Hopkins v T L Dallas Group Ltd & Anor

The First Defendant Dallas Group Limited (“DG”) is the holding company of the Second Defendant Dallas & Company Limited (“DC”), a company which carries on the business of insurance brokers. (I shall refer to DG and DC together as the Defendants). Mr Paul Towey (“Mr Towey”) was the Deputy Managing Director of both Defendants responsible for the marine insurance department of DC (“the Marine Department”). TTB Limited (“TTB”), which traded as The Trade Bureau, was at all material times an exporter of goods. Mr Henri Dana (“Mr Dana”) at all times acted as TTB’s managing director. Mr Leon Dwek (“Mr Dwek”) was its principal shareholder and one of Mr Dana’s two fellow directors. TTB’s customers included Mr Abdul Malik (“Mr Malik”) (who on the 14^th April 2000 changed his name to Mr Chabli) and companies associated with him, including Malicorp Trading SARL (“Malicorp”) and Alnada.

This action is concerned with the rights and obligations (if any) created by three letters which bear the date of the 29^th November 1995 (“the 1995 Letters”) signed by Mr Towey, in the case of two on behalf of DC, and in the case of the third on behalf of DG. In the 1995 Letters, in consideration for goods and finance supplied by TTB to Mr Malik or “Malicorp Trading Ltd” and associated companies, Mr Towey gave unconditional undertakings to TTB to pay (on behalf of DC) the sums of £372,000 and of £250,000 and (on behalf of DG) of £372,000. On the 1^st April 1997 Mr Towey on behalf of DC signed an acknowledgement of indebtedness to TTB in the sum of £500,000 under DC’s two 1995 Letters (“the 1997 Acknowledgement”). On the 16^th May 1997 Mr Towey on behalf of DC signed a confirmation of the receipt of the loan (“the 1997 Confirmation”). Mr Towey proffers as the explanation for signing the 1995 Letters that they enabled Mr Malik and his companies to earn trading profits which would be available to meet business expenses which Mr Malik could not afford to meet and which were currently met on his behalf by DC and to prevent him going bankrupt, an event which might be damaging to DC. There were in fact no trading profits but only trading losses. TTB went into insolvent liquidation in March 2002. By Deeds of Assignments dated the 20^th June 2002 and the 10^th October 2002 (“the Assignments”) the liquidator of TTB without any prior communication with the Defendants in consideration of the payment of £1,000 assigned all rights under the 1995 Letters, the 1997 Acknowledgement and the 1997 Confirmation to the Claimant Mr David Hopkins (“Mr Hopkins”). By letters dated the 27th June 2002 (“the Letters before Action”) Mr Hopkins gave notice of the first of the Assignments to DC and DG and made demand for payment of the sums undertaken to be paid. In this action, which was commenced on the 28^th June 2002, Mr Hopkins as assignee of those rights seeks an order against the Defendants for payment of the three sums which total £994,000. In the course of his final speech on behalf of Mr Hopkins Mr Boswood conceded that no sum ever became due under the undertaking given by DC to pay £250,000 and his claim is now limited to the two sums of £372,000.

The Letters before Action came as a complete surprise to DC and DG. The extraordinary dealings between Mr Towey and TTB were a revelation to them. Mr Towey had never disclosed the existence of the 1995 Letters or the 1997 Acknowledgement to his fellow directors or the auditors. DC and DG had dismissed Mr Towey for dishonesty on the 28^th July 1997 and Mr Towey had paid DC and DG £2 million in compensation for his defaults and defalcation at that time. But Mr Towey never disclosed that he had dealings with TTB of the character the subject of these proceedings, let alone his assumption of any such obligations on their behalf. Indeed he had warranted that he had entered into no such commitment. TTB, though in serious financial straits since 1996, had at no time prior to its liquidation ever made a serious claim for payment against the Defendants or written a letter before action, let alone sued. Indeed its accounts never made any reference to the 1995 Letters or the 1997 Acknowledgement and Mr Dana made no such reference when he prepared and signed TTB’s Statement of Affairs.

Faced with such a stale claim by Mr Hopkins as assignee and possessed of little (if any) direct knowledge of the dealings between Mr Towey and TTB, the Defendants were determined to defend the action, but they had real difficulty in identifying the appropriate lines of defence until the full facts emerged. As the facts and relevant law have emerged more clearly, the grounds of defence have changed to reflect the position as the Defendants saw it emerge.

Two examples should be recorded. The first relates to the defence of duress. Mr Towey gave his first witness statement for the Defendants in which he made the allegation of duress against Mr Dana. On this basis the Defendants pleaded duress as one of its defences. Mr Towey however later changed sides and made a number of witness statements for Mr Hopkins. Faced with this change of sides, the Defendants felt obliged to drop this allegation. In the course of his evidence Mr Towey confirmed the truth of the contents of his first witness statement. This occasioned an application by the Defendants for permission to further amend their Defence to revive the plea of duress. I refused permission because the application was made too late and because the allegation in Mr Towey’s statement did not sufficiently cover the dates when the 1995 Letters or 1997 Acknowledgement were signed.

The second relates to the legal character of the 1995 Letters. Until final speeches the Defendants contended that the 1995 Letters (if otherwise valid) constituted contracts of guarantee and that the provisions of section 4 of the Statute of Frauds 1677 accordingly applied, requiring formalities to be complied with which (the Defendants contended) had not been complied with. But when in the course of Mr Brodie’s final speech on behalf of the Defendants I intimated my provisional view that the 1995 Letters were not contracts of guarantee, but contracts by which the Defendants gave an unconditional undertaking to make stipulated payments on stipulated dates, Mr Brodie on instructions told me that he would not seek to argue the contrary. That line of defence accordingly no longer survives.

The issues raised by the Defendants which remain to be decided are as follows:

The first 1995 Letter reads as follows:

“T L Dallas Group Ltd

T.T.B. Ltd T/A The Trade Bureau

Chatham Buildings

8 Chester Street

Manchester

M1 5GE

29/11/95

Dear Sirs

In consideration for goods and finance provided by T.T.B. Ltd to Malicorp Trading Ltd and/or associated companies and/or nominees, we, T.L Dallas and Co Ltd, waiving all our rights of objection and defence arising from the said credit relationship, hereby irrevocably undertake to pay to The Trade Bureau immediately upon its first demand, a total sum of £372,000.00 (three hundred and seventy two thousand pounds sterling only) including principal, interest, and all other charges. The above sum is of £372,000.00 is payable in two instalments of £186,000.00 (one hundred and eighty six thousand pounds sterling only) one on 30/6/96 and the other on 31/12/96.

Our guarantee is valid until the original of this letter is returned to us by recorded delivery.

With each payment under this guarantee our obligation will be reduced pro rata.

Yours faithfully

[signed]

Paul Towey

For and on behalf of

T.L Dallas Group Ltd.

[witnessed]”

It will be noted that, whilst the letter heading is that of DG and signatory Mr Towey signs on behalf of DG, the party expressed in the body of the letter to be giving the undertaking to pay is DC. As a matter of construction of this home-made document, I think that this is a mistake in expressing the true intent of the parties to be derived from the letter as a whole which must be that DG should be expressed to be the party giving the undertaking. The original of this letter was never returned to DG.

The second 1995 Letter reads as follows:

“T L Dallas & Co Ltd

Established 1919

T.T.B. Ltd T/A The Trade Bureau

Chatham Buildings

8 Chester Street

Manchester

M1 5GE

29/11/95

Dear Sirs

In consideration for goods and finance provided by T.T.B. Ltd to Malicorp Trading Ltd and/or associated companies and/or nominees, we, T.L Dallas and Co Ltd, waiving all our rights of objection and defence arising from the said credit relationship, hereby irrevocably undertake to pay to The Trade Bureau immediately upon its first demand, a total sum of £372,000.00 (three hundred and seventy two thousand pounds sterling only) including principal, interest, and all other charges. The above sum is of £372,000.00 is payable in two instalments of £186,000.00 (one hundred and eighty six thousand pounds sterling only) one on 30/6/96 and the other on 31/12/96.

Our guarantee is valid until the original of this letter is returned to us by recorded delivery.

With each payment under this guarantee our obligation will be reduced pro rata.

Yours faithfully

[signed]

Paul Towey

For and on behalf of

T.L Dallas & Co Ltd.

[witnessed]”

The reference to Malicorp Trading Ltd is puzzling. That company did not exist at the time. With some hesitation I accept Mr Dana’s evidence that the insertion of this name was a mistake: the name intended was Malicorp. The original of this letter was never returned to DC.

The third 1995 Letter reads as follows:

“T L DALLAS & CO LTD

T.T.B. Ltd T/A Trade Bureau

Chatham Buildings

8 Chester Street

Manchester

M1 5GE

29/11/95

Dear Sirs

In consideration for goods and finance provided by T.T.B. Ltd to Abdul Hamid Malik and/or associated companies and/or nominees, we, T.L Dallas and Co Ltd, waiving all our rights of objection and defence arising from the said credit relationship, hereby irrevocably undertake to pay to The Trade Bureau immediately upon its first demand, a total sum of £250,000.00 (two hundred and fifty thousand pounds sterling only) including principal, interest, and all other charges. The above sum is of £250,000.00 is payable in two instalments one on 31/12/95 and the other on 31/1/96.

Our guarantee is valid until the original of this letter is returned to us by recorded delivery.

With each payment under this guarantee our obligation will be reduced pro rata.

Yours faithfully

Paul Towey

For and on behalf of

[signed]

T.L Dallas and Co Ltd.

[witnessed]”

As I have already said, Mr Hopkins has abandoned all claims to payment under this letter.

The 1997 Acknowledgement reads as follows:

“T L Dallas & Co Ltd

Established 1919

Henri Dana Esq

The Trade Bureau

82 Sussex Square

London

W2 2TX

1^st April 1997

Dear Mr Dana

We refer to our conversations during the last few months and regret we have been unable to produce the papers to you confirming the payment of £500,000.

TLDallas and Redcap together, on the assets out of which this money was guaranteed, confirm that we have a provisional Agreement to dispose through EIS Scheme 1580 M and to raise funds. We have accordingly guaranteed to pay £500,000 on Tuesday 7^th May by Telegrafic [sic] Transfer. Alternatively, if finance is available beforehand then some or all of the £500,000 will be paid beforehand.

Yours sincerely

For and on behalf of

TLDallas

[signed]

Paul Towey”

It will be noted that Mr Towey did not sign on behalf of Redcap and that Redcap signed no other document. Mr Boswood, counsel for Mr Hopkins, made clear in his submissions that his case is that the 1997 Acknowledgement is not a guarantee, but is an acknowledgement of the outstanding indebtedness of DC to TTB under the second and third 1995 Letters in the sum of £500,000 and an agreement by DC on the agreed date to pay that sum in consideration of the allowance of further time to pay as evidenced by the earlier correspondence. In view of the fact (as is now common ground) that no sum ever came payable under the third 1995 Letter, the 1997 Acknowledgement cannot give rise to any liability on the part of the Defendants to pay any sum beyond that due under the second 1995 Letter. Mr Boswood has not contended to the contrary.

On the 16^th May 1997 Mr Towey on DC’s letterheaded notepaper faxed the 1997 Confirmation to Mr Dana at TTB which reads as follows:

“With reference to the loan you have given us and that we confirm receipt of.

We hereby confirm we will pay you £30,000 by 1.00 p.m. on Wednesday 21 May 97 and a further £100,000 by close of business on the 31^st May 1997.”

The rights under this letter were (together with the 1997 Acknowledgement) the subject of the second of the Assignments. It is not suggested that this letter gives rise to any cause of action.

It is convenient at this stage in the judgment to say something about (in turn) the witnesses called by Mr Hopkins and by the Defendants and my findings on their credibility.

MR HOPKINS’ WITNESSES OF FACT

Mr Dana

Mr Dana was one of the three directors and shareholders of TTB and in fact (if not in law) the managing director. Mr Dana dealt with most of the sales made by TTB to Mr Malik and companies and individuals associated with him and with Mr Towey in all the dealings between Mr Towey and TTB.

Mr Dana on his own evidence is not averse to dishonesty if it suits his purposes. It is sufficient at this stage to refer to four examples of his dishonesty. First (as he told me) TTB was seriously insolvent from the end of 1995 but TTB quite deliberately concealed this from its auditors and did not disclose in its books or accounts substantial loans which (he says) it made and received because to do so would have revealed an even worse picture of TTB’s financial position than was already revealed and even greater insolvency. Secondly in his application to Trade Indemnity Plc (“TI”) for a credit insurance policy dated the 4^th December 1995 in respect of the sums of £372,000 stated as owing under the first and second 1995 Letters, he falsely stated that those sums were due in respect of goods to be shipped from the UK of which the customers to be insured were DC and DG. DC and DG were never customers for goods of TTB. Thirdly he told me that he caused payments due to TTB to be channelled through Energyaction Ltd (a subsidiary of TTB) as a purely cosmetic (and dishonest) exercise designed to mislead those concerned into believing that Energyaction was not (as in fact it was) dormant. Fourthly he told me that he prepared an internal invoice designed to mislead TTB’s accountants into believing that a sale of certain salt had been effected for US$160,000 when it had not.

His business methods instil no confidence in him. His evidence was to the effect that he did not keep a record in TTB’s books or accounts of the many loans he says that he made and received or of repayments. His only records were entries in his diary and (possibly) his laptop computer, which (he told me) were stolen from his car in October 2002. If this evidence is true, it is doubly disturbing that he kept TTB’s records in this manner and that he kept this material to himself and did not refer to it in his Statement of Affairs or hand it over on the liquidation of TTB to the liquidator.

Beyond this (not surprisingly in the circumstances) he was not an impressive or credible witness. He was unable to explain satisfactorily why the liabilities which he said that the Defendants assumed under the Letters were “written off” without any real effort to recover from the Defendants; why the 1995 Letters were never referred to in the accounts of TTB or its Statement of Affairs; or why (as he conceded he probably did and as I have no doubt that he did) he gave instructions to TTB’s solicitors Read Roper and Read (“RRR”) to write letters (“the RRR Letters”) to Mr Towey and his companies threatening proceedings against them for the sums alleged to be due under the 1995 Letters (though no specific reference was made to the 1995 Letters) but that no letter before action should be sent to either of the Defendants. It is quite clear, whatever he told Mr Gerald Krasner (“Mr Krasner”) of Bartfields (UK) (Limited) (“Bartfields”) who were TTB’s auditors or this court, that he knew at all material times that DC and DG were worth suing and indeed good for any sum due. Their resources were strained in 1997 as a consequence of Mr Towey’s fraud, but strengthened by Mr Towey’s payment of £2 million compensation and progressively improved thereafter. According to Mr Dana there was no possible defence to a claim to enforce the undertakings given. Yet he made no effort to secure any payment by DC or DG. The closest he got was to make a curious uninformative telephone call in early 1997 to Mr Colin Dallas to which I will subsequently refer.

In a word, he is a witness whose evidence on any matter in dispute requires the closest scrutiny, if not corroboration. Mr Towey confirmed the evidence in his first witness statement that Mr Dana resorted to threats of personal violence and of use of thugs against him when Mr Towey failed to do as Mr Dana wanted. Notwithstanding that passage in his witness statement, Mr Hopkins called Mr Towey as a witness. Mr Dana was not cross-examined on this allegation. Whether or not there is truth in this allegation, Mr Dana plainly was not scrupulous in his methods to get what he wanted.

Mr Dana introduced Mr Hopkins to the project of purchasing and pursuing the causes of action the subject of these proceedings and, in order to persuade him to purchase and fight these proceedings, assured him that there were no defences to the claims. That again he must have known to be false for in cross-examination he readily accepted that the third 1995 Letter never came into effect and “fell away”. Mr Dana agreed with Mr Hopkins to manage the project in return for a payment of £25,000 which is payable irrespective of the outcome of the action and (in all dealings with Mr Hopkins’ solicitors in relation to this action) has effectively acted as principal giving instructions to the solicitors without reference to Mr Hopkins.

Mr Malik

Mr Malik and his trading companies Malicorp and Alnada were long standing customers of TTB, and Mr Malik owned or controlled the companies which in turn owned the two vessels (the Amra and the Baroon) which figure largely in this litigation. His financial dealings with TTB and Mr Towey are clouded in mystery. When Mr Malik gave his evidence, he was obviously an old and sick man. His evidence was often scarcely audible and (as he told me and as was apparent when he gave evidence) his powers of recollection have seriously failed. It was possible to extract some information of value from him in cross-examination. Limited weight can be given to what he says.

Mrs Dana Walfisz (“Mrs Walfisz”)

Mrs Walfisz was personal assistant to Mr Dana in London during 1995 and witnessed the second 1995 Letter, the topic to which her evidence was principally directed. She was an obviously honest witness who gave her best recollection of what happened some years ago.

Mr Thomas

Mr Thomas was employed by TTB as in-house company accountant from 1992 until March 1996 and thereafter as export manager in charge of preparing export documentation for all transactions carried out by TTB until August 1998. He prepared a detailed analysis of Malicorp’s accounts correct to the end of February 1996. His role was that of a bookkeeper mechanically recording and compiling accounts, and not of questioning what was being done.

Mr Hopkins

Mr Hopkins with his accumulated savings moved to Spain where he has carried on a relatively successful drapery business. He met Mr Dana on holiday in Spain and they became friends. TTB supplied drapery to his business. Mr Hopkins never had any connection with the Defendants. Mr Dana brought to him the proposition that he purchase the rights under the 1995 Letters for £500. The proposition as presented was an astounding deal. For the £500 and a fee of £25,000 to Mr Dana and legal costs which would not exceed £25,000 Mr Hopkins was to recover £994,000 from Dallas. Mr Dana assured Mr Hopkins that there were no defences to the claims. Mr Hopkins told me that he has left the conduct of proceedings entirely to Mr Dana, that he has not read the pleadings and that he has not personally given any instructions to (or apparently received any advice from) the solicitors acting for him in this action. He has paid the solicitors several hundred thousand pounds on account of costs and he has very little money left. This is all very troubling, and the more troubling since he told me that he will be wiped out if he loses and is ordered to pay costs. His explanation was that he has trusted Mr Dana 100%.

Mr Dwek

Mr Dwek has had a chequered history as a businessman. Leaving aside TTB, several companies of his have gone into insolvent liquidation. He is apparently now very wealthy and must have been so in June 1995 when he invested £1.5 million in TTB to take up a substantial shareholding in and a directorship of TTB. On this investment he has apparently obtained no return. He witnessed the first 1995 Letter. He personally made loans to Mr Malik when TTB was unable to do so. Such loans were repaid. His conduct in relation to TTB was very much out of character for the adroit and successful businessman that he makes himself out to be and his evidence was unimpressive and indeed unconvincing. He gave me a puzzling explanation of why, whilst he witnessed the first 1995 Letter, Mrs Walfisz was asked to witness the second. He said that Mr Dana and he thought that it was prudent that Mrs Walfisz witness the second 1995 Letter in case it was ever questioned. He did not explain why they thought that it might be questioned. If there was any risk of any such question, one would expect (most particularly in view of the sums involved) that a solicitor would be instructed. He had no recollection whether the £250,000 the subject of the third 1995 Letter was ever advanced. He was unable satisfactorily to explain why one 1995 Letter was signed by DC and one by DG instead of one alone by DC and DG. He was unable to explain satisfactorily (if at all) why financial support by DC and DG for Mr Malik was channelled by DC or DG through TTB instead of directly. He recognised that the provision of guarantees by DC and DG for Mr Malik’s trading was “a rather unusual transaction”. But most extraordinary of all and totally unexplained by Mr Dwek was the failure at any time of TTB ever to make demand of DC or DG under the 1995 Letters, a matter which he conceded was very strange. Mr Dwek’s constant and unconvincing refrain as an explanation for events was that he trusted Mr Dana. In a word Mr Dwek was an unimpressive and unconvincing witness, and his evidence was troubling.

Mr Towey

Mr Towey (with Mr Dana) is the central character in this case. As I have already said, he made his first witness statement on behalf of the Defendants. He subsequently made several witness statements on behalf of Mr Hopkins and, when called by Mr Hopkins, verified the contents of all of them. Mr Towey was the director of DC and DG who on their behalf signed the 1995 Letters and 1997 Acknowledgement and the 1997 Confirmation. Whilst a director he was very secretive about the Marine Department and Lloyds Business of DC which were his fields of responsibility and made it plain to Mr Terence Goulding (“Mr Goulding”), an insurance broker working within the Marine Department under him, that he took strong objection to disclosure to others in the Defendants of his thoughts and concerns. In the words of Mr Goulding, Mr Towey could be quite a bully when crossed. He had reason to be secretive, for from 1991 onwards he was extracting money from DC by the subterfuge that the payments made were payments of insurance claims to clients, as indeed he admitted in cross-examination. He did so after I had advised him that he was entitled to refuse to answer questions where his answers might incriminate him. Mr Towey concealed from his co-directors not merely the 1995 Letters and 1997 Acknowledgement, but his arrangement with TTB under which very substantial sums were charged to DC in respect of trading by Mr Malik and in respect of payments to Mr Malik. To further cover up what he was doing, Mr Towey signed as director of DC deliberately false statements that all accounting records had been made available to the auditors and that these recorded all transactions undertaken, that no credit facilities had been provided except as disclosed and that there were no liabilities, whether contingent or otherwise, which were not disclosed. He initially denied that he was effectively expelled from DC for misconduct, but this was plainly the truth as was apparent from what I shall subsequently refer to as the “Severance Agreements” under which he agreed to pay £2 million in respect of the debt he has incurred in respect of dealings which he had charged to DC. His dismissal was to a degree dressed up for more palatable consumption. His evidence did little (if anything) to support Mr Hopkins’ case, but in various areas his evidence was both credible and supported that of the Defendants.

Mr Gavin Bell (“Mr Bell”)

At or about the time of the close of Mr Hopkins’ case, Mr Boswood told me that he wished to put in evidence a brief written statement of Mr Krasner. The matter to which this statement was directed was the absence of any reference to the 1995 Letters in the audited accounts of TTB and the reasons for it. The statement was inadequate to explain the position and accordingly Mr Boswood put in hand the preparation of a fuller witness statement and a bundle of supporting documents. Mr Krasner was not available to give evidence on the day fixed for this purpose and a co-director Mr Bell signed a witness statement and attended for cross-examination in his place. This was unfortunate because it was Mr Krasner, and not Mr Bell, who had the alleged conversations with the directors of TTB regarding the 1995 Letters and Mr Bell could not give any evidence of them and there are no written records of such conversations.

Mr Bell was from October 1997 the audit engagement partner of TTB. Neither he nor Mr Krasner ever saw any of the 1995 Letters. None of the directors of TTB ever mentioned them to him and he was in doubt whether, and if so when, Mr Krasner ever referred to them. If he had known of them, unless there was good ground to doubt their validity or the substance of the guarantor, proper practice and his practice would have been to note them in the accounts. He did not do so. Mr Bell told me that he ought to have been informed (but was not informed) of the 1995 Letters, of the RRR Letters and the subsequent correspondence and the fact that the figures set out in RRR’s Letters before action dated the 27^th October 1998 did not accord with the audited figure. Mr Bell under cross-examination was a defensive witness anxious not to make any concessions unless and until extracted from him. The evidence so extracted is credible and of some importance.

Mr Krasner

Mr Bell could not give evidence of the communications between Mr Dana and the auditors prior to October 1997. Only Mr Krasner could do that. The limitations on the scope of Mr Bell’s evidence rendered it desirable that Mr Krasner should give evidence and he attended for this purpose on Friday the 14^th May 2004. But the first thing that Mr Krasner told me was that he was a licensed insolvency practitioner and not a licensed auditor and that he never fulfilled any auditing role: he merely assisted Mr Bell when Mr Bell fulfilled the role of audit partner. He had known Mr Dana for 25 years and Mr Dwek for 10 years and was the strategic adviser and problem solver. As a witness he was plainly partisan seeking to be supportive in any way he could of the case made in their evidence by Mr Dana and Mr Dwek. He told me that he was professionally engaged after a fire at TTB’s warehouse in 1995 in acting as adviser to TTB in respect of an insurance claim against an insurance company and underwriters for fire damage to stock. The claim was settled in June 1998. After the claim was settled, he told me that his role in TTB’s affairs was negligible. As problem solver Mr Krasner’s primary and continuing concern was with cash flow. His evidence was to the effect that Mr Dana on two occasions told him that the debts owed to TTB by Malicorp and Alnada totalling £351,000 were guaranteed by the Defendants, that demands had been made of DC for payment of them but the demands had produced no payment, and that DC was making substantial losses. In my judgment, if Mr Dana did indeed refer to the 1995 Letters, it was in the context of seeking an urgent and immediate solution to TTB’s cash flow problems and not for audit purposes and to the effect that no such payment could be obtained from the Defendants. Mr Dana did not think that the undertakings in the 1995 Letters were worth pursuing or that anything was recoverable under them, and attached no importance to them. But the reason for this was not any lack of means on the part of DG and DG to satisfy any liability in whole or in part.

THE DEFENDANTS’ WITNESSES OF FACT

Mr Colin Dallas

Mr Colin Dallas became managing director of DC and DG and effective group chief executive following the buy-out in 1990 and succeeded his father as Executive Chairman in 2002. He gave evidence that he (and the other directors) in no way authorised Mr Towey to sign the 1995 Letters and knew nothing of them until the commencement of these proceedings, and that the Defendants had no need to raise funds in this manner. The bank facilities available were sufficient for this purpose and there was no need for recourse to any dealing with TTB and Mr Malik to raise funds. Mr Colin Dallas had complete trust in Mr Towey until 1995 when Mr Towey admitted that he had, under cover of expenses, withdrawn in respect of the Amra and the Baroon misappropriated amounts which were not large. The trust which Mr Colin Dallas placed in Mr Towey was shaken, but it continued notwithstanding. To prevent this happening again, he instructed Ms Edna Smith (“Ms Smith”) (the only non-director who was a signatory under DC’s bank mandate which at all times required two signatories) not to countersign any further cheques signed by Mr Towey, so as to enable and ensure that the other signatory was at all times another director who could and should check the propriety of every payment in future. No change in signing powers was made in the bank mandate for fear that this would create concern at the bank. Mr Towey was informed of this instruction which was a substantial reduction in his authority. In December 1996, the Board learnt of the thoroughgoing dishonesty of Mr Towey (although only part of the full picture) and this led to his effective dismissal which was finally negotiated and implemented at the end of July 1997 and the requirement for his repayment of £2 million to DC which Mr Towey duly made. Mr Colin Dallas was a witness of truth who answered every question asked carefully and convincingly. The one serious criticism that can and should be made of him is that he failed to report Mr Towey’s dishonesty to the regulatory authorities and indeed the police and left in his hands the affairs of the Marine Department and Dallas London Ltd (“DL”) when he knew Mr Towey had shown himself unfit for this purpose.

Mr John Butterworth (“Mr Butterworth”)

Mr Butterworth was a director of the Defendants and of DL. He was a witness of truth who set out to assist the court and his evidence is clear and totally credible. He told me (and I fully accept) that Mr Towey never mentioned to him any involvement in financing Mr Malik’s trading transactions.

Mr Goulding

Mr Goulding worked as a marine insurance broker in the Marine Department and had responsibility for the day to day management of the Marine Department. He had what (at least at times) was practically a full time job dealing with problems relating to the Amra and the Baroon. He was a totally honest witness. He made plain that he had no reason to believe that payments of invoices and cash payments by the Defendants came from anywhere other than their own funds.

Mr Christopher Hudson (“Mr Hudson”)

Mr Hudson is a chartered accountant who has worked for the Defendants since November 1998. He is a finance director of DG and the company secretary of DG and DC. Mr Hudson was involved in the Special Compliance Investigation into the £1.7 million written off by DC as a trading loss following Mr Towey’s departure in 1997 and negotiated a deal with the Inland Revenue under which the Inland Revenue agreed to allow DC to write off two thirds of the £1.7 million as a trading loss. In the course of the exercise Mr Hudson reconstructed the payments made by Mr Towey in connection with his dealings with the Amra and the Baroon. Mr Paul Kelly (“Mr Kelly”), who acted as finance director of the Defendants before Mr Hudson’s appointment and was not formally appointed as such, in early 1999 provided a schedule of payments covering the period September 1991 to December 1996. Mr Towey exhibited to his witness statement dated the 8^th January 2003 a further schedule relating to payments (“Mr Towey’s Schedule”) made on his instructions to TTB and its nominees in the years 1993 to 1997 using money from DC, DG, DL, his personal money and other accounts. Mr Hudson’s conclusions drawn from Schedules by Mr Kelly and Mr Towey and his efforts to trace and verify payments included: (1) that Mr Towey was guilty of subterfuge in dishonestly disguising the character of payments made as insurance claim payments (and so hiding them) and in dishonestly channelling payments through Energyaction; and (2) that TTB was fully repaid any debt owing to it which might otherwise be covered by the 1995 Letters. Mr Hudson was plainly an honest and conscientious witness who did his best to get to the bottom of the dealings by Mr Towey and in particular his dealings with TTB.

Mr Philip Davison (“Mr Davison”) and Ms Smith

The Defendants produced witness statements from two witnesses whom the Claimant did not wish to cross-examine and whose evidence is accordingly to be accepted. At all material times Mr Davison was in charge of the day to day administration of the Dallas No 2 or office account and Ms Smith was in charge of the day to day administration of the No 1 or client account and they both give evidence relating to Mr Towey’s practice in respect of drawings on these accounts. Neither had at this time reason to believe during that period that there was any dishonesty on the part of Mr Towey, though Ms Smith noted that, after she was instructed not to sign any cheques signed by Mr Towey, “he seemed to be under a cloud”.

Initially in the proceedings there was an issue as to whether Mr Towey had signed the 1995 Letters and the 1997 Acknowledgement and a direction was given permitting expert evidence to be called. Mr Hopkins’ expert witness was Dr Audrey Giles and the Defendants’ expert was Mr David Browne. In the light of their reports the Defendants conceded that the signatures were indeed those of Mr Towey. The reports have a limited relevance on the surviving question whether the 1995 Letters were indeed signed on the dates which they bear. For this purpose it was unnecessary for the experts to attend the hearing.

I should preface my account of the facts and history by saying that it is replete with inexplicable and unexplained happenings and inconsistencies and murky dealings which have not and cannot be fully explored at this trial. Any review of events must lead to the conclusion that there is more to what happened than what appears on the surface and has been disclosed. For comprehension of the best account which I can compile, I shall summarise the relevant facts under subject headings rather than provide a single chronological exposition.

The Dallas Companies

In 1919 Colonel Dallas founded DC which was based in Bradford and formed to carry on the business of insurance brokers. In 1974 70% of the shares in DC were sold to a London-based brokerage house CT Bowring Ltd which was subsequently taken over by a US-based company Marsh & McLennan. In January 1990 four directors of DC (namely Mr Colin Dallas, his father Mr Ian Dallas, Mr Towey and Mr Butterworth) incorporated DG as the corporate vehicle for the purchase of DC from Marsh & McLennan.

Mr Colin Dallas acquired 33% of the shares in DG, Mr Towey 20%, Mr Ian Dallas (as trustee) 6% and Mr Butterworth 5%. The remaining shares were acquired by working directors and clients. In 1992 Mr Towey was enabled to purchase a further 4% for £50,000. DG at all times merely served as the holding company of DC and did not trade. Insurance broking was at all times the only business of DC. It has never been involved in any way in international trade nor indeed, prior to the actions taken by Mr Towey, in ship-owning. Insurance was and is its only business. DC and DG at all times had good relations with its bank and at all times (including its most difficult year of 1997-9) had available all the loan and overdraft facilities which it required. There never was any need for arrangement for provision of monies for any purpose by TTB.

Mr Ian Dallas was Executive Chairman until he was succeeded by Mr Colin Dallas in 2002. Mr Colin Dallas was at all material times managing director and Mr Towey was deputy managing director of the Defendants. Mr Butterworth was at all material times the fourth director of the Defendants. As Mr Butterworth put it in his witness statement, everyone knew that Mr Ian Dallas was at the helm and Mr Colin Dallas was the managing director, and Mr Towey was subordinate to both and of course answered to the Boards of the Defendants. Neither of the Defendants had a finance director, but they retained Mr Kelly, a self-employed accountant, on a part time consultancy basis effectively to fulfil this role.

Mr Towey had a reputation as a wizard in all types of marine insurance and as a clever marine insurance broker. His role was to run and develop the marine insurance business and he was given a free hand in running the Marine Department. When in the early 1990s on Mr Towey’s suggestion DG incorporated as a subsidiary DL to carry on Lloyds brokerage business, Mr Towey was appointed its managing director and its business was very much his province. Commencing in October and November 1991 Mr Towey conducted a fraudulent scheme to extract money from DC and divert it to himself and (for his purposes) to individuals and entities connected with himself, Mr Malik, TTB and Mr Dana. He did so by fabricating insurance claims and disguising these payments as if they were long overdue insurance claims. He then used an accounting device to hide the false claims from DC. He also entered into transactions which on their face fall outside the business of insurance broking. These include signing the 1995 Letters and the 1997 Acknowledgement. All were concealed from DC and DG. The losses caused to the Defendants were some £3.7 million, £2 million of which he agreed to recoup when in 1997 he was forced to resign.

The bank mandate of the Defendants required two signatures for every payment out of Dallas funds. The authorised signatories included the four directors Mr Ian Dallas, Mr Colin Dallas, Mr Butterworth and Mr Towey. In 1992 the Accounts Manager Ms Smith was added to the list on the suggestion of Mr Towey on the basis that occasionally he had difficulties in finding a second director to sign cheques with him. The accounts of DL were operated quite separately from the Defendants by reason of its being a Lloyds broker and having to be part of the Lloyds broking system.

TTB

TTB was incorporated in 1985 and continued to trade until March 2002 when it went into creditors voluntary liquidation. The principal activity of TTB, according to its accounts was as “wholesaler of all classes of domestic goods”. TTB exported European made merchandise to developing economies, and in particular TTB specialised in exporting end-of-range branded goods. TTB had a paid-up capital of £1.5 million. TTB traded from addresses in Manchester and London and at all material times had a turnover of around £3-4 million. The original shareholders, each holding 50% of the shares, were Mr Eli Bourmad (“Mr Bourmad”) (who does not figure in these proceedings) and Mr Dana. In June 1995 Mr Dwek became and at all material times thereafter was a director and shareholder, having invested some £1.5 million in TTB which was totally lost on the liquidation. TTB’s subsidiary Energyaction was at all material times dormant. TTB’s auditors from early 1995 until its liquidation were Bartfields. The senior director Mr Krasner advised TTB on its various problems and in particular cash flow. The director responsible for the audit of TTB was Mr Bell. In TTB’s accounts for the year ended 31^st December 1998 (approved by Mr Dana and Mr Dwek on the 27^th September 1999) there is shown a trade debt for £351,186 (made up as to £236,186 due from Malicorp and £115,000 from Alnada). The notes to the financial statement stated that the customers were pursuing a claim (which I refer to as the “Amra Insurance Claim”) for sums substantially in excess of the amount owed to TTB, that they had agreed to assign the entire proceeds to TTB which should cover all sums due, and that the directors were confident as to the outcome of the action. In fact neither debtor had any interest in the Amra Insurance Claim and could not assign it and the claim had already been dismissed on the 11^th February 1997 and it is not apparent that any appeal against that dismissal was being pursued. No reference is made in the accounts to the 1995 Letters or 1997 Acknowledgement. In 2001 both debts are written off again with no reference to the 1995 Letters. Mr Krasner says that mention was made by Mr Dana of guarantees by the Defendants of the trade debt of £351,186, but even if this is correct the 1995 Letters were never produced or asked for and their terms were never disclosed. Equally plainly no importance was attached to them. (As Mr Dana revealed for the first time in his evidence) TTB was insolvent from the end of 1995 and had need to resort to dishonesty to conceal the seriousness of its position. This was of course never disclosed to its auditors. The directors of TTB did not disclose to Bartfield any loans or repayment of loans or other payments to DC or any payment of the living expenses of Mr Malik. There were inevitably continuing cash flow problems on which Mr Dana consulted Mr Krasner. Yet though (as Mr Krasner told me) TTB were good debt collectors, no effort was made to collect anything from DC or DG. TTB went into creditors liquidation in March 2002. Its Statement of Affairs (sworn by Mr Dana) disclosed book debts of £15,435: again there was no disclosure of the 1995 Letters. On the 20^th June 2002 at the request of Mr Dana the liquidator sold and assigned the rights under the 1995 Letters to Mr Hopkins for £500, and on the 10^th October 2002 the liquidator sold and assigned the rights under the 1997 Acknowledgement and the 1997 Confirmation to Mr Hopkins again for £500. Mr Hopkins gave notice of the assignments to the Defendants by separate letters dated the 27^th June 2002 and the 24^th January 2003.

The Amra 1 (“the Amra”)

At the heart of this case are two vessels for which in 1991, on behalf of DC, Mr Towey brokered insurance and for the benefit of whose owners without reference to his co-directors for some substantial period Mr Towey subsequently incurred heavy expenditure. This expenditure totalled approximately £500,000 by the end of 1992. His co-directors first learnt of what he had done towards the end of 1993 and discussed the situation that had arisen at a board meeting of DG on the 22^nd November 1993. They reluctantly decided that they had no real option but to continue such expenditure if past expenditure was to be recovered and to pass to Mr Towey the primary responsibility for resolving the problems relating to the Amra and the Baroon. The expenditure continued to rise until in 1997-8 it exceeded £3 million which nearly brought down DG and DC. It is necessary briefly to recount the relevant history in respect of each of these vessels in turn. Both were owned by companies owned or controlled by a Mr Malik and/or a Mr Philip Davidian (“Mr Davidian”). I shall begin with the Amra.

Mr Malik, an Iraqi national owned or controlled a company called Orient Shipping Limited (“Orient”). Mr Malik became a client of DC in the mid 1980s. He had an assistant called Mr Davidian. On the 1^st July 1991 Mr Towey on instructions given by Mr Malik obtained insurance cover for the Amra. Mr Towey, contrary to DC’s normal practice, agreed with Mr Malik that Orient should only pay £10,000 of the £80,000 premium and that DC should advance the balance of £70,000 by way of loan to Orient. DC issued a cover note dated the 2^nd August 1991 insuring the Amra to the value of US$1.8 million. Mr Towey instructed another broker to obtain the policy and the other broker did so, but the broker failed to pay the premium to the underwriters within the time specified. On the 18^th September 1991, within one month of the policy being obtained, the Amra became a constructive total loss and the underwriters refused an indemnity on grounds of non-payment of the premium within time. Orient maintained that it had a claim against DC for professional negligence in failing to ensure that the premium was paid in time if the failure to do so invalidated the policy as maintained by the underwriters. DC was insured against liability for professional negligence, but quite inexplicably, instead of making a claim under the policy and without reference to the other directors of DC, on the 27^th March 1992 Mr Towey on behalf of DC agreed with Orient that, in consideration of a waiver by Orient of claims against DC for negligence, DC should assist and cooperate with Orient in pursuing its claim against the other broker and the underwriter which I have already referred to as the Amra Insurance Claim. Pursuant to this agreement, on the 27^th April 1992 Orient executed a deed of indemnity by which it agreed to release DC from all liability and to hold DC harmless from all claims arising therefrom.

The terms of the policy required that proceedings against the underwriter should be commenced in Belgium, and DC through Mr Towey instructed and paid Belgian lawyers to pursue the claim in Belgium against the broker for damages for negligence and against the underwriter for a determination of the validity of the policy. In each case the claim was for the same sum of US$1.7 million. By the 21^st September 1992 DC had incurred costs of some £11,441 in respect of this claim. On the 17^th September 1993 Mr Davidian on behalf of Orient authorised DC to collect the proceeds of the claim on its behalf. There was no charge or assignment. Substantial defences were raised. As I have already said, the other directors of DC only learnt of the commitment assumed and expenditure incurred in late 1993, when they felt that they had no practical alternative to honouring the commitment which Mr Towey had assumed, not least because this was the only course available if DC was to recover the substantial expenditure already incurred in the litigation and because the prospects were seen to be promising. There were problems with the Belgian lawyers and they had to be replaced on the 12^th December 1996. On the 11^th February 1997 the Belgian court dismissed the claims against both defendants. It may be that notice of appeal was served. There is no evidence that any appeal was ever prosecuted. Under the terms of the Severance Agreements under which Mr Towey left the Defendants all rights of the Defendants in respect of the Amra Insurance Claim were assigned to Mr Towey. In July 1999 Mr Towey sought advice from solicitors regarding an assignment of the Amra Insurance Claim to TTB, but he was advised that there were substantial obstacles, not the least of which was that it was vested in Orient.

The Baroon

The vessel the Baroon was owned by Baroon Shipping Limited (“BSL”), a company owned by Mr Malik and Mr Davidian. In early 1991, Baroon was chartered to Albacora, a Spanish fishing company.

In December 1991 Mr Towey on behalf of DC agreed with Mr Malik to insure the Baroon. Insurance was effected from the 23^rd March 1992. The Baroon was valued at US$6.5 million. Remarkably again Mr Towey on behalf of DC advanced all of the premium. In June 1992 the Baroon was arrested at Mombassa by the Kenyan Port Authority for alleged breaches of UN Sanction 661. When this misfortune occurred, Mr Malik was apparently without income or funds to meet the costs of obtaining its release or maintaining the vessel. Mr Malik did not have the funds to pay the costs in respect of the vessel and Mr Towey took the decision without reference to the other directors to assist Mr Malik by paying those costs. On the 25^th June 1992 BSL undertook to repay to DC all money paid out in respect of the Baroon as security for advances made. On the 18^th February 1993 DC executed a first mortgage of the Baroon in favour of DC to secure BSL’s indebtedness to DC. Around the same time the Baroon was subject to a further arrest by Albacora.

In March 1993 the crew caused the Baroon to be re-arrested on the ground of arrears of wages. On the 23^rd March 1993 DC commenced “in rem” proceedings against the Baroon for enforcement of its mortgage. In September 1993 at the instance of Mr Towey, Mr Malik agreed that (as well as “assigning” the proceeds of the Amra Insurance Claim to DC) he should transfer the shares in BSL to Rayner Shipping Limited (“Rayner”), a company controlled by DG as security for the debt owed to DC. The transfer of the shares were effected by an instrument dated the 1^st October 1993. On the 1^st July 1994 Rayner granted DC a second preferred mortgage of the Baroon securing a facility of £2.5 million which included the £1,559,816 acknowledged to be due. It was following this that Mr Towey informed his co-directors of what he was up to.

In August 1994 DC instructed US lawyers to represent it before the US Government body responsible for ensuring compliance with sanctions, the Office of Foreign Assets Control, and obtain a release from arrest. In September 1995 the Baroon was dry docked in Mombassa for repairs. On the 17^th November 1995, through the medium of a side deal involving a pay-off to Albacora’s lawyer, DC reached a settlement with Albacora, the Baroon’s main creditor, involving payment to Albacora of US$500,000 in satisfaction of the far greater claim which it was making and agreement was reached for the release of the Baroon from arrest. On the 24^th January 1996 the US Government approved the Admiralty sale of the Baroon in Mombassa. As was clearly apparent at the time, they did so misled into believing that Rayner was the beneficial owner and not the mortgagee of the Baroon. On the 3^rd July 1996 the Admiralty Court in Mombassa issued a bill of sale transferring all title to the Baroon to Redcap at the price of US$1.7 million. The arrangement between DC, Redcap and BSL was (as had been the previous arrangement between Rayner and BSL) that Redcap should hold the Baroon as security for all sums due to DC and that the Baroon should be subject to that security, and the balance of any proceeds of sale, belonged to BSL. Mr Towey says that its value at the time was in excess of US$6 million and this is supported by a valuation report obtained after the sale. In fact the only payment made in respect of the purchase price of US$1.7 million was of US$6-700,000 provided by Redcap. To obtain the release of the vessel, because of the corruption prevalent in Kenya, Mr Towey says that he was forced to pay substantial commissions and make other large payments to corrupt Kenyan officials and lawyers. On the 20^th September 1996 the Baroon was towed to Sharjah for repairs where in May 1997 it was re-arrested on the application of the Iraqi Government who claimed that it was their property. The Sharjah Court (not surprisingly), having been shown the valuation of over US$6 million, held that the sale to Redcap was open to challenge as having been staged at a gross undervalue. This precluded any advantageous sale or charter by Redcap.

Throughout the whole period DC incurred very substantial expenditure maintaining, supplying, crewing and otherwise protecting their interest in, and the value of, the Baroon. To raise money for this purpose DG and Redcap through Mr Colin Dallas and Mr Kelly made efforts to establish an enterprise investment scheme on the security of the Baroon. It was to this proposed scheme that Mr Towey referred to in the 1997 Acknowledgement. The scheme however did not materialise and the Baroon’s value dropped to its scrap value of £400,000. Under the Severance Agreements the Defendants assigned to Mr Towey all rights of the Defendants in respect of the Baroon.

Mr Towey’s Dealings with TTB

In mid-1993 (according to Mr Towey) Mr Malik suggested to Mr Towey that DC “guarantee” the payment of the price of goods bought by him from TTB so as to enable him to earn profits which would or could be used to fund first the living expenditure of Mr Malik and his family (no quantum was ever specified) and then as to any balance to contribute to payments of the expenditure on the Amra and the Baroon. Such an arrangement was advantageous to TTB, for it secured profitable sales of its goods to Mr Malik, but there was more to it than a simple straightforward commercial transaction. So far as DC was concerned, this was outside its business of insurance broking and involved DC in assuming open-ended risks primarily, if not exclusively, for the benefit of Mr Malik. Mr Towey in cross-examination accepted that the proposition was silly, indeed ridiculous. Likewise for TTB it was an extraordinary arrangement, for in the case of all the rest of its business it sold goods only for cash or in return for a letter of credit, and not on credit secured by guarantee.

Mr Towey and TTB however apparently (so I am told) agreed to this form of arrangement, and on the 16^th July 1993 Mr Towey on behalf of DC gave a guarantee for £50,000 to TTB in respect of goods to be supplied to Mr Malik on a 90 day credit. Without awaiting receipt of any profits (and there appear to have been none) or indeed shipment of goods, Mr Towey used money channelled out of DG through TTB to make payments to or for Mr Malik (which included school fees and telephone bills). On the 29^th November 1993 Mr Dana sent a fax to Mr Towey at DC requesting payment of the £50,000 due under the guarantee. On the 23^rd December 1993 Mr Towey wrote to Mr Dana: “In consideration of services rendered on our behalf we [DC] hereby undertake to pay the sum of £35,000 on the 31.1.94”. On the 15^th March 1994 Mr Towey signed on behalf of DC a guarantee to TTB in respect of liabilities of Mr Malik to a limit of US$600,000. On the 17^th March 1994 TTB agreed not to demand payment of the US$600,000 guaranteed until sale of the Baroon. Mr Towey gave and TTB accepted still further guarantees. Towards the end of 1994 Mr Malik expressed to TTB the wish to buy goods worth £350,000 for shipments to Libya and Lebanon and for further credit of £350,000 for this purpose beyond the £95,000 currently outstanding secured by the guarantee proffered by Mr Towey. Mr Dana however insisted that a guarantee was not good enough for this purpose: he required a discountable instrument to provide TTB with the cash flow. An instrument was prepared intended to satisfy this requirement. A proposal was then put to TI for the necessary insurance cover which showed a contract for sale of the goods by TTB to DC for £350,000. TI said that the premium would be £95,000. That was acceptable to TTB and Mr Towey. But TI subsequently refused cover on the grounds that they would only provide cover for a basket of risks and not the risks in relation to one client only. Both before and after the refusal of the proposal by TI, TTB continued to sell goods to Mr Malik on the back of guarantees given by Mr Towey on behalf of DC.

On the 29^th November 1995 Mr Towey signed the three 1995 Letters all of which are expressed to be given in consideration of goods and finance provided by TTB to Malicorp or Mr Malik and associated companies and nominees. It is necessary to look in more detail at the factual background to them being signed.

In November 1995, it would appear that there was due from DC to TTB the sum of £370-375,000 made up of about £175,000 in respect of goods to be shipped to Libya and something in the region of £200,000 outstanding under previous guarantees. According to Mr Dana in November 1995 Mr Towey wanted TTB to give credit to Mr Malik for US$608,000 in respect of the price for doors to be shipped to Egypt and for approximately £87,878 in respect of the price of a shipment of salt from Tripoli to Egypt; TTB required from DC guarantees to cover the total liability of some £744,000; and Mr Towey said that “for internal reasons” (whatever that means) DC and DG would each separately guarantee one half of that figure. It is however quite plain that there was no question at the time of the guarantee liability being calculated by reference to or being intended to cover any sum in respect of the doors or the salt. There was no contemplation of the sale of either the doors or the salt at the time to Mr Malik. TTB was continuing at that time to find a shipper for its salt to a purchaser in Nigeria, and the salt remained in TTB’s stock until the 21^st July 1997. It was only on the 20^th December 1996 that TTB invoiced the doors to Alnada. At all times since the 5^th February 1998 Mr Towey has openly maintained (as he maintained in his evidence before me) that the doors and salt, and any liability in respect of the price for them, had nothing to do with DC. I fully agree. The only actual or anticipated liability of DC that can have been in the minds of parties when executing the first and second 1995 Letters was the sum of about £372,000.

The third 1995 Letter is drafted in a manner dishonestly to conceal its true character and purpose. It states that DC’s undertaking to pay £250,000 is given in consideration for goods and finance provided by TTB to Mr Malik, associated companies and nominees. It was for nothing of the sort as became clear when Mr Dana gave evidence. The document was prepared and signed to secure an urgent straightforward loan to DC of £250,000. The purpose of its execution was, and was only, to give TTB the opportunity to discount it. To discount it TTB needed to obtain insurance cover from TI in respect of the loan. The whole transaction was conditional on that cover being obtained. TTB did not have the funds to make the loan. As Mr Dana explained in his evidence, TI refused cover, and accordingly the loan of £250,000 was not made and the whole transaction fell away. The whole matter was forgotten until Mr Dana instigated the claim for the £250,000 in this action.

In early 1996 further negotiations took place and some new deal appears to have been arrived at, for on the 16^th February 1996 Mr Towey on behalf of DC wrote to Mr Dana:

“Dear Mr Dana

Re Our Guarantee of £250,000

I refer to our meetings and confirm our repayment schedule for the above debt as follows:

1)

T L Dallas & Co Ltd will make a payment of £35,000 on or before the 21^st February 1996.

2)

Starting from the 5^th March 1996 and on the 5^th of each month payments of £35,000 will be made.

3)

As and when T L Dallas & Co Ltd release the guarantee in Norway, which should happen no later tha[n] 30 days will make an additional lump sum payment of £80,000.”

I find this letter extremely troubling. I do not understand what legitimate reason can have justified its coming into existence. The letter can only have been designed to facilitate some illegitimate collateral purpose. It would appear that Mr Dana and Mr Towey had some reason of their own for requesting Mr Towey to confirm a repayment schedule for a non-existent debt of £250,000 under a guarantee that had fallen away. The letter appears to have provided the guise for payment to TTB on the 21^st February 1996 of £35,000 made by Mr Towey dishonestly drawing a cheque in TTB’s favour on the false basis that the sum was due to TTB under an insurance claim. No other further payment was made pursuant to the “repayment schedule”.

The aborted £250,000 transaction gave rise to preparation by Mr Dana of an illuminating document. On the 4^th December 1995 Mr Dana completed and (it appears probably) sent to TI an application for credit assurance. The assurance was not however in respect of £250,000 figure, but the two sums of £372,000 the subject of the first and second 1995 Letters. What is most particularly extraordinary is that those letters are there stated to be sums due in respect of goods to be shipped direct from the UK and that the customers were DC and DG. There was of course never intended to be any such shipment.

According to Mr Dana during 1996 and 1997 TTB made a number of cash loans to DC, and in particular one in early 1996 of £20-30,000 paid to Mr Terry Rayner to pay the crew of the Baroon; one between 1996 and 1997 of £20-25,000 paid to a Mr Paul Hoadly; and one on or about the 16^th May 1997 of £130,000, the receipt of which Mr Towey confirmed in a fax on the 16^th May 1997. There were also a series of repayments. According to Mr Dana the balance due to TTB at the date of its liquidation was £189,000 but there are no documents supporting this. TTB thereafter pressed Mr Towey for payment of sums due under the guarantees which he had given. In early 1997 what Mr Colin Dallas called a very brief and rather bizarre telephone call took place between Mr Dana and Mr Colin Dallas. Mr Dana did not give his name and was uninformative. All he stated was “Dallas” owed his company TTB money. It is possible (but doubtful) that reference was made to a guarantee. When Mr Colin Dallas said that he knew nothing about it, Mr Dana said that Mr Towey would know about it and rang off. Mr Colin Dallas raised the conversation with Mr Towey who replied that Mr Dana was a wild man and had long since been paid off, that Mr Colin Dallas should leave the matter with him and he would sort it out. Mr Colin Dallas heard nothing more about it. Mr Dana did not take the matter further. Later Mr Dana pressed Mr Towey to let him have a written guarantee which he could show to TTB’s bankers. One can only infer that the 1995 Letters were for some reason known to Mr Dana insufficient for this purpose. Mr Towey in response provided the 1997 Confirmation.

On the 9^th July 1997 (when signature to the Severance Agreements was imminent) Mr Towey began a continuing correspondence with Mr Dana about a £610,000 commitment to TTB which he had assumed on behalf of DC in respect of goods shipped and money advanced to Malicorp and associate companies of which he had repaid £60,000 stating that he was forming Paul Group Limited (“Paul”), that he was trying to buy from DG and DC (as well as DL) the main asset against which the debt was secured, that by doing so he was taking over responsibility for the debt and that he agreed to pay an extra £100,000 as interest charged by reason of delays in his payment schedule. He went on to request that no action be taken against DC. By letter dated the 11^th August 1997 he faxed that all guarantees issued by any Dallas group company or himself would be honoured by his new group and himself. In a fax of the same date he speaks of the imminent payment of £500,000 in respect of trading balances between Malicorp and Mr Malik and TTB.

After Mr Towey left the Defendants, according to Mr Dana no real transactions took place between Mr Towey and TTB. In 1998 Mr Dana instructed RRR to collect the debts outstanding. On the 27^th October 1998 RRR sent letters of demand in almost identical terms to DL, Paul and Mr Towey. The letter to DL reads as follows:

“Dear Sir

re: Our Client TTB Limited

We act on behalf of TTB Limited who inform us that they have a claim for £710,000 in respect of goods supplied and monies advanced to Malicorp and associated companies.

We are further instructed that payment in relation to the monies in question have been guaranteed by your company, and a number of companies including Paul Group International (Insurance Brokers) Limited, TL Dallas and Co Limited and P Towey personally. Despite innumerable promises for payment, payment has not been forthcoming. Upon this basis we write to inform you that, unless satisfactory proposals for payment are received by the close of business on Friday 30^th October, proceedings will be commenced for the recovery of all monies owing, not only against Malicorp, but against all the other parties who have guaranteed payment of the relevant monies.”

What is remarkable about the contents is that: (1) the sum claimed is £710,000; (2) each of the persons to whom the letters are addressed as well as DC are alleged to have guaranteed payment; (3) no mention is made of any liability on the part of DG; (4) no specific reference is made to any of the 1995 Letters; (5) no letter is sent to DC or DG.

By fax dated the 29^th October 1998, Mr Towey on Paul’s letter paper replied stating that he and Malicorp had been asking for a full breakdown for more than 12 months, but that this had never been provided, and taking objection to the many verbal threats made by Mr Dana. By fax dated the 4^th November 1998 RRR wrote that a full breakdown had already been provided to Mr Towey and Mr Malik and threatening that, unless and until payment was made within 7 days, legal proceedings would be initiated against the principal debtors and all guarantors. By fax of the same date Mr Towey insisted that neither he nor Mr Malik were in receipt of such a list and insisting on a full breakdown.

By fax dated the 18^th November 1998, RRR stated that the £710,000 was constituted as follows:

“1

Owing by Mr Malik of Malicorp For shipments to Beirut, Tripoli and Odessa £341,034.56

For shipment of doors to Egypt £93,000.00

For shipment of salt to Egypt £87,878.00 (include cost of goods at $90,000 + 50% of profit share, as agreed $55,000).

2

Monies advanced to P Towey and interest from 1993 [quaere 1996] onwards as agreed £189,000.00.

Total £710,000”

In an earlier fax from Mr Towey to Mr Malik dated the 5^th February 1998 Mr Towey had stated that “to the best of my knowledge the doors and the salt do not form part of anything to do with us” and that has been the position which he has taken throughout these proceedings.

By fax dated the 25^th November 1998 Mr Towey once more pressed for a full precise breakdown confirming monies borrowed and repaid. By fax dated the 7^th December 1998, RRR stated that TTB were preparing a further ledger showing how the monies were calculated and that this would be provided shortly. By fax dated the 8^th January 1999, RRR (1) provided ledger entries relating to the sum of £341,034.56; (2) stated that £93,000 was the sum remaining unpaid in respect of the price payable for shipping doors to Egypt; (3) stated that the agreement was for payment of the cost of the salt (US$90,000) and half the profit of US$110,000 on resale at US$200,000; and (4) stated that they were instructed that Mr Towey had all the relevant figures in respect of the advances made to him and interest. On the 26^th January 1999 RRR sent a fax threatening proceedings in default of payment by the end of the first week in February. On the 13^th February 1999, discussions proceeded for Mr Towey providing as security for any sums owed a charge on his shares in Paul for a debt stated to amount to £710,000. Mr Towey and Mr Malik continued to press for a full breakdown of the indebtedness alleged. Shortly thereafter Paul went into liquidation.

No proceedings were ever commenced. According to Mr Dana initially he stopped the claim against Mr Towey because Mr Towey and Mr Malik asked him to be more patient, and after 1998 TTB was not prepared to pursue a claim against Mr Towey since they knew that the actual claim lay against the Defendants. Unexplained is why, if this is correct, a claim was ever made against Mr Towey and the other parties threatened and why the claim was never proceeded with against DC and DG when (if there could ever previously have been any doubt about them being good for the sums claimed) that doubt had long been removed.

Relations between the Defendants and Mr Towey

I have already referred to the fact that in late 1995 a small part of Mr Towey’s wrongdoing came to light, namely that Mr Towey had drawn unauthorised expenses falsely debiting them to Amra and the Baroon, and Mr Colin Dallas attributed this misconduct to misjudgment rather than dishonesty. The consequent direction given to Ms Smith not to sign as second signatory any cheque or authorisation for payment of which the other signatory was or was intended to be Mr Towey proved extremely effective in preventing recurrence of the disclosed minor wrongdoing. It also had the effect of effecting a change in the form of his continuing undisclosed major wrongdoing of fraudulently extracting monies from DC under the guise of payment of non-existent insurance claims. Thereafter the payments from DC ceased to be made to TTB: they were made instead to various persons and entities connected with Mr Towey.

At the end of 1996 evidence came to light of more serious impropriety and indeed dishonesty on the part of Mr Towey and this led to a decision being made by the Defendants that Mr Towey must go, but go in a manner which did not expose the Defendants to a collapse in confidence or regulatory action. To this end the Severance Agreements were signed. Mr Towey was even at this stage evasive in explaining his activities. The full extent of his wrongdoing however only came to light later. He never mentioned the 1995 Letters or the 1997 Acknowledgement.

First and foremost of the Severance Agreements is an agreement dated the 28^th July 1997 (“the Debt Agreement”) made between the Defendants and Mr Towey, by which Mr Towey agreed to repay to the Defendants the sum of £2 million which he agreed and acknowledged was owing to them in connection with costs, losses and expenses incurred by the Defendants and/or breaches of his duties as employee and/or director of the Defendants. By the Debt Agreement the Defendants acknowledged receipt from Mr Towey of part payment of £900,000.

On the 5^th August 1997, Mr Towey resigned as a director of the Defendants. His letter of resignation confirmed that he had disclosed all transactions of whatsoever nature entered into by him on behalf of DG and DC. In his evidence he acknowledged that this statement was untruthful having regard to his non-disclosure of the 1995 Letters and the 1997 Acknowledgement.

By an agreement dated the 7^th August 1997 and made between the Defendants and Paul the Defendants agreed to sell to Paul for £2 million (of which £900,000 was acknowledged to have been received) the debts due from BSL and Orient.

By an agreement dated the 7^th August 1997 made between DG and Paul, DG sold to Paul all its shareholding in DL (and certain other companies) for £657,000.

It is very disturbing that the Defendants failed to report the default and dishonesty of Mr Towey to the regulatory authorities and indeed the police, and indeed by the Severance Agreements placed DL in his hands. The only explanation can lie in sensitivity on the part of the directors to the consequences to DG and DC if the true facts came to light.

The losses to DC occasioned by Mr Towey were close to £3.7 million, and accordingly DC, after giving credit for £2 million paid by Mr Towey, had to bear the balance of £1.7 million. In 1999 the Inland Revenue conducted a Special Compliance Investigation whether the Defendants should be allowed credit for this sum as a trading loss and eventually the Inland Revenue agreed to some two thirds of that amount being written off as a trading loss. It was in the course of Mr Hudson’s research undertaken for the purpose of those negotiations that the Defendants for the first time uncovered the full extent of the defalcations and dishonesty of Mr Towey and of his resort to subterfuge to disguise what he was doing.

Relations between TTB and the Defendants Otherwise than through Mr Towey

Save in so far as the knowledge of Mr Towey is to be attributed to the Defendants, the Defendants knew nothing of TTB prior to the commencement of these proceedings. With a single qualification all communications between TTB and the Defendants were through Mr Towey and it is plain that TTB and Mr Towey took precautions to ensure it was so. Mr Dana sent faxes addressed to Mr Towey at the Defendants’ Bradford office which were received at the Defendants’ single fax machine at their Bradford office e.g. the fax dated the 29^th November 1993 requesting payment of £50,000. The arrangements in place were such that they were not read by anyone other than Mr Towey and certainly not read by anyone who might be put on notice to raise questions about them.

The qualification is the bizarre telephone call made in early 1997 by Mr Dana to Mr Colin Dallas. Beside referring the matter to Mr Towey, Mr Colin Dallas caused a company search to be carried out, which revealed the existence of a different company called TTB, a £1 company which was an export and import agent for goods to and from Nigeria. He heard nothing more about the alleged debt referred to by Mr Dana either from TTB or Mr Towey before receipt of the Letters before Action.

Three significant events (or non-events) should be mentioned regarding the attitude taken by TTB to the 1995 Letters and disclosure of them to the Defendants. The first relates to the accounts of TTB. These accounts at no time disclosed the existence of the 1995 Letters. Mr Bell may have heard of them, but never saw them, and he would not and could not properly write off the debts so secured or make no reference in the 1998 audit (for which he was audit engagement partner) if he had thought that they were legally valid and had no sufficient reason to believe that the Defendants were not good for the sums in question. He had no such sufficient reason.

The second is that neither Mr Dana nor anyone else took any steps to ensure that the existence of the 1995 Letters was disclosed in TTB’s Statement of Affairs.

The third is that in 1998, with TTB facing a serious cash flow crisis, Mr Dana instructed RRR to collect the debts outstanding and accordingly send letters before action to DC, Paul and Mr Towey, but the letters made no reference to a claim against DG or to the 1995 Letters. Mr Dana was unable to explain this or the absence of any letter before action to either of the Defendants.

Mr Towey continued trading through Paul until Paul went into creditors liquidation in February 1999.

Execution of the 1995 Letters

The Defendants have devoted a great deal of time and effort to challenging the due execution of the 1995 Letters on the date they bear. There are curious features in this case which raise questions as to their due execution, but I am satisfied that due execution is established. One matter which particularly troubled me is the reference in the first and second 1995 Letters to Malicorp Trading Limited, which was a company only incorporated in 1997. I am satisfied however on the evidence that this was a mistake and reference was intended to Malicorp.

The signature of Mr Towey to all three 1995 Letters, though an issue before trial, ceased to be an issue once the trial commenced. It was for this reason it was unnecessary to call the parties’ respective handwriting experts. The experts’ reports reveal two things. The first is that there is indentation on the third 1995 Letter which was made when the first 1995 Letter was resting on the piece of paper which later became the third 1995 Letter. This indicates either that the paper on which the third 1995 Letter came to be printed was under the first 1995 Letter when it was signed or that the third 1995 Letter already existed (whether or not signed) when the first 1995 Letter was signed. Looking at the evidence of the various witnesses regarding execution, it is quite plain that the former is the case. The evidence (most particularly of Mrs Walfisz) establishes that the three 1995 Letters were signed on or about the 29^th November 1995: she was only employed for a short period thereafter. The contemporary correspondence (e.g. Mr Dana’s note dated the 29^th November 1995 and Mr Dana’s completed application to TI for credit insurance dated the 4^th December 1995) makes plain that the 1995 Letters were in existence about the date when they were written. The second is that the documents are “montages”. I do not think that this fact has any significance.

In a word I do not think that there is anything in this challenge to the genuine character of the 1995 Letters.

Quantum of Undertaking

The ordinary presumption must be that, where two persons (or companies) each give guarantees or bonds to a particular figure, the rights granted by each of them are independent of and in addition to those conferred by the other. If DC and DG had intended to give guarantees for a single sum of £372,000, they would be expected to say so or execute a joint guarantee. It is to be remembered however that the 1995 Letters were drafted by laymen. Mr Dana in his evidence said that he told Mr Towey that TTB required guarantees for £744,000 and said that for internal reasons the sum would be guaranteed under two guarantees for £372,000 one of which would be given by DC and the other by DG. Mr Dana was cross-examined as to the breakdown of the £744,000 and his evidence cannot stand. I have already held that the existing indebtedness intended to be covered was £372,000 only. Mr Towey in his evidence clearly recalled that the first and second 1995 Letters were intended to be alternative securities in respect of the same single sum of £372,000. This is supported by his contemporaneous signed note dated the 29^th November 1995. Looking at the evidence as a whole, I have no doubt that there is a single liability of £372,000 assumed under separate documents by DC and DG.

Validity of Assignment

The Defendants however contend: (1) that it is an implied requirement of the 1995 Letters that the demand thereunder for payment must be in writing; (2) that the only demands in writing were made in Mr Hopkins’ solicitor’s Letters before Action; (3) that in the consequence there were no demands in writing at the date of the assignments to Mr Hopkins of the claims under the 1995 Letters; and (4) that the assignments are legally without effect because (for want of a demand) there was as yet no claim and accordingly nothing to assign. There are however at least two answers to this contention.

The first is that there is no rule of law that demands under performance bonds or guarantees or undertakings such as the present must be in writing: it is always a matter of construction of the relevant instrument. The 1995 Letters do not in terms require a demand in writing. The high point for the Defendants is the observation of Staughton LJ in IE Contractors Ltd v. Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496 at 499 to the effect that he would “hesitate long” before construing a performance bond as requiring no more than an oral demand. I do not have that hesitation in the case of the informal document before me.

Secondly the terms of the Assignments are apposite to pass to Mr Hopkins all rights of TTB under the 1995 Letters including the right to make the required demand for payment. The Recitals recite that TTB (by its liquidator) has agreed to assign to Mr Hopkins “the Claim” which it defines as its claims against DC and DG pursuant to the 1995 Letters. The operative provisions go on to provide that TTB transfers, conveys and assigns to Mr Hopkins all those rights in title to and chose in action relating to or in anyway arising out of the matters giving rise to the Claim. The language chosen is plainly intended to effectuate the assignment of all rights conferred by the 1995 Letters and that must include, in the case where no demand has yet been made, a right to make such a demand and sue for the sum which thereupon becomes payable thereunder.

Breach of Fiduciary Duty

It does not seem to me to be credible that Mr Towey signed the 1995 Letters and their predecessors in order to finance trading by Mr Malik for the benefit of DC or DG: he did so in fraud of DC and DG for his own and/or Mr Malik’s benefit and purposes. Mr Towey accepted in cross-examination that for him to sign the 1995 Letters so as to earn profits available to provide the living expenses of Mr Malik (preventing him becoming bankrupt) and a contribution to the costs of pursuing the Amra Insurance Claim and conserving the Baroon was silly and indeed ridiculous. No profits were ever earned or were at all times speculative and yet payments proceeded to Mr Malik even before Mr Malik’s first shipment was made. Mr Towey kept no account of the payments to Mr Malik. No agreement was ever made as to what part or portion of any profit should be applied in any particular way. Mr Towey concealed all he was doing from his co-directors and auditors. In a word in all that he was doing both in regard to the 1995 Letters and their predecessors he was knowingly pursuing his own and/or Mr Malik’s interests and not those of DC or DG, at the expense and to the prejudice of DC and DG.

Authority of Mr Towey

The principal issue in this case is the actual and ostensible authority of Mr Towey as Deputy Managing Director of the Defendants to sign the 1995 Letters on behalf of the Defendants and to commit DC and DG to the liabilities assumed thereunder. Before I look at the facts I should say a word on the relevant law. The authority of an agent is “actual (express or implied) where it results from a manifestation of consent that he should represent or act for the principal expressly or impliedly made by the principal to the agent himself”: Bowstead & Reynolds on Agency 17^th ed (“Bowstead”) Article 22(1). This authority extends to doing “whatever is necessary for, or ordinarily incidental to, the effective execution of his actual authority”: Bowstead Article 27. The authority may in appropriate circumstances extend to raising funds and giving security for borrowings for the purpose of fulfilling the functions and duties assigned to him. Where a board of directors appoint one of the members to an executive position “they impliedly authorise him to do all such things as fall within the usual scope of that office” (Hely-Hutchinson v. Brayhead Ltd [1968] 1 QB 549 at 583).

The grant of actual authority to an agent will not normally include authority to act for the agent’s benefit rather than that of his principal and therefore, without agreement, the scope of actual authority will not include this. The grant of actual authority should be implied as being subject to a condition that it is to be exercised honestly and on behalf of the principal: Lysaght Bros & Co Ltd v. Falk (1905) 2 CLR 421. It follows that, if an act is carried out by an agent which is not in the interests of his principal, for example signing onerous unconditional undertakings, then the act will not be within the scope of the express or implied grant of actual authority. As a result there cannot be actual authority:

“the agent is simply not authorised to act contrary to his principal’s interests: and hence that an act contrary to those interests is outside his actual authority. The transaction is therefore void unless the third party can rely on the doctrine of apparent authority” (Bowstead para 8-218).

In the case of Macmillan Inc v. Bishopgate Trust (No 3) [1995] 1 WLR 978, Millet J (as he then was) stated that “English law … recognises the distinction between want of authority and abuse of authority” (at 984). He then went on to approve the statement that “an act of an agent within the scope of his actual or apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests”. Bowstead suggests that this statement of the law should be limited to apparent authority i.e. that acting fraudulently or in furtherance of own interests will by its very nature nullify actual authority, but not apparent authority. I respectfully agree.

In my judgment Mr Towey did not have actual authority to sign the 1995 Letters for two independent reasons. The first is that the giving of the undertakings therein contained did not fall within the ‘usual scope’ of his office of Deputy Managing Director with full responsibility for the Marine Department and to resolve the outstanding matters relating to the Baroon and the Amra Insurance Claim. It is necessary to bear in mind (as Mr Colin Dallas stated unchallenged in his evidence) that Mr Ian Dallas was Executive Chairman, Mr Colin Dallas was Managing Director and Mr Towey, though Deputy Managing Director, was subordinate to both and answerable to the Board. It is also necessary to bear in mind that, whilst Mr Towey was given a high degree of autonomy in the Marine Department and full responsibility to resolve outstanding matters relating to the Amra Insurance Claim and the Baroon, this did not give him authority to raise funds by financing trading by Mr Malik and his companies. DC had bank facilities at all times available and had no need or reason to have recourse to resort to unorthodox means. There was a requirement under the mandate for two signatories on any cheque. Mr Towey never had any authority at any time to raise money or earn profits as he thought fit, let alone enter into the onerous obligations under the 1995 Letters. Mr Towey’s conduct in concealing the 1995 Letters is indicative that he knew that this was so.

The second is that (as I have already held) he entered into the 1995 Letters, not for the benefit of DC and DG, but for his own benefit and/or the benefit of Mr Malik. He knew that it was highly disadvantageous to DC and DG to enter into the commitments which he did and it was for this reason that he never disclosed the commitments to the Defendants and was anxious that TTB should never disclose the commitments to the Defendants. In a word he knew that he was acting in breach of fiduciary duty and indeed dishonestly in signing the 1995 Letters.

Ostensible (or apparent) authority looks at the relationship between the third party and the principal and can lead to an outcome where a company is bound even though it has not actually authorised the agent. The four ‘conditions’ for ostensible authority were set out in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480:

No question arises of non-compliance with the fourth condition. The critical question is whether the first three of the conditions are satisfied. As regards the first condition it is well established that an agent cannot by his own acts confer upon himself ostensible authority, but ostensible authority may arise where the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it: see Lord Keith in Armagas Ltd v. Mundogas SA [1986] AC 717 at 777. On the facts of this case, as it seems to me, the first and second conditions are satisfied in respect of DC, for the evidence establishes that Mr Towey entered into a whole series of undertakings in the same terms as those contained in the 1995 Letters in the period leading to the 1995 Letters and DC (albeit through the actions of Mr Towey) honoured them. The honest and reasonable expectations of TTB so engendered should be protected. The only question therefore is whether TTB were honest and had a reasonable expectation to this effect. No such expectation can have been engendered in respect of DG, DG gave no such previous undertakings and indeed never traded.

Where an agent is acting within the usual authority of a person in his position, the third party will normally not be expected to inquire as to the details of his authority unless the transaction is abnormal or there are other circumstances giving rise to suspicion. If there are suspicious circumstances or abnormalities, then the third party should “make such inquiries as ought reasonably to be made” to ensure that the authority is sufficient to bind the principal.

In my judgment the 1995 Letters and their predecessors were abnormal transactions and the circumstances gave rise to suspicion as to the propriety of the conduct and the existence of the necessary authority to enter into them on the part of Mr Dana. The arrangements gave rise to unusual and onerous obligations which did not form part of the business of any insurance broker and Mr Dana and Mr Dwek knew this and that Mr Towey was acting in breach of fiduciary duty. In my judgment actual knowledge is plainly to be inferred. At the very least Mr Dana should so have known and, if he did not do so, can only have shut his eyes to the facts. In a word Mr Dana did not act in good faith in entering into the 1995 Letters and the 1997 Acknowledgement. I bear in mind that Mr Towey procured the honouring of their predecessors. The facts and matters which to my mind establish these propositions include the following:

As I have just said I am satisfied that Mr Dana knew that in his dealings with TTB Mr Towey was acting in breach of his fiduciary duties to DC and DG. Even if I am wrong in holding that Mr Dana had actual knowledge, in my judgment Mr Dana was on the clearest notice that the transactions were both abnormal and suspicious and required confirmation of their propriety and regularity from Mr Colin Dallas, the Managing Director. This obvious step Mr Dana deliberately refrained from taking, and for this reason also he cannot rely on any claim based on the existence of ostensible authority on the part of Mr Towey.

I accordingly hold that the 1995 Letters are not binding on the Defendants.

Discharge of Liability Under First and Second 1995 Letters

If contrary to my view the first and second 1995 Letters created binding obligations to pay the sums stated, the issue arises whether the sums have in fact been paid. I have held that no sum was ever payable under the undertaking to pay £250,000 under the third 1995 Letter and that the first and second 1995 Letters impose on the Defendants the obligation between them to pay one single sum of £372,000. The onus is upon the Defendants to establish that this sum has been paid. A real difficulty on this issue is that TTB apparently kept no proper accounts or records and Mr Dana cannot put forward any documents establishing the state of account.

The Defendants contend that they have made payments to TTB or third parties at their direction after the date of the 1995 Letters totalling £764,632. It is common ground that a total sum of £764,642 has been paid by the Defendants but Mr Hopkins challenges that more than £45,000, or alternatively £45,000 and three further payments totalling £65,062, have been paid in respect of the liability under the first and second 1995 Letters.

Mr Towey in a document marked “PTI” listed payments made up to the 1^st August 1997 when he left the Defendants. Mr Hudson used Mr Towey’s Schedule to prepare his own revised Table C which sets out those payments included within Mr Towey’s Schedule made after the date of the 1995 Letters (i.e. the 29^th November 1995) which total £679,642.86. If the payment of £20,000 to Mr Rayner is excluded on the ground that the date of payment is not known, the figure is reduced to £679,642. After examining the books and accounts in his revised Table C Mr Hudson gave evidence that two further payments disclosed in the TTB’s bank statements totalling £40,000 require to be added which bring his figure for repayment to £719,642.86.

The issue between the parties is whether the attribution of the payments made by the Defendants to their liability under the 1995 Letters stands. Mr Hopkins has suggested that the payments made may be referable to other loans allegedly made by TTB to Mr Towey. There is no documentary evidence of such loans or of any payments of such loans. £200,000 of debt outstanding on the 29^th November 1995 under previous guarantees was part of the consideration for the 1995 Letters. In the absence of any proper or reliable records kept by TTB and in the circumstances of this case, I think that I should be slow in relating payments to such unknown or unknowable debts rather than those which are documented and are now sought to be enforced. But whatever might be the position in the absence of direct and reliable evidence, there is direct and reliable evidence as the debts to whose discharge the payments were to be attributed, namely that of Mr Towey.

I think that the payments are attributable (so far as necessary for this purpose) to discharge of liability under the 1995 Letters, most particularly for three reasons. The first is that Mr Towey had in 1998 already for over a year requested a detailed breakdown. It was never provided. The second is that Mr Towey in the course of his evidence given on behalf of Mr Hopkins in these proceedings reaffirmed on oath what he said in his first witness statement made on behalf of the Defendants that full repayment had been made. In that first witness statement he stated in paragraph 7:

“7.

Since signing the guarantees [i.e. the 1995 Letters] I believe that all sums that were owing to TTB have been repaid. I attach marked ‘PTI’ a list of payments made on my instructions. The reference ‘From Lon.’ Is a reference to TL Dallas (London) Ltd which subsequently became Paul Group International (Insurance) Limited. The reference to Terry T. is the reference to Terry Rayner who is now dead and who helped me with the shipping matters. Energy and Action were a TTB company. I believe that Leon Dwek was a director of TTB Limited. Parweld, Mehmet Emin, Tutor Bank and Naci Adiyaman were all payees nominated by Henri Dana.”

Mr Towey had no reason or incentive to give false evidence in this regard and he was in the best position to know the truth. His evidence on this issue was clear and unqualified. In respect of this evidence I think that he was an honest witness and his evidence should be accepted, and I prefer it to the evidence of Mr Dana where it is in conflict. The third is that the conduct of TTB has been consistent and consistent only with full acceptance that there was no subsisting liability and that means, if TTB thought that the 1995 Letters were valid and enforceable that TTB thought that full repayment had been made. Quite deliberately no claim or letter before action was sent to either of the Defendants in respect of this alleged liability. No reference was made to the 1995 Letters or 1997 Acknowledgement or any liability thereunder in its accounts. No disclosure was made to the liquidator or in the Statement of Affairs.

In my judgment, if (contrary to my view) the 1995 Letters are valid and enforceable, on the evidence before me the full liability thereunder has been fully discharged.

I accordingly dismiss this action. The action is a reminder of the dangers inherent in the modern practice of liquidators and trustees in bankruptcy selling causes of action. It would surely in the ordinary case be fairer to all concerned and more advantageous to the estate of the insolvent company or bankrupt, if before any such sale was concluded, the liquidator or trustee sought bids for the cause of action from the party against whom they may lie. It will often be worth that party making a payment exceeding the price otherwise obtainable from a third party to buy from and accordingly settle the claim with the liquidator or trustee. This must in any event have been likely in this case.

This action is a cautionary tale, the moral of which is that you get what you pay for. Mr Hopkins purchased for £1,000 the rights to a cause of action against DC and DG for £994,000. The deal was indeed too good to be true. The claim was a bad one and, instead of a bounty of £994,000, Mr Hopkins must pick up a bill for costs likely to be close to that figure.