Swindon Town Football Co Ltd v Diamandis

This is an appeal brought by the Swindon Town Football company Limited ("the company") against a decision of Peter Smith J given on 19 July 2010 when he dismissed the company's application for an order restraining Mr Michael Diamandis, the respondent to the application (“the Petitioner”), from proceeding with a petition presented by him on 21 April 2010 to wind up the company and, additionally, ordered that the petition be struck out.

The petition was brought on the familiar ground of alleged unpaid debts, and the ground upon which the application was made by the company was the familiar ground that the petition was an abuse of process because there was a bona fide dispute on the part of the company in respect of the debts on which the petition was founded.

The law relating to this issue is well established. In his judgment at paragraph 10 the judge referred to the well-known observations of Lord Hoffman in Parmalat Capital Finance Ltd v Food Holdings Ltd (in liquidation) [2008] BPIR 641 (PC) at paragraph 9, and I do not propose to set them out again.

In this case, the background is helpfully supplied by the judge in paragraph 2 to 6 of his judgment:

At paragraph 7 the judge identified a total of £249,475 which the Petitioner claimed the company owed him, and, as the judge explained, there were three categories of debt:

Outstanding trade debts of Dunwoody for the period 30^th April 2003 to 30^th December 2007 paid by him for goods and services supplied to the company (£66,475).

Accrual of Management Fees of the Petitioner pursuant to his employment as Manager of the company from the commencement of employment until 2004 (£123,000).

Personal loans from the Petitioner to the company dated 5^th and 26^th November 2007 (£60,000).”

The judge considered this issue and concluded that the evidence was quite clear that the agreement was with the company. In that connection he relied on three documents to which Ms Hilary Stonefrost, who appears on behalf of the company, took us. The first is Schedule 3 to the letter before claim sent by the Petitioner's solicitors, Lorrells Geogiou Nicholas, on 7 December 2009, which does indeed refer to fees receivable of £123,00 and being "recoverable" from the company, and also states "above fees verified and confirmed by directors during audit historically". However, there is no evidence which supports that latter statement.

The second document is an email from one Stanley Gray of the company and STFC, to Jamie Drake on 14 December 2007 confirming "outstanding balances" of inter alia £123,000 "acurral [obviously a misprint for accrual] management fee"

The third document, which the judge considered, understandably, to be of particular importance, was the SPA which the judge referred to in paragraph 4 of his judgment. This records in terms, in Schedule 8, that £180,000 was a current debt of the company owed to the Petitioner. Schedule 8 is headed “Current Creditors of the Club” and sets out a number of other sums, five of which are over £1million. The SPA contains various, not unfamiliar provisions referring to the fact that these sums are warranted to be owing and that these sums should be repaid after the agreement with SPA has been completed.

There was some evidence that the SPA was entered into under great pressure because the company was in severe financial problems, pressed by the Revenue for payment, and threatened with winding up. Nonetheless there is obvious force in the judge's point, reflected in Mr Armstrong's submission on behalf of the Petitioner, that due diligence must have been carried out to some extent, and somebody must have been satisfied and prepared to warrant that this sum was owing. Nonetheless, the SPA was an agreement to which the Petitioner was not a party, and it is therefore no more than evidence (albeit evidence of significant weight, on the face of it) in favour of the contention that the management fees were a liability of the company.

A number of documents were identified by Ms Stonefrost in the course of her submissions, which she says the judge did not refer to, and, she says, had he referred to them, he would, or at least should, have been satisfied that the management agreement, and therefore liability for fees thereunder, was not with the company. She first drew attention to a letter of 3 January 2002 from Mr Holt, (a director, I believe, of the company and STFC at the time) the Petitioner, in these terms, so far as relevant:

Although the letter is not entirely clear, Ms Stonefrost says with some force that, on the face of it and in light of the words “on behalf of the Wills’ family”, and “you have agreed with the Wills family”, it is the Wills family who had engaged the Petitioner, not the company.

The evidence of the Petitioner before the judge was in the form of a witness statement which contains some words which suggest that the agreement was with the Wills family. However, it contains some other words which suggest that the agreement might have been with the company. To me at least it seems that the natural meaning of paragraph 70 of his evidence, in particular, was that the agreement was with the Wills family:

A few paragraphs later the Petitioner referred to "a service contract with the Wills family" which he had. So it looks from this as if there was a reasonable case for thinking that the agreement may well have been between the Petitioner and the Wills family rather than the Petitioner and the company. As matters have progressed, Mr Armstrong, on behalf of the Petitioner, has told us that his case is that there were two agreements, each of which involved him being paid £80,000 per annum, one with the company and one with the Wills family.

We have further evidence put in, or sought to be put in, by the company which was not before the judge. It is right to mention that that does suggest that there was quite plainly a management agreement with the Wills family, but Mr Armstrong, while opposing that evidence going in, makes the point that it does not take matters any further anyway if there were two separate agreements. I have to say that for my part the natural meaning of the Petitioner's evidence which I have read and the letter to which I have made reference is that there was one agreement (and again, at least if one confines oneself to the extracts from his witness statement which I have read and to the letter of 3 January which I have read) there certainly must be a strong case for saying that the agreement must be with the Wills family and not the company.

Ms Stonefrost also relied on one or two pieces of other evidence which the judge did not refer to. The first is that the Petitioner was in fact disqualified from acting as a director and could not be involved in the management of a company, which suggests, she said, that it was more likely that he was advising those who were managing such as the Wills, rather than the company itself. I have to say I regard that as little more than a straw in the wind, but I do not think it is a point without force.

Ms Stonefrost also refers to a judgment given in another case involving both the company and STFC: Datasat Communications Ltd & Ors v Swindon Town Football Club Ltd [2009] EWHC 859 Com, where Mr Gavin Kealey QC, sitting as a deputy judge of the Queen's Bench Division Commercial Court, gave a judgment in which he considered certain evidence given by the Petitioner in writing, and says at paragraph 18:

Ms Stonefrost also refers to a file note made by Mr Backhouse, a director of the company, which was prepared on 12 April 2010. The judge rejected this as not being an expert report, not being a report by an independent person and of no value. In the context of the present type of case, where much of the evidence, indeed all the evidence, even the witness statements, are documentary, and where much of the evidence in support of his case comes from the Petitioner, who himself is an interested party, it seems to me to have been a bit harsh. In my view, the file note of Mr Backhouse was something which could properly be taken into account.

That file note concluded the consultancy fees had all been paid. It could be read as reading that Mr Backhouse's impression from the papers was that the liability for the fees was that of STFC, but I have to say it is not entirely clear to me that that it is what it appears to say in the note, and for my part, albeit for reasons slightly different from those of the judge, I do not think it is a particularly impressive document.

Then there is an email, dated 23 February 2009, from James Wills to Mr Fitton, one of the main moving characters of the company, in which he refers to the fact that:

Finally, Ms Stonefrost relies on the annual report and accounts, for the year ending 31 May 2008, in respect of the company, which were not exhibited during the evidence but which the judge asked to see and which were produced to him. The annual report and the financial statements, which are signed off in the usual way by the directors, do not record any liability to the Petitioner in respect of management fees.

Creditors are identified in the normal way in notes 11 and 12 to the account, and it is quite clear that there is nothing there which would include liability for the management charges which the Petitioner paid.

In light of that analysis of the evidence I am satisfied that this is not a case where it can be said that there is no reasonable basis for doubting that the management fees are owing by the company to the Petitioner. In my view, the sums may very well be owed, but it is not clear to whom they are owed, and in those circumstances it would be wrong to give what amounts to a summary decision in favour of the Petitioner on the management fees on the basis that there is no bona fide excuse as to the company's liability. In my view there is good ground for thinking that that could be a valid defence to that claim and therefore I would disagree with the judge on that issue.

The second item is trade debts. The judge dealt with the trade debts in paragraphs 19 to 23 of his judgment. There is no doubt that £120,000 had fallen due to Dunwoody, the company referred to in paragraph 6 of his judgment, in respect of services supplied to the company. The question is whether the benefit of that debt had been assigned to the Petitioner. Although the judge referred in his judgment to the Petitioner being "an equitable assignee of the benefit of the debts owed by the company to Dunwoody” (see paragraph 38), it seem to me quite clear that the effect of the judgment was that, in effect, the benefit of the debt was transferred to the Petitioner effectively by novation, as Toulson LJ said in argument.

The judge accepted that, and his reasons were essentially in paragraph 32 to 34 of his judgment. Ms Stonefrost's attack on this part of the judgment is essentially that the reasons, with all due respect to the judge, do not support his conclusion.

I am proceeding on the basis that this money for services provided was undoubtedly owed to Dunwoody; the question is whether the benefit was transferred by some sort of novation agreement to the Petitioner. The Petitioner effectively was a managing director of Dunwoody, as the judge stated at paragraph 6 of his judgment, so it would not be too difficult for a novation to have occurred on the basis that he had agreed it.

The judge says that, effectively, he accepts the Petitioner's statement in his witness statement that there was:

It is quite true that the Petitioner said in his evidence that the agreement was with those three people who were directors. It is also clear from the first full paragraph on the second page of the letter before claim of 7 December 2009 that his case was that this was agreed in June 2008. But when one looks at the report and accounts to which I have made reference it is clear that only one of those three people was a director of the company at the time, namely James Wills, and that there were five other directors but none of them was included or among the three people with whom the Petitioner says he agreed.

The second point the judge makes in paragraph 32 of his judgment is that "Ms Gray confirms that arrangement in her witness statement". Ms Stonefrost has taken us to Ms Gray's witness statement of 29 June 2010 in which she explains that she had been a financial director of the company and director and company secretary in STFC. She says this in paragraph 4:

The judge then turned at paragraph 33 to an exchange of emails, which he says supports the conclusions he had reached. The email which he principally relied on was one to which I have already referred, namely that of 23 February 2009. It does seem to me that she is right that the judge misinterpreted this email insofar as he seems to have thought that it involved Mr Wills confirming to Mr Fitton that the benefit of the Dunwoody debts was assigned or was agreed to be novated with the Petitioner. It seems to me that the letter had nothing to do with those debts. It was concerned with the £120,000 considered in the first issue, namely the management services, and with the £60,000 loan to which I have not so far referred. In my view, therefore, the evidence simply does not support the conclusion that the judge reached on this issue.

I am far from suggesting that the Petitioner's case is hopeless. The judge criticised the company for not coming up with convincing evidence about this, and, as with the first issue (the management charges).. There are possible arguments that can be raised as to the deficiencies in the company's evidence, and I am far from saying that some of the judge's adverse comments are unjustified, but I come back to the question we have to decide, which is whether there is a bona fide dispute as to whether these trade debts, which were originally owing to Dunwoody, are now owing to the Petitioner. To my mind that was something which the Petitioner had to make good and was an assertion which he had to establish. The judge's reasons for holding the claim established do not hold water, in my view. As I said, it may transpire, if the matter goes to trial that a judge, having heard all the evidence, is satisfied that there was novation, but to my mind it cannot be said on the evidence before the judge that that was clearly right; it is a point which is fit to go to trial. It was not a claim on the basis of which a company could properly be wound up without having the opportunity of a trial.

The final issue is whether, as the petition says, the sum of £59,905 paid to him was appropriated to the trade debt. In a sense it could not have been, because of the conclusions I have reached in relation to the trade debt. However there are two reasons why the judge should not have concluded the payment was not appropriated to the loan of £60,000 which the Petitioner had made to the company, but to the trade debts. The first is that the appropriation which is alleged by the Petitioner would have occurred before the trade debts arose, which seems to me to be a complete answer to the point. The second reason, is that if one reads the email of 23 February 2009, which deals with the £60,000 and the payment in effect of £59,905, it seems to me clear from that email that the company was saying that it had appropriated the sum towards the payment of the loan, and of course if the debtor, when repaying, appropriates, then it is not open to the creditor, as it were, to trump that appropriation.

As I say, the point does not seem to me to arise if one accepts that it is at least arguable that the trade debts were not debts owing by the company to the Petitioner.

In these circumstances, for my part, I would allow this appeal.

I agree.

I also agree.