Dawson v Bell

This case concerns the unravelling of the parties’ business and property interests following the breakdown of their personal relationship and the termination of their relationship in business together. After a nine day trial of the Claimant’s claim and the Defendant’s counterclaim in the Mercantile Court at Bristol His Honour Judge Havelock-Allan QC found that £22,241 was due to the Claimant on his claim and £55,230.44 was due to the Defendant on her counterclaim. After netting-off and due allowance for interest, the upshot was a judgment for the Defendant in the sum of £32,989.44 together with interest quantified at £5,970.20. The Claimant appeals with permission of the single Lord Justice.

The story of the development, collapse and dissolution of the parties’ relationship, and of their property and business interests, is complex. It is fully set out in a careful and comprehensive reserved judgment delivered by the judge on 21 May 2014. As that judgment is apparently not available electronically through the Bailli website I append it hereto as Annex A to my judgment. In circumstances which I shall later describe the judge issued an Addendum to his Approved Judgment in September 2014, and I append that too as Annex B.

In the light of the foregoing resort may be had to the two annexed judgments for the full facts of the case. I need attempt no more than a very brief summary before turning to the issues argued on the appeal.

The Defendant, Laura Bell, was, when she first encountered the Claimant, a dominatrix. The Claimant, Stephen Dawson, first contacted her in the autumn of 2001 having seen her in commercial videos on her femdom website. The Defendant was at that time living in a flat in London at 16 Masters Lodge, Johnson Street, Tower Hamlets with her then social partner, Steven Giles. Mr Giles helped the Defendant shoot the adult videos in which she appeared. These were sold to a distributor in the USA and some of the material was made available on line. The Defendant also provided personal services of the femdom variety to clients who visited her at the Masters Lodge address.

The Claimant had a full time job as a salesman or sales manager which, he says, earned him as much as £60,000 per annum in salary and commission. But he had an interest in female domination and as a side line he ran a fetish website with a Mistress Directory, although this had no video content. After receiving from him some emails, which the Defendant says were like fan mail, she met the Claimant around the beginning of 2002 when he became a client of her female domination services. By mid-2002 their relationship had turned from that of supplier and customer into a more personal one. Around the same time the personal relationship between Mr Giles and the Defendant came to an end. Mr Giles continued working on the filming side of the Defendant’s business and remained living at Masters Lodge, but the Claimant replaced him as the Defendant’s social partner.

In 2004 the Claimant and the Defendant incorporated Adwelsh Media Limited (“AML”), with the Defendant holding 51% and the Claimant 49% of the shares. The Claimant and the Defendant were the only directors. AML was set up to market adult videos through the internet, on a website called The English Mansion (“TEM”).

The website was a success and by August 2004 the parties decided to purchase the lease of a flat in Bristol at 9 Brewhouse, Georges Square (“the Brewhouse”). The flat was purchased in the Claimant’s sole name.

In July 2005 the parties decided to live all of the time at Masters Lodge and let the Brewhouse.

On 1 August 2005 the parties entered into a Declaration of Trust (“the First Declaration of Trust”) which provided that the lease of the Brewhouse was held by the Claimant for the Defendant absolutely as to £100,000 or one third of the net proceeds of sale, whichever was the greater, and as to the balance of the net proceeds of sale for the Claimant absolutely.

In January 2006 the Defendant sold the flat at Masters Lodge.

On 4 August 2006 the Claimant and the Defendant purchased another property, Little Lodge, in Gloucestershire, in their joint names as tenants in common.

The personal relationship between the Claimant and the Defendant came to an end in December 2007.

As a result, the Claimant moved into the Brewhouse and paid all of the mortgage and service charges on the Brewhouse, and also continued to pay half of the mortgage outgoings on Little Lodge.

In or around August 2008 the parties transferred the Brewhouse into their joint names and on 1 August 2008 another Declaration of Trust was signed (“the Second Declaration of Trust”) to this effect.

The Claimant maintains that he signed the Second Declaration because the Defendant told him that he would still be entitled to half the net profits of AML and so both of them would be comfortably off for the foreseeable future.

In or around August 2008 the Defendant became aware that a class of B shares had been created when AML had been incorporated, of which 100 shares had been issued in the name of the Claimant. She then began to examine the accounts of AML and concluded that there had been an imbalance in the dividends which had been paid to the Claimant and the dividends which had been paid to her. As a result, she insisted that a series of balancing payments be made to her.

The Claimant says that the Defendant reinforced her insistence by, for the first but not the last time, making threats to remove AML’s video library, take the TEM website down and “smash the hard drive” if he did not agree. The judge found that these were in fact empty threats, as the Claimant well knew. Apart from the fact that the threatened steps would have killed, or at least seriously wounded, the goose laying the golden egg for both of the parties, most of the film library was held on the host servers in the USA and the Claimant had a duplicate copy of the master tapes on a second hard drive which he kept in a safe at the Brewhouse – [81]. In any event the Claimant agreed that the balancing payments should be made and for a time this restored the trust and confidence in their business relationship.

Later in 2008 Mr Paul Hatcher joined AML to assist with the IT and to act as a cameraman and film editor. Mr Hatcher began a personal relationship with the Defendant not long after he joined the company. He moved into Little Lodge at the beginning of 2011.

The Defendant suggested that Mr Reding, who had so far been AML’s IT Manager, was to be allocated some shares in AML in recognition of his contribution to the business. The proposal was to cancel the B shares and to increase the ordinary shares from 100 to 1,000, of which 501 would be allocated to the Defendant, 481 to the Claimant and 18 to Mr Reding. On 11 December 2008 a Shareholders’ Agreement and a Sale Agreement was signed by the Defendant, the Claimant and Mr Reding. Drafts of those agreements were sent by the Defendant to the Claimant nearly three weeks before the meeting at which they were signed. Those drafts had been prepared by a solicitor, a Mr Ian McColl of Gregg Latchams. Although the Claimant may have been unaware before the meeting whether Mr McColl was acting for the company or for the Defendant, it was made unequivocally clear to him at the outset of the meeting that Mr McColl was acting for the Defendant alone. The judge also found that Mr McColl had explained to the Claimant on the telephone in advance of the meeting that he was acting for Laura Bell, and not for him. Both the Claimant and Mr Reding were told at the meeting that if they had any concerns about the documents which they were to be asked to sign, they should take legal advice.

The Shareholders’ Agreement contained detailed provisions in clause 3 as to what was to happen if a shareholder wanted to dispose of his or her shares. A Transfer Notice had to be given to the other shareholders, who had the right to acquire the shares at a price to be agreed or determined by an accountant’s valuation. Clause 4, headed “Events of Default”, specified a number of circumstances in which a shareholder would be deemed to have served a Transfer Notice e.g. upon death or bankruptcy. Clause 4.1.5 stated that in the case of the Claimant only, he would be deemed to have served a Transfer Notice upon “his ceasing to be a director of the Company”. The Claimant says he did not notice this provision when he signed the Agreement and it was not specifically drawn to his attention either at the meeting, or when the Defendant sent him the drafts beforehand.

On 27 May 2009 the Claimant and the Defendant signed another Declaration of Trust (“the Third Declaration of Trust”), providing that in future Little Lodge was to be held by them as tenants in common in the shares £201,000 for the Defendant and £16,000 for the Claimant, and that if the net sale proceeds were insufficient to generate these sums, they were to be reduced pro-rata.

Shortly thereafter, the parties agreed to reduce Mr Reding’s salary to £35,000. The salary reduction was never implemented and Mr Reding left AML in December 2010 to join the Claimant’s new business venture.

There were negotiations between the Defendant and the Claimant concerning the latter’s involvement in AML as well as their respective interests in the Brewhouse and Little Lodge.

On 27 October 2009 the parties made various agreements. Firstly, it was agreed that the transfer of the Brewhouse into the sole name of the Claimant, already signed on 19 September, could now be executed by being lodged at the Land Registry. Little Lodge was transferred into the sole name of the Defendant. Secondly there was a Share Purchase Agreement (“the SPA”) under which the Claimant’s shares in AML were transferred to the Defendant for £47,500. The Claimant effectively resigned from AML as a director and as company secretary.

After the agreements had been signed, the Defendant failed to make the necessary payments under the SPA, on the basis that the Claimant had overpaid himself £54,000 in dividends from the company without the Defendant’s knowledge.

Matters rapidly became contentious and the disputes proceeded to trial. The Claimant’s main claim at the trial was that he was coerced to enter into the SPA by duress. An issue which arose in that context was whether clause 4.1.5 of the 2008 Shareholders’ Agreement was enforceable. The Claimant contended that it was an onerous provision which was not binding on him as it was not specifically drawn to his attention before he signed the agreement. The threat to invoke it was therefore unlawful. He sought an order setting aside the SPA as well as damages for intimidation.

The Defendant’s counterclaim was based on the allegation that the Claimant had misappropriated company funds which she sought to recover as assignee of the company.

The Claimant in turn contended that, to the extent that the counterclaim succeeded, he was entitled to a contribution from the Defendant in respect of his liability to her as assignee of the company pursuant to section 1(1) of the Civil Liability (Contribution) Act 1978 on the basis that she too was liable to the company in respect of such misappropriations on the basis that she had been aware of them and owed a duty to the company to prevent their taking place.

The judge found that the Claimant was not subjected to any illegitimate pressure to sign the SPA. Clause 4.1.5 of the earlier Shareholders’ Agreement was binding on the Claimant. The Claimant had in any event, by his conduct between November 2009 and July 2010, affirmed the SPA signed on 27 October 2009. His findings on the duress claim meant that the claim for damages for intimidation failed in limine. The Defendant was however liable for the amounts unpaid under the SPA. The counterclaim succeeded in a greater amount. The claim for contribution failed.

The Claimant appeals on six grounds. I will address those grounds in the same order as did Mr Oram for the Claimant.

The judge held that the tort of intimidation requires proof of a threat to do something unlawful, with intent to cause injury to the person who is threatened, and submission by that person. He pointed out that a threat to do what a man may lawfully do is not a threat. He held that his findings on the duress claim meant that the intimidation claim failed in limine. Mr Oram submits that whether two party intimidation requires a threat of unlawful action is an undecided question. The law in that regard should he submitted develop consistently with that on duress where, he suggests, illegitimate pressure is sufficient. Further, he submitted, on the basis of the judge’s findings submission, or the success of the coercion, was made out.

The judge made his findings in the context of duress alleged to vitiate the Claimant’s consent to the SPA. The enquiry is however to this extent the same, in that neither a defence to a contractual claim nor a claim in tort can succeed unless it is shown that the will of the “victim” has been coerced. The practical effect of the pressure must be compulsion or the absence of choice.

The difficulty confronting Mr Oram on this part of the case is that the judge did not find that the Claimant’s will was coerced. It is perhaps also true that the judge made no explicit finding that the Claimant’s will was not coerced, because he focused on the logically prior question whether the pressure to which he was subjected was illegitimate. But in my judgment the judge did not come close to a finding that the Claimant’s will was coerced, and the findings which he did make are completely inconsistent with such a conclusion.

Mr Oram points to the fact that at [85] the judge said:

“85.

There is no question that on 27 October 2009 the claimant was under commercial pressure to sign the SPA.”

Mr Oram submits that it is implicit in that finding that the Claimant was in fact coerced into signing the agreement. I disagree. Being under pressure is not the same as succumbing to it. Mr Oram next submitted that in making that finding the judge must have had in mind evidence from Mr McColl to the effect that, in the course of the critical meeting on 27 October, when Mr McColl asked the Claimant if he was ready to sign, the Claimant might have said something along the lines “well I don’t believe I’ve got much choice”. That may or may not be so, but that evidence would be a slender basis on which to conclude that the Claimant in fact either had, or thought he had, no practical choice other than to sign the agreement. The judge did not have to decide that point because, as he pointed out at [85] in the sentence immediately following that which I have set out above, “Mr Oram has correctly identified that the question is whether the pressure was legitimate.”

I am however in no doubt that the judge’s critical findings are such that we cannot possibly accede to the submission that the judge implicitly found that the Claimant’s mind or will was coerced. The judge found that in July 2009 the Claimant had taken legal advice from solicitors Messrs Meade King as a result of which he knew that the Defendant could not simply dismiss him as a director with impunity – see the judge’s findings at [83]. The Claimant had the power greatly to prolong the process by requiring the Defendant to call a Shareholders’ meeting – [99]. The Claimant also appreciated that if he did nonetheless cease to be a director his shares could be compulsorily acquired, but only at an agreed value or a value determined by an independent accountant. The judge also found that there was a good deal of bargaining between the parties over the weekend and on the Monday before the meeting on Tuesday 27 October – [42]. At [43] the judge records the significant improvements to the terms on offer obtained by the Claimant. The judge summarised the state of play at the end of 26 October as being that the Claimant had pressed hard for a better financial deal and had won certain concessions but he was still pressing for more – [99]. At the critical meeting the next day the Claimant secured the Defendant’s agreement to increase the consideration for the shares by a further £5,000, with a corresponding improvement in the terms of payment – [51]. In the run up to the meeting, during the period 12 – 25 October, the Claimant had shrewdly used his absence in Devon to make the Defendant wait for his formal agreement to the transfer of his interest in Little Lodge – [95]. All this, combined with the judge’s finding that in any event the price offered for the Claimant’s shares was reasonable, taking into account the net financial value to the Claimant of the property transfers, and the other benefits he received, as itemised at [118], is completely inimical to any suggestion that the Claimant’s will was overborne.

At [124] the judge said this:

“124.

For the reasons I have given, I do not find that the claimant was subjected to illegitimate pressure to sign the SPA. I also find that his conduct between November 2009 and July 2010 was an affirmation of the SPA when the pressures which he says induced him to sign it in the first place no longer operated. The claim for duress cannot succeed in the light of these findings.”

I think it is clear both from this paragraph and in the light of the other considerations to which I have already referred that the judge had not concluded that it was the pressure to which the Claimant had been subjected which had induced him to sign the SPA. The judge also noted, at [123], the Claimant’s own evidence in cross-examination that had the Defendant made the whole of the secondary payments under the SPA he would probably not have challenged it. In the same paragraph the judge concluded that the duress claim was a construct of the Claimant’s legal team. That must hold equally good for the claim in intimidation which simply recycles the same material and attaches to it a different rubric of the law. The claim in intimidation cannot succeed.

In the light of our indication in the course of argument to the effect that the claim in intimidation could not succeed, Mr Oram did not address us on the question whether he could establish, contrary to the judge’s findings, that the pressure brought to bear on the Claimant was illegitimate. I do not understand how Mr Oram could have begun to prosper in that endeavour. One step on that road was to establish that the Claimant was not bound by clause 4.1.5 of the Shareholders’ Agreement of December 2008. That argument is hopeless for the reasons given by the judge at [101] – [104]. There was nothing unusual about the clause and the Claimant had ample time to read it, understand it and, if necessary, take advice about it, and he was reminded, before he committed himself to it, of the need to take advice if he had any concerns.

I am bound to say however that for my part I do not understand the logic of the Claimant’s argument that the price offered for his shares was derisory and that, linking the share sales with the property transfers and threatening to invoke clause 4.1.5 to enforce the deal, amounted to illegitimate pressure. On the assumption, contrary to the judge’s findings, that the price offered was indeed derisory, it seems to me that the invocation of clause 4.1.5 would in such circumstances have been positively beneficial to the Claimant as it would have ensured that his shares could only be acquired for a price that was either agreed or determined by an accountant’s valuation.

It has been unnecessary for us to go behind the judge’s finding of fact that the price offered for the shares, about £170,000 when all its elements are taken into account, was in fact reasonable, albeit near the lower end of the range, which was either £164,000 - £205,000 or £178,000 - £223,000, depending on the discount appropriate to a minority shareholding. As the judge observed, the valuing of shares in a private company is not an exact science. I note that even here the summit of Mr Oram’s ambition was to demonstrate that the appropriate range on the assumption of a 40% discount was between £227,692 and £284,615 rather than the judge’s range on this hypothesis of £178,000 - £223,000. It would have been difficult on that basis to sustain the submission that the offer made was derisory.

Clause 4.3 of the SPA obliged the Claimant to enter into a Compromise Agreement with the company relating to his resignation as a director and as secretary of the company. The Claimant signed this agreement on 26 November 2009 and the judge found that the Defendant must have signed it on behalf of the company sometime shortly thereafter. It was accepted at trial that the agreement was binding. The judge regarded signature of this agreement as conduct by the Claimant affirmatory of the SPA, and he also noted that it was fatal to that part of his claim for damages for intimidation which sought compensation for loss of his directorship. In the light of our conclusion on Grounds 2 and 1 Mr Oram acknowledged that it was pointless to address us on his argument that an agreement by the Claimant with the company could not effect a compromise of claims against the Defendant in her personal capacity.

Ground 4 asserts that the judge considered the directors’ loan aspect of the counterclaim on a basis that was not pleaded. Ground 6 asserts that the judge was wrong to permit further evidence to be adduced in support of the counterclaim after the conclusion of the trial and after delivery of his principal judgment.

The counterclaim was in respect of misuse of company money and of the company credit card. It was alleged that under this head the Claimant owed the company over £295,000, which the Defendant claimed as assignee of the company. The claim was pleaded in paragraphs 68, 68.0A and 69 of the Amended Defence and Counterclaim, supported by Schedules 1, 3 and 4. Schedules 1 and 3 suggested that there was due from the Claimant to the company £258,000 odd on the directors’ loan account and a further £21,000 odd under the rubrics “misappropriated Paypal”, “unauthorised mobile”, “misappropriated funds bank account” and “equipment not returned to the company”. Schedule 4 showed unauthorised personal use of the company credit card in an amount of just over £19,000. Shortly before the trial, on 12 July 2013, the Defendant’s accounting expert Ms Winspeare produced a table, supported by the Defendant’s further witness statement of 8 April 2013, which so far as I can understand it increased the claim very slightly to £304,670.

The judge accepted Mr Oram’s submission that the Claimant’s prima facie liability so far as the greater part of the claim was concerned was half of the net debit on the directors’ loan account as at the beginning of 2010. This was because since the first year of trading the two directors’ loan accounts were combined in a single account. Money which the Claimant or the Defendant received from AML as personal monies rather than as salary, dividend or reimbursement of a legitimate company expense was recorded in the accounts as an accrual to the directors’ loan account. If either was paid less than their entitlement by way of salary, dividend or reimbursement of expenses, it was booked as a credit to the combined account. Thus in each set of company accounts, from the first trial balance to the approved and filed accounts for each tax year from 2005 to 2009, there was a single directors’ loan account in which the payments received by the directors were netted off against their entitlements to create a single loan balance. The Claimant was not recorded as a net debtor in any one year any more than the Defendant was recorded as a net creditor. See [147] and [148]. As the judge recorded at [148], this is not an uncommon way of running the accounts of a private company where the directors are married or social partners. On the figures produced by the company accountant Mr Orr the prima facie liability of the Claimant was therefore a sum of £8,175.90 – see [152]. As the judge there recorded:

“152.

Any other sum awarded under this head must relate to a payment which the claimant can be shown to have received from AML which was not allocated to the directors’ loan account and to which it can be demonstrated that the claimant was not entitled e.g. as being payment of salary or reimbursement of a legitimate business expense. I am not certain whether any of the disputed sums, which the claimant says were business expenses, fall into this category. I will hear further submissions from counsel on that question if necessary. For now I express, as briefly as I can, my conclusions about the figures. I shall do so by reference to the table produced by Ms Winspeare on 12 July 2013, summarising the extent of agreement and disagreement in the experts’ joint statement.”

The judge then proceeded to a painstaking analysis of the figures and of the evidence, both factual and expert, concluding, at [177]:

“177.

I leave counsel to work out the financial consequence of the findings made in paragraphs 153 and following of this judgment. Whether it results in judgment against the claimant for a debt due to AML in any greater amount than the sum of £8,175.90 depends on what I have said in paragraph 152.”

Mr Oram complains that it was unfairly prejudicial for the judge to proceed to examine the claim in this way because the experts had hitherto, or at any rate before service of Ms Winspeare’s 12 July 2013 position paper, considered only payments made directly between the company and the Claimant, and had not examined general expenditure or payments made to third parties which were alleged to have been made for the benefit not of the company but of the Claimant personally. Mr Oram tells us that the amounts at stake did not justify the Claimant instructing his own accounting expert Mr Isaacs to revisit the claim on this basis. That as it seems to me was a judgment for the Claimant to make. The short answer to this ground of appeal is that Mr Oram very fairly accepted that he had made no objection at trial to the judge dealing with the counterclaim in this way. That was the time to object to what was essentially a matter of case management. In any event, it is I think quite clear that the Claimant and his accountant could if they had chosen so to do have dealt with the amounts counterclaimed on this basis. They could have asked for further time had they needed it. I note also that it is not suggested that the judge has reached incorrect conclusions as to the individual amounts said to have been misappropriated by the Claimant. The complaint is only of procedural unfairness. In my judgment there was none.

As indicated in [177], the upshot of the exercise was that the judge was unsure whether the misappropriated amounts, or some of them, had been allocated to the directors’ combined loan account. It was only to the extent that the individual amounts could be shown not to have been allocated to the directors’ loan account that he was prepared to allow the claim. On handing down his principal judgment the judge heard further argument on the point. He rejected an argument on behalf of the Defendant to the effect that because the individual directors’ loan accounts had been set-off against each other, that did not mean that there was no liability of the Claimant for the misappropriated funds. He directed that the Defendant should file further submissions and further evidence in support of her argument that, in the light of his findings at paragraphs [153] – [176] of the principal judgment, there should be judgment on the counterclaim in an amount of £68,582.03 additional to the £8,175.90 dealt with at paragraph [152]. The Claimant was given liberty to respond with further submissions and evidence if so advised. The Defendant filed both further submissions and a second witness statement of Mr Orr in compliance with that order. Mr Orr’s witness statement contained an analysis of the sums that were booked to the directors’ loan account in an effort to demonstrate which of the figures addressed in paragraphs [153] to [176] of the principal judgment was the subject of set-off within that account and which was not. The Claimant filed submissions in response but no further evidence.

In the event, for the reasons set out in his Addendum Judgment, the judge concluded that the counterclaim succeeded in the additional amount of £41,154.54.

In his Addendum Judgment the judge said this:

“5.

The claimant objects in principle to any attempt by the defendant to introduce into the counterclaim under this head: (1) sums which were not pleaded to have been misappropriated from AML, and (2) sums which the defendant acknowledged in her pleadings had been withdrawn from AML with her consent. In practice this submission amounts to saying that the only pleaded counterclaim to recover sums alleged to have been misappropriated by the claimant from AML relates to the sums in columns 3 to 6 of Schedule 3 to the ADCC (totalling £21,188.93) and the sums in Schedule 4 to the ADCC (totalling £19,198.56). Accordingly, the claimant’s submissions are confined to the sums in paragraph 5(a)-(e) of Mr Mason’s skeleton of 29 May and do not respond to the items in 5(f)-(h), let alone the two additional amounts or the alleged liabilities to HMRC.

6.

I cannot accept the claimant’s objection. Paragraphs 11 and 68 of the ADCC plainly allege that to the extent the sums withdrawn by the claimant from AML exceeded his dividend entitlement, they were not authorized withdrawals. My reading of paragraph 2.7.1 of the same pleading is that withdrawals were made with the consent of the defendant insofar as they represented the claimant’s dividend entitlement and no further. The case pleaded in the ADCC was always that the excess of withdrawals over dividend entitlement represented a loan by AML to the claimant which was counterclaimed in column 2 of Schedule 3 to the ADCC as a debt due to be repaid to the company. The amount of the alleged debt was £258,278.17. Columns 3 to 6 of Schedule 3 included additional sums alleged either to have been misappropriated (through PayPal or from the company bank account) or to have been unauthorized expenditure (mobile phone) or to represent the value of equipment taken and not returned. I am of the clear view that the counterclaim has always extended to cover the sums in all of the columns of Schedule 3 to the ADCC on one and the same basis, namely that they were not authorized or legitimate expenditure and are liable to be repaid to the company. Thus, the consideration given to the validity of the counterclaim in paragraphs 135 to 176 of the original judgment was not confined to the sums in columns 3 to 6 of Schedule 3 and to the sums in Schedule 4: nor was the experts’ evidence. It extended to the entirety of Schedule 3 and included the allegedly unauthorized loans in column 2.

7.

However, in paragraphs 141 to 146 of the original judgment I addressed, and accepted as well-founded in principle, a number of submissions about the counterclaim which the claimant advanced at the trial. Amongst these was the argument that the defendant may be taken to have acquiesced in the payment of any sums withdrawn from AML by the claimant of which she was aware at the time of the withdrawal and, if the withdrawal was for a legitimate purpose of the company, she would be precluded from objecting to it. If it was not for a legitimate purpose of the company e.g. to meet a company expense, she could be liable to the company as a co-director for having permitted the withdrawal of the money and therefore liable to contribute to any claim by the company to recover the money.

8.

I considered that the manner in which the directors’ loan account had been combined into a single account rendered it unnecessary to address these arguments. The assumption which I made was that all or most of the allegedly unauthorized loans to the claimant in column 2 of Schedule 3 had in fact been allocated to the claimant’s director’s loan account and set-off against the defendant’s director’s loan account to result in a single net debit on the combined directors’ loan account. Hence I concluded that it was only if this could be shown not to have been the case, and the money was not expended on a legitimate business expense, that there was an arguable basis for adding it to the counterclaim.

9.

The assumption underlying this conclusion would appear to have been wrong. So I have had cause to reconsider the argument about acquiescence and the defendant’s liability to make contribution.”

Recognising that the burden of proof was on the Defendant to show that the various sums found to be not legitimate company expense had not been the subject of a set-off within the directors’ loan account, he proceeded to make his findings accordingly with the outcome I have described.

I can detect nothing unfair or prejudicial in the procedure adopted by the judge. What was done after the trial was a logical working-out of the consequences of the exercise conducted at trial without objection from the Claimant. Essentially, the Claimant is inviting us to revisit case management decisions of the judge. I would decline to do so, although as is apparent in my view the Claimant’s objections to the course adopted lack substance.

The judge observed at [215] that the premise for the contribution claim is that the Claimant has been found liable for breach of his fiduciary duty and that the Defendant was correspondingly in breach of her duty as a director in the circumstances which gave rise to the Claimant’s breach. Section 1(1) of the Civil Liability (Contribution) Act 1978 provides:

“Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).”

In his principal judgment the judge rejected this claim for contribution on two grounds: (i) that it was defeated by the principle ex turpi causa non oritur actio and (ii) that in order to succeed the Claimant needed to assert and prove his breach of fiduciary duty, and his liability had only been established in debt.

It was only after delivery of his two judgments, when the parties came to address the judge about costs and permission to appeal, that counsel drew to his attention the decision of Ferris J in K v P [1993] Ch 140 to the effect that the ex turpi defence is not available against a claim under section 1(1) of the Civil Liability (Contribution) Act 1978. In refusing permission to appeal the judge adhered to his second ground for refusing the relief. It would seem that neither counsel at that stage drew to his attention sections 3 and 7(1) of the Act which provide:

“3.

Proceedings against persons jointly liable for the same debt or damage.

Judgment recovered against any person liable in respect of any debt or damage shall not be a bar to an action, or to the continuance of an action, against any other person who is (apart from any such bar) jointly liable with him in respect of the same debt or damage.

7 Savings.

(1)

Nothing in this Act shall affect any case where the debt in question became due or (as the case may be) the damage in question occurred before the date on which it comes into force.”

Furthermore, the decision of the House of Lords in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397 establishes that a right to contribution depends upon a correspondence, even if in part only, between the damage, loss or harm for which each of B and C is liable to A. However, when it comes to the assessment of the amount of the contribution recoverable, section 2(1) of the Act prescribes that “the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question.”

The claim for contribution here fails in my judgment for the simple reason that it is not just and equitable having regard to the extent of the Defendant’s responsibility for the damage in question that she should pay a share of what the Claimant owes the company. I am prepared to assume that the Defendant knew of the practice of unlawful use of the company’s funds, and that in breach of her own duty to the company she failed to put a stop to it. In making that assumption I would however record that the Claimant was the company’s financial administrator, and that from 2007 onwards the Defendant had remonstrated with the Claimant about the fact that he had received a good deal more money from the company’s bank account than she had, and that there had been an imbalance in the dividends. Mr Oram submitted that there should be a contribution, not necessarily of 50%, to the amount of £41,154.55 to which I have referred in paragraph 45 above. He says that it is not equitable that one director should bear the entire brunt of the liability to the company, particularly where the one surviving director has directed the company to sue the former director.

If the amounts misappropriated had been used for the joint benefit of the Claimant and the Defendant those submissions might have real force. However they were not. The payments were for the exclusive benefit of the Claimant. Some are even payments for the services of a prostitute in the Czech Republic used by the Claimant. It is fanciful to think that the Defendant condoned or had any responsibility for the making of payments of that sort with company money. When the Defendant challenged the Claimant about this particular expenditure on the Paypal account in October 2008 he dissembled, suggesting that the account might have been fraudulently accessed. Even on the assumption that the Defendant might bear some responsibility for permitting some of the misappropriation to go unchecked, I do not regard it as seriously arguable that justice and equity require her to contribute to the Claimant’s liability to reimburse the company in respect of amounts misappropriated for his exclusive benefit.

At the conclusion of Mr Oram’s submissions in support of the appeal we announced that the appeal would be dismissed. These are my reasons for joining in that decision.

I agree.

I also agree.

There is an old adage that it is unwise to mix business with pleasure. This case is perhaps a paradigm example. It concerns the unravelling of the parties’ business and property interests following the breakdown of their personal relationship and the termination of their relationship in business together.

The defendant, Laura Bell, was, when she first encountered the claimant, a dominatrix. The claimant, Stephen Dawson, first contacted her in the autumn of 2001 having seen her in commercial videos on her femdom website. The defendant was at that time living in a flat in London at 16 Masters Lodge, Johnson Street, Tower Hamlets with her then social partner, Steven Giles. Mr Giles helped the defendant shoot the adult videos in which she appeared. These were sold to a distributor in the USA and some of the material was made available on line. The defendant also provided personal services of the femdom variety to clients who visited her at the Masters Lodge address.

The claimant had a full time job as a salesman or sales manager which, he says, earned him as much as £60,000 per annum in salary and commission. But he had an interest in female domination and as a side line he ran a fetish website with a Mistress Directory, although this had no video content. After some emails, which the defendant says were like fan mail, she met the claimant around the beginning of 2002 when he became a client of her female domination services. By mid-2002, their relationship had turned from that of supplier and customer into a more personal one. Around the same time, the personal relationship between Mr Giles and the defendant came to an end. Mr Giles continued working on the filming side of the defendant’s business and remained living at Master Lodge: but the claimant replaced him as the defendant’s social partner.

On 24 February 2004, Adwelsh Media Limited (“AML”) was incorporated. The claimant and the defendant were the only two directors and shareholders. The defendant held 51% of the shares and the claimant held the other 49%. He was also the company secretary. AML was set up to be the vehicle for a new business of marketing adult videos, especially femdom videos, through the internet. A software coder called Frank Reding was engaged to design a new website for AML. It was initially called The English Dungeon (www.TheEnglishDungeon.com) but early on the name was changed to The English Mansion (www.TheEnglishMansion.com).

There is a dispute as to how much the idea of this new business was the claimant’s. The defendant certainly had the plan in mind in 2002. She knew that it was essential to build up a library of film content before the launch, and had started shooting footage (in much of which she appeared as the principal model) in the autumn of 2003. But I am satisfied that the claimant made a significant contribution, in ideas and suggestions if not working time (since he remained in his full-time employment), to the creation of AML and the English Mansion (“TEM”).

TEM was an almost immediate success. It generated sufficient income to persuade the claimant in August 2004 that he could risk giving up his job in order to work for AML. He had by then also dropped his own website. After a year of trading, TEM was doing so well that AML could afford to employ Mr Reding as its IT Manager. He took up the position on 27 June 2005 on a salary £30,000 per annum, working from home.

In August 2004, the claimant and the defendant decided to buy a property together. They purchased the lease of a flat in Bristol at 9 Brewhouse, Georges Square (“the Brewhouse”). Thereafter they divided their time between the Brewhouse and Master Lodge. The Brewhouse was purchased in the claimant’s sole name. The purchase price was £347,500 and there were associated costs of about £14,500. Of the total cost, £80,500 was provided by the defendant from her own resources, £15,000 was contributed by a loan from a rich friend of the defendant called Howard White. The defendant obtained a further loan of about £8,000 from Mr Giles and says that the claimant contributed only £1,000 (towards the reservation fee). He says his contribution was £9,500. The balance was funded by a mortgage with the Halifax. The mortgage payments and service charge were paid by the claimant out of his personal bank account; but he received a 50% contribution from the defendant towards the service charge and, when the property was not rented out, was paid money by AML to cover the cost of the mortgage.

In July 2005, the defendant dismissed Mr Giles from his employment with AML and he moved out of Master Lodge. The claimant and the defendant then decided to live all of the time at Master Lodge and to rent out the Brewhouse. On 1 August 2005, they entered into a Declaration of Trust (“the First Declaration of Trust”) which provided that the lease of the Brewhouse was held by the claimant as to £100,000 or one-third of the net proceeds of sale, whichever was the greater, for the defendant absolutely, and as to the balance of the net proceeds of sale for the claimant absolutely.

In January 2006, the defendant sold the flat at Master Lodge. She and the defendant rented another London flat at Olivers Wharf in Wapping, where they lived, and which they also used as filming studio, until May of that year. In May, they then rented a house in South Wales for about two months while looking to buy a property in the South West.

On 4 August 2006, the claimant and the defendant purchased a property called Little Lodge near Chipping Sodbury in Gloucestershire. The purchase price including stamp duty and fees was £853,000. They purchased it in their joint names as tenants in common. The lion’s share of the purchase price was provided by a joint mortgage of £598,000 from Bank of Scotland. The parties funded the mortgage equally from their respective earnings from AML. For the rest of the purchase price, £185,500 was contributed by the defendant from the sale proceeds of Master Lodge and £70,000 came from money paid by AML. It was described in the company’s books as a “dividend”, but a question arises as to whether the £70,000 was a dividend or a loan to the directors. After the principal events with which this action is concerned, the defendant renamed Little Lodge as Glass Lodge; but I shall refer to it throughout as Little Lodge.

Over the next 18 months the personal relationship between the claimant and the defendant cooled. It came to an end in December 2007. The claimant says that he was the one who broke it off; but it does not greatly matter who was the one who terminated it.

Around the same time, the tenants of the Brewhouse flat gave notice they would be leaving in the spring of 2008. The claimant proposed that, when they left, he should move back into the Brewhouse on his own. He did so in March 2008. Thereafter, he paid all of the mortgage and service charge on the Brewhouse, as well as continuing to pay half of the mortgage on Little Lodge. The dividends and salary he received from AML were sufficient for the time being to cover these costs.

The split was at first amicable, but the defendant took to working mainly from home between January and August 2008. She continued with filming and working on AML’s video library and website at Little Lodge, but avoided meeting with the claimant wherever possible. During this time the parties began discussing what was to happen to their joint property interests. It did not extend beyond the Brewhouse at that stage. It was agreed that the Brewhouse would be transferred from the sole name of the claimant into the joint names of the claimant and the defendant and that it would be held by the two of them as tenants in common with the first £100,000 or one-third of net sale proceeds (whichever was the greater) going to the defendant as before, but the balance now being held for the two of them absolutely rather than belonging exclusively to the claimant.

The transfer of the Brewhouse into the parties’ joint names happened on or shortly before the beginning of August 2008. On 1 August 2008, another declaration of trust was signed recording the new arrangement (“the Second Declaration of Trust”). The claimant says that he signed the Second Declaration because the defendant told him that he would still be entitled to half the net profits of AML and so both of them would be comfortably off for the foreseeable future.

There then followed an incident, which could be said to mark the beginning of the process by which the business relationship between the claimant and the defendant was eventually severed. I intend the narrative which follows to be as neutral a recital of the facts as possible.

Sometime in or about August 2008, the defendant discovered that, in addition to the 100 ordinary shares which had been issued when AML was incorporated, a class of B shares had been created very early in the life of the company, of which 100 had been issued in the name of the claimant. When the defendant asked the claimant about this, he said that the B shares had not been issued on his instructions. He says that he immediately offered to surrender them. The discovery sowed the first seed of distrust in the mind of the defendant. She began examining the accounts of AML and concluded that there had been an imbalance in the dividends which had been paid to the claimant and the dividends which had been paid to her. She criticised the claimant for taking more money out of the company than he was strictly entitled to do and insisted on a series of balancing payments being made to her.

The claimant says that on this, as on a number of subsequent occasions, the defendant got her way by making threats. According to him, she threatened to remove from AML’s video library all films in which she appeared, and she said that she would take the TEM website down and “smash the hard drives” if he did not agree. The claimant says that any such action would have been ruinous for him personally because he had no other source of income on which to live or to meet his mortgage commitments. So he agreed that the “balancing payments” should be made. For a time, this restored the trust and confidence in their business relationship.

There were two developments in AML in the autumn of 2008. The company took on a new employee, called Paul Hatcher. He was employed to assist with IT and to act as a cameraman and film editor. These were jobs for which the claimant had been responsible since the departure of Mr Giles in mid-2005, save for a brief period from September 2006 when one of his friends, Alex Bennett, had been engaged to perform the role. Mr Hatcher began a personal relationship with the defendant not long after he joined the company. He moved into Little Lodge at the beginning of 2011.

The second development was that the defendant suggested allocating some shares in AML to Mr Reding as a recognition of his contribution to the business. The defendant instructed solicitors in October 2008 to advise AML about this restructuring and to prepare a written agreement. The firm she instructed was Gregg Latchams LLP and the solicitor who handled the matter was Mr Ian McColl.

The proposal that emerged was that the B shares should be cancelled and the issued ordinary shares increased from 100 to 1000, of which 501 would be allocated to the defendant, 481 to the claimant and 18 to Mr Reding. This had the effect of reducing, but only very slightly, the defendant’s stake in the company.

A meeting was fixed for 11 December 2008 at Gregg Latchams’ offices at which the parties would sign the necessary documents. The claimant says that, unbeknown to him (although this is disputed), the defendant and Mr McColl had agreed, on or about 20 October, that Mr McColl should regard himself as acting on her behalf rather than acting on behalf of the company. The reason, as Mr McColl pointed out, was that the existence of the B shares meant that there was a potential conflict of interest between the directors. The defendant says that the claimant was aware from the outset that Mr McColl was instructed on her behalf. This is disputed. Mr McColl says that he made clear to the claimant when he first spoke to him that he was acting for the defendant. This also is disputed.

The meeting at Gregg Latchams on 11 December was attended by the claimant, the defendant and Mr Reding. The defendant had previously sent the claimant, on 22 November 2008, copies of the draft agreements prepared by Mr McColl. There was a draft Shareholders’ Agreement, which increased AML’s ordinary share capital and allocated the newly issued shares as proposed, and there was a Sale Agreement between the claimant and AML under which the claimant sold the B shares back to the company for £100. Both Agreements were signed at the meeting. The Shareholders’ Agreement was signed by the claimant and the defendant in their personal capacities and also on behalf of AML as directors. It was also signed by Mr Reding. The Sale Agreement was signed by the claimant in his personal capacity and by the claimant and the defendant on behalf of AML.

The Shareholders’ Agreement contained detailed provisions (in clause 3) as to what was to happen if a shareholder wanted to dispose of his or her shares. A Transfer Notice had to be given to the other shareholders, who had the right to acquire the shares at a price to be agreed or determined by an accountant’s valuation. Clause 4, headed “Events of Default”, specified a number of circumstances in which a shareholder would be deemed to have served a Transfer Notice e.g. upon death or bankruptcy. But clause 4.1.5 stated that in the case of the claimant only, he would be deemed to have served a Transfer Notice upon “his ceasing to be a director of the Company”. The claimant says he did not notice this provision when he signed the Agreement and it was not specifically drawn to his attention either at the meeting, or when the defendant sent him the drafts beforehand. The Shareholders’ Agreement also contained restrictive covenants in clause 12 which were intended to bind the signatories from the moment any of them ceased to be shareholders of AML. There is no evidence that any particular attention was paid to these when the Agreement was signed.

In 2009, the defendant became increasingly concerned about the finances of AML and, in particular, the cashflow. A major overhead was the cost of hosting AML’s website. The web host, a company called Cool Piranha USA Inc., provided servers located in the USA. Their monthly charge was expensive. In mid 2007 it was just under $17,000. The defendant had asked the claimant to investigate alternatives. He had commissioned a report by a company called By Storm Graphics and Web Design LLC. The By Storm report, dated 6 June 2007, reviewed the services of a number of providers and recommended two companies who were likely to be cheaper than Cool Piranha. But Mr Reding took the view that it was better to stick with the current provider and the claimant deferred to him. So no change was made at that time. Mr Hatcher did some research in late 2008 which showed that AML could obtain web hosting services for as little as $3,800 per month. The defendant now raised the web hosting issue again as part of her general concern that AML’s overheads were too high. At a meeting at Canary Wharf on 7 January 2009, she was critical of Mr Reding’s decision not to make a change and of the claimant for supporting him. A decision was taken to change web host to a cheaper provider. Not long afterwards, the defendant insisted on reducing the monthly dividend payments to shareholders. In the summer of 2009, she also said that Mr Reding’s salary should be reduced.

Before raising the question of Mr Reding’s salary, the defendant told the claimant that she wanted to sever the joint tenancy of Little Lodge and to convert it into a tenancy in common. On 27 May 2009, the claimant and the defendant signed yet another declaration of trust (“the Third Declaration of Trust”). It provided that in future Little Lodge was to be held in the following shares: £201,000 for the defendant and £16,000 for the claimant, and that if the net sale proceeds were insufficient to generate these sums, they were to be reduced pro rata. If the value of the property was greater than these sums, the balance was to be held in equal shares.

It was a few weeks after the signing of the Third Declaration of Trust that the defendant spoke to the claimant about Mr Reding’s salary. She told the claimant that she wanted to reduce it from £40,000 per annum (the level to which it had increased since 2005) to £35,000 per annum. She says that the reduction was in the interests of economy because AML’s finances were in a poor state. The claimant says that the defendant was cross that Mr Reding had not taken steps to find a cheaper web host and because she had discovered that Mr Reding had his own adult website (www.limitedaudience.com) which was being hosted by Cool Piranha for no charge – so, seemingly, he had had an interest in maintaining the status quo.Although the web host had now been changed (to a company called NationalNet Inc.), the defendant thought that the change should have happened sooner. The claimant says that he felt compelled to agree to the salary reduction.

The defendant asked Mr Reding to meet her. Mr Reding lived near Norwich, so the defendant rarely saw him. She thought she ought to communicate so important a decision face-to-face. The meeting took place at a Novotel hotel in London on 28 July 2009. The claimant was also present. The defendant told Mr Reding that AML had decided to reduce his annual salary by £5,000, starting in November. Mr Reding accepted the decision and carried on working for AML. In the end the salary reduction was not implemented. But Mr Reding was dismayed by the proposal. He gradually became disenchanted with the way the defendant managed the company. He resigned in December 2010, and joined the claimant in his new business venture.

When the Novotel meeting was over, the defendant asked the claimant to have dinner with her. They went to a restaurant called Itsu in South Kensington. Over dinner the defendant made the claimant an offer to buy all, save a nominal holding of about 50, of his shares in AML for £35,000, on the understanding that he would resign as a director but continue to be employed by AML on a salary of £50,000 per annum plus bonus or commission. The claimant says that the defendant also told him that she wanted him out of the Brewhouse, and if he did not agree to leave she would sack him, take his shares and evict him from the property.

The defendant proposed that they should meet again on 31 July to finalise an agreement. This was too quick for the claimant. On 30 July he postponed the meeting, saying he needed more time. He had been to see a solicitor (a free consultation with the Bristol firm of Meade King) about his position. The solicitor had pointed out to him that the effect of clauses 3 and 4.1.5 of the Shareholders’ Agreement was that if, for any reason, he ceased to be a director of AML, the defendant could compulsorily acquire his shares at either an agreed value or a value determined by an independent accountant. He therefore realized that the defendant could force a sale of the shares by voting him off the Board. He began sending emails to himself, recording how he was feeling and his concerns. He sent an email to himself on 30 July expressing concern about the defendant’s integrity if she should engineer his constructive dismissal from AML in the future. He thought she had “previous” in the way she had severed her relationship with Mr Giles. The claimant also says that the defendant became threatening when he rang to postpone the meeting on 31 July. Allegations of threatening behaviour by the defendant are a thread running through the claimant’s evidence and underpin his claims for economic duress and damages for intimidation.

Around the beginning of September 2009, the defendant raised with the claimant the question of separating their property interests altogether. The claimant by now appreciated that the writing was on the wall so far as his directorship and shareholding were concerned, so he was anxious to get any property issues sorted before agreeing anything about his involvement in AML. The proposal mooted by the defendant was that the claimant should be given her interest in the Brewhouse and that she should be given his interest in Little Lodge. The claimant says that he calculated that this would cede net equity to him of about £80,000. Up until this point, he had been paying half the mortgage on Little Lodge and all of the mortgage on the Brewhouse. He did not think her proposal offered him enough. He held out for some additional cash.

There is a difference of view between the parties as to how far the disposal by the claimant of his shareholding and the separation of their property interests were interrelated. The claimant gives the impression in his witness statement that while they were negotiated in parallel, the sums which were agreed did not depend one on the other. Thus, the offer made at the Itsu meeting to buy his shares for £35,000 remained on the table until the final stage of the negotiations in October 2009. By contrast the defendant says that the purchase of the shares and the property split were connected and that, when she proposed the property split, she also proposed a revised figure of £10,000 for all of the claimant’s shares. Her calculation was that, when added to the greater worth of her interest in the Brewhouse than his interest in Little Lodge, the reduced offer still valued his shareholding at around a three-figure sum. When the claimant held out for more, the defendant says that she agreed to pay about £10,000, in two payments of £5,000, towards his credit card bills, and that a deal in principle was struck on that basis, namely, £10,000 for the shares plus £10,000 in cash plus her share of the Brewhouse and the job with AML.

There is contemporaneous documentary evidence which supports the agreement to provide cash towards the claimant’s credit card bills. Whilst the claimant denies that any terms had even provisionally been agreed at this stage, the deal described by the defendant certainly explains how the sum of £10,000 for all of the shares, rather than £35,000 for some of them, crept into the first draft of the Share Purchase Agreement (“SPA”). I am also in no doubt that from this point in time the claimant understood that the defendant was linking the price for the shares with the value of the interests to be transferred in the division of the property, even if he still wanted to look at the two halves of the negotiation in isolation from each other.

Kirby Simcox were the solicitors who had previously acted in respect of the property transactions. The claimant instructed Sue Hodkinson of that firm to prepare the necessary transfer documentation. The claimant’s intention was that the Brewhouse should be transferred first. This made sense for two reasons. First, it was doubtful that he would be allowed by the mortgagee to assume sole responsibility for the mortgage unless he could show he was a company director with a commensurate income. Second, the defendant would need to be free of the Brewhouse mortgage if she was to be able to take over the whole of the mortgage on Little Lodge. The outstanding mortgage loan on the Brewhouse was about £240,000. The loan on Little Lodge was nearly £600,000.

The claimant’s instructions to Ms Hodkinson covered only the transfer of the Brewhouse. Since no money was to pass to the defendant, Ms Hodkinson realised that if she advised both parties, she might face a conflict of interest. She emailed both of them on 9 September with a warning about the need for one party to seek independent legal advice if there was a risk of conflict and asked for the defendant to join in giving instructions to Kirby Simcox if she thought that no conflict of interest existed. The defendant rang Kirby Simcox to say that she believed there was no conflict of interest and that she was happy to go ahead. She explained that the transfer of the claimant’s interest in Little Lodge would happen later.

The parties had a preliminary meeting with Ms Hodkinson on or about 29 September. It was agreed that the Brewhouse transfer would be implemented as soon as possible, and the transfer documentation was signed at the meeting. It was also agreed that the parties should enter into an agreement formally declaring their joint intention that the claimant’s interest in Little Lodge was to be transferred to the defendant at a later date. Ms Hodkinson had advised that this was sensible, in order to protect the defendant’s position.

In the meantime, there had been further discussion about the claimant’s future involvement in AML. The defendant had scheduled a meeting with AML’s accountant, Mr Philip Orr, at his offices in Epsom on 14 September 2009. The claimant made a point of attending the meeting and after it was over he and the defendant had lunch at a Nando’s restaurant nearby. Over lunch the defendant made a revised job offer. The salary she was now prepared to pay was £40,000 per annum rather than £50,000, and the bonus or commission was to be capped at £7,500. The defendant says she felt that that was the most that AML could afford. She told the claimant that she also wanted a break clause in the contract entitling AML to terminate his employment after 6 months if she considered that his performance was not good enough. The claimant made clear that he was not happy to accept those terms.

Everything came to a head in October. The defendant forced the pace by writing the claimant a formal letter, dated 7 October, informing him that as from 1 November 2009, his salary (as a director of AML) and dividend payments would cease. On or about 8 October, Ms Hodkinson produced a draft declaration about the transfer of the claimant’s interest in Little Lodge to the defendant. The following day the defendant e-mailed Mr McColl saying that she had finally reached agreement with the claimant about his future involvement in the company. She asked Mr McColl to draw up all the necessary paperwork to cover: (1) the claimant's resignation as a director, (2) the purchase by the company of all of his 481 shares for £10,000 (of which she said that he had already received £3,000), (3) a reduction of the issued share capital of AML from 1,000 shares to 100 shares with 98 shares being put in her name and two shares in the name of Mr Reding, and (4) a contract of employment for the claimant on a six month trial, starting from 1 November 2009 for which she promised to provide a job description. She also told Mr McColl that the Brewhouse was no longer the company address of AML and that the address had changed to Atlantic House, Imperial Way, Reading RG2 0TD.

The defendant wanted to get the property transactions and the company transactions settled as soon as possible. However, from Monday, 12 October until Sunday, 25 October the claimant was away in Devon looking after his recently widowed mother and taking some pre-booked annual leave. He said that the earliest he would be available to go to see the solicitors to execute the necessary documents was Monday, 26 October.

The claimant’s case is that he thought that the Brewhouse transfer would have gone through by then, and it would simply be a question of him having to sign the declaration for Little Lodge and having to sign whatever documents needed to be signed to record the terms on which his position in the company was to change. However, on 20 October, the defendant emailed Kirby Simcox, giving instructions to hold the transfer of the Brewhouse until after the declaration about the transfer of Little Lodge had been executed. Around the same time she asked Mr McColl whether there was anyone at Gregg Latchams who could advise her how she could prevent the Brewhouse transfer from being completed until the claimant had signed the declaration about Little Lodge.

The claimant learned that the Brewhouse transfer was being held back when Ms Hodkinson copied to him her response to the defendant’s instruction of 20 October. Ms Hodkinson said:

“There now appears to be a conflict of interest arising in that Laura does not agree to further steps on finalising the transfer of Brewhouse (by our sending the transfer for registration at the Land Registry) without my having received from Steve the signed agreement relating to Little Lodge. I will take no further steps until I have instructions from both of you to finalise the land registration of Brewhouse. We received the sealed transfer deed back from Bank of Scotland last week as you know. I was away in the latter part of last week. With the paperwork they sent is a form for us to complete to confirm the completion date. Without this they write that they are unable to amend their records. In the circumstances and to give you both time to clarify I will delay sending this until I receive confirmation from you that this can proceed.

I must advise you both to take independent legal advice from a solicitor in a firm other than Kirby Simcox if you both are not able to agree on my finalising the land registration for you. I know that you had hoped to avoid this and hope that it is soon resolved.”

The claimant spoke to Ms Hodkinson on 23 October. He said he was willing to sign the declaration relating to Little Lodge. He made a provisional appointment for them both to see Ms Hodkinson at 2pm on 26 October. The same day, Mr McColl produced a draft of the SPA and a draft Compromise Agreement. He sent them both to the defendant who forwarded the draft SPA (but not the Compromise Agreement) to the claimant by e-mail on Saturday, 24 October. She told the claimant that she had booked for them both to see Mr McColl at Gregg Latchams at 4pm on the Monday, and that she wanted the meeting with Ms Hodkinson postponed to midday or later on 27 October.

In the end, both meetings took place on Tuesday, 27October. There was a good deal of bargaining between the parties over the weekend and on the Monday before. The claimant was beginning to have misgivings about continuing to work for AML after his resignation as a director because he had no guarantee of job security. He was also keen to push through the transfer of the Brewhouse before signing up to the SPA because this would give him more leverage to negotiate the best price for his shares in AML. The defendant’s concern was that, if her interest in the Brewhouse was transferred to the claimant before the SPA was signed, not only would her bargaining position be weakened but the claimant might drag his feet over the transfer to her of his interest in Little Lodge.

On Monday, 26 October, the claimant told the defendant that he no longer wanted a job with AML. He said that he intended to set up his own business and pressed for better terms if there was to be a clean break. The negotiations that day led to 3 changes in the draft SPA: (1) the price for the claimant’s shares was increased from £10,000 to £42,500, (2) the defendant agreed that the claimant could keep certain equipment he had used to make films for AML: this included a video camera, editing suite, laptop and monitor, which the defendant estimated were worth around £12,500, and (3) the 12 month anti-competition covenant in clause 7.1.1 of the draft SPA was removed.

Both solicitors’ offices were in Queen Square. The meeting with Ms Hodkinson at Kirby Simcox was at 4pm and the meeting with Mr McColl at Gregg Latchams followed at 5pm. Ms Hodkinson was convinced by this time that she faced a real risk of a conflict of interest if she advised both parties, because she was by now aware that the property transfers were being put in place in tandem with negotiations through Gregg Latchams about the separation of business interests as well. On the morning of 27 October she had emailed the defendant (with a copy to the claimant) saying that the conflict which in her view had arisen precluded her from advising both sides and that they should both now take independent legal advice. Shortly before midday, she sent another message to both parties stating that she required written confirmation from them that they had “taken legal advice independently of this firm” before the meeting could go ahead. The claimant and the defendant both replied by email in the early afternoon to say they were happy to go ahead with the meeting in order to complete the Brewhouse transfer and to sign any further documentation Ms Hodkinson considered necessary, including for the transfer of Little Lodge.

When the meeting at Kirby Simcox began, Ms Hodkinson (out of an abundance of caution) says that she got both parties to sign a formal letter stating that they had had the opportunity to obtain independent legal advice and were content to proceed with the transactions.The claimant then signed a form of consent to the removal of the joint tenancy restriction on the title of Little Lodge at the Land Registry. Both parties signed a TR1 transfer of the claimant’s interest in Little Lodge as a tenant in common to the defendant. The transfer documentation for the Brewhouse had already been completed and was ready to go. When the signing was over and the meeting was drawing to a close, Ms Hodkinson wanted to know whether she should lodge the transfers immediately. This was what the claimant wanted to happen: but, according to him, the defendant at that point insisted that lodging the transfers at the Land Registry was dependent on the outcome of the next meeting at Gregg Latchams and that Ms Hodkinson should wait until instructions to go ahead were received from both of them. That was how the matter was left.

Ms Hodkinson sent an email to both parties at 5.54 pm summarizing the outcome of the meeting in the following terms:

“To confirm what was agreed in our meeting late today:

You wish me to complete the legal work on The Brewhouse. I have the transfer ready to date today, and to notify the bank of that date and submit the stamp duty land tax return as soon as you both e-mail me to confirm this can now be completed. As soon as we have the SDLT certificate (which is not always instantaneous online but is usually the same day) I will submit the land registry application. As soon as the registration comes back I will e-mail copy completed registration to Steve, copying in Laura.

In relation to Little Lodge, a separate matter, I prepared today as suggested in Steve's e-mail a "TR1" transfer deed for Little Lodge and also Steve's consent, once the bank has approved the transfer and we can progress this, to my removing the "joint owners restriction" from the deeds exactly as it will be removed on The Brewhouse. In each case as you are "tenants in common" I have to submit an application to remove the restrictions at the same time as the transfer is registered. Steve may have to sign more paperwork for the Little Lodge transfer, as we discussed.

Steve confirmed that he was happy for me to act for Laura in the Little Lodge transfer, if she wishes me to do so, with Steve acting on his own behalf or, if he wishes, instructing other solicitors. Once the bank consent to this and the transfer can go through I will ensure that Steve is removed from the mortgage on Little Lodge as part of registration of the transfer. Laura will pay for the legal work on Little Lodge.

If you think any of the above is incorrect or either of you has a question please let me know.

Otherwise please both confirm that the above reflects your wishes when you e-mail me tonight/tomorrow to proceed. I will not proceed tomorrow until you both e-mail me your agreement.”

At 7:53 pm that evening the claimant e-mailed Ms Hodkinson saying: “I hereby confirm that all went well with full agreement during the subsequent meeting so you have my consent to proceed as you state in your e-mail …”. At 10:46 pm, the defendant also e-mailed Ms Hodkinson to say: “I can confirm that all the necessary documents were signed by myself and Mr Steve Dawson at our meeting at Gregg Latchams this evening. I am in total agreement with your e-mail and wish to proceed in the manner stated within it. I would very much like you to act for me in the transfer of Little Lodge in the manner also covered in that e-mail”.

The claimant maintains that his message giving the go-ahead to Ms Hodkinson belied the true state of affairs surrounding the meeting with Mr McColl. He had received an e-mail from the defendant attaching a copy of a revised draft of the SPA only shortly before the meeting with Ms Hodkinson. So he had had no more than a quick glance at it before the meeting at Gregg Latchams began. Unbeknown to him the draft had been the subject of exchanges between Mr McColl and the defendant earlier in the afternoon. Attention was focused at the trial on two particular e-mails from Mr McColl to the defendant shortly before the meeting with Ms Hodkinson. The first was sent at 1:55 pm. In it, Mr McColl reminded the defendant of the strength of her position:

“Re: Share Purchase Agreement

As discussed, I would like to reiterate that if you wish to remove Stephen as a director you may do so (without his consent) by the passing of an ordinary resolution (which requires a simple majority of votes) and, as you are the majority shareholder, you have the power to pass such a resolution. You would need, in such circumstances, to make sure that you complied with the requirements under the law in order to do so (such as the provision of 28 days special notice confirming your intention to remove Stephen as director) but I could advise you on this process.

As you are also aware, the shareholders agreement dated 11.12 .08 provides (under clause 4.1.5) that if Stephen is no longer a director he would immediately be deemed to have served a "Transfer Notice" on the other shareholders offering his shares to them at fair value as determined by independent accountants. I suspect that any amount determined by independent accountants to be the fair value for Stephen's shares would be considerably less than the sum of £60,000 which you propose to pay to him under the terms of the share purchase agreement. Are you sure that you are comfortable proceeding via the share purchase agreement route at this price?”

The second e-mail was sent at 3:42 pm. Attached to it was the final version of the SPA and it contained the following reminder: “Please reiterate to Stephen that, as you are my client and as I am acting under your instructions, you should feel free to take independent legal advice on this matter.” The claimant says that the defendant did not relay this part of the message to him.

The latest draft of the SPA reflected the revised terms which had been settled between the claimant and the defendant the previous day. It provided that the claimant had agreed to sell his 481 ordinary shares in AML to the defendant for the sum of £42,500, of which £3,000 was stated to already have been paid prior to execution of the agreement. The balance was to be satisfied by two separate payments, the primary payment of £19,500 being made 30 days from the completion date and the secondary payment of £20,000 being made on 1^st February 2010 subject to due performance by the seller of his obligation in clause 4.3 to enter into a Compromise Agreement relating to his resignation as a director and as secretary of the company. The consideration for the Compromise Agreement was expressed to be the transfer of the equipment to the claimant. Clause 5 of the SPA contained warranties to be given by the seller and clause 7 contained restrictive covenants designed to apply to the claimant after his resignation.

Mr McColl opened the meeting by introducing the revised draft SPA and explaining, in broad terms, the effect of it. There came a point in the meeting when Mr McColl was asked to leave the room. The claimant then tried to persuade the defendant to improve her offer. Reluctantly the defendant agreed to change the figure from £42,500 to £47,500, and to increase the primary payment from £19,500 to £24,500. When Mr McColl returned, he was asked to produce a further revised version of the SPA. The SPA was then signed by both parties in their personal capacities and their signatures were witnessed by him.

Schedule 1 to the SPA was a set of “Completion Board Minutes” in which it was resolved by the Board of AML that the company should enter into the SPA and should authorise the defendant to sign the SPA on its behalf. The board meeting took place in the course of the meeting at Gregg Latchams and the defendant signed the Board Minutes. The Minutes contained a resolution approving the share transfer and accepting the claimant's letter of resignation as a director and company secretary.

The claimant's title to the lease of the Brewhouse was formally registered at the Land Registry on 29 October. A few days later, the defendant told Mr McColl that she thought that the claimant had taken as much as £60,000 more out of AML than she had previously thought. He advised her to think carefully whether, in those circumstances, she really wanted the claimant to have the equipment: but the claimant said that it would be too difficult to get it back. In any case, the equipment was going to be the consideration for the Compromise Agreement. So the deal was left undisturbed.

On 6 November, the defendant sent the claimant a draft of the Compromise Agreement, telling him that he needed to take legal advice before he signed it. He did so. He went to John Hodge Solicitors who told him that a number of provisions in the Compromise Agreement ought to be changed and that they would write to the defendant suggesting amendments. Correspondence ensued between John Hodge and Gregg Latchams in which some of the proposed amendments were accepted and others not. A sticking point was the ambit and effect of the restrictive covenants in clause 9. The same point applied to the restrictive covenants in clause 12 of the Shareholders’ Agreement and clause 7 of the SPA but had not occurred to the claimant before. The claimant now realized that, even in the absence of an anti-competition covenant, the remaining covenants would prevent him from working in the near future with any of the models who had appeared for TEM. There was at least one model (Elizabeth Hills, who went by the Mistress name of “Eleise de Lacy”) who had indicated to him that she was willing to appear in films on his planned new website. There was also a couple in Prague, called Dirk Doelle and Petra Cerna (who used the Mistress name “Lady Natalie Black”), with whom AML had set up a joint venture promoting another website called www.LadyNatalieBlack.com (“LNB”). The claimant wanted to be able to work with them in the future as well. The claimant told the defendant on 25 November that he would sign the Compromise Agreement, if she agreed to allow him to work with any model who had appeared for TEM.

On 26 November Gregg Latchams sent a revised copy of the Compromise Agreement to John Hodge under cover of a letter making certain concessions which had been incorporated in the revised draft, but not conceding all the points that had been raised by the claimant. The letter did not address the point about the restrictive covenants in clause 9 and they remained unchanged. Nevertheless, the claimant signed the Agreement and got John Hodge to send it back to Gregg Latchams on 26 November before he had heard the defendant’s answer to his request about working with models who had appeared on the TEM website and with Dirk and Petra. If he believed that she would give way on this, he was right. On 27 November, the defendant told Eleise that she had no objection if Eleise wanted to work for the claimant. On 2 December, the defendant told the claimant that she would make a similar concession in respect of Dirk and Petra, once she had signed the Compromise Agreement.

The defendant must have signed the Compromise Agreement sometime shortly thereafter. There was no copy bearing her signature in the trial bundles; but it is not disputed by either party that the Agreement is binding.

On 13 December 2009, the defendant wrote a letter to the claimant on AML’s headed notepaper as follows:

“This is to confirm to you in writing that you may have my permission as the representative of Adwelsh Media to set up an adult movie site and you may use or contact any of the models we have worked with at TEM site.

However, you may not contact or work with any of our full-time staff Frank Reding, Paul Hatcher or Frances Rodgers and cannot mimic the TEM/NLB site in any way i.e. similar name; overall look, style or layout; or our unique site features.

I am also happy for you to re-launch the LNB site as of the 24th of February 2009. I have received confirmation in writing from Dirk and Petra to pass on any material I have to you. I also will be writing up a final agreement as a conclusion to the business for the purpose of our financial accounts and will make sure everyone has a copy of this.

If you want any information regarding the transfer of the domain names and LNB.com and .co.uk please contact me directly to do this, not any of the AM staff.”

The defendant made the primary payment under the SPA, albeit in instalments and not within 30 days of 27 October. The last instalment was paid on 1 December.

The defendant did not make the secondary payment, which was due on 1 February 2010. On 26 January, Gregg Latchams wrote a letter to the claimant saying that the payment would not be made for the following reasons:

“Payment of the purchase monies was and is conditional on you complying with the terms of the Agreement, and in particular, clauses 5.1 and 6. We do not propose setting out the precise terms of those clauses here, but refer you to the Agreement for such detail.

In breach of clause 5.1, it has become apparent on checking the financial records of the Company that you overpaid yourself £54,000 in dividends from the Company. We attach a copy of our client’s accountant’s letter dated 21 January 2010, confirming the figures. In contrast, these figures show that our client is owed £38,000 in dividends.

The overpayment of dividends to you, was made without our client’s authority or knowledge and your actions are in breach of the warranties set out in the Agreement, namely:

“5.1.5

Since the Company’s last accounts date, the Seller (i.e. you) has not entered into any transactions on behalf of the Company or incurred any debt or liability… for the Company other than in the normal course of business;

5.1.10

There are no material facts or circumstances, in relation to the assets, business or financial conditions of the Company, which have not been fairly disclosed in writing to the Purchaser (i.e. our client) which, if disclosed, might reasonably have been expected to affect the decision of the Purchaser to enter into this Agreement.”

Our client reserves her right to include further breaches as and when appropriate.

Clause 6 of the Agreement confirms that you have provided an indemnity in respect of all losses incurred by either our client, or the Company and our client now looks to you to honour the terms of the Agreement and to repay the £54,000 owed by you to it.

You will appreciate that as a result of the above, our client will not be making the final payment to you under the Agreement, and will offset that payment against the monies due to the Company. Our client is therefore prepared to accept a payment of £34,000 to the Company in full and final settlement of all outstanding issues between you, our client and the Company.”

The non-payment provoked the claimant into launching this action in June 2011. By this time the defendant was in the process of completing the sale of Little Lodge.

Counsel (Mr Oram for the claimant and Mr Mason for the defendant) agreed a list of issues for the trial. I do not intend to follow that list in this judgment: but it is a useful guide. The claimant’s main claim is that he was coerced to enter into the SPA by duress. He seeks an order setting aside the SPA and damages for intimidation. In the alternative, the claimant claims the amount of the secondary payment under SPA and damages.

The defendant has a counterclaim, brought as assignee of the rights of action of AML. The counterclaim raises the following issues: (1) Has the claimant: (i) withdrawn monies from the Company in excess of his entitlement? or (ii) withdrawn monies to settle his own personal liabilities as set out in Schedule 3 to the counterclaim? (2) Did the claimant make unauthorised use of the company credit card in respect of the transactions set out in Schedule 4 to the counterclaim? (3) Is the claimant in breach of the warranty contained in clause 5.1.10 of the SPA in that there were material facts or circumstances, in relation to the assets, business or financial condition of the company which had not been fairly disclosed? (4) What is the proper construction of clause 7 of the Compromise Agreement? Was the claimant in breach of it by virtue of: (i) failing to make provision for the Company’s Corporation Tax and PAYE liabilities; or (ii) failing to disclose to the defendant the Company’s tax liabilities, against which no provision had been made? (5) What is the meaning and effect of the restrictive covenants contained in clause 12 of the Shareholders’ Agreement, clause 7 of the SPA and clause 9 of the Compromise Agreement? Are they in restraint of trade? Can they be enforced against the claimant? Is the claimant in breach of them? If so, what is the remedy? (6) Is the claimant in breach of his director’s duty of care as a result of arrangements made for the Company’s web hosting servers? If so, what loss has the company suffered?

There is, in addition, a contribution claim brought by the claimant against the defendant in her personal capacity in the event that the counterclaim for misuse of company funds and/or for breach of the director’s duty of care succeeds. The foundation for it is that the defendant herself owed a like duty to AML and failed to discharge that duty in that she did not monitor the claimant’s activities and herself received and made use of company funds in a similar fashion to him.

I heard evidence from the parties and from Mr Reding (for the claimant) and Mr Orr, Mr McColl, Ms Hodkinson, Miss Philips and Miss Dirago (Mr Orr’s payroll and accounts clerks) and Mr Hatcher (for the defendant). The parties’ expert witnesses, (Roger Isaacs of Milsted Langdon LLP and Vanessa Winspeare of MJN Forensic Accountants) gave evidence also.

The claimant and the defendant are the witnesses whose oral testimony matters most. Assessing the credibility of a claimant who has a fetish for female domination and claims to have been the victim of duress and intimidation by his female partner is not easy. Assessing the credibility of a defendant who denies threatening behaviour, but who has made a career as a dominatrix and appearances in femdom videos is not easy either. Neither was a wholly believable witness. Neither was more obviously giving a truthful and unvarnished account than the other.

The claimant sounded very plausible, but the account given in his two witness statements glossed over so much of the detail of his business relationship with the defendant, and of his negotiations with her, that to my mind it gave a wholly one-sided picture. It painted him as the victim of a bullying and aggressive partner who twisted his arm at every turn to get her way. I find, on the contrary, that the claimant himself was every bit as manipulative as he accused the defendant of being. He enjoyed the lifestyle which money from the company afforded him. He took a good deal of money from AML’s bank account to cover personal expenses and his contribution to the management of the business did not always justify the financial rewards he received. At least this is the impression I have from the contemporaneous records, leaving aside the evidence of the defendant and Mr Hatcher (who may rightly be said to have an axe to grind and for that reason is not wholly reliable).

Apart from ignoring much of the defendant’s case in his two witness statements (e.g. her complaints about the extent to which he paid himself sums of AML’s money which were far greater in total than the sums she received from the company), the claimant’s written evidence was inaccurate in much the same way as was the defendant’s. I give two examples. The first was his explanation of how the B Shares came to be issued. The claimant said that he was unaware that they had been created and that it must have been done by the incorporation agency. But the defendant later obtained a copy of the application to Companies House for the registration of the B shares. It was in the claimant’s handwriting and dated 1^st May 2005, more than a year after AML was incorporated. The second is his evidence that, when Mr McColl left the room during the meeting on 27 October 2009, he pleaded with the defendant to improve her offer and was turned down flat. Although in paragraph 54 of the counterclaim the defendant appeared to accept this version of events, I find that it was not true. During that short interval in the meeting, the defendant agreed to treat a sum of £5,000 which she had promised to pay earlier in the month towards one of his credit card bills, but which had not yet been paid as a sum to be added to the price of the shares. So the price in the SPA was increased by this amount to £47,500 and Mr McColl had to get his secretary to amend the draft before signature. Rather than being implacable, as the claimant depicted, the defendant in fact made another concession.

I treat the claimant’s written and oral evidence with considerable circumspection. The emails which he sent himself at the time were in my judgment self-serving and their content must be treated with caution. I am in no doubt that he was a good deal more resilient in negotiating with the defendant than he would have the court believe. As the majority shareholder in AML, the defendant was in the stronger position, but the claimant was intent on salvaging the best deal he could out of the wreckage of his relationship with the defendant. I do not accept that the negotiation was as one-sided as he tried to portray it.

I regard the defendant’s evidence with the same degree of misgiving. She appeared in the witness box as a quietly spoken and almost diminutive figure. She appeared to give thoughtful and considered answers. At times she was tearful. Yet I am certain that beneath the relatively composed exterior which she presented in court, the defendant is a tough individual. I doubt it is possible to make a career in the adult entertainment industry without having that attribute. The contemporaneous correspondence demonstrates that the defendant was not only pro-active in the business but she had a good grasp of business strategy and of the finances, when and if she paid attention to them. I find, however, that she was inconsistent in her attention to the financial details and I think there is force in the claimant’s contention that her moods were changeable.

The defendant’s evidence contained as many, if not more, inaccuracies as the claimant’s. One example was her evidence about having retained personal copyright over her appearances in films in TEM’s catalogue when in fact she had signed a Model Release Form in respect of marketing and distribution not only in the USA but worldwide. Another was the denial in paragraph 119 of her witness statement of 6 July 2012 (her first trial statement) that she had ever agreed to the claimant withdrawing money from AML to meet his liability under the Brewhouse mortgage, when this had already been contradicted by the answer given by her legal team to Request No. 8 in the claimant’s Request for Information dated 28 September 2011.The answer is that the defendant did agree to sums being paid from AML’s bank account to the claimant to enable him to pay the Brewhouse mortgage when that property was not rented out, and the point should have been conceded from the outset.

Although my assessment of the defendant is that she was a tough bargainer who was used to getting her way, I do not accept that the proposals she made to the defendant in negotiations were unreasonable or unfair. There was a process of negotiation in the course of which she made a number of pragmatic concessions. The claimant’s case of duress and intimidation is about the methods the defendant is alleged to have used to secure eventual agreement. On that issue I do not consider that either party gave a truthful account.

The claimant not only seeks a declaration that the SPA is set aside but a direction that the SPA and his letter of resignation are delivered up. In effect, he is asking to be reinstated as a director and shareholder. However, no challenge is made to the validity of the Compromise Agreement, nor to the Shareholders’ Agreement, nor any of the Declarations of Trust or the property transfers.

The modern law of duress was explained by Lord Scarman in Universe Tankships Inc. of Monrovia v. International Transport Workers Federation[1983] 1 A.C. 366. The case concerned a threat by the International Transport Workers Federation (I.T.F.) to black i.e. boycott, a ship in port as part of a trade dispute. Lord Scarman was in a minority but his exposition of the law of duress has since been endorsed as an accurate statement of the position. He said (at pp.400-401):

“It is, I think, already established law that economic pressure can in law amount to duress; and that duress, if proved, not only renders voidable a transaction into which a person has entered under its compulsion but is actionable as a tort, if it causes damage or loss: Barton v. Armstrong [1976] A.C. 104 and Pao On v. Lau Yiu Long [1980] A.C. 614. The authorities upon which these two cases were based reveal two elements in the wrong of duress: (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted. There must be pressure, the practical effect of which is compulsion or the absence of choice. Compulsion is variously described in the authorities as coercion or the vitiation of consent. The classic case of duress is, however, not the lack of will to submit but the victim's intentional submission arising from the realisation that there is no other practical choice open to him....

The absence of choice can be proved in various ways, e.g. by protest, by the absence of independent advice, or by a declaration of intention to go to law to recover the money paid or the property transferred: see Maskell v. Horner [1915] 3 K.B. 106. But none of these evidential matters goes to the essence of duress. The victim's silence will not assist the bully, if the lack of any practicable choice but to submit is proved. The present case is an excellent illustration. There was no protest at the time, but only a determination to do whatever was needed as rapidly as possible to release the ship. Yet nobody challenges the judge's finding that the owner acted under compulsion....

The real issue in the appeal is, therefore, as to the second element in the wrong duress: was the pressure applied by the I.T.F. in the circumstances of this case one which the law recognises as legitimate? For, as Lord Wilberforce and Lord Simon of Glaisdale said in Barton v. Armstrong [1976] A.C. 104, 121D: “the pressure must be one of a kind which the law does not regard as legitimate.”

As the two noble and learned Lords remarked at p. 121D, in life, including the life of commerce and finance, many acts are done "under pressure, sometimes overwhelming pressure": but they are not necessarily done under duress. That depends on whether the circumstances are such that the law regards the pressure as legitimate.

In determining what is legitimate two matters may have to be considered. The first is as to the nature of the pressure. In many cases this will be decisive, though not in every case. And so the second question may have to be considered, namely, the nature of the demand which the pressure is applied to support.

The origin of the doctrine of duress in threats to life or limb, or to property, suggests strongly that the law regards the threat of unlawful action as illegitimate, whatever the demand. Duress can, of course, exist even if the threat is one of lawful action: whether it does so depends upon the nature of the demand. Blackmail is often a demand supported by a threat to do what is lawful, e.g. to report criminal conduct to the police. In many cases, therefore, "What [one] has to justify is not the threat, but the demand …": see per Lord Atkin in Thorne v. Motor Trade Association [1937] A.C. 797, 806.”

Mr Oram derived the following propositions from the Universe Tankships case, with which I substantially agree:

The essence of a classic case of duress is that consent has been obtained by the exercise of pressure which the law does not regard as legitimate. Thus the agreement is treated in law as revocable unless it is affirmed expressly or by implication by the party on whom the illegitimate pressure was placed after that pressure had ceased to operate on his mind.

Duress can be brought about by economic pressure or by non-economic means.In the reference already cited from The Evia Luck, Lord Goff of Chieveley said: “… it is now accepted that economic pressure may be sufficient to amount to duress … provided at least that the economic pressure may be characterized as illegitimate and has constituted a significant cause inducing the plaintiff to enter into the relevant contract”

Economic pressure is a familiar feature of commercial transactions where one party is in a stronger bargaining position than the other. If it is lawful pressure, the courts will be slow to infer that it qualifies as duress. In CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714, the plaintiff paid an invoice from the defendant for the supply of a consignment of cigarettes. The payment was made by the plaintiff under threat of having its credit facilities withdrawn by the defendant. The defendant was a regular supplier to the plaintiff but on this occasion the consignment had been stolen in transit between two of the plaintiff’s warehouses in circumstances where the defendant genuinely believed that the goods were at the plaintiff’s risk. The Court of Appeal upheld the decision of Judge Kershaw QC that it was not a case of duress. Steyn LJ held (at p. 718 d-e):

“We are being asked to extend the categories of duress of which the law will take cognizance. That is not necessarily objectionable, but it seems to me that an extension capable of covering the present case, involving “lawful act duress” in a commercial context in pursuit of a bona fide claim, would be a radical one with far-reaching implications. It would introduce a substantial and undesirable element of uncertainty in the commercial bargaining process. Moreover, it will often enable bona fide settled accounts to be reopened when parties to commercial dealings fall out. The aim of our commercial law ought to be to encourage fair dealing between parties. But it is a mistake for the law to set its sights too highly when the critical enquiry is not whether the conduct is lawful but whether it is morally or socially unacceptable. That is the enquiry in which we are engaged. In my view, there are policy considerations which militate against ruling that the defendants obtained payment of the disputed invoice by duress.

Outside the field of protected relationships, and in a purely commercial context, it might be a relatively rare case in which “lawful act duress” can be established. And it might be particularly difficult to establish duress if the defendant bona fides considered that his demand was valid. In this complex and changing branch of the law. I deliberately refrain from saying “never”. But as the law stands, I am satisfied that the defendants’ conduct in this case, did not amount to duress.”

In Progress Bulk Carriers Ltd v Tube City IMS LLC, The Cenk K [2012] 1 Lloyds Rep 501, Cooke J revisited the dictum of Steyn LJ and a number of subsequent cases in considering an appeal from an arbitration award in which it had been held that charterers’ agreement under protest to accept the nomination by owners of a substitute ship with later laycan under a voyage charter which had contained no contractual right of substitution had been procured by economic duress. The circumstances were that the owners had left the substitution so late that the charterers had no option but to accept it without being in default with the receivers in China. Cooke J upheld the award and dismissed the owners’ appeal. Having quoted what Steyn LJ said in the CTN Cash and Carry case, Cooke J continued (at paras. 30-33) as follows:

“30.

This is Court of Appeal authority for the proposition that the exertion of pressure by “lawful means,” does not prevent the operation of the doctrine of economic duress. Whilst the particular examples in earlier cases, to which reference is made in the passage quoted above, do not take the matter much further, Stein LJ refers to “the critical enquiry” as being “not whether the conduct is lawful. But whether it is morally or socially unacceptable”. He said in terms that that was the enquiry in which the court was engaged, although the court should not set its sights too high and it might be a relatively rare case in which “lawful act duress” could be established, particularly in a commercial context.

31.

The decision to which the arbitrators referred, when saying that the victim probably did not have to establish “no reasonable alternative” as an ingredient of economic duress, was Huyton v Cremer (Ibid). At p. 629, in the right-hand column, Mance J (as he then was) accepted that a compromise agreement could be voidable for duress, which involved illegitimate pressure, consisting in the non-performance or threat of non-performance of an obligation, the existence of which was apparently the subject of the compromise. The party asserting duress would have to show on the facts that the illegitimate pressure was a significant cause inducing it to enter the contract of compromise, and protests about the illegitimate pressure would be a relevant factor in considering that. He then went on to deal with the two basic ingredients of duress, to which I have already referred and to the submission made on behalf of Cremer that party either threatening or committing a breach of contract, even if acting in good faith could be guilty of illegitimate pressure.

32.

At p. 637, the judge referred to CTN Cash and to the decision of the House of Lords in The Evia Luck [1992] AC 152, referring to a dictum of Lord Goff in the latter decision. Lord Goff had said that it was accepted that economic pressure could amount to duress, provided that the economic pressure could be characterised as illegitimate and constitute a significant cause inducing the plaintiff to enter the relevant contract. Mance J went on to state that this left room for flexibility in the characterisation of illegitimate pressure and of the relevant causal links. He said that the recognition of some degree of flexibility was not open to the reproach that it introduced a judicial discretion because courts frequently had to form judgements regarding inequitability or unconscionability, giving effect in doing so, to the reasonable expectations of honest people. It was the law’s function to discriminate between different factual situations, and so it was appropriate to adopt the approach set out by Steyn LJ in CTN Cash, by focusing on distinctive features of the particular case and deciding whether or not, did amount to a case of duress.

33.

The more recent cases on economic pressure in no way derogate from the principles to which I have referred. Dyson J (as he then was) in two decisions in 2000, set out the range of factors which fell to be considered when looking at the question of legitimate pressure. At para. 131 of DSND Subsea v Petroleum Geo-services [2000] BLR 530, he set out the range of factors to be taken into account in a passage which he repeated in Carillion Construction Ltd v Felix (UK) Ltd [2001] UKHL 49, [2001] 4 All ER 801 at para. 24 and which were accepted as accurate by counsel in that case and in the subsequent decision of David Donaldson QC, sitting as a deputy High Court judge in Adam Opel GmbH v Mitras Automotive (UK) Ltd [2007] EWHC 3481 (QB):

“The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the claimant to enter into the contract: see Universe Tankships Inc. of Monrovia v International Transport Workers’ Federation [1983] 1 AC 366, 400B-E, and Dimskal Shipping Co SA v International Transport Workers’ Federation [1992] 2 AC 152, 165G. In determining whether there has been illegitimate pressure, the court takes into account a range of factors. These include whether there has been an actual or threatened breach of contract; whether the person allegedly exerting the pressure has acted in good or bad faith; whether the victim had any realistic, practical alternative but to submit to the pressure; whether the victim protested at the time, and whether he affirmed and sought to rely on the contract. These are all relevant factors. Illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining.”

A case to which Mr Oram attached particular significance was the decision of the Privy Council in Borrelli v. Ting [2010] Bus LR 1218. In that case the Privy Council allowed an appeal from the Bermuda Court of Appeal by the liquidators of a Bermudan company called Akai Holdings Ltd. The liquidators had proposed a scheme of arrangement to provide funds for the liquidation, which was opposed by two shareholder companies controlled by Mr Ting, the former chairman and chief executive of Akai. The liquidators were liable to lose the value of Akai’s listing on the Hong Kong Stock Exchange at the end of 2002 if the scheme of arrangement was not put in place. On 30 December 2002, Mr Ting entered into a settlement agreement with the liquidators whereby the liquidators compromised any cause of action against Mr Ting in respect of the affairs of Akai in return for the support of the two shareholder companies for the scheme of arrangement. Subsequently evidence came to light that Mr Ting had misappropriated funds from Akai and the liquidators joined Mr Ting to proceedings they had commenced in Hong Kong to recover the misappropriated funds. Mr Ting commenced an action in Bermuda for a declaration that the settlement agreement was binding and for an injunction restraining the Hong Kong action against him. The decision of the Bermuda Court of Appeal, reversing the Chief Justice, was itself reversed by the Privy Council. Giving the Opinion of the Board, Lord Saville of Newdigate said this (at paras. 31-35):

“31.

In the view of the Board, the liquidators had no reasonable or practical alternative but to make a deal with James Henry Ting. Put colloquially James Henry Ting had the liquidators over a barrel. The failure of Akai Holdings Ltd was generally regarded as the largest or one of the largest corporate insolvencies ever to take place in Hong Kong. The liquidators considered that there might be grounds for seeking to recoup some at least of the losses from the auditors. To abandon the scheme meant in effect the end of any real chance of the liquidators recovering anything from the collapse of Akai Holdings Ltd.

32.

In the view of the Board, James Henry Ting’s failure to provide any assistance to the liquidators; his opposition to the scheme; and his resort to forgery and false evidence in order to further that opposition amount to unconscionable conduct on his part. Against the background of his failure to cooperate with the liquidators, as it was his duty to do under the winding up rules of both Hong Kong and Bermuda, had he not opposed the scheme for purely personal and selfish reasons, in the process using forgery and false evidence, then there would have been no need for the settlement agreement. In other words, by agreeing to withdraw the opposition to the scheme, James Henry Ting did no more than he should have done from the outset, had he acted in good faith, rather than in an attempt to avoid responsibility for his conduct of the affairs of Akai Holdings Ltd.

33.

In such circumstances the Board considers that it would offend justice nevertheless to permit James Henry Ting to call in aid the settlement agreement in order to defeat claims made by the liquidators against him relating to the affairs of Akai Holdings Ltd. Those claims include claims (which the Chief Justice found to be well arguable) that he had misappropriated for his own benefit very large sums from Akai Holdings Ltd.

34.

An agreement entered into as a result of duress is not valid as a matter of law. Duress is the obtaining of agreement or consent by illegitimate means: Director of Public Prosecutions for Northern Ireland v Lynch [1975] AC 753 and Universe Tankships Inc. of Monrovia V International Transport Workers’ Federation [1983] 1 AC 366. Such means include what is known as “economic duress”, where one party exerts illegitimate economic or similar pressure on another. An agreement obtained through duress is invalid in the sense that the parties, subject to the duress has the right to withdraw from the agreement, though that right may be lost if that party later affirms the agreement or waives the right to withdraw from it.

35.

The Board is of the view that in the present case the liquidators entered into the settlement agreement as the result of the illegitimate means employed by James Henry Ting, namely, by opposing the scheme for no good reason and in using forgery and false evidence in support of that opposition, all in order to prevent the liquidators from investigating his conduct of the affairs of Akai Holdings Ltd or making claims against him arising out of that conduct. As the Board has already observed, by adopting these means, James Henry Ting left the liquidators with no reasonable or practical alternative but to enter into the settlement agreement.”

I do not think that the case of the Borrelli v Ting introduced any new principle. Rather, it was an application of the established principles, which are founded on the concept of what is conscionable, to a particular set of facts.

The claimant’s evidence was replete with allegations of the defendant’s threatening behaviour. According to him, it all began early in 2009 when she first said that she would take down the website and smash the hard drives. A similar threat was allegedly made in April and again in the course of telephone conversations at the end of July. All were recorded by the claimant in emails to self. I am prepared to accept that the defendant may have said something very like this: but it was an empty threat, as the claimant well knew, and I find that it was of no causative effect when the time came for the parties to enter into the SPA. Aside from the fact that the threatened steps would have killed, or at least seriously wounded, the goose laying the golden egg for both of the parties, most of the film library was held on the host servers in the USA and the claimant had a duplicate copy of the master tapes on a second hard drive which he kept in a safe at the Brewhouse.

Then there is the statement allegedly made by the defendant over dinner at the Itsu restaurant on 28 July 2009 that she wanted the claimant out of the Brewhouse, and if he did not agree she would sack him, take his shares and evict him anyway. The defendant denied saying anything of the kind. She accepted that she knew that the claimant would have to sell his shares to AML if he was removed as a director but said she did not to know at that juncture that it was within her power to remove him by a simple vote. I cannot accept this evidence at face value. I find that the defendant thought she had control of AML and could do as she wanted as majority shareholder. I doubt she had received any advice about the mechanics of voting the claimant off the board or the risks of challenge she would run if there was no good cause for his removal. She must have said enough to the claimant over dinner about him being removed as a director, for the claimant to have felt the need to consult Meade King.

I reject any suggestion that what the claimant was told by Meade King was that the defendant could sack him from the company with impunity. No doubt the strength of the defendant’s position was drawn to his attention, but any competent solicitor would also have pointed out that there was a process to be gone through. The defendant would have to give due notice of a shareholders’ meeting, and he could go to court (by an unfair prejudice petition under section 994 of the Companies Act 2006) if, as a minority shareholder, he had grounds for arguing that he was being unfairly treated. The claimant’s email to self of 30 July, recording his telephone conversation with the defendant that morning, demonstrates that in broad terms he was aware of his rights. I am in no doubt that the claimant appreciated that the threat of legal proceedings against the defendant and AML for, as he would have described it, “unfair dismissal” was a powerful weapon which was likely to make the defendant pause for thought and be more reasonable. The last thing she wanted was to be embroiled in litigation. Whilst therefore the claimant realised at the end of July 2009 that his position as a director was vulnerable, he also realised that he was not without a remedy if the defendant made moves to sack him.

In the run-up to the meeting at Gregg Latchams on 27 October, the defendant told Mr McColl and AML’s bank (HSBC) that the claimant was going to be removed as a director if he did not resign. That reflected the defendant’s understanding of what she was lawfully entitled to do as the majority shareholder. The claimant says that the threat of sacking was repeated by the defendant on 27 October as they walked from the offices of Kirby Simcox to the offices of Gregg Latchams and was raised again at the meeting at Gregg Latchams when Mr McColl left the room. I am not persuaded that the defendant used the term “sacking” because I do not accept the claimant’s evidence that the defendant’s behaviour on 27 October was aggressive. I find that the defendant’s manner was firm but not threatening. I do, however, accept that both on the short walk between the two meetings and when Mr McColl was out of the room during the Gregg Latchams meeting, the defendant pointed out to the claimant the alternative of his being removed from the Board by shareholder vote if he decided to back out of the SPA. On the second occasion, the claimant was asking for the last time for the offer to be improved, and this is when the price in the draft SPA was increased by £5,000.

There is no question that on 27 October 2009 the claimant was under commercial pressure to sign the SPA. Mr Oram has correctly identified that the question is whether the pressure was legitimate. He concentrated on 3 aspects of the defendant’s conduct which in his submission constituted pressure which was not legitimate (1) the threat to remove the claimant from the Brewhouse, (2) making completion of the property transfers conditional on the signing of the SPA, and (3) threatening to expropriate the claimant’s shares in AML by triggering the call option in clause 4.1.5 of the Shareholders’ Agreement. I will consider each of these in turn.

A threat to evict the claimant from the Brewhouse would not have been lawful. Since August 2008, the property had been in the parties’ joint names and the claimant was a tenant in common. As Mr Oram pointed out, by virtue of section 12 of the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) the defendant could not exclude the claimant from the property without his consent. A fortiori this was the case by the time of the meeting at Kirby Simcox on 27 October because the claimant had arguably become entitled to the entire beneficial interest in the lease by that point.

However, I do not find that any threat to evict or remove the claimant from the Brewhouse was made. The first allegation of such a threat being made was at the Itsu meeting. I am not persuaded by the claimant’s evidence about that. His email to self of 30 July does not suggest that that was part of the threats the defendant was making two days later. Even if I am wrong, and the defendant did say on 28 July that she wanted the claimant out of the Brewhouse, this was overtaken by the subsequent negotiations about the property transfers and was of no causal effect by 27 October.

The second occasion on which the threat is said to have been made was during the short walk between the solicitors’ offices in Queen Square on 27 October. I do not accept this part of the claimant’s evidence either. By now the deal reached in principle was that the defendant was going to transfer to the claimant her interest in the Brewhouse in return for the transfer of his interest in Little Lodge to her. Postponing the implementation of these transfers until after the SPA was signed posed the obvious risk that they might not go through if the SPA was not executed. That could have meant that the claimant would lose the Brewhouse if he was unable to sustain the mortgage on his own. The defendant might have pointed this out: but I do not think that she threatened to evict the claimant or said that she would have him removed.

Pointing out the risk of his losing the Brewhouse was not unlawful. The linking of the property transactions with the business side of the deal was still capable of being illegitimate pressure; but I do not find that it was. The claimant had known for nearly 2 months that not only did the defendant want to acquire his shareholding in AML and obtain his resignation as a director but also that she wanted to separate their property interests. The negotiation about the property split began separately from the business side of the deal. I find that the claimant was keen to keep it that way for three reasons. The first is that it was simpler. The second was that he realised very well that since the defendant was in a stronger bargaining position over his position as a director of AML and the acquisition of his shares, his bargaining position on the property split would be weakened if the property transfers became dependent on the business transaction. The third was that he did not want the value of any equity coming his way under the property split to be taken into account in fixing the price for the shares. He felt that it was in his interest to keep the two apart. By contrast he knew by the end of September 2009 (as I have already held) that the defendant was now looking at the two together. This is one of the reasons why Ms Hodkinson found the claimant so very pressing about getting the Brewhouse transfer completed as soon as possible.

The claimant does not challenge the property split in this action because he regards it as fair. In his written closing submissions, Mr Oram calculated that the claimant contributed £25,500 and the defendant contributed £96,500 to the purchase of the Brewhouse (assuming all money from AML is split in shareholding proportion). The figures rise to £32,797 and £103,797 respectively if mortgage payments up to the date of the Second Declaration of Trust are included. The corresponding figures for the purchase of Little Lodge were £34,300 and £221,200 (again on the assumption that the £70,000 contribution from AML was split in shareholding proportion). Including mortgage payments up to October 2009, the figures rise to around £103,300 for the claimant and £290,200. These figures make no distinction between the interest and capital repayment elements of any mortgage. This was a distinction which neither party would have had in mind. In fact the Brewhouse mortgage was a capital repayment mortgage throughout, but while the property was let, between about August 2005 and March 2008, the claimant kept all the rent in order to cover the mortgage costs. The mortgage on Little Lodge was a repayment mortgage from August 2006 until about February or March 2009, and then became an interest-only mortgage. However the fact that the claimant paid 50% of the mortgage on Little Lodge up to October 2009 did not mean, as he sought at one point to suggest, that he had acquired a 50% interest in the property. His contribution to the purchase price and his mortgage contributions would have given him a beneficial interest in Little Lodge but it would certainly have been less than 50%.

All this, however, ignores the Declarations of Trust (which the claimant does not challenge) and the parties’ respective equity in the two properties in the light of those Declarations. In my judgment, Mr Mason is right when he submits that this is what matters when considering how far the property split benefitted the claimant. The Brewhouse was put on the market by the claimant in 2010. At that time it was valued at £365,000. The claimant decided not to sell. He held onto the property until January 2014, when it was sold for £378,000. If the Second Declaration of Trust had remained in place and the property had been sold in October 2009, the defendant would have received the first £100,000 of any net sale proceeds. Above that figure the parties would have shared the proceeds equally. Discounting the valuation in 2010 by £25,000 so as roughly to represent the value of the property in October 2009 (which in my view is a generous deduction), there was net equity in the Brewhouse in October 2009 of more than £100,000. The original mortgage was around £245,000 of which the defendant says that about £25,000 had been repaid while the mortgage was a joint responsibility. She put the net equity as high as £140,000. The claimant admits that it was around £80,000. I think the figure was nearer £115,000. So the rescinding of the Declarations of Trust and the transfer of the defendant’s interest ceded net equity to the claimant of not less than £100,000 and possibly as much as £107,500 (on the basis that the surplus above £100,000 was to be shared).

There was no corresponding release of equity by the transfer to the defendant of the claimant’s interest in Little Lodge. So there is no benefit the other way to be set-off. The purchase price, net of stamp duty and costs, was £815,000. The mortgage was for £598,000 on an interest-only basis. Under the Third Declaration of Trust, the defendant was to receive the first £201,000 of the net proceeds of sale. When the property was sold in about July 2011, it generated net sale proceeds of about £200,000. On the not unreasonable assumption that the market value of Little Lodge in the autumn of 2009 was no higher than in the summer of 2011, the claimant stood to receive no share of the sale proceeds when the property split was agreed. The immediate benefit of the split was all one way, from the defendant to the claimant.

The claimant’s only riposte was to say that he signed the Third Declaration of Trust on the defendant’s representation that that he would always have a half share of the business of AML. But there is no challenge to the validity of that Declaration on the grounds that he was persuaded to sign it by misrepresentation. The claimant was not gullible. By May 2009, his personal relationship with the defendant was long past. The defendant had already commenced a new relationship with Mr Hatcher and she had already started to become awkward with the claimant about AML’s finances. There was no guarantee of the duration of his interest in AML, and he knew it.

It is true that by the time of the meeting at Kirby Simcox on 27 October, the deal over the property transfers had been finalized, and that the defendant’s instruction to Ms Hodkinson at the meeting on 27 October to wait until after the Gregg Latchams’ meeting before processing the transfers was a change of tack on her part. But I do not think it came as a bombshell to the claimant, nor do I think the linkage of the property split with the share sale at that point amounted to an illegitimate form of pressure.

The context is that the claimant had been pressing hard for a few weeks to get the Brewhouse transfer completed before anything else happened. Ms Hodkinson saw that the defendant’s position would be exposed if that transfer was implemented without the claimant signing a formal declaration of intent about the transfer of his interest in Little Lodge. Although he agreed in principle to sign such a declaration when meeting Ms Hodkinson with the defendant on or about 8 October, he went to Devon for 2 weeks immediately after that before doing so. I do not question that the claimant had good reason to visit his mother in Devon, but I am also certain that he used the period between 12 and 25 October deliberately in order to make the defendant wait. She made strenuous efforts to get hold of him so that she could get his signature on the new declaration but he avoided meeting her and said that he would not be ready to proceed further until Monday 26 October. I think it likely that if he had signed the Little Lodge declaration before going to Devon, the property transfers would have gone through before the share deal was finalized.

The upshot of frustrating the defendant over his signing of the Little Lodge declaration is that she became suspicious that he was going to be difficult about it. That was the reason why she instructed Kirby Simcox on 20 October to hold the Brewhouse transfer until the Little Lodge declaration was signed. There was more than a grain of justification for that suspicion. The defendant gave evidence (paragraphs 321-328 of her first trial witness statement) of how the claimant was later uncooperative about effecting the actual transfer of his interest in Little Lodge and the removal of his name from the mortgage. This was not investigated at the trial but it demonstrates that the claimant could be very uncooperative when he wanted to be.

The claimant’s evidence that he expected to find that the Brewhouse transfer had been completed when he returned from Devon is not true. Although the defendant’s instruction to Kirby Simcox was not copied to him, he knew perfectly well that she was unwilling to go ahead with the Brewhouse transfer until he had signed the Little Lodge declaration. He was not surprised to learn, when talking to Ms Hodkinson on the Friday before his return from Devon, that the Brewhouse transfer was awaiting his signature on the declaration.

It was against that background that the terms of the share sale was negotiated between the parties over the weekend of 24/25 October and on the following Monday. I have already found (paragraph 32 above) that the claimant realised that the defendant was now linking the net value to him of the property transfers with the price of the shares when he saw the offer of only £10,000 in the first draft of the SPA. A link was established between the two sides of the negotiations at that point, however hard the claimant had previously tried to avoid it.

The deal over the shares did not begin to take its final shape until sometime late in the afternoon of 26 October. In the course of that day, the claimant had said that he no longer wanted a job from AML but intended to set up a femdom website of his own. He had pressed hard for a better financial deal and had won certain concessions; but he was still pressing for more. When the defendant told Ms Hodkinson at the first of the meetings on the afternoon of 27 October to hold the Brewhouse transfer until she had had confirmation that the outcome of the Gregg Latchams meeting was satisfactory, I do not think that she was applying illegitimate pressure on the claimant. It was a logical step for the defendant to take because, if the Brewhouse was transferred to the claimant and he declined to sign the SPA save at a much higher price than was currently under discussion, there was not only a risk that the whole process would be greatly prolonged by the defendant having to call a shareholders’ meeting but also a risk that the value conceded in the property transfers would be lost sight of.

I accept that the conclusion I have just expressed depends to some extent on whether the price offered for the claimant’s shares, taking account of the net financial value to him of the property transfers was reasonable or a clear under-value. That brings me to the threat to use what Mr Oram described as “the call option”. There are two strands to the claimant’s case here. The first is to question whether clause 4.1.5 of the Shareholders’ Agreement was enforceable at all. If it was not, any threat to resort to it would have been unlawful and for that reason would have been a form of illegitimate pressure. The second is the claimant’s contention that the price offered for his shares was so derisory that, linking the share sale with the property transfers and threatening to use the call option to enforce the deal were pressure tactics which for that reason, even if lawful, should be treated as illegitimate.

I am of the clear opinion that clause 4.1.5 of the Shareholders’ Agreement was binding on the claimant. It is not uncommon for shareholders in a private company to stipulate for a right of pre-emption in the event of another shareholder wishing to dispose of his shares. It appears that there was already such a right in Article 9 of AML’s Articles of Association. If the claimant wanted to sell his shares, he had to give first refusal to the remaining shareholders. This right of pre-emption was repeated, with refinements, in clause 3 of the Shareholders’ Agreement. No complaint is made about that clause. The complaint is about the “drag-on” right in clause 4.1.5. Mr Oram submitted that this was an onerous provision and that it should have been expressly pointed out to the claimant before he signed. The defendant’s email to the claimant and Mr Reding of 22 November 2008 had conspicuously failed to do that. She had simply said:

“Here are copies of the documents we will be signing at the Solicitors for you to check over. Please make sure you have read everything and are happy with it all. Clauses have been included re your concerns i.e. if a shareholder dies, the shares must go to the next shareholder with the largest share. Frank can only sell his shares back to us and he has to do this if he loses his job etc. There are also drag along rights i.e. if you and I (as majority shareholders) wanted to sell the company, Frank would be 'dragged along' with the sale. ...”

Mr Oram submitted that, if the clause was not pointed out to the claimant before he signed, it ought not to be treated as binding. He argued that it was an open question how far the Interfoto principle applied to clauses contained in signed contract documents and that this was a case where it ought to apply. However, he accepted, as being an accurate statement of the law, the following passage in the judgment of Mr Andrew Popplewell QC (as he then was) in Do-Buy 925 Ltd v National Westminster Bank plc [2010] EWHC 2862 (QB):

“90.

As to incorporation, the Claimant relied on Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, [1988] 1 All ER 348, [1988] 2 WLR 615 for the proposition that where there is a contractual provision which is particularly unusual or onerous, a party will not be able to rely on the clause unless he has done sufficient fairly to bring the clause to the attention of the other party.

91.

I agree with Mr Davies-Jones that such principles have no application to cl. 21.2 in the present case. He rightly points out that it remains an undecided question whether the Interfoto principle can ever apply to a signed contract. In that case the Defendant was held not to be bound by a term in a printed set of conditions which had been provided to him in the form of a delivery note, but which he had neither signed nor read. In Ocean Chemical Transport v Exnor Crags Ltd[2000] 1 Lloyd's Rep 446, [2000] 1 All ER (Comm) 519, Evans LJ, with whom Henry and Waller LLJ agreed, was prepared to assume that the principle might apply to onerous and unusual clauses in a signed contract "in an extreme case where a signature was obtained under pressure of time or other circumstances". In HIH v New Hampshire [2001] EWCA Civ 735, [2001] 2 All ER (Comm) 39, [2001] 2 Lloyd's Rep 161, Rix LJ doubted whether the principle was properly applicable outside the context of incorporation by notice (see para 209). In Amiri Flight Authority v BAE Systems plc [2003] EWCA Civ 1447, [2004] 1 All ER (Comm) 385, 392, [2003] 2 Lloyd's Rep 767, Mance LJ, with whom Rix and Potter LLJ agreed, noted the doubts of Rix LJ in HIH v New Hampshire and stated that it was unnecessary to decide whether the principle could ever apply to signed contracts. He envisaged that it might do so where for example a car owner was asked to sign a ticket on entering a car park or a holiday maker asked to sign a long small print document when hiring a car which in either case proved to have a provision of "an extraneous or wholly unusual nature"; but that such cases might be ones where the application of the provision was precluded by an implied representation as to the nature of the document. He reiterated the normal rule that in the absence of any misrepresentation, the signature of a contractual document must operate as an incorporation and acceptance of all its terms. This is a reflection of the well known principle whose existence and importance was recently emphasised by Moore-Bick LJ in Peekay v Australia and New Zealand Banking Group [2006] EWCA Civ 386, [2006] 2 Lloyd's Rep 511, 520 at para 43:

“It was accepted that a person who signs a document knowing that it is intended to have legal effect is generally bound by its terms, whether he has actually read them or not. The classic example of this is to be found in L'Estrange v Graucob [1934] 2 KB 394. It is an important principle of English law which underpins the whole of commercial life; any erosion of it would have serious repercussions far beyond the business community.”

92.

This is not an extreme case, nor one in which there is any reason to depart from the principle that a party should be bound by a contract he has signed. The signature on the Application Form was immediately below an acknowledgement that the signatory had read the General Terms and Conditions which came at the end of a section headed "Important-you should read this carefully". Ms Searle accepted that she was provided with the General Terms and Conditions and had had an opportunity to read them; and that the Bank were entitled to assume that she had done so. I see no room for the application of the Interfoto principle in this case, even were it capable of applying to some signed contracts.”

I find nothing in the above passage which gives any comfort to the claimant that, by reason of the Interfoto principle, he should not be bound by clause 4.1.5. He was given a draft of the Shareholders’ Agreement more than a fortnight before the meeting. The meeting was not called under pressure of time. There was some suggestion that the lack of express warning about the clause, was compounded by the fact that the claimant did not know that Mr McColl, who had drafted the Agreement, was acting for the defendant rather than for AML.

I reject that suggestion. Whilst the claimant might have been in doubt as to whether Mr McColl was acting for AML or for the defendant when he arrived at the meeting on 11 December 2008, he was left in no doubt that Mr McColl was acting for the defendant when the meeting started. I found Mr McColl to be a truthful and largely accurate witness (his only obvious error was to get the date of the meeting wrong in his witness statement). I accept his evidence that at the outset of the meeting he told the claimant and Mr Reding that he was acting for the defendant and that if they had any concerns about the documents they were about to be asked to sign, they should get independent legal advice. I also accept Mr McColl’s evidence that he had already told the claimant on the telephone that he was acting for the defendant and not for him. However, the effect of this warning could have been compromised by the defendant’s email of 22 November 2008 in which she had referred to Gregg Latchams as “our company solicitors”. I should add that I accept also that Mr McColl’s Attendance Note of the meeting on 27 October 2009 was accurate where it said: “IM reiterated to SD, before the meeting began, that as IM was only acting for B, SD should feel free to take independent legal advice about the SPA before signing it and SD said that he was not going to take independent legal advice because he could not afford it.”.

The Shareholders’ Agreement gave the defendant and Mr Reding the right, pro-rata to their own shareholdings, to purchase the claimant’s shares, if he ceased to be a director, at either an agreed value or a value fixed by accountants. Clause 5 provided that the Share Value was to be “that proportion of the amount the Accountants consider to be the fair value (assuming a sale) of the entire issued share capital of the Company (Total Shares) that such Shares bear to the Total Shares”. The price in the SPA for the 481 out of the 1,000 shares in AML held by the claimant was £47,500. In my judgment it is relevant, when considering this price, also to take account of the fact that the defendant had ceded net equity to the claimant in the property transfers of not less than £100,000, and had also paid just under £5,000 (actually £4,860) on 6 October 2009 towards one of his credit card bills, and had agreed that the claimant could keep the BMW 5 Series 5 motor car which, although it was not being run as a company car, he had purchased in July 2006 with £26,500 of AML’s money. There was also the equipment which the claimant was being allowed to keep. Although this was expressed to be the consideration for the Compromise Agreement, it was in reality part of the deal over the sale of the shares. The value ultimately placed by the defendant on this equipment was £11,165.

The experts (Mr Isaacs and Ms Winspeare) each provided a valuation of AML as at October 2009. There was a substantial measure of agreement between them as to the methodology. They both adopted a capitalization of earnings approach. They agreed that the future maintainable earnings of the company, subject to 5 potential adjustments on which they held differing views (“the deductions not agreed”), were £232,000 per annum. It was common ground that the appropriate multiplier was between 4 and 5 times pre-tax profits. Given the extent of agreement, it seemed at first surprising that the figures in the joint statement should be so far apart. Mr Isaacs’ valuation of the claimant’s shares was between £347,500 (basis multiplier of 4) and £434,300 (basis multiplier of 5). Ms Winspeare’s equivalent valuations were £28,500 and £35,600.

Aside from the deductions not agreed, part of the gap was explained by the fact that Mr Isaacs’ figures were presented on a quasi-partnership basis without discount for the fact that the claimant’s shareholding was a minority shareholding. Each shareholder in a company treated as a quasi-partnership company is treated as if he were a partner entitled to a share of the value of the company in direct proportion to his shareholding. No discount is applied to reflect the fact that the shareholding may be a minority shareholding. Mr Isaacs postulated a discount of 60% on the value of the claimant’s stake would be appropriate if AML was not to be treated as a quasi-partnership company. This brought his figures down to £149,000 (basis multiplier of 4) and £186,000 (basis multiplier of 5). He was also uncertain to what extent the Shareholders’ Agreement was binding. If it was binding, Mr Isaacs’ evidence was that the discount should be more nuanced to reflect the “fair value” stipulation in clause 5 of the Agreement. In his view “fair value” required regard to be had to the extent to which the shareholding interests of the other shareholders might be enhanced if they acquired the departing shareholder’s shares. The resulting value would be the average of three values: (1) the discounted value of the claimant’s shareholding, (2) the increased value of the defendant’s shareholding if she acquired 50.1% of the claimant’s shares and (3) the increased value of Mr Reding’s shareholding if he acquired 1.8% of the claimant’s shares. Mr Isaacs’ fair value figures were £276,000 (basis multiplier of 4) and £345,000 (basis multiplier of 5) – an arithmetic discount of about 26% on the quasi-partnership figures.

Ms Winspeare agreed broadly with Mr Isaacs’ evidence as to how and where a minority discount applies and how the “fair value” of a minority shareholding is assessed but she pointed out that the size and extent of any discounts to be applied to the shareholdings of the departing shareholder and the remaining shareholder(s) is a subjective exercise. She did not think there was justification for applying any discount to the defendant’s shareholding in arriving at a fair value because, in her view, the defendant had little interest in purchasing the claimant’s minority shareholding. Ms Winspeare understood that the defendant retained copyright in her film appearances. So she could abandon AML at any time, start a new business and take AML’s film library with her. My understanding is that she applied no minority discount to the claimant’s shares but also applied no enhancement factor to the value of the shareholdings of the defendant and Mr Reding.

My conclusions on these issues are as follows. AML was in the nature of a quasi-partnership (see Re Bird Precision Bellows Ltd [1986] 1 Ch 658, Oliver LJ at 667B-C). However clause 5.2 of the SPA expressly provided that any valuation was to be undertaken on the assumption that the sale of the whole of AML was between a willing buyer and a willing seller. The exercise of valuation must share at least that characteristic of a notional sale to an independent third party. Unlike in Parkinson v Eurofinance Group Ltd [2001] 1 BCLC 720, the accountants conducting a valuation under the SPA would not be entitled to approach their task on the basis that this was a sale by an unwilling vendor. Some minority discount must be applied to the claimant’s shareholding to reflect the defendant’s voting control, but perhaps not as high as 60%.

Second, Ms Winspeare’s assumption about the defendant’s control of the film catalogue was factually mistaken. The Model Release Form signed by the defendant on 1 February 2004 covered all jurisdictions, not just the USA. It was signed a few weeks prior to the incorporation of AML but was clearly expressed to be an agreement between the claimant on the one hand and “Adwelsh Media” and “Fantasies Unlimited” on the other. It covered all films made inter alia for The English Dungeon which later became TEM. The defendant would have been in great difficulty arguing in October 2009 that the Release did not cover her appearances in all films belonging to TEM. Thus the defendant did have an interest in remaining a shareholder of AML and in acquiring absolute control through the acquisition of her pro-rata entitlement to the claimant’s shares. By contrast Mr Reding had no real interest in exercising his right to acquire any part of the claimant’s shares.

Third, I agree that it is right when seeking to ascertain a fair value, even in the context of a notional sale of the whole business between a willing buyer and willing seller to have regard to the personal circumstances of the actual buyer and seller. Some discount should be applied to the value of the defendant’s shareholding in arriving at a fair value to reflect the extent to which that holding will be enhanced if 50.1% of the claimant’s shares were added to it. I am not persuaded that the discount should be as high as 40% or that it should be as high as 85% in the case of Mr Reding pro-rata entitlement. The tables suggest to me that 35% and 65% would be nearer the mark. There is a case for saying that no discount at all should be applied to Mr Reding’s shareholding since his interest in acquiring the claimant’s shares was negligible. This brings Mr Isaacs’ figures down to around £268,000 to £335,000.

The first of the deductions from future maintainable earnings that is not agreed between the experts is the level of open market salary for the work undertaken by the claimant. Mr Isaacs allowed £20,000 plus employer’s NIC (13%). Ms Winspeare says the figure should be £60,000 plus employer’s NIC or £5,000 per month (which is the level of monthly income which the claimant claims to have lost by not having received the secondary payment under the SPA). First, I think that a third party purchasing AML would have needed to employ a person to handle the financial administration of the company. This is principally what the claimant was doing in 2009, although he still performed a role in arranging film shoots. I would put the cost of such a person at £30,000 per annum plus NIC (i.e. £33,900). I do not think this figure is inconsistent with the wages and salaries costs incurred by AML in 2011.

The second deduction is a replacement salary for the defendant. Mr Isaacs again allows a sum of £24,600 plus employer’s NIC. Ms Winspeare allows three times that figure (£73,986 plus NIC) on the basis that the defendant was performing three distinct roles: (1) an actress/model, (2) a scriptwriter/blogger and (3) a production and marketing assistant. My view here is that, although the defendant had lost control over her film catalogue to AML, she could leave and start afresh and that was a risk which a third party purchaser would have to meet. Second, the role of lead model in pornographic films has its shelf life. The defendant admitted that her acting career was drawing to a close. Over the next few years the business would need to recruit a new lead model as the principal Mistress in its film content. A principal Mistress would be someone willing to perform live sex acts on film and not just appear naked. The evidence was that this could cost up to £1,000 per filming session. I am in no doubt that Mr Isaacs’ figure for a replacement for the defendant is much too low. The defendant would be difficult for a purchaser to replace in one individual. Aside from being lead model, she was the author of most of the film scripts and stage directions. She had primary responsibility for how AML’s film library was kept and was updated and was in charge for all the on-line content put out by AML. This included product for website customers as well as advertising and promotional material. If a single person could be found to perform these roles (and in my estimation it would be more likely to be two people), the cost would be nearer £60,000. I would allow £67,800 inclusive of NIC.

The next item is an allowance for the cost of hiring equipment and costumes. Put shortly, the defendant has a substantial wardrobe of costumes and props suited to the role of a dominatrix. These ought to be treated as assets of AML and written down over a period. A purchaser of AML would need to acquire replacements or hire them, if such items are available for hire. Ms Winspeare’s figure of £12,000 as an annual cost over 4 or 5 years of purchase strikes me as far too high. If the figure is also meant to include the cost of hire of filming equipment, I consider that this can and should be catered for in an allowance for studio hire. Mr Isaacs concedes a sum of £1,000 for writing down the capital cost but did not quarrel with a capital cost of around £12,000. If this is to be fairly reflected as a deduction from maintainable annual earnings over 4 or 5 years, the right figure to allow in my view is £2,500.

Ms Winspeare has deducted £44,000 for the fact that the defendant was a lead model. I agree with Mr Isaacs that this is an aspect of the salary cost of replacing the defendant. I believe that I have adequately covered it in the figure of £67,800.

Little Lodge was regularly used by AML for filming, as Masters Lodge was before that. A purchaser would need to replace these venues by hiring studios with the necessary equipment. Mr Isaacs does not quarrel with a figure of £10,000 per annum but believes it is already covered by a charge of £10,000 in the company’s accounts. So any further deduction would be double counting. In my judgment a deduction for studio hire is justified in principle. It is for the claimant to make good the suggestion that it is already catered for as an expense in the company’s accounts, because he opposes any further allowance being made for this cost, and he was the financial administrator of AML until his resignation. I have heard no explanation as to whether the rental figure in the accounts covered Little Lodge, rather than filming at other locations. Accordingly, I would allow the deduction of £10,000 from maintainable earnings.

On the findings I have made, the maintainable earnings figure is £117,800 per annum. The value of AML was £471,200 (on the basis of a multiplier of 4) or £589,000 (on the basis of a multiplier of 5) and a fair value for the claimant’s shares, if accountants had been asked to assess it under the SPA, would have been in the range of about £164,000 to £205,000. The range would be £178,000 to £223,000 if the minority discount on the claimant’s shareholding was reduced from 60% to 40%. The valuing of shares in a private company is not an exact science, especially where (as here) the company was engaged in a highly competitive, fast-changing and unusual niche market and where the standard of record keeping is poor. Nevertheless I consider these figures give a more realistic appraisal of the value of AML and of the claimant’s shareholding than the figures put forward in the joint statement.

If one attributes a second hand value to the BMW in October 2009 of £10,000, which was the value the claimant was prepared to give it in his oral evidence, and allocates half of that value to the claimant and half to the defendant, the claimant achieved in his negotiations with the defendant benefits (the cash to pay off his credit card, the transfer of her equity in the Brewhouse, the price for the shares in the SPA, the value of the equipment and her interest in the BMW he was allowed to keep) which were worth in total around £170,000. This was near the lower end of the fair value range. The offer of £47,500 for the shares, when viewed in the context of the rest of the package was a reasonable one. It was certainly not derisory.

In the light of these figures, I do not consider that the postponing of the property transfers until after the Gregg Latchams meeting, and the making clear to the claimant that he could be forced to sell his shares at an agreed or independent valuation, brought to bear pressure that was not legitimate.

When determining whether an agreement should be set aside for duress, a factor to be taken into account is whether the claimant acted in such a way as to affirm the agreement once the pressure was off. In this case the first mention of duress was made in the letter before action from John Hodge Solicitors, dated 8 July 2010. Prior to that the claimant had pressed for the secondary payment under the SPA. Notwithstanding Gregg Latchams’ letter of 26 January, warning him that the payment would be withheld, the claimant’s solicitors wrote twice, on 5 February and on 10 March insisting that payment be made. Nothing was said to the defendant or her solicitors about threats or coercion. I infer that the claimant said nothing about threats or coercion to John Hodge either. Yet I am quite sure they would have asked him to explain the relevant background to the SPA when he instructed them to demand payment. This was affirmatory conduct.

So too is the fact that the claimant signed the Compromise Agreement in December 2009 and has since taken no steps to have it set aside. The Compromise Agreement stated in clause 2 that it recorded the terms on which the claimant and AML had “agreed to settle all outstanding claims which the Employee has or may have against AML or its officers or employees arising out of or in connection with or as a consequence of his employment and/or its termination”. By early December 2009, the Brewhouse transfer had been completed and the primary payment under the SPA had been made. The claimant was relieved of the pressures which he says forced him to sign the SPA. The only leverage which the defendant possessed at that point was to seek to compel the claimant to enter into the Compromise Agreement (clause 4.5 gave the defendant and AML the right to enforce the claimant’s undertaking to enter into the Compromise Agreement) and to withhold the secondary payment until he did so. The equipment which was to be the consideration for the Compromise Agreement was already in the claimant’s possession.

I agree also with Mr Mason’s submission that the Compromise Agreement is fatal to the claimant’s claim that his letter of resignation should be returned and that his resignation as a director should be reversed. It is also fatal to that part of the claim for damages for intimidation which seeks compensation for loss of the claimant’s directorship, if the intimidation claim was otherwise well-founded.

The claimant said in the course of cross-examination that if the defendant had paid the whole of the secondary payment under the SPA he would probably not have challenged it. He would have “have left it at that”. Mr Oram sought to make a virtue of that piece of evidence by submitting that it showed that it was not until the defendant reneged on the secondary payment that he came to believe that he might have an avenue to challenge the SPA. It was the defendant’s failure to make the secondary payment which emancipated the claimant from the duress. I do not follow this argument. The claimant was warned on 26 January 2010 that the secondary payment was not going to be made because the defendant believed that he was liable to reimburse a greater sum to AML. Yet he still instructed his solicitors to press for payment. The answer given by the claimant in cross-examination to my mind illustrates that until the letter before action in July 2010, duress and coercion were not his primary considerations. He was more concerned to see the defendant honour her side of the bargain in the SPA. The duress claim was a construct of the claimant’s legal team once they had probed the claimant for a fuller account of the background history. It supports the view that the claimant’s conduct between November 2009 and July 2010 was an affirmation of the SPA not a repudiation of it.

For the reasons I have given, I do not find that the claimant was subjected to illegitimate pressure to sign the SPA. I also find that his conduct between November 2009 and July 2010 was an affirmation of the SPA when the pressures which he says induced him to sign it in the first place no longer operated. The claim for duress cannot succeed in the light of these findings.

The tort of intimidation is a variant of the broader tort of causing loss by unlawful means (see Lord Hoffman in OBG Ltd v Allan [2008] 1 AC 1 at para. 7). It requires proof of a threat to do something unlawful, with intent to cause injury to the person who is threatened, and the submission to the threat by the person to whom it is addressed. It is actionable only on proof of damage. The threat must be to do something which would be actionable either per se or if loss is suffered. In this context, “an intimation that a man is going to do what he lawfully may do is not a threat” (Atkin LJ in Ware and De Freville Ltd v Motor Trade Association [1921] 3 KB 40 at 87.

My findings on the duress claim mean that the claim for damages for intimidation fails in limine.

The defendant admits that she did not pay all of the secondary payment under the SPA: but she claims to have paid part of it. The claimant alleges that none of the secondary payment was paid and that £5,000 is still due to him in respect of the primary payment.

It is common ground that 4 payments were made towards the primary payment of £24,500 which was due by clause 3.2 of the SPA to be paid within 30 days of the Completion Date. A sum of £10,000 was paid on 6 November 2009. A further sum of £250 was paid on 7 November, and sums of £10,000 and £2,250 were paid on 30 November and 1 December respectively.

As to the balance of £2,000, the claimant accepts that he agreed to this sum being deducted from the primary payment because, on or about 22 October 2009, he had received payment of a sum of £2,000 from AML by way of dividend which the defendant maintained that he should not have received because he was on the verge of selling his shares. His evidence was that he agreed to forego payment provided the defendant honoured the whole of the secondary payment. The defendant’s version of the agreement is different. She says that the agreement over the £2,000 was made very shortly after the SPA was signed and before any of the primary payment had been paid. The claimant agreed to the reduction of the primary payment from £24,500 to £22,500 on condition that £10,250 of the primary payment was paid by 6 November and the remaining £12,250 was paid within the agreed timescale i.e. by 26 November. The claimant made the agreement because he needed some of the cash sooner than the SPA stipulated. I prefer the defendant’s evidence on this point.

Nevertheless the deadlines for payment were not met. On the defendant’s own evidence, £250 of the first instalment was one day late and all of the second instalment was late by several days. The agreement to forego the £2,000 is therefore not binding. That still leaves the question whether the claimant was entitled to receive the dividend of £2,000 which had been paid on 22 October 2009. There are two pieces of evidence which have a bearing on the answer. The first is that the recital to the SPA stated that the claimant had already received £3,000 of the total consideration of £47,500. This sum represented a dividend of £3,000 which the claimant took from AML’s account on or about 5 September 2009. He had accepted in the negotiations with the defendant that he ought not to have received this sum. If he was prepared to acknowledge that he should not have received the September dividend, one may ask rhetorically why he was entitled to the October dividend? The second piece of evidence is that the defendant says that the dividend of £2,000 was a sum paid to each of them by AML on or about the 22nd of each month to enable them to meet their joint liabilities under the mortgage of Little Lodge. According to the contemporaneous documents, the claimant and the defendant were each liable at that time to pay Bank of Scotland, monthly in arrears, a sum of about £1,600 around the 27^th of each month for the Little Lodge mortgage. The defendant says that the claimant took the money on 22 September but did not make his mortgage payment on 27 October. Mr Mason went further in his closing submissions and said that the records showed that the claimant skipped the August payment as well.

The view I take of this evidence is that the £3,000 must remain a deduction from the price payable under the SPA because the SPA says so. Whatever the reason, the parties agreed to record in the preamble that the claimant had already had the benefit of payment of £3,000 of the agreed consideration. So far as the £2,000 is concerned, the defendant secured the claimant’s agreement to set that sum off against the primary payment on certain conditions as to the timing of payment of the balance. Those conditions were not met. The sum of £2,000 therefore remains owing. If the defendant wanted to claw it back, she should have included it in her counterclaim. £2,000 of the primary payment remains unpaid.

In Schedule 2 to the defence and counterclaim, the defendant set out the sums which she said she had paid towards the consideration under the SPA. It is noteworthy that she did not claim credit in Schedule 2 for the £2,000. She admitted an overall non-payment of £17,140. Included in her list of payments was the sum of £4,860 which she had given the claimant on 6 October 2009 to pay one of his credit card bills. Whilst it is appropriate to take this sum into account in considering the overall package the claimant derived from his negotiations it was expressly not regarded as part of the £47,500 figure in the SPA (unlike the second £5,000 which the defendant had promised, which was added to the price for the shares in the final negotiation at the Gregg Latchams meeting on 27 October when Mr McColl was out of the room). The sum of £4,860 cannot be treated as part payment of the sums due under clause 3 of the SPA.

Accordingly there remains unpaid under the SPA, a sum of £22,000. Subject to the counterclaim, the claimant is entitled to judgment for this sum and an appropriate sum of compensation under s. 5A of the Late Payment of Commercial Debts (Interest) Act 1998. The figure claimed, which was not disputed, is £240.

The claimant also claims damages for breach of the SPA by reason of the fact that not all of the consideration was paid. The damages were quantified in paragraph 77 of the particulars of claim in a sum of £55,000, comprising loss of filming and website income at the rate of £5,000 per month over 11 months from February 2010 to January 2011. The reason for this loss was said to be that the launch of the claimant’s new website was delayed through lack of working capital. No evidence was produced to substantiate the effect on the claimant’s new business of the fact that £22,000 under the SPA had not been paid or to establish the loss of income. Mr Isaacs was not asked to address the quantum. Ms Winspeare said she was unable to consider it for lack of evidence. The claim certainly exceeded by a comfortable margin the earnings which the claimant derived from Carmine Code in its first two years of operation. I find the claim for damages is not substantiated. Subject to the counterclaim, the claimant is entitled to no more than nominal damages of £1 for breach of the SPA.

The heading of this counterclaim disguises its scope. What began as an assertion in Gregg Latchams’ letter of 26 January 2010 that the claimant had overpaid himself £54,000 in dividends from the company had expanded, by the time the defence and counterclaim was served, into an allegation that the claimant owed the company over £295,000. Whilst it is tempting to regard this part of the counterclaim as a contrived counter-attack with no substance, that would not be entirely fair. It is certainly a retaliation, in the sense that I doubt very much that the defendant would have pursued this complaint if the action had not been brought, but it has some foundation in the company’s records. The claimant did receive a good deal more money from AML’s bank account than she did, and from time to time, especially after 2007, she remonstrated with him about that fact. The claimant ought perhaps to have seen this counterclaim coming. He sent a long email to Mr Reding on 11 October 2009 “as a fellow shareholder” voicing concerns about the amount of money he had discovered that the defendant was spending on the company’s credit card. It reads as though he was anxious to get a shot in first. However the bank statements and credit card bills establish without any doubt that his expenditure of company money was far greater.

It is important to note the basis on which the defendant was able to instruct Gregg Latchams to say that the claimant had overpaid himself £54,000 in dividends. A few days earlier Mr Orr had written to her with a copy of AML’s interim accounts for the period 1 March to 31 October 2009 and the latest balance on the directors’ loan accounts. Her account was £38,030.75 in credit whilst the claimant’s account was £54,382.54 in debit. This calculation involved Mr Orr reversing an accounting convention which had been applied in all the company accounts of AML since the first year of trading, which was that the two directors’ loan accounts were combined in a single account. He now separated the two accounts to produce these figures. I have no doubt that was done on the defendant’s instructions. It was the beginning of a process of unravelling the combined account which resulted in Schedules 3 and 4 of the defence and counterclaim.

Schedules 3 and 4, in the revised form in which they were served with the amended defence and counterclaim, contain the following analysis. Schedule 3 purports to show that the claimant is liable to reimburse to AML: (1) director’s loans totalling £258,278.17, (2) sums totalling £1,304.60 charged to AML’s Paypal account which were not business expenses, (3) £2,120.80 in unauthorised mobile phone charges, (4) £10,857.76 withdrawn from AML’s bank account other than for business purposes, and (5) the value of equipment retained by the claimant (other than the equipment referred to in the SPA), which is stated to be worth £6,905.77. The total of the sums in Schedule 3 is £279,467.10. Schedule 4 amounts to an additional £16,313.53, comprising £5,706.01 of payments made on the company’s credit card between 2007 and 2009 which are said not to have related to business expenses and £10,607.52 of expenditure on fuel in excess of the authorized monthly allowance.

Schedule 1 to the defence and counterclaim was left unchanged when the amended pleading was served. In Table 1 it set out the after tax profit in each of the tax years ending in 2005 to 2010, the authorized or declared dividends in those years and the parties’ respective shares of those dividends on the assumption that the defendant was entitled to 51% and the claimant to 49% (strictly speaking 50.1% and 48.1% in 2009 and 2010 after the share reorganisation in the Shareholders Agreement). Table 2 was a statement of the total sums which the claimant and the defendant took from the company in each of the corresponding tax years. The figures in Schedule 1 were intended to be corroborative of those in Schedules 3 and 4. The defendant’s case, in essence, is that the amount by which the money taken from the company by the claimant exceeded his share of authorised dividends is money which he is liable to repay.

The experts have scrutinised the figures and have arrived at their own conclusions as to the indebtedness, if any, of the claimant and of the defendant to AML. They range, at one end of the spectrum, from Mr Isaacs’ opinion based on the court accepting Mr Dawson’s evidence uncritically, or only where corroborated by contemporaneous documents so far as business expenses are concerned, to Ms Winspeare’s opinion based on accepting the defendant’s evidence uncritically, or only where corroborated by contemporaneous documents so far as business expenses are concerned, at the other end of the spectrum. If all of the claimant’s evidence about business expenses is accepted, Mr Isaacs believes that he owes nothing to AML and has in fact been underpaid to the tune of £25,851. If the court only accepts the claimant’s evidence where corroborated, the overpayment by AML is £49,441. Ms Winspeare’s corresponding figures are overpayments of £121,900 and £304,670. As to the defendant’s indebtedness to AML, Ms Winspeare’s opinion is that there is none and that she has been underpaid to the tune of £198,110. Mr Isaacs, based on the claimant’s evidence, concludes that the defendant has been overpaid a sum of £51,854.

Much of the difference between the experts rests on the treatment which should be given to the money AML contributed to the purchase of Little Lodge and towards the mortgage commitments on Little Lodge and the Brewhouse. Before any consideration of the figures, however, there are some points of principle raised by Mr Oram. In his submission they demonstrate that the way in which this part of the counterclaim has been presented is misconceived.

Mr Oram’s first point is that the defendant’s claim, as assignee of AML, is in debt. It is not a claim for equitable compensation for breach by the claimant of his fiduciary duty as a director in misappropriating company money.

Second, Mr Oram submits that the claim is rightly one in debt because it is in truth a claim to recover the balance outstanding on the directors’ loan account. He says that the way in which the claimant’s liability has been calculated in the Schedules to the defence and counterclaim, by treating all sums withdrawn from AML by the claimant in excess of his dividend entitlement as liable to be reimbursed, is flatly inconsistent with the company’s accounts which have included a single combined directors’ loan account since trading began. Unless the combined directors’ loan account is set aside or ignored, the defendant can only establish that money was misappropriated by the claimant from AML, and should now be repaid, if it is money that was taken without the knowledge of the auditors and has not been allocated in the accounts in any way at all.

Mr Oram’s third point is that, even if that is wrong, the approach adopted in the claim is flawed. It rests on a presumption that all withdrawals from AML’s bank account not obviously pursuant to a contractual entitlement to dividend or salary were a misappropriation. As he pointed out in opening the claimant’s case, the way in which this part of the counterclaim is put does not properly distinguish between the claimant’s entitlement to salary and reimbursement of expenses as a director, and the claimant’s entitlement to income by way of dividend as a shareholder. There is a clear dividing line in Table A under the Companies Act 1985 between these various entitlements and they need to be established chronologically because it is not open to a director to seek to excuse an alleged misappropriation of funds by claiming to be able to set-off a subsequently acquired entitlement to remuneration e.g. by way of salary (see Hoffman LJ in Zemco Ltd v Jerrom-Pugh [1993] BCC 275 at 281D-G). A fortiori this is so where the subsequent entitlement is a dividend to which he is entitled as a member rather than as an officer of the company.

Fourth, Mr Oram submits that the driver of this part of the defendant’s claim is a comparison between what the claimant received from AML and what she was paid by the company. Her fundamental complaint is that the claimant received more than she did: hence her insistence from time to time on receiving balancing payments from AML. But the mere fact that the claimant received more does not establish that AML has a claim against the claimant to recover the difference, as opposed to she having a personal claim of her own against AML for equality of treatment.

Mr Oram’s final point is that the defendant has stated in her pleaded case (answers 5 and 8 to the claimant’s RFI dated 28 September 2011) that she was aware that the claimant was withdrawing “certain moneys” from AML and that the claimant was aware of all money which she withdrew from AML. The defendant alleges that “all sums withdrawn by [her] have been subsequently covered by agreed and declared dividends in her favour”. This statement of the position has several implications. If and insofar as the defendant was aware of sums withdrawn by the claimant from AML and did not object, she may be taken to have acquiesced in them on behalf of the company since she was the only other director. Such acquiescence would preclude a claim to recover them if the withdrawals were otherwise lawful. If they were not, it exposes her to a claim for contribution for her own breach of duty. Second is the point already made that any balancing payments made by AML to the defendant herself must have been lawful at the time they were made. They cannot be justified on the basis that later they were “covered” by dividend declarations: see Zemco above. Third, the defendant cannot bring a personal claim against the claimant to compel him to repay money to AML so long as she herself has retained the benefit of any balancing payments (see: Towers v African Tug Co. [1904] 1 Ch 558).

In my judgment each of these points made by Mr Oram is well-founded. The claim is wrongly formulated. However, a complete answer to it is the combined directors’ loan account.

On the joint instructions of the parties to Mr Orr, the accounts of AML were set up from the inception of trading to include a combined directors’ loan account. Money which the claimant or the defendant received from AML as personal monies rather than as salary, dividend or reimbursement of a legitimate company expense was recorded in the accounts as an accrual to the director’s loan account. If either was paid less than their entitlement by way of salary, dividend or reimbursement of expenses, it was booked as a credit to the combined account.

Thus in each set of company accounts, from the first trial balance to the approved and filed accounts for each tax year from 2005 to 2009, there was a single directors’ loan account in which the payments received by the directors were netted off against their entitlements to create a single loan balance. The claimant was not recorded as a net debtor in any one year any more than the defendant was recorded as a net creditor. This is not an uncommon way of running the accounts of a private company where the directors are married or are social partners. Mr Orr confirmed in his oral evidence that this was how his firm was originally instructed to set up the accounts of AML and that the accounts were approved in this format in each succeeding year.

Mr Mason argued that there was no evidence that the defendant ever applied her mind to the directors’ loan account. The company accounts were signed by the claimant alone. The defendant should not be treated as bound by what they contained. I cannot accept that submission. The defendant almost invariably accompanied the claimant to the meetings with Mr Orr when the company’s accounts were discussed. These meetings decided: (1) how sums were to be allocated in the accounts between categories of cost and expense and (2) that Mr Orr’s original instruction, to present an aggregate directors’ loan account in the company accounts at the financial year end in which the parties’ individual loan accounts were set-off against each other should continue. The absence of express discussion or a formal shareholder vote on any of the detail is not critical. All that needs to be shown, objectively, is that both parties (who were the only shareholders until 2009) were aware of the form of the accounts and approved them. This is no more than an application of the Duomatic principle. Neuberger J (as he then was) summarized that principle in EIC Services Ltd v Phipps [2004] 2 BCLC 589 at para. 122 as follows:

“The essence of the Duomatic principle as I see it, is that [certain specific formalities, here in the company’s articles] can be avoided if all members of the group [being the group entitled to determine the matter in issue], being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppels, and whether members of the group give their consent in different ways at different times, does not matter.”

I am in no doubt that the defendant was aware of the content of the company accounts year on year and that she approved of the accounts being adopted in that form. There is no evidence that Mr Reding took any different view when he became a shareholder in 2009.

Mr Mason submitted that a distinction should be drawn between the accounts up to the tax year ending 28 February 2007 and the accounts for the next two years because the personal relationship between the claimant and the defendant came to an end in December 2007. He argued that the claimant should at least be held liable for 50% of the net debit on the combined directors’ loan account as at 28 February 2007. The personal separation of the parties would certainly have justified an alteration in the basis of accounting by creating separate director’s loan accounts (whether from 1 March 2007 or 1 March 2008 is a matter of debate): but this was not done. The defendant continued to be involved in the financial affairs of AML as before and continued to instruct Mr Orr jointly with the claimant. No change was made to the combined directors’ loan account. I see no warrant for setting aside the basis on which the accounts of AML were prepared, either before or after 2007.

It follows that I accept Mr Oram’s submission that his client’s prima facie liability in debt under this head of the counterclaim is half of the net debit on the directors’ loan account as at the beginning of 2010. On the figures produced by Mr Orr in January 2010 that is a sum of £8,175.90. Any other sum awarded under this head must relate to a payment which the claimant can be shown to have received from AML which was not allocated to the directors’ loan account and to which it can be demonstrated that the claimant was not entitled e.g. as being payment of salary or reimbursement of a legitimate business expense. I am not certain whether any of the disputed sums, which the claimant says were business expenses, fall into this category. I will hear further submissions from counsel on that question if necessary. For now I express, as briefly as I can, my conclusions about the figures. I shall do so by reference to the table produced by Ms Winspeare on 12 July 2013, summarising the extent of agreement and disagreement in the experts’ joint statement. I shall use the following sub-headings.

Agreed figures. The experts are agreed that in total the claimant received a sum of £506,733 from AML in the relevant tax years (ending 28 February 2005 to 2010). They are agreed on his salary entitlement in that period (£87,500), on his share of the authorised dividends (£363,890) and on the fact that he paid £21,142 into the company in that time. I accept those figures as a starting point.

Personal expenses of the claimant settled by AML. The claimant admits that £59,983 of company money was used to settle his personal expenses. There are three disputed expenses which the claimant says were for the mutual benefit of himself and the defendant, and which the defendant says were exclusively personal expenses of the claimant. The first is the sum of £26,500 used to purchase the BMW. It was purchased in the claimant’s name and was not run as a company car. Mr Orr said that the acquisition cost was treated by him as if it was a loan to the claimant. However the defendant treated it as if it was joint property in her negotiations with the claimant over the price of the shares, because part of the deal was that he should be allowed to keep the vehicle. There would have been no such discussion if the vehicle had been regarded by her as entirely his. Notwithstanding that the defendant used company money to buy a car of her own, (a Toyota Rav 4), she only did so after her relationship with the claimant came to an end. Until then they both used the BMW and both travelled in it together. I regard the cost of the BMW as an expense to be treated as shared 50:50. For that reason I have attributed 50% of the vehicle’s residual value as ceded by the defendant to the claimant as part of the deal over the claimant’s shares.

The second item is a sum of £2,500 withdrawn from the company on 9 July 2007 to be paid to “Linda” (Mr Dawson’s ex-wife). The claimant gave no evidence about this payment but the contemporaneous documentation records that it was a consultancy fee for a property search for an investment flat. The defendant allocated this expense in one of her cost spreadsheets as not being for the company. The parties were still together as a couple at the time. I accept it was a joint expense but not a company one. Thus 50% of this sum is for the claimant’s account.

The third sum is one of £863.19 which was the sterling equivalent of 1,000 euros which was paid out of the company’s account in November 2008 as a deposit on a trip to Africa in support of a charity. The claimant had made the booking to go on the trip alone but not before mentioning it to the defendant. The trip was due to take place in February 2009 and would have cost in total around £10,000, a good deal of which would have gone to the charity. I find that the defendant was initially enthusiastic about supporting the venture but then got cold feet about the size of the cost. In the event the claimant’s father died early in 2009 and he had to cancel. The deposit was non-refundable and was treated by the organisers as a charitable donation. In the circumstances, I consider this was worthy company expense, even if the whole cost of the trip might not have been. It should be shared.

There remains a discrepancy of £3,495 between Mr Isaac’s figures and Ms Winspeare’s figure based on the defendant’s witness statement dated 8 April 2013. I am unable to resolve this sum because it is not clear what personal expenses it is said to relate to. Some time was spent at the trial exploring with the claimant certain sums he withdrew from AML’s bank account under the reference of “BANNER”. It was put to him that most of them were simply withdrawn in order to cover his credit card bills or the overdraft on his personal bank account. But one such sum (of £2,000) was withdrawn on 14 September for payment to the claimant’s ex-wife Linda, possibly in connection with garage doors for Little Lodge. I was not persuaded that any of the BANNER items to which reference was made in the course of the evidence were legitimate company expenses. However none of them in combination totalled £3,495 and for all I know they are otherwise accounted for in the experts’ joint statement by not having been included in the heading of “Reimbursed business expenses”. The burden of proof is on the defendant to explain the additional £3,495. I am not persuaded that this sum should be added to the total of the personal expenses settled by AML on behalf of Mr Dawson.

Reimbursed business expenses. There is a very large gap between the experts’ figures for legitimate business expenditure which the claimant should be allowed to deduct from his total company receipts. If all of the claimant’s evidence as to what constituted a business expense is accepted at face value, the figure is £88,082. If only those expenses identified by the claimant as business expenses for which corroborating evidence exists is deductible, the figure falls to £7,525 according to Mr Isaacs and only £3,530 according to Ms Winspeare.

Ms Winspeare’s figure of £3,530 is, I believe, the figure of £3,530.16 of “company expenses” which the defendant included on the first page of the spreadsheet attached to her witness statement of 8 April 2013. The defendant included them in the spreadsheet as a deduction from the claimant’s total receipts as if they were a legitimate deduction (notwithstanding her addition of an asterisk and the legend “To be determined by the Court”). In the absence of any evidence to suggest these were not business expenses, they must be treated as deductible.

Ms Winspeare has treated the combined totals of the versions of Schedules 3 and 4 to the amended defence and counterclaim (£40,387) under a separate heading of “Misappropriated Funds” and has disallowed them in their entirety. Whilst Mr Isaacs has addressed the total in the original Schedule 4 (£16,313) under the heading of that Schedule, namely, “Unauthorised Company Credit Card Payments”. They are in truth all disputed business expenditure and I shall deal with them here.

Schedule 3 comprises four sums amounting in total to £21,188.93. The first is a sum of £1,304.60 comprising 5 payments on AML’s Paypal account in the autumn of 2007 which the defendant says was cost the claimant incurred in visiting a Mistress in the Czech Republic called Jana Zapletalova (Miss Christine). I accept the defendant’s evidence about this. When the defendant challenged the claimant about this Paypal expenditure in October 2008, he did not give an honest answer. He suggested it might be a fraud. It was not a fraud. The expenditure was his, and it was not a business expense.

The second sum is £2,120.30 for unauthorised use by the claimant of his company mobile phone. The defendant says AML company employees were allowed £25 per month for mobile phone costs, and that the claimant’s mobile phone usage exceeded this allowance by £2,120.80 between 1 August 2008 and 1 September 2009. In the Answers to the Request for Information served in October 2011, the defendant alleges that the £25 allowance was orally agreed with the claimant in or about August 2007. I do not accept that. I have seen no documentary evidence of a £25 monthly limit being imposed before March 2009. The £25 monthly allowance at that time applied only to Mr Hatcher and Mr Reding. It was not applied to the claimant until sometime around June. Prior to that the defendant was certainly making comparisons between the claimant’s mobile phone bills and her own, but not by reference to a monthly limit but rather only in order to demand that balancing payments be made to her from the company’s account by way of compensation. I find that the allowance was applied to the claimant in June 2009. There is no warrant for backdating it. I hold that no more than £250, being a proportion of the excess incurred in the tax year beginning 1 March 2009, is reclaimable by AML.

The third sum is one of £10,857.76, comprising 10 individual amounts which the defendant contends are instances of misappropriation of funds from AML’s bank account because the expenditure was personal or the money taken belonged to AML. However six of the items were listed by the defendant in a spreadsheet which she must have prepared in April or May 2008. The spreadsheet gives a little more detail. The Payment to Friend on 9 July 2007 was the £2,500 paid as a consultancy fee to the claimant’s ex-wife in connection with a property search. It was marked down (correctly) as not a business expense: but I have already dealt with it elsewhere as a shared expenses of the parties. So it would be double counting to deal with it in Schedule 3. The Holiday Flight on 27 November 2007, the cash withdrawals on 4 January, 10 February and 11 February 2008 and the deposit for Flat on 28 January 2008 appear to be being treated in the spreadsheet as a business expense or at least a shared expense: certainly not as a misappropriation. I would attribute to the claimant a 50% deduction for all of these. This comes to £1,172.28. I do the same for the other Holiday flight and the Cash Withdrawals on 9 and 16 June 2006. They are not mentioned in the spreadsheet because they fall outside the period: but there seems to be a pattern here. This gives a further deduction of £906.59. The last item of alleged misappropriation is a sum of £4,200 which, as I recall, was the deposit which was paid by the tenant of the Brewhouse. If this is right, it was not company money strictly speaking. The claimant retained all the proceeds of the rental but was meant to be using it to put towards payment of the mortgage. Whether or not the deposit represented a surplus, I am not inclined to add it to the sums which the claimant may be liable to repay to AML.

The fourth and final sum in Schedule 3 is a sum of £6,905.77 said to relate to equipment (other than that given to the claimant under the SPA as consideration for the Compromise Agreement) which was purchased by the claimant with the company’s credit card and which he is alleged to have taken with him and not returned. It is listed at page A65 of the pleadings bundle. I heard no explanation from the claimant about this equipment. My conclusion is that he is liable to repay a sum of £5,000 to AML in respect of this equipment. I have reduced the claim to reflect the fact that some of it was more than a year old by the time of the claimant’s resignation.

The amended version of Schedule 4 to the defence and counterclaim totals £19,198.56 rather than £16,313.53. Both Mr Isaacs and Ms Winspeare were inclined to treat the sum of £16,314 as liable to be reimbursed by the claimant unless the claimant’s evidence was to be accepted. There are two components to Schedule 4. It lists in the first column payments made by the claimant on the company credit card between 16 February 2007 and 1 October 2009, totalling £8,591.04, which the defendant says she is certain were not incurred on legitimate company business and which she did not authorise or approve. In the second column it lists payments for fuel made on the company credit card by the claimant. The defendant’s case is that there was a monthly limit of £100 for fuel which the claimant regularly exceeded without her permission. The excess comes to £10,607.52.

The claimant gave no explanation for the expenses in the first column of Schedule 4. Some of the larger items relate to the BMW. I have treated that as a shared asset. These should therefore be allocated 50:50. That reduces the total by £1,134.89. Other significant costs were for electrical items (£1,081.00), Carphone Warehouse (£149.99), a flat screen (£1,081.00) and stationery equipment (£46.47 Staples). I give the claimant the benefit of the doubt that these were bona fide company expenses and infer that AML now has the benefit of these items. Most of the rest of the items in the Schedule, amounting to £3,733.54, are attributable to holidays, hotels, flights and restaurants. These are not self-evidently company expenses but I make the assumption that one-third could be justified whilst the balance (£2,500) is cannot. Accordingly, the amount of unauthorised expenditure on the company credit card in Schedule 4 which I would treat the claimant as liable to reimburse to AML under this head is £3,635 (£1,135 plus £2,500).

Turning to the alleged excessive expenditure on fuel, there is no contemporaneous written evidence of the imposition of any restriction on the use of fuel before about 11 June 2009. On that date, the defendant sent the claimant an email saying she would be setting an allowance for his fuel costs; but the email does not say what that allowance was to be. The accounts attached to her email of 11 May 2009 record the claimant’s petrol expenses between 30 October 2008 and 18 March 2009, but not in terms that any proportion is to be reimbursed in whole or in part to AML. In the circumstances, I am not persuaded that any excess fuel costs are to be added to the claimant’s potential indebtedness to AML.

This still leaves the difference between Ms Winspeare’s £3,530 and Mr Isaacs’ £7,525 or £88,082. The only proportionate way in which I can resolve this discrepancy is by accepting Mr Isaacs’ figure of £7,525 as a starting point, rather than Ms Winspeare’s figure of £3,530, and, for the rest, taking a percentage view based on my assessment of the claimant’s evidence in which he sought to justify it. The evidence is contained in Appendix 17 to Mr Isaacs’ report. The expenditure for which he has identified corroborating evidence (£7,525) appears to have the characteristics of a company expense and for that reason I accept it. As to the remaining £80,557.20, a large proportion of which is represented by cash withdrawals allegedly for film shoots, I would allow a deduction of no more than 60%. Thus £55,859 of the £88,082 is to be treated as a deductible expense and £32,223 is not. My reason for this conclusion is that I accept the defendant’s evidence that the cash withdrawals were greater than the claimant should have required for film shoots, and because I do not consider that the claimant was being a wholly honest witness when he tried to justify all the expenditure in Appendix 17 as being wholly incurred on company business.

The ESaver Account. It is common ground between the experts that £181,500 of company money was paid into an Abbey National ESaver account. In fact there were two such accounts operated between August 2004 and November 2007. The defendant says that account No. 32049414 was a company savings account, intended to contain a reserve for tax and other substantial liabilities, and account No. 76515425 was her own personal savings account. The latter was used as a transfer point for funds paid into the former because the defendant had on-line banking facilities on that account.

The parties agree, and so do the experts, that the following sums were paid out of the company ESaver account: £86,000 to pay Corporation Tax for the years 2005, 2006 and 2007, £70,000 towards the purchase price of Little Lodge, £15,500 to repay the loan towards that purchase price from Mr White, £8,400 to repay the loan towards that purchase price from Mr Giles. The £86,000 was undoubtedly a company expense and rightly does not feature in the experts’ joint statement Table of the claimant’s indebtedness to the company. There is no dispute that the £70,000 contribution to the purchase of Little Lodge was not a company expense and was for the joint benefit of the parties. £35,000 of this sum must therefore be allocated to the claimant. A question arises whether the claimant should likewise have attributed to him 50% of the cost of repaying the two loans which assisted in the purchase, notwithstanding that they were loans made to the defendant. Ms Winspeare is of the opinion that he should and has therefore added a total net sum to his indebtedness of £46,950. I agree with her approach. The loans were for the parties’ joint benefit in enabling the property to be purchased for both of them. If company money was used to repay the loans it is a joint indebtedness to the company (and the claimant and the defendant would each be entitled to treat 50% of the loans as part of their contribution to the purchase).

Two other movements of funds into and out of the company ESaver account are recorded in the experts’ figures. Ms Winspeare adds a sum of £15,000 to the claimant’s indebtedness which is shown in the account records as having been paid to the claimant as if it were a dividend. It would appear from the defendant’s spreadsheet at page C34 of trial bundle B2 not to have been included in the overall total of £506,733 of payments made by AML to the claimant. Subject to confirmation from counsel that that is indeed the position, and further argument if necessary, I think Ms Winspeare is right to treat the sum of £15,000 as an addition to the claimant’s overall potential indebtedness to AML.

Ms Winspeare also credits the claimant with £20,000 of “Monies returned to ESaver”. It is common ground that the claimant paid at least this sum into the ESaver account. Mr Isaacs believes that the figure should be £30,000 and deals with it under the heading “Monies received on behalf of Ms Bell”. I will address it under that heading.

Company cheques used for claimant’s purposes. These two cheques were identified in the defendant’s witness statement dated 8 April 2013 (paragraph 54). She exhibited the cheque stubs from the company’s cheque book. The first cheque was for £2,100 drawn by the claimant payable to himself on 18 May 2006. The second was payable to Mainstay for £1,990.68 and was dated 11 February 2007. The defendant says that this was a personal bill. Mainstay were the property managers at the Brewhouse. The cheque to them must have been in payment of the claimant’s share of the service charge which the parties had agreed to split equally. The defendant is in my judgment right that this was a personal expense of the claimant. I find she is right about the first cheque also. It does not feature in Mr Isaac’s Appendix of cash withdrawn by the claimant to meet company expenses and is not otherwise explained as a company expense.

The Brewhouse mortgage. There is an issue as to how the money paid to the claimant out of AML’s bank account to enable him to pay the mortgage on the Brewhouse should be treated. The total, if one excludes the service charge payments recorded in Appendix 20 to Mr Isaacs’ report, was about £72,000. It is included in the headline figure of £506,733. However, Mr Isaacs credits the claimant with a sum of £23,532, representing 50% of the total mortgage payments, net of the rent which the claimant retained (with the defendant’s agreement) to pay the mortgage while the Brewhouse was rented out. He does so because the claimant maintains that 50% of the mortgage on the Brewhouse was attributable to her even though he made all of the payments. Ms Winspeare disagrees and makes no such allowance.

The claimant was cross-examined about his stance over the Brewhouse mortgage. I had greatly difficulty following his reasons for saying that 50% should be allocated to the defendant. The agreement when the property was purchased was that he should have sole responsibility for the mortgage. Once the property was rented out, about a year after it was purchased, he kept all of the rent. From March 2008, he was the sole occupant of the Brewhouse. The contemporaneous correspondence reflects the claimant’s agreement that he had sole responsibility for the Brewhouse mortgage even in the first year of ownership. In my judgment Mr Isaacs is not correct to include a credit of £23,532 in his calculations.

Monies received on behalf of Miss Bell. In Appendix 19 to his report Mr Isaacs has recorded the three sums of £10,000 which the claimant says he paid to the defendant or reimbursed to AML. The first two sums were the product of some share dealing. There is no dispute that he paid £20,000 into one of the ESaver accounts in May 2006 and that he is entitled to credit for that amount. The third £10,000 was purportedly paid by a cheque drawn on the claimant’s personal account in September 2007. However, there is no record of this sum being paid into the ESaver accounts. In cross-examination, the claimant could not recall the identity of the payee and said that the money could have been used to pay for renovations at Little Lodge, in particular the installation of electronic gates. It is the claimant who seeks the benefit of this additional credit. His evidence has not persuaded me that he is entitled to it.

I leave counsel to work out the financial consequence of the findings made in paragraphs 153 and following of this judgment. Whether it results in judgment against the claimant for a debt due to AML in any greater amount than the sum of £8,175.90 depends on what I have said in paragraph 152.

Both breach of warranty counterclaims concern the claimant’s alleged failure to make proper provision for AML’s liabilities to pay Corporation Tax and PAYE. The defendant’s case is that the claimant orally agreed with her in October 2008 that each month he would put £5,000 of the company’s money into a reserve account for Corporation Tax and would make additional provision of up to £5,000 per month when necessary for PAYE. The defendant says that when she entered into the SPA she believed that such provision had been made. After the SPA and the Compromise Agreement had been signed and the claimant had left the company, the defendant says that she discovered that no reserve had been made. Her case is that AML had no immediately available funds with which to meet a Corporation Tax liability of about £40,000 and PAYE liabilities of about £3,500. The Corporation Tax, by agreement with HMRC, had to be paid in instalments.

The warranty in the SPA which the defendant claims was broken was the warranty in clause 5.1.10. It provided:

“5.1

The Seller warrants to the Purchaser and to the Company that:

5.1.10

There are no material facts or circumstances, in relation to the assets, business or financial conditions of the Company, which have not been fairly disclosed in writing to the Purchaser which, if disclosed, might reasonably have been expected to affect the decision of the Purchaser to enter into this Agreement.”

Clause 5.2 went on to state:

“The Seller warrants and represents to the purchaser and the company that each warranty under clause 5.1 is true, accurate and not misleading at the date of this agreement. The seller shall fully indemnify the purchaser and the company against any loss, expense, cost or liability suffered or incurred by either the purchaser or the company as a result of any breach by the seller of any warranty under clause 5.1.”

The warranty in the Compromise Agreement was in clause 7. It stated as follows:

“7.1

The Employee warrants and represents to the Employer that up to and as at the date this Agreement becomes binding in accordance with Clause 13 the Employee:

7.1.1

has not committed any breach of any duty owed to the Employer;

7.1.2

has not done or failed to do anything amounting to a repudiatory breach of the express or implied terms of his employment with the Employer or which, if it had been done or omitted after the execution of this Agreement, would have been in breach of any of its terms;

7.1.3

it is not employed or self-employed in any capacity nor is he in discussions which are likely to lead to nor has he received such an offer of employment or self-employment; and

7.1.4

is not aware of any matters relating to any acts or omissions by him or any director, officer, employee or agent of the Employer which if disclosed to the Employer would or might reasonably affect its decision to enter into this Agreement.

7.2

The warranties and representations given by the Employee in Clause 7.1 are a strict condition of this Agreement and the transfer of ownership of the Consideration is subject to the accuracy of those warranties and representations.”

There is, as Mr Oram correctly submitted, a difference between the two warranties. The warranty in the SPA, although given to both the defendant and AML, is primarily one for the protection of the defendant as purchaser. The obligation on the claimant was to disclose material facts and circumstances. Whilst the existence of a reserve fund for taxation would be material, there would be no breach of warranty if the defendant already knew that no such reserve existed. The warranty in the Compromise Agreement is one given to AML as the “Employer”. The warranty is that the claimant has not committed any prior breach of duty.

I make the following findings. The claimant was at all material times the financial administrator of AML. He agreed with the defendant, at a meeting on 11 December 2008, that he would set up a reserve account for tax liabilities into which he would pay a sum of about £8,000 per month, £5,000 of which was for Corporation Tax and £3,000 of which was for PAYE. This followed difficulty which AML had experienced in paying Corporation Tax in 2008 because there was no reserve. The claimant was the sole signatory on AML’s four bank accounts with HSBC, and the bank statements were sent to his address: but the defendant could have had access to them if she had wanted. There was a difference of recollection as to when the defendant acquired full on-line access to these accounts. It was not until she acquired her own code generating key fob and log-in password. I find that that did not happen in the case of the HSBC accounts until sometime in late 2008. Another Abbey National ESaver account was created in the summer of 2009 specifically as a tax reserve but the defendant did not have on-line access to it until sometime in the autumn of that year.

The defendant knew in April 2009 that the claimant had not set up a reserve because he told her. She insisted again that he should do so, and this time suggested that the reserve should be £10,000 per month. She repeated this instruction several times in the course of the summer because she knew that AML’s Corporation Tax bill that year was likely to be at least £40,000. In the event the Corporation Tax assessment for the tax year ending 28 February 2009 was £39,261.56. It was due for payment on 1 December 2009. There was no money set aside to meet it and the tax was paid in 4 monthly instalments. AML was able to meet its PAYE liabilities in 2009 from cashflow, although the defendant discovered in February 2010 that one month of PAYE, in a sum of £3,500, had been missed.

I do not accept the claimant’s evidence that the defendant knew that there was no reserve for tax when she signed the SPA. She may have suspected that all was not well, but she had delegated the task of setting up the reserve to the claimant and had reminded him several times of this obligation. The claimant was in breach of the warranty in the SPA for not disclosing that he had not created a tax reserve.

By the time the Compromise Agreement was signed the defendant knew that there was no reserve because the date for payment of the Corporation Tax had passed and she had checked the position. I do not consider that that fact absolved the claimant from the obligation to disclose what had been a clear breach of duty on his part. It simply proves that the defendant would have entered into the Compromise Agreement in any event. The claimant was in breach of the warranty in clause 7 of the Compromise Agreement as well.

The defendant counterclaims an indemnity under clause 5.2 of the SPA and damages for breach of the warranties in both agreements. However, no particulars of any specific loss (e.g. tax penalties or interest on tax) have been given. There is no justification for awarding an indemnity to the value of the tax due. On the issue of damages, the case is put more generally that the defendant, had she known the true position, would not have entered into the SPA or would not have agreed to pay the same price for the claimant’s shares. I reject the first of these assertions. I find that the defendant would still have entered into the SPA even if she had known before it was signed that there was no reserve for tax. She had compelling reasons for wanting to reach an agreement whereby the claimant left the company, just as she had compelling reasons for wanting to compromise any employment claim by entering into the Compromise Agreement.

I accept that the defendant might have tried to drive an even harder bargain over the share price. Mr Mason did not suggest any figures. In his closing submissions he simply invited the court to award “a compensatory amount”. Having carefully considered this question, I have come to the conclusion that the defendant would probably not have agreed to the final increase in the share price from £42,500 to £47,500. That is another way of saying that if the claimant had owned up about the fact that there were no tax reserves, as he should have done, the defendant would not have so readily promised to pay not one, but two sums of £5,000 to help the claimant meet his credit card bills. I therefore award damages of £5,000 for breach of the warranties in the SPA and the Compromise Agreement.

With one exception, the restrictive covenants in clause 12 of the Shareholders’ Agreement, clause 7 of the SPA and clause 9 of the Compromise Agreement were in similar terms.

There was a covenant (“the customer dealing covenant”) against dealing with or supplying any person who had at any time during the previous 12 months been a client or customer of AML (clause 12.1.2 of the Shareholders’ Agreement, clause 7.1.1 of the SPA and clause 9.1.1 of the Compromise Agreement).

There was an anti-solicitation covenant (“the supplier solicitation covenant”) prohibiting the claimant from soliciting or enticing away from AML any supplier who had supplied goods and/or services to AML at any time during the previous 12 months (clause 12.1.1 of the Shareholders’ Agreement, clause 7.1.2 of the SPA and clause 9.1.2 of the Compromise Agreement). However, clause 12.1.1 of the Shareholders’ Agreement went further and extended the anti-solicitation to customers and clients of AML (“the customer solicitation covenant”).

Finally, there was a covenant (“the employee solicitation covenant”) that the claimant should not solicit or endeavour to entice away from or discourage from being employed by AML any person who was an officer or employee of the company (clause 12.1.3 of the Shareholders’ Agreement, clause 7.1.3 of the SPA and clause 9.1.3 of the Compromise Agreement).

The duration of these covenants was the same in each agreement. The customer dealing covenants and supplier solicitation covenants were for 18 months. So was the customer solicitation covenant in clause 12.1.1 of the Shareholders’ Agreement. The employee solicitation covenants were all for 12 months. However, the starting dates differed. The covenants in the Shareholders’ Agreement were expressed to run from the date on which the claimant ceased to be a shareholder in AML i.e. from 27 October 2009. This was the same date as the “Completion Date” from which the covenants in the SPA operated. But the covenants in the Compromise Agreement applied from the “Termination Date”, which was 4 December 2009. The difference is immaterial to the issues of alleged breach raised in the counterclaim.

It has to be said that the customer dealing covenant was unrealistic and practically speaking very difficult to enforce once the defendant agreed to delete any anti-competition covenant from the draft SPA and conceded that the claimant could set up a competing website offering the same genre of pornography. Customers are internet users. There would be no way of policing whether a user of the claimant’s new website was someone who had previously accessed the TEM website and paid to view material on that website as well. Fortunately, the ambit of the counterclaim for breach of restrictive covenant is quite narrow and is focussed on breach of the employee solicitation covenant. Wider issues do not arise.

The counterclaim stems from the creation of the new business, called Carmine Code, which the claimant launched after his resignation from AML, and in particular Mr Reding’s involvement in that business. The domain name www.carminecode.com was purchased by the claimant on 2 September 2009. A web page was set up in September 2009. The claimant chose NationalNet as the web host. Carmine Code Ltd was incorporated on 17 November 2009. The first set of company accounts, for the period ended 31 March 2011, state that the company began trading on 14 February 2011.

The alleged breaches of covenant are twofold: (1) that the claimant set up his own business, in conjunction with Mr Reding, in competition to that of AML, and (2) that he sought to entice Mr Reding away from his employment with AML.

The claimant made a number of assertions in her evidence which might have founded other allegations of breach. One was that the claimant took all AML’s company contacts when he left the company. Whether or not this is true, there is no pleaded case of breach of confidence nor any counterclaim for delivery up of documents containing confidential information belonging to AML..

Another assertion was that the claimant’s new website or websites (aside from www.carminecode.com, the claimant has set up another website called www.femmefatalefilms.com) bore a striking similarity in layout and style to the TEM website and were trying to mimic the TEM website contrary to the express prohibition in paragraph 2 of the letter of 13 December 2009. The complaint about mimicking was abandoned by the defendant in the course of her evidence. It would in any case have failed because the letter of 13 December 2009 was a relaxation of the existing covenants, not a vehicle for imposing new restrictions for which there was no consideration. There is also no counterclaim for passing-off.

The counterclaim for breach of restrictive covenant comes down to the role played by Mr Reding in the claimant’s new business. Mr Reding was not exempted from the employee solicitation covenant by the relaxation in the letter of 13 December 2009. Mr Mason sought to suggest that the second paragraph of that letter actually broadened the covenant so that it was without limit of time. There is no warrant for that suggestion for the reason I have already given. The December letter was intended to relax the agreed covenants not to extend them. In any case a covenant preventing the claimant from ever working with Mr Reding would most certainly be too broad. However, the employee dealing covenant for 12 months (until 27 October 2010 under the Shareholders’ Agreement or the SPA, and until 4 December 2010 under the Compromise Agreement) was in my judgment a valid and enforceable covenant.

The evidence concerning Mr Reding’s involvement in Carmine Code is as follows. Mr Reding’s agreed date of departure from AML, allowing for one month’s notice, was 31 January 2011. According to Companies House records he joined the board of Carmine Code on 1 February 2011 and remained a director until 13 August 2012. He resigned at that point: but his resignation lasted only two days. The explanation given for this brief resignation was that it was done to enable the claimant to apply for a business loan. Mr Reding rejoined the Board of Carmine Code on 15 August 2012 and was still a director at the time of the trial.

Companies House records show that at all times until the annual return dated 17 November 2012, the claimant was the holder of the only issued share in Carmine Code. At some point between November 2011 and November 2012 a second share was issued in the name of Mr Reding. (D117) Mr Reding’s oral evidence was that he first received a share in Carmine Code in March 2011 and that he had had no interest in the company until after the end of January of that year.

However, the claimant’s case, confirmed by a letter from his solicitors dated 11 January 2013, is that Mr Reding had a 50% stake in Carmine Code from the date of incorporation. Mr Reding could, of course, have held a 50% beneficial interest in the one issued share in Carmine Code at any time before 31 January 2011, without being named as a shareholder himself.

In his witness statement, Mr Reding says that after he resigned from AML, he set up his own company, Future Red Ltd, and that it was only after his resignation that he “got talking to Stephen Dawson who suggested we became partners in his new venture now that he was out of [AML’s] contract’s period of not hiring their staff”. He retreated from that position in his oral evidence. He admitted that he had talked to the claimant about the claimant’s future business plans in late 2009 and in early 2010. He knew about the acquisition of the Carmine Code domain name in September 2009 and that a web page had been set up in September 2009: but he said that it was simply a holding page.

It was put to Mr Reding in cross-examination that he had worked for Carmine Code before his resignation from AML and possibly from as early as October 2009. His answer was not convincing. He said he did not think so and “Not really”. The fact is that only Mr Reding had the expertise to produce a commercial website. His explanation of how the claimant’s new websites came to be created is that he adapted work he had started as a private project. He was only prepared to admit that this process of adaptation occurred during his period of notice. He had no option but to make this admission because, on 4 January 2011, Mr Hatcher had contacted him to say that AML had spotted that a site called www.femmefatalefilms.com had been “stealing” AML’s computer codes. In other words, it had been noticed that the source coding used to create the TEM website had been used for this new site. Mr Reding replied that he was responsible for the Femme Fatale site but that he had only began working on it after his letter of resignation.

I do not accept the distinction which Mr Reding drew between preparing the template for a website as a private project and the adaptation of that template to create websites for Carmine Code. In my view, all of the preparatory work was work for Carmine Code unless it can be shown that it was done speculatively. The overwhelming probability is that it was done at the request of the claimant or in response to an intimation from the claimant that it would be needed in due course for his new business. Even if that is wrong, and the process of adaptation began in January 2011 or after the employee dealing covenant against the claimant expired on 4 December 2010, what matters is whether the adaptation was done in consequence of an approach which the claimant had made to Mr Reding prior to 4 December 2010. I have no doubt that it was and that the approach was contrary to the employee dealing covenant. I find that the claimant invited Mr Reding to join him in his new business when Mr Reding was free to do so, and asked for his help in creating the new website. He made that invitation long before 4 December 2010. The claimant’s admission that he regarded Mr Reding as having a 50% interest in Carmine Code from its incorporation suggests that the invitation was made around the time of the claimant’s resignation from AML.

The breach of covenant is historic. The covenant itself had expired before Mr Reding handed in his notice. No question of injunctive relief arises, and none was sought at the trial. The question is what, if any, financial compensation should be awarded to AML. I will infer, in the claimant’s favour, that his approach or approaches to Mr Reding took place after he had resigned as a director. I bear in mind that the claimant was free to solicit Mr Reding after 4 December 2010. I am also satisfied that Mr Reding would have left AML in any event sometime early in 2011. Amicable though the parting was, Mr Reding was not entirely happy with the defendant’s management (as I have already found) and he had projects of his own that he wanted to pursue. The prospect of working with the claimant was undoubtedly a major factor but it was not the only factor. At best, therefore, the claimant’s breach of covenant deprived AML of the services of Mr Reding no more than a few weeks sooner than he would have departed of his own accord or as a result of approaches which the claimant was entitled to make after 4 December 2010. This is not in my judgment an exceptional case justifying the award of an account of profits. The appropriate remedy is damages, representing such loss as can be shown to have been suffered by AML. There was no evidence of any loss other than the fact that AML might have to have its own website re-designed with new source coding. No price was put on that exercise but Mr Mason accepted that it was likely to be modest. I award a sum of £1,000.

The counterclaim for damages for alleged breach by the claimant of his duty as a director of AML in failing to arrange a switch to a cheaper web host is quantified in a sum of about £250,000. It is said that Cool Piranha was costing AML on average £16,100 per month whereas NationalNet cost only about £2,100 per month. The defendant’s case is that a saving of around £14,000 per month could have been made over the 18 months between July 2007 (the month after receipt of the By Storm report) and January 2009 (when the decision was finally taken to switch to National Net).

The figures are striking. However, the issue is primarily a technical one. The responsibility for deciding whether to make a switch of server host was that of the directors of AML. It was the joint responsibility of the claimant and the defendant. The claimant was delegated the task of researching the options. The claimant discharged that task by commissioning the By Storm report. It was for the Board to look at the report, take further advice if necessary, and come to a decision.

I am unable to accept the defendant’s evidence that she was not shown the By Storm report. She certainly knew about it. I am satisfied that she had access to it. If she did not ask to see it or decided not to read it, that did not absolve her from her duty to the company to form a view as to the right course to take. The matter was discussed by the directors with Mr Reding. Mr Reding’s explanation for sticking with Cool Piranha was that AML was using 10 to 11 servers at the time and he felt that moving to a new host would be dangerous because it would be a major exercise involving down time from the web. He was also not impressed by the By Storm report because he thought most of the information it contained was reproduced from data published by an American IT research and advisory company called Gartner Inc. Mr Reding was proved wrong 18 months later because the switch to NationalNet appears to have been uneventful. But that is not, without more, an adequate foundation for finding that he was negligent in recommending that AML maintain the status quo, let alone for concluding that the claimant was in breach of duty for going along with his advice.

The standard of care owed by a director is that of a reasonably diligent person having both the general knowledge skill and experience reasonably to be expected of a person carrying out the same functions as are carried out by that director and the general knowledge, skill and experience that that director has (se. 174 Companies Act 2006). I do not consider that the claimant was in breach of that duty in not recommending a switch to a cheaper web host in the summer of 2007.

There is an arguable case for saying that the directors should have kept the possibility of a switch actively under review between July 2007 and the autumn of 2008 (when Mr Hatcher began investigating alternatives). However, the defendant produced no evidence to show what a further investigation in that interval of time would be likely to have turned up. I note, for example, that NationalNet was not one of the alternative providers which was reviewed in the By Storm report. I do not know when they came on the scene.

I have ignored the suggestion in the defendant’s written evidence that Mr Reding did not express a disinterested opinion because his own personal website was being hosted by Cool Piranha free of charge, because that allegation was not put to him in cross-examination. The defendant has not made good the breach of duty necessary to support this head of the counterclaim. It fails in its entirety.

The claimant’s Part 20 claim against the defendant for contribution is founded on the proposition that a co-director, especially a more senior director, has an obligation to supervise a colleague at least to the extent of ensuring that systems are in place to enable that colleague to discharge any functions delegated to him in an efficient manner (Re Queen’s Moat Houses plc, Secretary of State for Trade and Industry v Bairstow No. 2 [2005] 1 BCLC 136. Mr Oram referred also to Re Barings plc, Secretary of State for Trade and Industry v Baker (No. 5) [2000] 1 BCLC 523 at 535-536 for the following principles:

Mr Oram submitted that the claimant would be liable to contribute in equity if she assented to use of the company’s money in a manner that was in breach of trust even if she did so under protest, and that she would similarly be liable under statute (the Civil Liability (Contribution) Act 1978) to the extent that her breach of duty caused AML the same loss.

However, the premise for the contribution claim is that the claimant has been found liable for breach of his fiduciary duty and that the defendant was correspondingly in breach of her duty as a director in the circumstances which gave rise to the claimant’s breach. That is no doubt a case which the company could advance against the defendant or any party with standing to sue in the company’s name or sue the company. But in order for the claimant to rely on an alleged breach of statutory or fiduciary duty by the defendant in the circumstances of this case, he must first assert his own breach of statutory or fiduciary duty. The argument in essence is saying “you are liable to contribute to my liability because it was for you to prevent me from breaching my duty”. In my judgment that is not a permissible claim in law or in equity because it involves the claimant relying on his own wrong, not as a parallel breach but as an essential ingredient of the cause of action against the defendant. The principle ex turpi causa applies in this context.

Even if that is wrong, Mr Oram was careful to emphasise that the counterclaim against his client for misappropriation of company was brought in debt. It is not pleaded as a claim for breach of statutory or fiduciary duty. The factual findings I have made regarding the sums which the claimant received from AML may support a finding of breach of such a duty, but I have drawn no such conclusion. The counterclaim in debt succeeds to the extent found in paragraph 151 of the judgment save insofar as there are sums of money which were not allocated in the company’s accounts to the combined directors’ loan account which the claimant received from AML and which I have found that he has not justified as a legitimate business expense. If there are, the debt under this head of the counterclaim will increase pro tanto. The fact that the defendant may similarly be indebted to AML is irrelevant to the claimant’s liability.

To get a claim for contribution off the ground the claimant needs positively to assert and prove his breach of statutory or fiduciary duty, as well as that of the defendant. In my judgment it is not open to him to advance a contribution claim on that basis.

The claim to set aside the SPA has failed. The claim for breach of the SPA has succeeded to the extent of £22,241. Against that liability, the defendant has succeeded, as assignee of AML, in recovering approximately £8,000 as the claimant’s share of the net balance on the directors’ loan account, and, personally and as assignee, damages of £5,000 for breach of warranty and damages of £1,000 for breach of covenant. It remains for counsel, if necessary after consulting the experts, to ascertain whether there are further sums for which judgment should be given on the counterclaim to recover the claimant’s indebtedness to AML. On any view, however, the sums for which the parties have succeeded in this action are unlikely to justify the substantial legal cost they have incurred in fighting this action to trial. The dispute is one which has been fuelled by intransigence on both sides. The counterclaim would never have been raised if the claim had not been brought. The claim would not have been brought if full payment under the SPA had been made. The dispute should have been compromised long before it reached this court.

In the judgment handed down on 21 May 2014, I allowed the counterclaim brought by the defendant as assignee of AML to the extent of a sum of £8,175.90 (paragraph 152). I held that: “Any other sum awarded under this head must relate to a payment which the claimant can be shown to have received from AML which was not allocated to the directors’ loan account and to which it can be demonstrated that the claimant was not entitled e.g. as being payment of salary or reimbursement of a legitimate business expense. I am not certain whether any of the disputed sums, which the claimant says were business expenses, fall into this category. I will hear further submissions from counsel on that question if necessary”. Without prejudice to argument on that point, I went on, in paragraphs 153 to 176 of the judgment to make findings about the figures discussed by the experts, in particular those which appeared in Schedules 3 and 4 of the Amended Defence and Counterclaim (ADCC). I stated at paragraph 177 that it was for counsel to work out the financial consequences of those findings but made it clear that whether the findings meant that the defendant was entitled to succeed on this head of the counterclaim in any sum greater than £8,175.90 depended on whether (a) the further sum was not one which had been allocated to the combined director’s loan account and (b) was one to which the claimant had not been entitled as a payment towards, or in lieu of, salary and was not reimbursement of, or payment of, a legitimate business expense.

At the hearing on 29 May which followed the handing down of judgment, the claimant made no concession that any further sum was repayable by him to AML. The defendant sought to argue that the judgment under this head of the counterclaim should be increased by an additional £68,582.03 (by my arithmetic the figure is £68,457.32). This would result in a net overall judgment in favour of the defendant rather in favour of the claimant. Mr Mason (counsel for the defendant) identified 8 sums in his skeleton argument (paragraph 5(a)-(h)) about which I had made findings in paragraphs 153 to 176 of the judgment. He submitted that those findings were to the effect that the claimant had misappropriated these sums from AML, and that the fact that the individual director’s loan accounts had been set-off against each other did not mean that there was no liability of the claimant for the misappropriated funds. I rejected that analysis at the 29 May hearing and ordered that the defendant should file further submissions and evidence if she contended that the sums in paragraphs 5(a)-(h) of Mr Mason’s skeleton had not been allocated to the combined directors’ loan account.

Mr Mason filed a second skeleton argument and a second witness statement of Mr Orr in compliance with that Order. Mr Oram served submissions in response and Mr Mason filed submissions in reply. This judgment deals with those submissions. The parties were invited to say whether they required another hearing and neither requested one. So, on 14 July, I made an Order that the issues arising were to be determined on paper.

Mr Orr’s witness statement contains an analysis of the sums that were booked to the directors’ loan account in an effort to demonstrate which of the figures addressed in paragraphs 153 to 176 of the original judgment was the subject of set-off within that account and which was not. In his accompanying skeleton, Mr Mason has highlighted the extent to which the 8 sums referred to in paragraph 5(a)-(h) of his skeleton argument of 29 May were within the set-off. But he has gone further and now claims that two additional amounts, which were the subject of findings in paragraphs 153-176 of the original judgment but were not mentioned at the hearing on 29 May, should also be added to the counterclaim as satisfying the dual test in paragraph 152 (not allocated to the directors’ loan account and not a legitimate business expense). He also makes a claim on behalf of the defendant for the tax liability AML will allegedly incur on these amounts and asks for the defendant to be indemnified against the amount of the fine which is alleged to be payable to HMRC.

The claimant objects in principle to any attempt by the defendant to introduce into the counterclaim under this head: (1) sums which were not pleaded to have been misappropriated from AML, and (2) sums which the defendant acknowledged in her pleadings had been withdrawn from AML with her consent. In practice this submission amounts to saying that the only pleaded counterclaim to recover sums alleged to have been misappropriated by the claimant from AML relates to the sums in columns 3 to 6 of Schedule 3 to the ADCC (totalling £21,188.93) and the sums in Schedule 4 to the ADCC (totalling £19,198.56). Accordingly, the claimant’s submissions are confined to the sums in paragraph 5(a)-(e) of Mr Mason’s skeleton of 29 May and do not respond to the items in 5(f)-(h), let alone the two additional amounts or the alleged liabilities to HMRC.

I cannot accept the claimant’s objection. Paragraphs 11 and 68 of the ADCC plainly allege that to the extent the sums withdrawn by the claimant from AML exceeded his dividend entitlement, they were not authorized withdrawals. My reading of paragraph 2.7.1 of the same pleading is that withdrawals were made with the consent of the defendant insofar as they represented the claimant’s dividend entitlement and no further. The case pleaded in the ADCC was always that the excess of withdrawals over dividend entitlement represented a loan by AML to the claimant which was counterclaimed in column 2 of Schedule 3 to the ADCC as a debt due to be repaid to the company. The amount of the alleged debt was £258,278.17. Columns 3 to 6 of Schedule 3 included additional sums alleged either to have been misappropriated (through PayPal or from the company bank account) or to have been unauthorized expenditure (mobile phone) or to represent the value of equipment taken and not returned. I am of the clear view that the counterclaim has always extended to cover the sums in all of the columns of Schedule 3 to the ADCC on one and the same basis, namely that they were not authorized or legitimate expenditure and are liable to be repaid to the company. Thus, the consideration given to the validity of the counterclaim in paragraphs 135 to 176 of the original judgment was not confined to the sums in columns 3 to 6 of Schedule 3 and to the sums in Schedule 4: nor was the experts’ evidence. It extended to the entirety of Schedule 3 and included the allegedly unauthorized loans in column 2.

However, in paragraphs 141 to 146 of the original judgment I addressed, and accepted as well-founded in principle, a number of submissions about the counterclaim which the claimant advanced at the trial. Amongst these was the argument that the defendant may be taken to have acquiesced in the payment of any sums withdrawn from AML by the claimant of which she was aware at the time of the withdrawal and, if the withdrawal was for a legitimate purpose of the company, she would be precluded from objecting to it. If it was not for a legitimate purpose of the company e.g. to meet a company expense, she could be liable to the company as a co-director for having permitted the withdrawal of the money and therefore liable to contribute to any claim by the company to recover the money.

I considered that the manner in which the directors’ loan account had been combined into a single account rendered it unnecessary to address these arguments. The assumption which I made was that all or most of the allegedly unauthorized loans to the claimant in column 2 of Schedule 3 had in fact been allocated to the claimant’s director’s loan account and set-off against the defendant’s director’s loan account to result in a single net debit on the combined directors’ loan account. Hence I concluded that it was only if this could be shown not to have been the case, and the money was not expended on a legitimate business expense, that there was an arguable basis for adding it to the counterclaim.

The assumption underlying this conclusion would appear to have been wrong. So I have had cause to reconsider the argument about acquiescence and the defendant’s liability to make contribution.

Mr Mason argues in his June submissions that Mr Orr has demonstrated in his second witness statement that the following sums (which I have already held were not a legitimate business expense) were also not allocated to the directors’ loan accounts. The sums are: (1) £8,875.29 of “BANNER” expenses (judgment paragraph 157), (2) £1,124.11 comprising 4 out of 5 payments on AML’s Paypal account (judgment paragraph 161), (3) £250 of expenditure on mobile phone (judgment paragraph 162), (4) £1,494.25 of the miscellaneous items of expenditure totalling £10,857.76 (judgment paragraph 163), (5) £3,219.95 of unauthorized credit card expenditure (judgment paragraph 166), (6) £27,172.47 representing 40% of expenditure on “production costs” in 2005 and 2006 (judgment paragraph 168), (7) £2,100 in respect of the cheque drawn by the claimant on the company’s account on 18 May 2006 and made payable to himself (judgment paragraph 173), (8) £1,250, being 50% of the £2,500 paid to the claimant’s ex-wife in July 2007 (judgment paragraph 155), and (9) £5,000 towards the value of company equipment taken by the claimant and not returned (judgment paragraph 164). These sums come to a total of £50,486.07.

The above sums were withdrawn from AML’s bank account or expended by the claimant during the financial years ending 28 February 2005, 2006, 2007, 2008, 2009 and 2010. I expected to see an analysis of the accounts in all these years to show where the withdrawals were not dealt with within the directors’ loan account. Mr Mason submits that that is precisely what Mr Orr has done in Exhibit PO1 to his witness statement. He says that Mr Orr has then gone on in Exhibit PO2 to illustrate how sums treated as a company expense in Exhibit PO1 were not allocated to the claimant’s director’s loan account. This is not quite right. Mr Orr has gathered into Exhibit PO1 various items of expenditure in the years 2006-2010 which come in total to £38,850.24. These he has no doubt extracted from the management accounts or spreadsheets underpinning the annual accounts for the years in question. He has then indicated in Exhibit PO1 whether the sum withdrawn was treated as a company expense or was allocated to the claimant’s director’s loan account. I have no reason to disbelieve Exhibit PO1 as an accurate summary. However Exhibit PO1 is not comprehensive in the sense that it does not include all of the items of expenditure comprised within the sums listed in paragraph 10 above. Exhibit PO2 consists of a schedule of the figures included in the combined directors’ loan accounts in each year from 2004-2005 to 2008-2009 and for 1 March to 31 December 2009, and an illustration of how sums were actually treated in the accounts in the financial year ending 28 February 2008. Mr Orr appears to be inviting the Court to accept that the treatment of expenditure in that year proves how similar expenditure by the claimant in other years was treated even if not expressly itemized in Exhibit PO1. Thus, he asserts in paragraphs 6, 7 and 8 of his accompanying witness statement that all expenditure on “production costs” in the financial years ending 28 February 2005, 28 February 2006 and 28 February 2007 was treated as a company expense. This inference is presumably to be drawn from the fact that expenditure on “props/direct costs” was treated in this way in the year to 28 February 2008.

The burden of proof here rests on the defendant, since she is the counter-claimant. It is for her to produce any evidence necessary to support the submission that the sums which I have held in paragraphs 153 to 176 were not a legitimate company expense, were sums which were not the subject of a set-off within the director’s loan accounts, were unauthorized expenditure and therefore are liable to be repaid to the company. I sympathise with Mr Oram’s submission that, except for the items specifically addressed in Exhibit PO1 and Exhibit PO2, the evidence contained in Mr Orr’s second witness statement largely rests on assertion. Save where supported by Exhibit PO1 and Exhibit PO2 and the cashbooks and accounts in the trial bundles, I am not prepared to draw the inferences from Mr Orr’s second witness statement which Mr Mason invites me to draw in his June submissions or his submissions in reply.

My conclusion on the sums in paragraph 10 above are as follows:

Strictly speaking the last two items in the list in paragraph 12 above were not covered by my Order of 29 May because they did not feature in Mr Mason’s skeleton argument for the hearing on that date. I have considered whether it is fair to allow the defendant to make additional submissions in respect of them and have come to the conclusion that it is fair, since both were the subject of express findings in the judgment. However, I reject the counterclaim for sums likely to be payable to HMRC which was advanced for the first time in Mr Mason’s June submissions. This head of counterclaim was never pleaded and it should have been. There is no justification for seeking to introduce it at this late stage of the action.

The result of this Addendum is that the amount of the counterclaim brought by defendant as assignee of AML is increased from £8,175.90 to £49,230.44. This produces a net judgment in favour of the defendant of £32,989.44 (£49,230.44 plus the sums of £5,000 and £1,000 awarded to the defendant in paragraphs 188 and 206 respectively of the May judgment, less the £22,241 awarded to the claimant in that judgment).

The hearing at which judgment was formally handed down is to be treated as having been adjourned to 29 May. The hearing of 29 May is further adjourned until a date on which the parties can address me (if convenient, by telephone) on the appropriate order as to the costs of the action and any application for permission to appeal. The time for serving a notice of appeal continues to be stayed until that hearing takes place.

I invite the parties to find a convenient date and time for that hearing to take place within the next 4 weeks.

I recognize that the parties are likely to approach the question of costs on the basis that the winner is the party who is the net financial recipient under the judgment by more than a nominal amount. For that reason I direct that the defendant shall file any skeleton argument about costs 5 clear days before the date of the final hearing and the claimant shall file his skeleton argument 3 clear days before that date.