Square Mile Partnership Ltd v Fitzmaurice McCall Ltd

On 22^nd July 2005 I delivered a reserved judgment in this action, giving the defendant judgment on the counterclaim. In this judgment I use the same expressions as in that one. Immediately after judgment I dealt with various detailed matters of quantum. There were three points. One was common ground. Of the others I ruled against the defendant on one and in its favour on another, and delivered a second judgment on that day dealing with those points. The claim in respect of which I ruled in favour of the defendant had the effect of adding the amount of £54,982 to the counterclaim. Having done that, I then adjourned the matter for a week so that costs, interest and any other matters could be dealt with.

The matter duly resumed before me on 29^th July and the parties embarked on argument on the question of costs. During the course of argument it became apparent that my second judgment of 22^nd July proceeded on a misapprehension as to what was common ground between the parties as to the effect of one of the provisions of the share sale agreement. It became apparent that the point in question was not common ground between the parties after all. That materially affected the scheme of my judgment. The order had not been drawn up at that stage so I felt it right to recall my second judgment of 22^nd July on the point in question so that it could be reargued in due course. Questions of costs and interest were left over until then, because argument on those points might be affected by the recalled element of my previous decision. This judgment deals with that recalled point.

The background to the point is set out in the approved transcript of the second judgment of 22^nd July. The actual point is dealt with in paragraphs 8 to 14. Paragraphs 8 and 9 set out the point, and I repeat them here:

“8.

The single [point] relating to the counterclaim arises in these circumstances. Before the Share Sale Agreement, a debt was owing from RBF to Robert Bruce Fitzmaurice Group Limited (‘Group’). The amount of that debt was £54,982. In accordance with clause 4.3.1 of the Agreement, as set out in that judgment, that debt ought to have been repaid, otherwise discharged or waived before exchange and completion. None of those things happened in this case, and it was carried on into the books and is reflected in the audited accounts. It therefore remained owing at completion, subject to a point made by Mr Gadd [for the defendant] and, as far as the accountants are concerned, is reflected as a liability in RBF’s accounts. Had it been repaid before completion, then Group would have had the money, but the gross assets would have been less and the net assets would have been the same.

9.

Mr Gadd submits that there should be an adjustment under clause 6.3 to reflect this. That is to say, the amount payable under that clause should be increased by an appropriate amount to reflect the fact that there is an increase in the net assets. He submits that, because of clause 4.3.1, Group can no longer sue RBF for the money, and Mr Trace [for the claimant] did not assert otherwise.”

On the basis that it was not recoverable any longer I ruled that the amount should be added to the counterclaim because an adjustment was required to show the net assets as increased by the amount of that non-recoverable debt.

At the end of paragraph 9 I observed that Mr Trace did not dispute that the debt was no longer recoverable. It is a misapprehension as to that which caused me to recall that judgment. I myself had observed that an answer to the point would be that the debt was still recoverable, and the claimant would now wish to argue that it was. I have now heard argument on the correct footing.

Mr Gadd’s whole argument on the point depends on his satisfying me that clause 4 of the share sale agreement has brought about a situation in which Group is not, following the share sale agreement, liable on the debt in question. The relevant parts of clause 4 read as follows:

“4.3

The vendor shall procure that at completion:

4.3.1 All indebtedness owing as:

(a)

between the Vendor on the one hand and RBF and the subsidiary on the other hand (or vice versa);

(b)

between RBF and the Subsidiary on the one hand and any of the directors or employees or former employees or RBF and/or the Subsidiary, except as provided in the accounts to the Last Accounts Date;

is repaid or otherwise discharged or waived (whether such indebtedness is due for payment or not).”

The principal basis of his submissions was the case of Snelling v Snelling 1973 QB 87. In that case three brothers, all directors of a company, had entered into an agreement that if any of them resigned then he would forgo any claims against the company. The company owed money to each of them. One of them resigned, and then sued the company. The other brothers were joined as defendants on their own application and sought a declaration that the benefit of the moneys had been forfeited. Ormrod J held that the company, as a stranger to the contract, could not rely on it as a defence to the claim, but that since all the relevant parties were before the court the proper order to make was to dismiss the claim. At page 97 he said:

“The next problem is to consider the relief to which they [viz the remaining directors] are entitled. They have claimed a declaration that the amount shown in the plaintiff’s loan account has been forfeited to the defendant company and is now applicable in accordance with the resolution of the board of directors of the defendant company passed on May 22, 1969, but I feel some doubt whether this is the appropriate form of declaration. They are certainly entitled to a declaration that the provisions in the agreement of March 22, 1968 are binding on the plaintiff. Had these provisions been worded positively and not negatively, e.g. as a promise by the resigning director to release the company from its indebtedness to him, I think that, on the authority of Beswick v Beswick [1968] A.C. 58 this would have been an appropriate case on the facts in which to order specific performance of that promise in whatever was the appropriate form. Similarly, had the second and third defendants themselves taken proceedings, before the plaintiff issued his writ, to retrain the anticipated breach they would have been entitled to an injunction restraining him from demanding payment by the company of his loan account. Had he subsequently started an action against the company it would, presumably, have been stayed as an abuse of the process of the court. But what is the appropriate form of order when the second and third defendants have been joined in the plaintiff’s action, and succeeded on the counterclaim? This is the procedural problem on which I would have been grateful for authoritative guidance. An injunction against the plaintiff restraining him from pursuing the action is excluded by the provisions of section 41 of the Act of 1925. But once it is established that the second and third defendants are entitled to enforce their contract with the plaintiff, the court is bound to take some action against the plaintiff. One solution would be to stay all further proceedings in the action between the plaintiff and the defendant company, either under the proviso to section 41 or under the court’s inherent jurisdiction to protect its process from abuse.

And on page 99 he added:

“If the action was left with no more than an order staying further proceedings on the claim, the plaintiff could start another action only to have it also stayed and so on ad infinitum. The reality of the matter is that the plaintiff’s claim fails and the order of the court ought, if possible, clearly to reflect that fact.

Accordingly, I think that plaintiff’s claim should be dismissed and that there should be judgment for the second and third defendants on the counterclaim, together with a declaration in appropriate terms.”

Mr Gadd said that this showed how the claim should be treated. If Group had sought to sue RBF for the outstanding debt and/or refuse to release it the claimant would have been entitled to an order for specific performance or an injunction to restrain Group from demanding payment. If Group had sued the claimant could have intervened (like the brothers in Snelling) and had the proceedings struck out as an abuse of process. Looking at the matter another way, the claimant could have compelled Group to waive the debt as a result of clause 4, and since equity looks on that as done which ought to be done, the debt should be treated as not due and the net assets (and the audited accounts) adjusted accordingly, giving the defendant the benefit of an extra £54,000 odd in its claim.

I do not think that this reasoning is correct. Snelling was not a case which decided that the debt was not due. Looking at the way the case was decided, Ormrod J probably felt that technically the debt was due as a debt looking at the position simply between the plaintiff and the company – see his reluctance to grant a declaration that the debt had been forfeited. What he did was to dismiss the claim once the right parties were before him in the circumstances obtaining in that particular litigation in order to give effect to the rights of all the parties before him. The question of the correct treatment of the debt before then did not arise. One cannot therefore extrapolate from that case and say that it follows that in the present case there is, in effect, no debt even if Mr Gadd is right about the effect of clause 4.

In addition, the effect of the provisions in Snelling and in the present case are different. In Snelling the whole purpose of the provision was to deprive the outgoing director of the benefit of his claim. That was why the remaining directors could have obtained equitable relief preventing the claim being brought. That is not the effect of clause 4. Under clause 4 Group was to be entitled to procure that the claim be honoured. Group could, of course, have chosen to waive it instead, but it was to have the benefit of it if it wished. What clause 4 required was that that the chosen steps should be taken by the time of the share acquisition.

This follows through into the claim for equitable relief. It does not appear to me to be the case that the claimant in this case could have restrained an action for an injunction or specific performance. In Snelling Ormrod J observed that

“To give judgment for the plaintiff against the defendant company for the amount claimed in the statement of claim and judgment for the second and third defendants on the counterclaim would be absurd, unless, which is clearly not the case here, the second and third defendants could be adequately compensated in damages. So far as they are concerned a judgment against the company would frustrate the very purpose for their [the brothers’] agreement with the plaintiff was made”. (at 96H-97A)

That is not the position in relation to clause 4. If Group had sought to sue RBF shortly after the share sale the claimant might or might not have sought to prevent it. In fact it would seem to me to be likely that it would not, because if it had it would have been met with the argument that the audited accounts showed the sum due, and it should only have relief on terms that it accepted that the sum payable by it under the share sale agreement should be increased by the amount of the debt, which seems to me to be a very good point. That would make the action not worth while – the claimant might just as well let the judgment be granted against RBF. It seems to me to be very unlikely that the claimant would be able to have its cake and eat it – that is to say, to be able to restrain the action for the debt and resist paying the increased value by which the assets would be increased if the debt were forgiven. It might be said that the choice would be the claimant’s – it could choose whether to enforce a bar arising out of clause 4 and pay more consideration, or leave the judgment to go against RBF – and if that is right then it does not follow that Group is entitled to treat the position as one in which the claim is treated as waived. Alternatively, it can be said that the claimant should not be entitled to equitable relief at all because it would be adequately compensated in damages, albeit that the damages would be nominal. This is so because it had suffered no loss as a result of the non-discharge of the debt – the debt remained outstanding but the consideration payable was that much less, and there is no basis for supposing any other kind of uncompensated loss. The effect of this is that Group is not entitled itself to say that its failure to deal with the matter before completion means that the debt must be treated as discharged and the net assets of RBF adjusted accordingly for the purposes of calculating the consideration.

All this ties in properly with the other important provisions of the agreement. Clause 6 measures what has to be done by reference to the audited accounts. That is the yardstick. The audited accounts showed the debt as owing. Mr Gadd’s argument involves a complaint that the yardstick is not the right length. That does not seem to me to be the right approach. First, the audited accounts are the chosen yardstick for the purposes of clause 6, and that yardstick has the length that it has. Second, as a matter of history Group had a chance to have an input into the drawing of the audited accounts, and it availed itself of that opportunity in various respects without complaining that this debt should not have appeared there. If fairness matters then the original creditor therefore had an opportunity to complain about the status of the debt and the accounts. Group was not disadvantaged by this analysis because it could have sued on the debt.

This analysis is sufficient to deal with the claim. Mr Trace QC, for the claimant, advanced additional points arising out of correspondence from the solicitor acting for Group which he said represented the debt to be owing, and which actually claimed it. While it is not necessary for me to express a final conclusion on it, I should say that I do not think that that correspondence assists him. It is correspondence which is to some extent itself confused, and its treatment of the debate is debatable. All in all I get no assistance from that correspondence, but I do not think I need that assistance anyway.

It will be apparent from the discussion appearing above that there was something a little odd about the debate in this case. It involved a debate as to the status of a debt arising between two parties neither of whom was a party to this action. That made the matter a little unsatisfactory. At the last hearing I mentioned that it might be necessary to join others (particularly RBF, which was sold on by the claimant about a year after the share sale) but nothing was done about that in the intervening period. Mr Gadd indicated that so far as he was concerned his client did not want the additional expense of joining RBF. Group was not a party either, but at least was still in the defendant’s camp, as it were. The absence of the paying party whose obligations were in issue made the matter somewhat unsatisfactory, but the questions arose and I had to address them.

In the circumstances I find for the claimant on this issue.