Maidment v Attwood & Ors

Mr Thomas Grant, for Mr Maidment, submits that Mr Attwood’s remuneration was so obviously excessive that the onus of showing that the remuneration was reasonable had shifted to Mr Attwood. On his submission, the judge was wrong to hold that Mr Maidment was debarred from bringing an unfair prejudice claim because the accounts had been placed on a public file. Mr Andrew Clutterbuck, for Mr Attwood, seeks to uphold the judge’s conclusion on a number of grounds principally directed to the judge’s finding about excessive remuneration and Mr Maidment’s conduct. I will deal with those matters separately after I have dealt with the question whether the judge was right to hold that Mr Attwood’s conduct was not unfairly prejudicial because Mr Maidment could have found the information about the excessive remuneration by inspecting Tobian’s file at Companies House.

In my judgment, the judge’s approach was wrong in principle: it involves a new restriction on the manner in which shareholders can enforce the liability of directors for wrongs to their company. As we have seen, in O’Neill v Phillips Lord Hoffmann held that the content of fairness in the unfair prejudice remedy is coloured by its context of the corporate vehicle. One major feature of the context is that, in a company, shareholders in general permit the directors to apply the assets of the company in accordance with its constitution on terms that the directors perform their duties. If the directors do not perform their duties, they may be liable to the company in accordance with the stringent standards applying to fiduciaries.

To maintain the balance of power between shareholders and directors, shareholders are given the right in certain circumstances to bring proceedings to enforce that liability of the directors to the company in circumstances where the company cannot take action itself. Thus the Companies Act 2006 provides that in certain circumstances, shareholders have the right to bring a derivative action to enforce the directors’ liability to their company, or, through the unfair prejudice remedy, to ensure that they (the shareholders) are compensated or obtain other relief in respect of the loss. Shareholders are limited by the statutory requirements in relation to these remedies. In the case of derivative actions, those requirements are to be found in sections 260 to 264 of the Companies Act 2006. Those requirements do not include a failure to read the filed accounts at Companies House. The judge’s approach means that minority shareholders are at risk of losing their rights if they do not read their company’s filed accounts. This approach imposes a requirement for diligence that has no basis in the statutory provisions or in principle or authority.

The judge’s approach was flawed in another respect. There was also the second breach of duty by reason of the fact that Mr Attwood had fixed the remuneration by reference to his own interests contrary to his duty as a director of Tobian. This was unfairly prejudicial conduct on the basis of the approach to unfairness adopted in O’Neill v Phillips. The fact that this breach of duty had occurred was unsurprisingly not disclosed in Tobian’s filed accounts. The judge’s reason for rejecting Mr Maidment’s case based on excessive remuneration was additionally flawed because it did not address this separate basis for holding that there was unfair prejudice.

I now turn to the two grounds raised by Mr Clutterbuck for upholding the judge’s order for different reasons.

Mr Clutterbuck submits that the judge’s finding on excessive remuneration is unsound. He submits that there was no proper benchmark before the judge to enable him to conclude that Mr Attwood’s remuneration was excessive. On his submission, Mr Maidment had not adduced expert evidence on the proper level of remuneration, and the liability trial was intended to deal exhaustively with all issues as to unfair prejudice. Therefore his claim based on excessive remuneration should also have been dismissed for this reason. I would reject this submission for the reasons given in the next two paragraphs.

In my judgment, as Blackburne J held in Irvine v Irvine [2007] 1 BCLC 349 at [267]–[268], where the court has to determine the appropriateness of a director’s remuneration, it should do so by reference to objective commercial criteria. I would add to that observation that, in the light of the public debate that has taken place in recent years over executive pay in large companies, much guidance can be found about the remuneration of directors in listed companies in the various guidelines that have been produced, such as the Association of British Insurers’ Principles of Remuneration. The court may today also find this useful background material. But the practice of the court as to the determination of appropriate levels of remuneration is not applicable unless all issues as to liability for unfair prejudice were required to be resolved at the liability trial. I will consider that question when I consider below the course which the judge should have taken with regard to this claim.

Mr Clutterbuck’s second submission under this head is that the judge should have treated Mr Attwood and Ms Heard as a single management team, that is to say, rather than ask whether the remuneration paid to Mr Attwood was excessive, the court should ask whether the remuneration paid to both of them viewed overall was excessive. In my judgment, it is not open to him to say that, because Ms Heard was underpaid, or ungenerously paid, her remuneration can be taken into account as some form of mitigating factor when considering how much Mr Attwood was overpaid. In any event there is no evidence that Ms Heard was underpaid.

In limited situations the court rejects an unfair prejudice petition because of some conduct on the part of the petitioner: see Buckley on the Companies Acts, [18] (Protection against Unfair Prejudice), paragraph [24]. Examples of such conduct include cases where a party has abused the process of the court. Mr Clutterbuck essentially relies on this principle for saying that Mr Maidment’s petition should have been dismissed in its entirety because of Mr Maidment’s conduct.

I would reject that submission also. The short answer is that the judge did not make any finding that Mr Maidment had so conducted himself as to disentitle him from relief, and there is nothing that would justify this court in taking that course. Mr Clutterbuck relies on various items of conduct by Mr Maidment. Mr Maidment had decided unilaterally upon a divorce of the interests that he and Mr Attwood jointly had in Annacott and Tobian. Mr Maidment’s evidence was that he considered that he should be entitled to the former and that Mr Attwood was adequately compensated by his shareholding in Tobian. Mr Clutterbuck submits that the judge found, in paragraph 76 of his judgment, that Mr Maidment considered that, as compensation, Mr Attwood should have Mr Maidment’s interest in Tobian. The judge held:

“76.

I have no doubt that after the correspondence between solicitors ended in December 2003, Mr Maidment felt that Mr Attwood had been sufficiently remunerated for his earlier contribution to Annacott by his investment in Tobian, and that he was entitled to nothing further from Annacott. I conclude that Mr Maidment therefore set about engineering a situation in which he would divest Annacott of its assets, leaving nothing against which Mr Attwood could assert a claim.”

The critical words are “his investment”: they are ambiguous but more naturally refer to Mr Attwood’s majority holding than to Mr Maidment’s shareholding. Moreover there is no evidence that Mr Maidment took any steps to transfer his shareholding to Mr Attwood. Paragraph 76 of the judge’s judgment accordingly does not justify the inference that Mr Maidment decided to abandon his shareholding in Tobian to Mr Attwood. In any event, the judge did not refer to this point in paragraph 158 of his judgment (paragraph 17 above). The judge did not hold that Mr Maidment was disqualified from pursuing the proceedings by virtue of his conduct but that there had been no unfair prejudice.

Mr Clutterbuck points out that the relationship between Mr Maidment and Mr Attwood was hostile and that Mr Maidment had made no point about the remuneration until after Mr Attwood served his petition in relation to Annacott. Mr Maidment had blamed Mr Attwood for an incident in which he was seriously mugged in Rainham station car park on 28 April 2003. (The judge made no findings about whether Mr Maidment was right to attach any blame to Mr Attwood). Mr Clutterbuck also submits that Mr Maidment had set about destroying the value of Mr Attwood’s investment in Annacott by misappropriating its assets. In my judgment, neither the parties’ hostility to each other nor the fact that the Tobian petition was retaliatory justifies Mr Attwood committing what would otherwise be unfairly prejudicial conduct in relation to Tobian. Justice is not administered on the basis of tit for tat. Moreover, the judge did not mention any of this conduct in paragraph 158 of his judgment.

Furthermore, there is no finding of the judge that Mr Maidment had knowingly acquiesced in any breach of duty by Mr Attwood to Tobian. Had Mr Maidment made a covert strategic decision to leave Mr Attwood with the burden of running Tobian and free to continue drawing excessive remuneration with a view to seeking to recover it from him at a later date, the court might well have held that he was barred from pursuing the excessive remuneration ground. However, that is not what the judge held. The judge rejected the complaint about excessive remuneration on the basis that there had been no unfair prejudice, not on the basis that Mr Maidment’s conduct had disentitled him to relief.

Accordingly the next question is: what should the judge have done about the excessive remuneration claim?

We have seen that the content of fairness is contextual. It is also flexible and open-textured. It is capable of application to a large number of different situations. The courts are also given wide powers to fashion relief to meet the circumstances of a particular case. Parliament clearly intended the courts to adopt a flexible approach to proceedings under section 994, and to be flexible in the exercise of their powers in relation to these proceedings. This is confirmed by the approach that the Privy Council took in Gamlestaden (paragraph 12 above). The course that I consider that the judge should have used in this case is a development of that approach.

In this case, the judge was not engaged on the exercise of quantifying the value of Mr Maidment’s shares in Tobian, but of ascertaining whether there had been unfair prejudice. If Tobian had been solvent, the judge would not have had to quantify the amount of the excess remuneration. That quantification exercise would be done at the quantum hearing as a step in establishing the price payable under any buyout order.

Where, however, the company is insolvent, the court has to be flexible in its approach. This is because there is the complication that the petitioner may not be able to show that he obviously has some interest in the company meriting relief because his sole interest constitutes shares which at the moment of trial are valueless because no relief has yet been given in respect of the matters of which he complains. The court has to do what is necessary in that situation to achieve a just and fair result.

In this case, the right course in my judgment is for the judge to consider whether enough has been shown to justify a further hearing. Normally this will involve showing a provisional case to an appropriate standard in the circumstances of the case. The appropriate standard will usually be a real prospect of success. The usual dividing line between the liability hearing and the quantum hearing is not set in stone.

In my judgment, there was a real prospect that the claim based on excessive remuneration could lead to the grant of relief even though Mr Maidment did not adduce expert evidence as to how Tobian’s loss should be quantified at the liability trial. There were ample grounds on which the judge could reach the conclusion that Mr Attwood’s remuneration was out of the norm for this particular company, and in that sense (if no other) that the remuneration was excessive. The judge did not need to make a finding at that stage as to the amount of remuneration that could properly have been paid. It was sufficient for him to conclude, as he would have been bound to do, that there was a real prospect that the claim for loss would exceed the amount of Tobian’s deficiency as regards creditors.

In these circumstances, in my judgment, the judge could properly remit to the quantum hearing any issue from the liability trial that was more conveniently dealt with at the further hearing provided that it was not procedurally unfair to either party to do so. He would hear their submissions on this as we have done. In my judgment, in the circumstances of this case it was just and convenient to remit the issue of the quantification of the element of Mr Attwood’s remuneration which was excessive to the quantum hearing even though it went to the issue of unfair prejudice which would normally be wholly dealt with at the liability trial. Dismissal of the petition deprived Mr Maidment of the opportunity of showing that the excess was sufficient to “plug the hole” resulting from Tobian’s insolvency. It deprived him of access to justice in that respect. Mr Attwood is put to the cost of a further hearing but he could have had no expectation that all the issues in the case would be dealt with at a single hearing: there had been no order to that effect. Newey J had made an interim order that share valuation evidence should be adduced at the quantum hearing but I give little weight to that as he was working on the basis of the usual dividing line between the liability hearing and the quantum hearing. Procedural fairness, therefore, supported remittal of the issue to a quantum hearing.

In my judgment, the appeal must be allowed on this ground. There is no need to deal with Mr Grant’s submission that the onus of showing that the remuneration was not excessive to any particular extent had shifted to Mr Attwood.

Mr Grant submits that it was a clear breach of duty for Mr Attwood to allow Epyc to trade using the name of Oliver Jaques without payment. Mr Attwood would not have caused Epyc to use Tobian’s trading name if it had not carried a certain cachet. It was Mr Attwood’s responsibility to protect Tobian from misuse of its assets. The fact that Epyc did not trade profitably in this period does not constitute a good defence to this claim.

Mr Clutterbuck contends that there was no liability on Mr Attwood since Epyc made no profits. If he is wrong on this, he submits that there is a risk of double liability if Tobian was held to be entitled to both this claim and a claim arising out of the subsequent sale to Epyc.

In my judgment, by not negotiating a licence fee from Epyc Mr Attwood failed to protect the interests of Tobian as he was bound to do in order to discharge his duties as a director of Tobian. I do not consider that there would have been an outright sale of Tobian’s trading name in 2005 since Tobian required the name for its own business. The correct measure of loss, therefore, is the amount that Tobian would have received if Mr Attwood and Epyc had negotiated at arm’s length for a licence for Epyc to use Tobian’s trading name for the period 2005 to 2008. I reject Mr Clutterbuck’s further submission that it is too late for this claim to be advanced and that the witnesses were not asked about the terms of the licence. This claim was argued below. The measure of damages is a matter of law and any evidence can be dealt with at the quantum hearing.

Mr Clutterbuck’s further submissions go to the important issue of proportionality. He submits that a claim arising out of the use of Tobian’s trading name would at best lead to the recovery of only a small sum of money. Thus, on his submission, it would be disproportionate to have a further hearing to determine the value to be put on this claim, especially given the length of other hearings between the parties in relation to Tobian and Annacott.

In my judgment, a claim or other potential asset should not be left out of account in valuing the company’s assets unless it is clear that it would be involve disproportionate cost to value it. I recognise that there is bound to be a risk that this claim may prove to be insignificant in value. I also accept that, had this claim stood alone it would not have been sufficient to eliminate the deficiency as regards creditors and it would not have justified a further hearing. However, leaving aside the question of the claim which I have yet to consider arising out of the sale of Tobian’s trading name, I consider that the claim for damages for the use without payment of Tobian’s trading name should be remitted for the following reasons:

Contrary to the submission of Mr Clutterbuck, it is clear that Mr Attwood was responsible in law for fixing the price of £5,000 + VAT for the eve of liquidation sale of Tobian’s assets, including its trading name, to Epyc in his capacity as the sole director of Tobian, and that he did not discharge his duties as a director in fixing it. Mr Attwood fixed it not by reference to the best interests of Tobian but by reference to the estimate of the sum that needed to be injected into Tobian so that a meeting of creditors could be called and Tobian put into voluntary liquidation. It is not, as Mr Clutterbuck suggests, a defence to this breach of duty that, after the liquidation, the liquidator in her letter dated 14 December 2010, having investigated Tobian’s assets, confirmed that Epyc did not need to pay any further sum for the assets acquired from Tobian. It was likewise not a defence that Epyc had agreed to pay more if the liquidator determined that a further sum should be paid. In any event, the liquidator’s valuation was incorrect because it was prepared on the express basis that the goodwill was valueless because Epyc had already been using it. Epyc could not properly have acquired the trading name or goodwill as it had not paid for the right to do so. Mr Attwood could not delegate his duty to anyone else. Mr Attwood is liable to account to Tobian for any loss resulting from his breach of duty.

There is again the question of whether it would be disproportionate to remit this issue to a further hearing. On the one hand, Mr Grant submits that there was a substantial undervaluation of Tobian’s goodwill and trading name. Epyc is still using the name of Oliver Jaques. In addition, Tobian would have had partly completed contracts with sellers of property and management agreements with the owners of flats, which were simply handed over to Epyc. On the other hand, Mr Clutterbuck submits that Epyc agreed to cover these contracts and agreements so as to protect Tobian from claims for breach of contract. There are insufficient findings to resolve this dispute. It is clear, however, that there was a breach of duty. I consider that the question of the value of the claim arising out of the breach of duty should be remitted to a further hearing. There is a real prospect that at a further hearing Mr Maidment could show that goodwill and trading name was undervalued on sale to Epyc. In addition the reasons given in paragraph 55 above apply also here.

I would allow this appeal. In my judgment the judge was wrong to dismiss the unfair prejudice petition brought by Mr Maidment in respect of Tobian. The judge should have adjourned the petition for a further hearing. This would have provided an opportunity to determine whether Tobian would have had a surplus as regards members if Mr Attwood had not acted in breach of duty in (1) drawing excessive director’s remuneration, or (2) permitting Epyc to use its trading name without fee in the period 2005 to 2008, or (3) selling its name and goodwill to Epyc on the eve of liquidation for £5,000 + VAT. In my judgment, Mr Maidment had established that, if that were the case, he had suffered unfair prejudice as a member of Tobian in respect of which the court could grant relief.

There will be no buyout order or other relief ordered at this stage since it still has to be determined whether Mr Maidment’s shares have any value.