Whalley v Doney & Anor

LORD JUSTICE PETER GIBSON: Mr Justice Laddie will give the first judgment.

MR JUSTICE LADDIE: This is an application for permission to appeal made on behalf of George Malcolm Doney and Malcolm Doney Associates, who are the respondents in this action brought by Alan Peter Whalley, the liquidator of MDA Investment Management Ltd.

The issues which arise in this case follow from proceedings brought by Mr Whalley in respect of alleged misfeasance and breach of fiduciary duty committed by, and also to certain preferences allegedly made by, the proposed appellants.

The issues are succinctly summarised in the skeleton argument of Mr Davies QC, who appears on behalf of the proposed appellants. They concern an agreement dated 15 July 1998 between MDA Investment Management Ltd (“Investment”) and a partnership, the vendors, and a subsidiary of a company called Farlake Ltd, referred to as IPS, for the sale of a business. The business was that which had been conducted by Investment. The maximum total consideration under the agreement was valued at about £2.4 million. Of that, £1 million in cash was paid over in relatively short timescale to Investment. £160,000 in cash was paid to the MDA partnership and three equal tranches (in July 1999, 2000 and 2001) were to be passed to MDA partnership in the form of what was described as loan stock. As the trial judge, Park J, held, it was a misnomer to refer to this as loan stock. But in any event what was to be handed over in the form of shares amounted to £1.25 million. That was to go to the MDA partnership. The result of all of this was that well over half of the total value realised on the sale of Investment’s business was passed not to the company itself but to MDA partnership, in which Mr Doney was by a long way the largest partner.

In the proceedings to which I have referred, the liquidator challenged the division of the proceeds of sale of the company's business as a misfeasance or breach of fiduciary duty. He also alleged, although as it proved unsuccessfully, that there was a transaction at an undervalue. In addition to these major claims, he also argued that various payments authorised by or for the benefit of Mr Doney were unlawful preferences.

The matter came on for trial before Park J in June 2003. The trial itself lasted just over three weeks and resulted in a detailed and lengthy judgment running to over 160 paragraphs. During the course of the trial the learned judge had the advantage of hearing oral evidence from a number of major players in the transactions which were at the heart of the proceedings and evidence from expert accountancy witnesses, one called on each side.

Park J came to the conclusion that the allegations of misfeasance and breach of fiduciary duty were made out. There was then subsequently a short supplementary hearing lasting some two days, in which the consequences of his earlier judgment were worked out and in accordance with which the learned judge decided in what sum Mr Doney should be ordered to compensate the company, which by this time had gone into liquidation.

An application for permission to appeal was not made to Park J at the time of the giving of the first judgment, and so that matter comes before us without the judge himself having been asked to express a view on whether permission would be appropriate. An application for permission to appeal against the second judgment was made to the learned judge and he declined to give that permission. The matter comes before us as a result of the direction of Chadwick LJ.

Before us today Mr Davies has presented a large number of arguments in a detailed skeleton in which he challenges the decision of Park J, particularly in the first judgment. Perhaps the core submission he makes, although by no means the only one, is that the learned judge was in error in his approach to the question of misfeasance and breach of fiduciary duty. He says that it may well be that the company would have been solvent after the transaction, in that the £1 million that it received would have enabled it to pay off all its debts, and therefore the surplus which went to Mr Doney in large part was not money which was being diverted from creditors, but was money which would in all events have gone to him as being surplus to the requirements of the company to meet its debts. He points to the fact that the judge did not determine whether there was balance sheet insolvency. He says therefore the whole approach of the court to the question of whether there was or was not misfeasance or breach of fiduciary duty was in error.

In my view it is necessary to step back and to look at what the judge did find after having heard all the evidence and having read the no doubt voluminous documents put before him. Park J came to the conclusion that the company was in dire financial straits. It was unable to paid its debts. It was insolvent on a cash flow basis, although he did not actually hold that it was insolvent on a balance sheet basis. He held that what Mr Doney was doing was diverting well over 50% of the value of the company effectively into his own pocket, and he held that this activity, when it was clear that the company was in a dire financial state, amounted to misfeasance and a breach of fiduciary duty.

Although Mr Davies has attacked the basis upon which the judge arrived at this conclusion and has said that he is prepared to challenge the findings of fact which the judge made in support of it, it appears to me that the judge gives ample and extensive reasons for coming to the conclusions of fact which he did come to, and if so it appears to me that it is clear on the material found by the judge that this company was at the relevant times insolvent. I do not see how an appellate court could go behind the careful findings of fact that the judge made in this respect. Indeed, it appears to me that Mr Davies has not produced material before us which gives us any reason to suspect that the learned judge erred on these findings.

Furthermore, it is apparent on the material before us that the judge was entitled on the material before him to come to the conclusion, not only that the company was insolvent before the criticised transaction, but also thereafter. Mr Randall QC, who has appeared before us today on behalf of the respondent, has drawn our attention to the fact that, for example, debts to the Inland Revenue existed both before and after the transaction. Those debts have not been extinguished. Everything, it appears to me, points to the fact that the company was insolvent. If that is so, it must follow that there appear to be no substantial basis on which the judge's findings that Mr Doney breached his duties as a director by diverting large parts of the sale proceeds to himself could be impugned.

I should also mentioned that Mr Davies has attacked the decision of the judge in relation to Mr Doney's application under section 727 for relief from the consequences of the misfeasance and breach of duty which the judge found. He says that the judge has followed a line of authority which is open to attack. In particular, the judge appeared to take the view that section 727 could only involve an objective inquiry as to whether or not the defaulting director had acted reasonably or otherwise, whereas, Mr Davies says, there are authorities which suggest a subjective approach may be the correct one.

It appears to me that in the end it does not matter whether or not Mr Davies is correct in relation to this issue, because the judge assumed for the purpose of his second judgment that Mr Doney had overcome the legal requirement for coming within the scope of section 727. The only issue then to be determined was whether in all the circumstances the judge should exercise his discretion in Mr Doney's favour to relief from the whole or part of the consequences of the misfeasance which he had already found against Mr Doney. In relation to that the learned judge decided, on the basis of all the material which he had seen and a great deal of which is set out in his first judgment, that this was very far from a case where it would be appropriate to exercise the discretion in Mr Doney's favour. I can see no basis upon which it would be appropriate for an appellate court to depart from such an exercise of discretion by the trial judge.

For these reasons, I would refuse permission to appeal.

LORD JUSTICE PETER GIBSON: I agree.