985] 8 IPR 250. The decision was primarily concerned with a procedural issue and in particular whether Mr Wilden should have been a party to the proceedings and whether if so, that defect could be cured. Mr Wilden was in control of the company and its managing director and president. He had produced certain drawings. He was found not to be employed by the company and the judge accordingly rejected the company’s claim to title on that basis. He also however went on to hold that a managing director does not necessarily hold any copyright interest in trust for the company. He found in that case on the basis of evidence given by Mr Wilden that when producing the drawings “he was entitled to ask for a royalty and indeed at a later stage it was paid a royalty” [page 259], and that there was no holding in trust. He found “his claim to a royalty and the apparent acceptance of this as being a perfectly well justified claim in respect of the use of his drawings is wholly inconsistent with any assertion that the plaintiffs [the company] were entitled to any copyright interest”. It is perhaps worth noting that even in that case Mr Kentridge QC who might have supported the argument of no trust, apparently “did not press his cause on this aspect” [see page 258].

Certain fundamental principles relevant to the decisions in the above cases and to the arguments presented on the appeal, which I do not think were in dispute as between Mr Oliver and Mr Mortimore, can I think be expressed in the following propositions. First it is the duty of any agent to employ the materials and information obtained by reason of his agency solely for the purposes of the agency and the agent will be liable to account to his principal for profits made. Second, directors including de facto directors are fiduciary agents for the company, and they are trustees of the property of the company in their hands or under their control. Third, an agent will not be liable to account if he is acting with the fully informed assent of the principal. Fourth, directors of a company cannot in any case lawfully use their powers except for the benefit of the company, and cannot act ultra vires the company. Fifth, all the shareholders may relieve a director from liability from any breach of duty, provided only that the breach is not ultra vires the company and does not involve a fraud on its creditors [Gore-Brown 44^th edition paragraph 27.21.2]. Sixth, it would be ultra vires the company to distribute assets of a company to the shareholders other than by way of a distribution of profit lawfully made or by a reduction in capital duly sanctioned by the court or possibly a return of capital by the adoption of a special procedure under the Companies Acts. [see Hoffman J in Aveling Barford Limited v Perion Limited [1989] BCLC 626 at 631].

There is a further principle upon which Mr Mortimore laid particular emphasis and which again is not in dispute. It is referred to as the Duomatic principle after the decision in Re Duomatic Limited [1969] 2 Ch 365. That principle accepts that all shareholders may formally or informally assent to or approve an arrangement or a transaction so that it is binding on the company. But that principle as Mr Oliver pointed out only applies to acts or transactions which are intra vires the company. That that is so, is exemplified by In re Holt Garage (1964) Limited [1982] 3 All ER 1016. Thus, and again Mr Mortimore did not dissent from this, if a director of a company 100% owned by himself decided simply to take the assets of the company for himself, he would not be able to rely on the Duomatic principle, because such conduct could not be considered a bona fide distribution of profits and would be a reduction of capital and ultra vires the company without the sanction from the court.

There were I think canvassed by Mr Mortimore two routes whereby Mr Davies should not be held to hold design rights in trust for the company. But each route started with the fundamental proposition that it should be inferred that Mr Davies intended the design rights to be his rather than any of his companies’. Whether that inference should be drawn is linked with consideration of what Mr Davies would have to show in addition to that intention, if he was to succeed by either of the alternative routes canvassed. Since paragraph 44 of the judge’s judgment is not in dispute, and the consequences are not in dispute if the companies were not 100% owned, he would either have to show that the companies lawfully assented to him having the design rights at the time they were created, or he would have to show that at some later date the companies ratified his retention, thereby waiving any breach of fiduciary duty.

I am going to deal with the assent aspect first and on the assumption that it can be established that Mr Davies intended that he should beneficially own the design rights. The supposition therefore is that Mr Davies as a director or de facto director, used the company assets to produce the design rights but intended as he produced them not to hold them beneficially for the company. The submission then is that by virtue of the Duomatic principle, it should be inferred that through his 100% shareholding the court should hold that the companies had assented to that retention.

Although assent of the principal is an answer in many cases, in the company law context that assent must be intra vires the company.

Mr Mortimore was ultimately inclined to accept that if Mr Davies was ever under an obligation to hold the design rights in trust for the companies – if as he termed it they were ever “in the box”, then because the revesting of the beneficial interest in Mr Davies would not be a valid distribution of profits, and would be a reduction in capital without sanction of the court, Mr Davies could not rely on his 100% ownership of the shares to produce a lawful assent to him holding the beneficial interest. Mr Mortimore distinguished Ball v Eden Project Limited & Another [2002] I BCLC 313 relied on by Mr Oliver on the basis that the intellectual property right was in that case already “in the box”.

As it seems to me it should not make any difference whether the company has the right to ensure that an asset gets “into the box”, or whether the asset is “in the box” before assent is inferentially requested and given. If it is ultra vires to revest the beneficial interest once that beneficial interest is held for the company, it cannot as it seems to me be intra vires to assent to a director (1) acting in a way which would vest the beneficial interest in the company; but (2) being entitled to retain that beneficial interest.

In addition Mr Mortimore could not point to any formal act of “ratification” or “assent”. A specific act of assent would be required. It is not enough for the application of the Duomatic principle to say “the shareholders would have been happy if they had been asked” [see Hoffman LJ in D’Jan of London [1994] 1 BCLC 561-564]. Northstar was a company close to insolvency. The creditors had an interest. That would itself have made it likely that the giving of any assent would be ultra vires, but it also emphasises the necessity for a formal act of ratification if assent is to be relied on.

But in any event what is the evidence that Mr Davies ever intended otherwise than to hold the design rights for the companies? Mr Mortimore relied on the following matters as showing Mr Davies had the intention to retain the rights. First, he relied on the fact that when Mr Davies commenced trading through a different company e.g. the Quickfit companies after NSIL, he simply assumed the design rights could be used by those companies. This having regard to the ways in which Mr Davies behaved does not point any more to proper behaviour as opposed to improper behaviour.

Mr Mortimore then relied on various documents produced between August 1997 and January 1998. In August 1997 after the formation of Northstar Mr Davies purported to confirm to Northstar that he was carrying on a separate business [see bundle E page 54]. Mr Naden for Northstar wrote to the solicitors for Northstar by letter dated 26^th September 1997 stating: “The owners of the rights to Northstar System Limited glazing system is Mr Howard Davies.” [See bundle E page 94.] Mr Davies by letter dated 27^th October 1997 confirmed he was “sole designer” [see page 111]. The accounts of Northstar as at 15^th December 1997 referred to no design rights. A chart produced for the purpose of the DTI investigation, enquiring into whether Mr Davies had been acting as a shadow director, indicated a separate business in the hands of Mr Davies licensing the use of the design rights to Northstar [see pages 165-166 of bundle E].

But at the very same time as the above documents were being produced seeking to avoid the consequences of being held to be a shadow director and seeking to avoid any suggestion that he was acting as a director of Northstar, a contract of employment was being produced backdated to October 1996 which suggested that Mr Davies was employed and that the design rights were those of Northstar. An agreement was drafted in July 1997 as between Northstar and Alumex under which Northstar was “to retain all intellectual property right to its design”. Furthermore in an affidavit produced in proceedings concerning Janice Bardsley dealing with Mr Davies’ assets as at 15^th May 1996 no reference was made to Mr Davies being the owner of any design rights.

Finally, as has been referred to at the commencement of this judgment, Northstar in fact purported to execute an assignment of the design rights in favour of Seaquest dated 13^th January 1998.

The fact is that little reliance can be placed on any documents produced by Mr Davies or by those acting for him. So far as solicitors were concerned they could only act on the information that was being supplied by Mr Davies. So far as Mr Davies’ nominees were concerned they were simply doing that which Mr Davies requested them to do.

Paragraph 44 in the judge’s judgement is the critical paragraph and there is no challenge to the findings in it. That paragraph is totally inconsistent with any separate business under which Mr Davies was creating the designs and licensing Northstar to use the same. The paragraph is only consistent with Mr Davies acting for the companies and creating the designs through the companies. In such circumstances he would normally hold such designs in trust for the company. There is no reason to infer any intention that he intended to do otherwise than that which his obligations demanded of him.

In those circumstances it seems to me clear that Mr Davies held any design rights in trust for the company through whom he was operating the business as at the time he created those design rights. On that basis in accordance with the schedule to the judge’s judgment he would hold the design rights for the respective companies in relation to which the judge found ownership.

I have read in draft the judgment of Longmore LJ related to costs and am in complete agreement with it.