Jafari-Fini v Skillglass Ltd & Ors

Mr Stuart Isaacs QC:

INTRODUCTION

1. This trial of preliminary issues arises out of the Claimant's acquisition in 2003, through Phoenix Acquisitions Limited ("PAL"), of a majority shareholding in Chesterton International Plc ("Chesterton"), the well-known commercial and residential estate agency and provider of other property-related services. Following its acquisition by PAL, Chesterton was renamed Chesterton International Limited. Chesterton was placed into administrative receivership on 7 March 2005. The Claimant claims to be entitled to be the beneficial owner of a majority of PAL's issued shares. Whether or not he is so entitled essentially depends upon whether PAL and he were in default under various financing agreements dated 16 April 2003 made with the First Defendant ("Skillglass") in order to fund the acquisition. Skillglass was placed into administration on 30 March 2005.

2. The Claimant, who previously had legal representation but who appeared in person in these proceedings, is a businessman with experience in the United Kingdom property market since 1989, initially in the residential sector and later the commercial sector. He first became interested in acquiring Chesterton in early 2003, when he already owned about 11% of its shares. He engaged the services of investment advisors Babcock & Brown to investigate and advise on the possibility of acquiring Chesterton and to prepare an offer to its shareholders. Through Babcock & Brown's solicitors, Denton Wilde Sapte, he was introduced to Mr David Rowland, a wealthy financier residing in Guernsey, as a source of funding for the proposed acquisition. Mr Rowland effectively controls Rowland Capital CI Limited ("Rowland Capital"), a family company incorporated in Guernsey.

3. PAL was incorporated on 12 March 2003. On 14 March 2003, PAL's issued share capital was transferred to the Claimant who, together with Mr David Carter of Babcock & Brown, was appointed a director of PAL. The Claimant acquired PAL solely as the vehicle for his proposed acquisition of Chesterton. He resigned as a director of PAL on 16 April 2003. PAL was placed into administration on 5 April 2005.

4. Mr Rowland was interested in funding the proposed acquisition but was unwilling for the funding to be provided by Rowland Capital itself. Instead, he thought about involving the Third Defendant ("Resurge"), an AIM-listed company in which a company related to Rowland Capital owned about 17% of the shares. The joint managing directors of Resurge at all material times were Mr Jonathan Rowland, David Rowland's son, and Mr Jamie Constable. Resurge was placed into administration on 30 March 2005. It was subsequently refinanced and changed its name to Adeste Investments Plc and came out of administration on 7 September 2005.

5. Skillglass is a wholly-owned subsidiary of Resurge. Its sole business at all material times was to borrow money from Resurge and Rowland Capital and lend money to PAL. Jonathan Rowland was also a director of Skillglass until 9 April 2003. In this judgment, I shall refer to Skillglass and Resurge together as "the Defendants".

6. Resurge was interested in the Claimant's proposed acquisition of Chesterton and decided that Skillglass should provide the funding for it.

7. The key financing agreements were entered into on 16 April 2003: (1) a Term Loan Facility Agreement between PAL and Skillglass ("the Facility Agreement"); (2) a Composite Guarantee and Debenture granted by PAL to Skillglass ("the Debenture"); (3) a guarantee executed by the Claimant in Skillglass' favour ("the Guarantee"); and (4) legal charges over shares and property granted by the Claimant in Skillglass' favour ("the Shares Charge" and "the Property Charge").

8. On that date, an Investment Agreement was also entered into between the Claimant, PAL, Resurge and Phoenix Holdings Partners LLC ("PHP") which made provision for the subscription of ordinary shares in PAL at Completion (as defined). PHP was a special purpose investment vehicle wholly-owned by Babcock & Brown. It was envisaged that the Claimant would sell his existing holding in Chesterton to PAL in return for shares in PAL and would subscribe approximately £1 million in cash for additional shares in PAL, giving him the majority interest in PAL, with Resurge and PHP as minority shareholders.

9. Also on 16 April 2003, Rowland Capital and Skillglass entered into a loan facility agreement under which Rowland Capital agreed to provide Skillglass with sufficient funds to enable Skillglass to advance monies to the Claimant under the Facility Agreement. Skillglass' obligations towards Rowland Capital were secured by a debenture of the same date and by a guarantee and legal charge over shares executed by Resurge in Rowland Capital's favour.

10. The first drawdown under the Facility Agreement was on 9 July 2003.

11. On 27 October 2003, Skillglass served on PAL a notice of default under the Facility Agreement ("the October notice of default").

12. On 11 December 2003, Skillglass served on PAL a notice of demand under the Facility Agreement ("the December notice of demand").

13. It was common ground that the date for repayment of a sum of £3,700,100 under the Facility Agreement was 4 January 2004 and that the date for a further repayment to reduce the outstanding balance to £4 million was 9 July 2004 and that neither of those repayments was made.

14. On 14 May 2004, the Claimant issued a claim form against Skillglass. Particulars of Claim were served on 10 June 2004 in which a wide range of relief was claimed on behalf of the Claimant and also PAL. In July 2004, the Claimant applied for permission to amend the claim form to add derivative claims on behalf of PAL and to continue with such derivative claims. On 26 October 2004, His Honour Judge Rich QC, sitting as a judge of the High Court in the Chancery Division, dismissed the Claimant's applications. He also gave directions for the further conduct of the action, including a direction that the Claimant should serve Amended Particulars of Claim deleting the derivative claims on behalf of PAL. Amended Particulars of Claim were served on 9 November 2004. On 16 March 2005, the Court of Appeal dismissed the Claimant's appeal against Judge Rich QC's decision: [2005] EWCA Civ 356.

15. The Court of Appeal decided that what was required was not a derivative claim by PAL but some machinery whereby PAL was formally bound by the outcome of the Claimant's claim against Skillglass. This was because the real issue was not whether a minority shareholder should be allowed to bring a claim in PAL's name but whether a majority shareholder, the Claimant, whose shares were said to be held on trust for him by Skillglass, should be allowed to use PAL's name to sue Skillglass.

16. Therefore, the Court of Appeal ordered amongst other things that the action should proceed to the trial of preliminary issues whether the Claimant was entitled to such of the following relief against Skillglass as the Claimant claimed in his Amended Particulars of Claim:

"1. Declarations that:

a. Skillglass was not entitled to serve the notice of default dated 27 October 2003 ("the October notice of default") or the notice of demand dated 11 December 2003 ("the December notice of demand");

b. Skillglass' actions in serving the October notice of default and the December notice of demand and in subsequently enforcing the Facility Agreement and Debenture in reliance upon the October notice of default and the December notice of demand constituted breaches of the Facility Agreement, the Debenture and of the Nominee Declaration dated 10 July 2003;

c. By reason of Skillglass' aforesaid breaches of the Facility Agreement, the Debenture and Nominee Declaration dated 10 July 2003, [PAL] is discharged from liability under the Facility Agreement and Debenture.

2. A declaration that by reason of the matters set out in (1) above [the Claimant] is discharged from liability under the MJF Guarantee, the MJF Shares Charge and the MJF Properties Charge.

3. Declarations that:

a. No default having occurred under the Facility Agreement, Skillglass was not entitled to make demand under and to seek to enforce the MJF Guarantee, the MJF Shares Charge or the MJF Properties Charge as it purported to do in its letter to [the Claimant] dated 11 December 2003 and subsequently;

b. By making demand under and seeking to enforce the MJF Guarantee, the MJF Shares Charge and the MJF Properties Charge as aforesaid, Skillglass acted in breach of the MJF Guarantee, the MJF Shares Charge, the MJF Properties Charge and of the Nominee Declaration dated 27 June 2003;

c. By reason of Skillglass' aforesaid breaches of the MJF Guarantee, the MJF Shares Charge, the MJF Properties Charge and of the Nominee Declaration dated 27 June 2003, [the Claimant] is discharged from liability under the MJF Guarantee, the MJF Shares Charge and the MJF Properties Charge.

4. An order for the delivery up and cancellation of the MJF Guarantee, the MJF Shares Charge, the MJF Properties Charge and of the Nominee Declaration dated 27 June 2003.

5. A declaration that [the Claimant's] shares in PAL taken by Skillglass in purported enforcement of the MJF Shares Charge belong to MJF free from any security or other interest in favour of Skillglass.

6. An order for the re-transfer of such shares to [the Claimant].

7. Alternatively, if [the Claimant] is not discharged from liability under the MJF Guarantee, the MJF Shares Charge and the MJF Properties Charge, a declaration that no valid demand has been made under the Facility Agreement and accordingly the MJF Guarantee, the MJF Shares Charge and the MJF Properties Charge have not become enforceable."

17. The Court of Appeal also ordered that PAL be joined as a defendant for the purpose only of ensuring that that it be bound by any declarations made on the trial of those issues; and that it be permitted but not obliged to take part in the proceedings. PAL in fact took no part in these proceedings, other than on the first day of the trial to make an application, which was unopposed, for the adjournment until the time that judgment was handed down of an application by it for the costs of a witness summons issued by the Claimant.

18. On 3 June 2005, the Claimant served a second Amended Particulars of Claim which named as defendants not only Skillglass and PAL but also Resurge, Rowland Capital and David and Jonathan Rowland.

19. On 6 June 2005, Master Bowles gave the Claimant permission to join Resurge as an additional defendant. No permission was sought or obtained for Rowland Capital or David or Jonathan Rowland to be joined as additional defendants and the action has not proceeded against them. There is a pending application by Resurge to strike out the claim against it and for summary judgment on its counterclaim.

20. Skillglass served an Amended Defence and Counterclaim on 5 December 2005. The Claimant had already served a Reply and Defence to Counterclaim on 22 September 2005. Resurge served its Defence and Counterclaim on 27 July 2005, without prejudice to its position that no claim lies against it.

THE 16 APRIL 2003 AGREEMENTS

The Facility Agreement

21. Under the Facility Agreement, Skillglass agreed to make available to PAL a maximum principal amount of £12,857,025 for the purchase of all of the issued and to be issued ordinary shares in Chesterton and for the payment of related costs and fees. The facility was available for drawdown at any time during the Certain Funds Period (as defined). By clause 13.1, repayment was to be made as follows: (1) £1,299,900 on or prior to 21 days after the first drawdown; (2) £3,700,100 on or prior to 180 days after the first draw down; (3) a further repayment so as to reduce the outstanding balance to £4 million on or prior to 365 days after the first drawdown; and (4) the balance then outstanding on the second anniversary of the first drawdown.

22. Clause 20.1 of the Facility Agreement required PAL to ensure that the consolidated profits before tax and the operating cashflow of its group did not adversely vary by more than 15% of the relevant financial projections set out in the Business Plan (as defined) against which PAL's financial condition was to be measured. However, by a side letter dated 16 April 2003 ("the Side Letter"), the parties agreed that the original forecasts in the Business Plan would be replaced by "Revised Forecasts" and that until such time as the revised forecasts were agreed or deemed to be agreed or if earlier prior to the expiry of the Certain Funds Period a breach of clause 20.1 would not constitute an Event of Default and Skillglass would not have any rights to enforce its security in respect thereof. The Side Letter provided that from the Unconditional Date (defined in the Facility Agreement to mean the date on which all of the conditions of PAL's offer for Chesterton became fulfilled or else waived and the offer had become or been declared to be wholly unconditional in all respects), PAL would have unlimited access to the Chesterton Group and would start work on producing such revised financial forecasts, in particular the profit and loss forecast and cashflow forecast in the same format as those annexed to the Facility Agreement.

23. Clause 23 of the Facility Agreement dealt with Events of Default. Clause 23.1 identified those events which would constitute an Event of Default by PAL. In particular, clause 23.1.2 made it an Event of Default where PAL was in breach of the undertaking set out in clause 20.1. Clause 23.2 identified the rights then given to Skillglass:

" Rights on a default

Upon and at any time after the occurrence of an Event of Default, and for so long as the same is continuing, the Lender may, in its sole discretion by notice in writing to the Borrower:

23.2.1 cancel any unutilised amount of the Facility, whereupon the obligations of the Lender shall be reduced to zero; and/or

23.2.2 declare the Term Loan to be due and payable on demand, whereupon the Loan, together with all interest thereon and other amounts payable under the Banking Documents shall at all times after such declaration be due and payable; and/or

23.2.3 declare that the Security Documents shall have become enforceable.

PROVIDED THAT, prior to the expiry of the Certain Funds Period, the Lender shall not be permitted to:

(a) take any of the actions referred to in sub-clauses 23.2.1 to 23.2.3 (inclusive) of this clause 23.1; and/or

(b) invoke any right or discretion (for which provision is made in this Agreement) requiring any prepayment or repayment of the Term Loan; and/or

(c) exercise any right of rescission; and/or

(d) refuse to make any Advance,

Unless a Major Default has occurred and is continuing which has not been waived in writing by the Lender."

24. By clause 1.1 of the Facility Agreement, the "Certain Funds Period" was defined, so far as is material, to mean the period from 16 April 2003 to whichever was the earlier of either the date on which the offer for Chesterton lapsed or was withdrawn or else the date which was 220 days from the date of the offer.

25. The expression "Major Default" was also defined by clause 1.1 to mean any Event of Default under clause 23.1.3(b) (to the extent that it resulted from a breach of any of clauses 21.8.2, 21.8.5 and/or 21.8.9) and clauses 23.1.7 to 23.1.10 of the Facility Agreement, except that the reference in any such clause to a Charging Company was deemed for the purposes of the definition of a "Major Default" to be a reference to PAL. ("Charging Companies" were otherwise defined to mean PAL and its subsidiaries which were from time to time required to exercise security documents in Skillglass' favour pursuant to the terms of any Banking Document).

The Debenture

26. Under the Debenture, PAL covenanted to pay on demand all monies owed by it under the Facility Agreement and secured that obligation by fixed and floating charges over all its assets and undertaking, including therefore its shares in Chesterton, as security for its obligations to Skillglass.

The Claimant's guarantee

27. By the Guarantee, the Claimant guaranteed to Skillglass PAL's liabilities under the Facility Agreement and undertook to pay and discharge on written demand by Skillglass all monies due from PAL thereunder.

The Claimant's legal charges

28. The Claimant's obligations to Skillglass under the Guarantee were secured by the Shares Charge and the Properties Charge. The Shares Charge created a first fixed charge over all the shares in PAL which were beneficially owned by the Claimant. It provided that at any time after the Claimant's obligations under the Guarantee should have become due and payable, and without any further consent or authority on the Claimant's part, Skillglass might exercise with respect to the charged shares any powers and voting rights attaching thereto. The Properties Charge created a legal charge over two properties in St John's Wood, London NW8 and over a lease of a property in Maida Vale, London W9.

The Investment Agreement

29. By clause 1 of the Investment Agreement, the Claimant applied for 2,199,900 'A' shares at a price of £1 per share; PHP applied for 500,000 'B' shares at a price of £1 per share; and Resurge applied for 900,001 'C' shares at a price of 1 penny per share.

30. Clause 2 provided:

" Completion and the Offer

2.1 Completion of such subscriptions by the Investors for the New Shares shall take place … on the day on which the Offer [for Chesterton] becomes or is declared wholly unconditional in all respects, … when the following matters in this clause 2.1 shall take place in such order as the Investors may require:

(a) the [Claimant] shall pay to [PAL], or procure the payment to [PAL] of, the sum of £1,051,553, in part payment of the sum due from him pursuant to clause 1.1 … of which £151,553 is subject to the undertakings in the agreed form;

…

2.2 The [Claimant] shall direct Citibank NA to transfer the monies payable to Citibank NA in connection with their acceptance (on behalf of the [Claimant] to the client account of Halliwell Landau … . It is agreed that such payment to Halliwell Landau, who will hold such monies on behalf of [Skillglass], will constitute a valid discharge of the [Claimant's] obligations to pay the balance of the subscription monies due from him to [PAL] pursuant to clause 1.1.

…

2.4 In the event that the [Claimant] is unable to make the payment of £1,051,553 referred to at clause 2.1(a) above at Completion, he shall subscribe for 1,300,000 of such 'A' ordinary shares … and Resurge shall subscribe for an additional 936,000 'C' ordinary shares (the "Additional 'C' Shares") at par on the basis that payment by Resurge of the subscription monies of £9,360 is to be made within 7 days of Completion whereupon the Additional 'C' Shares shall be allotted to Resurge as fully paid.

2.5 Upon the issue of the Additional 'C' Shares, the Investors shall enter into an option agreement under which the [Claimant] shall be entitled to purchase such shares from Resurge for £936,000 within one year of Completion, in the agreed form and the Shareholders hereby consent to such action, to the extent required.

31. Clause 3 made provision for the composition of PAL's board of directors following Completion. Clause 3.1 provided that immediately following completion, the board would comprise the Claimant as chairman, David Carter (PHP's appointee) and Mr Constable (Resurge's appointee). Clause 3.2 gave the Claimant the right to appoint five directors, of whom one would be nominated as chairman; and to appoint a representative to attend as an observer at board meetings. Clause 3.3 provided for PHP to appoint one director and a representative to attend as an observer. Clause 3.4 provided for Resurge to appoint three directors and have a representative to attend as an observer. By clause 3.5, the appointment and removal of directors was to be by written notice to PAL or at any board meeting.

32. Clause 21 dealt with the situation where there was a default under the Facility Agreement. It provided that in the event of a "Default" within the meaning of the Facility Agreement which was not remedied by PAL, Skillglass would have the right to maintain control of PAL in place of the Claimant.

33. Schedule 3 to the Investment Agreement comprised a list of actions which, by clauses 5.3 and 5.4, were prohibited unless PHP and Resurge gave their prior written consent.

THE EVIDENCE

The witnesses

34. Evidence was given by the Claimant himself. His evidence in chief comprised various statements made in the present proceedings at the pre-trial stages and in other proceedings. He also called as witnesses Mr Hassan Alemi, who was employed at Chesterton from 17 July 2003 until January 2004, and Jonathan Rowland. Jonathan Rowland's evidence was given in unusual circumstances. The Claimant had initially applied for permission to issue a witness summons requiring him to give evidence but it was not proceeded with after the Defendants agreed to allow him to be called by the Claimant as a witness. For that purpose, Jonathan Rowland prepared a witness statement dated 10 December 2005 dealing with issues about which the Claimant had indicated he wished him to give evidence. The Defendants then effectively permitted the Claimant to cross-examine Jonathan Rowland.

35. On the Defendants' behalf, oral evidence was given by Mr Ted Webster, Chesterton's chief executive and a director from 27 June 2003 until it went into receivership; David Rowland; Mr Graham Robeson, David Rowland's trusted advisor and employee of various of his companies since 1968; Mr William Heaney, at all material times the company secretary of Chesterton and of PAL; Mr Philip Briggs, at all material times Chesterton's financial controller; and Ms Margaret Morrow, who had worked at Chesterton since 1984 as a personal assistant to various chairmen and directors, including the Claimant. The Defendants also relied on a hearsay statement by Mr Anthony Brierley, at all material times a director of Skillglass; and on an email dated 24 February 2004 from Mr Takiar to Mr Webster submitted under a hearsay notice dated 16 December 2005.

The offer for Chesterton

36. With the funding arrangements in place, on 1 May 2003 PAL made a public offer to acquire the shares in Chesterton for 12 pence per share in cash, which valued Chesterton at approximately £10.2 million. The offer was conditional upon PAL receiving acceptances of not less than 90% (at which level of acceptances the minority interest could be compulsorily bought out under sections 428 to 430F of the Companies Act 1985) but PAL had the right to decide on a lesser percentage of acceptances of not less than 50%. The offer was initially open for acceptance until 22 May 2003 but the time for acceptance was extended by PAL until 30 June 2003. It was always the Claimant's intention, if the offer were successful, to repay the majority of PAL's borrowings by selling off certain non-core assets and taking Chesterton private (which it could do at a level of acceptances of 75%) and using the "whitewash" procedures under sections 155 to 158 of the Companies Act 1985 to pass money up to PAL.

37. In early June 2003 there were discussions between PAL and its financiers on whether the offer should be declared unconditional, even though the level of acceptances was below 90%. A fee of £100,000 for this concession, to be paid by PAL to Skillglass, with £85,000 going to Rowland Capital, was negotiated. However, Rowland Capital was reluctant to proceed at that stage, preferring to wait and see how matters developed.

38. By 26 June 2003, the 90% acceptance level had still not been reached.

Mr Webster's £250,000 loan to the Claimant

39. Meanwhile, on or about 24 June 2003, the Claimant approached Mr Webster to request a loan. Mr Webster had first come into contact with the Claimant in late 2002 and was asked by Babcock & Brown to carry out a limited due diligence exercise on Chesterton for which he received a fee of £25,000.

40. Mr Webster's understanding was the Claimant was short of money which he needed to sustain his majority shareholding in PAL. Mr Webster agreed to lend the Claimant £250,000 on the terms of a loan agreement executed on the evening of 26 June 2003. The loan was for one year and at an exceptionally high rate of interest. It was to be secured amongst other things by a second charge over the Claimant's shares in PAL but no security was ever provided because Skillglass withheld its consent to the second charge. The monies were advanced the following day. Mr Webster only declared his loan to the Claimant at a Chesterton board meeting which took place on 23 December 2003 although I accept Mr Webster's evidence that the loan was known about by Mr Ardley, who became Chesterton's deputy chairman. I also accept that Mr Robeson was aware by the end of July 2003, in the context of discussions about the second charge, that Mr Webster had proposed to lend the Claimant money. However, I also accept Mr Robeson's evidence that he was misled, probably by Mr Constable, into believing initially that the loan was for the Claimant's general purposes and then that it was required to enable the Claimant to repay a third party debt. I found Mr Robeson to be an honest and truthful witness. Where his evidence differed from that of the Claimant, I preferred it.

Events of 26/27 June 2003

41. On 27 June 2003, the board of Skillglass met to consider whether to permit PAL to waive the 90% acceptance condition and declare the offer unconditional. The two directors who attended were Mr Constable and Mr Brierley. It was resolved to permit PAL to declare the offer unconditional.

42. As a result of the offer becoming unconditional, the Claimant, Resurge and PHP became obliged to take up shares in PAL. The Claimant became the beneficial owner of approximately 61% of the PAL shares, subject to the Shares Charge, PHP became the owner of approximately 14% of the shares and Resurge became the owner of the remaining 25% of the shares.

43. The Claimant was unable to obtain the funding which he had anticipated to enable him to pay for the balance of his shares in time for the subscription on 27 June 2003. Accordingly, the option provided for by clause 2.4 of the Investment Agreement came into play. On 27 June 2003, a call option agreement as envisaged by clause 2.5 of the Investment Agreement was executed between the Claimant, Resurge and PHP which entitled the Claimant to buy from Resurge for £936,000 within a year of Completion the additional shares for which Resurge paid only £9,360. The call option agreement was varied by a side letter of the same date whereby, upon immediate payment by the Claimant of £50,000, the shares were transferred to him immediately and he became obliged to pay £936,000 within 365 days of the transfer or £886,000 within 180 days of the transfer.

44. It was also agreed that the shares which were the subject of the Shares Charge should be registered in Skillglass' name forthwith to be held by Skillglass pending default under the Facility Agreement. These arrangements were recorded in a Nominee Declaration dated 27 June 2003 under which Skillglass undertook to the Claimant that it would hold his shares in PAL as nominee or bare trustee to deal with the shares only as the Claimant might direct until such time as the money secured by the Guarantee became payable; and in a Nominee Declaration dated 10 July 2003 in which Skillglass gave a similar undertaking in relation to PAL's shares in Chesterton. From those dates, Skillglass was the registered holder of approximately 61% of PAL's shares and 87% of PAL's shares in Chesterton.

45. Immediately after the offer was declared unconditional, Resurge appointed two nominees to PAL's board, namely Mr Constable and Mr Robeson. On 2 September 2003, Resurge's third nominee, Mr Brierley, became a director.

46. The Claimant, however, made no new appointments to PAL's board. His two original appointees, Mr Webster and Mr David Taylor (formerly Chesterton's sales director until 2000), remained. On 19 September 2003, Mr Webster resigned as a director of PAL. The Claimant neither replaced him nor himself became a director.

47. The Claimant, Mr Webster and Mr Taylor all joined the board of Chesterton on 27 June 2003. A service agreement relating to the Claimant's employment as a director of Chesterton was concluded on 28 June 2003.

Events of August to December 2003

48. On 1 August 2003, PAL repaid the first tranche of £1,299,900 due under the Facility Agreement from monies subscribed under the Investment Agreement.

49. On 15 August 2003, PAL gave notice that the offer would close on 29 August 2003, which it did.

50. Following PAL's acquisition of a majority interest in Chesterton, it quickly became apparent that Chesterton's financial condition, in particular its cashflow, was a lot worse than had been expected. The board developed a strategy to implement savings, restructure the business and sell off assets, including the Facilities Management ("FM") business. The sale of the FM business was successfully overseen by the Claimant. Whilst Chesterton's immediate cashflow position was improved by the sale of the FM business, the impact of the sale was limited and short-term: the majority of the cash received by Chesterton from the sale went in repayment of bank loans and other liabilities; also, excluded from the sale was the major part of the FM business' fixed overheads, namely its liability to pay rent and rates on Lily Hill House, a substantial property in Bracknell, Berkshire.

51. In September 2003 Chesterton's bankers, Royal Bank of Scotland, refused to increase its borrowing facilities. A number of substantial payments needed to be made and Chesterton was concerned that it lacked the cash to meet its liabilities. Mr Constable therefore approached Rowland Capital, via Mr Robeson, with a request for an emergency facility of up to £3 million, to tide the company over until it could use the sale proceeds of the FM business to repay its immediate liabilities.

52. Mr Webster's evidence, confirmed by Ms Morrow, was that from about October 2003 the Claimant was under a great deal of stress both because of the position at Chesterton and because of personal problems and that the Claimant did not come into work for weeks right up until he went to Iran on 7 December 2003. The directors were concerned that the company might be trading insolvently. I accept that evidence.

53. The overall problem at this time was Chesterton's inability, in view of its parlous financial position, to pay a dividend or otherwise provide cash to PAL with which PAL could discharge its obligations to Skillglass under the Facility Agreement. In particular, Mr Robeson's evidence was that it had become clear by October 2003 that Chesterton's directors and auditors would be unable to make the necessary declarations of solvency to enable "whitewashing" to take place so as to enable Chesterton to render PAL financial assistance in repaying the loan from Skillglass.

54. On 13 October 2003, David Rowland had a short meeting with the Claimant at the Carlton Tower hotel in London, after having learned from Mr Robeson about the serious cashflow problems at Chesterton and the possible need to inject more funds. Mr Rowland was clear from the meeting, and concerned, that the Claimant wished to keep Mr Robeson away from the management of Chesterton's business because, unlike with Jonathan Rowland and Mr Constable, the Claimant said he could not deal with Mr Robeson.

55. The October notice of default asserted the existence of an Event of Default under clause 23.1.2 of the Facility Agreement on the ground that PAL was in breach of the undertaking set out in clause 20.1 of the Facility Agreement which required that PAL ensure that in respect of each month the Group's "Total Contribution" (a measure of its operating cash flow) must not adversely vary by more than 15% from certain forecasts. It further stated that Skillglass was exercising all its various rights under clause 23.2 of the Facility Agreement.

56. On 24 October 2003, PAL made a £600,000 advance repayment of the second tranche of monies due on 4 January 2004 under the Facility Agreement, thereby reducing the repayment due on that date to £3,100,100. However, the parlous financial position of Chesterton put in doubt the source of funds from which it was intended to repay that balance of the second tranche, although a further part loan repayment of £400,000 was made on 8 December 2003.

.

57. On 28 October 2003, a PAL board meeting took place attended by Mr Robeson, Mr Constable and Mr Taylor. Also present were the Claimant, Mr Ardley, Jonathan Rowland and Mr Briggs. (Mr Brierley was not present as he was in Australia at the time and did not participate by telephone, even though the minutes erroneously record him as having been present). Draft minutes of the meeting were circulated for comment. It was noted in the minutes, signed by Mr Robeson, (and in the draft minutes) that the October notice of default had been received. PAL's board resolved that the Claimant, Mr Ardley and Mr Webster be appointed as directors of PAL, in the hope of reversing the situation where, according to the Defendants, PAL was being ignored and sidelined by the Claimant. However, neither Mr Ardley nor Mr Webster was interested in rejoining the board. At the meeting, the board also considered various alternative arrangements for obtaining cash in order to meet PAL's repayment obligations.

58. On 2 December 2003, a PAL board meeting took place attended by Mr Robeson, Mr Constable, Mr Taylor and Mr Carter's alternate, Mr Hanson. Mr Webster, even though he was no longer a director, was also present along with Mr Heaney and others. At the meeting, concern was expressed about Mr Webster's and Mr Ardley's unwillingness to become directors. The Claimant was not present, which was a matter of great concern to Mr Robeson, given the financial position of Chesterton and his role as executive chairman, although the Claimant's evidence was that the only reason he did not attend was that he was too busy making his arrangements to travel to Iran. Also, at the meeting Mr Webster and Mr Ardley took the view (as directors of Chesterton) that it was not in Chesterton's interest to release any cash to PAL under any of the arrangements previously proposed. This made it inevitable that PAL would be unable to repay the second tranche when it became due to Skillglass on 4 January 2004 under the Facility Agreement.

59. The situation resulted in Skillglass serving the December notice of demand. The same day it made formal demand upon the Claimant under his Guarantee.

60. The minutes of PAL's board meetings on 28 October and 2 December 203 were apparently not approved for signature as true records of the proceedings until a board meeting on 14 July 2004.

61. On 12 December 2003, there was a Chesterton board meeting. The Claimant did not attend because by this time he was in Iran. At the meeting, Mr Constable and Mr Robeson were appointed as directors nominated by PAL; and the Claimant, on a proposal by Mr Constable supported by Mr Robeson but opposed by Mr Webster, was removed as chairman. In view of Mr Webster's unease about the Claimant's removal, the board agreed to hold a further meeting on 18 December 2003 ahead of the Chesterton AGM which in fact took place on 23 December 2003 and at which Skillglass would in all likelihood vote to remove the Claimant if the board had not already done so.

62. According to the Defendants, there was great concern about the difficulty in contacting the Claimant in Iran, where he had left no forwarding address. Ms Morrow was unable to reach him. Contact could be made only when the Claimant telephoned in and, even then, the telephone often went dead. The minutes of Chesterton's board meeting on 12 December 2003 record Mr Webster as having said that the Claimant had not been contactable. The general effect of Mr Webster's conversations with the Claimant was that he should return to London to sort things out with PAL's lenders. Mr Webster, in his own words, wanted to get the executive and the money closer together. Mr Heaney's evidence confirmed the difficulty in communicating with the Claimant in Iran. It was also David Rowland's evidence that he had a telephone conversation with the Claimant while he was in Iran and expressed concern that the Claimant should return to London. For his part, the Claimant disputed that he was being elusive. He said that everyone knew he was going to Iran, where his father was in poor health, and he provided a landline and Iranian mobile phone number and was in contact and planned to return to England on the morning of the 23 December 2003 in time for the AGM. In the event, however, he had difficulties with his passport which meant that he was only able to leave Iran on 1 January 2004. I accept the Defendants' evidence that it was very difficult to make contact with the Claimant and that he was being urged by them to return to England to deal with the situation at Chesterton as a matter of urgency but did not do so until early January 2004.

63. On 18 December 2003, the further Chesterton board meeting took place. The minutes record that although the Claimant had attempted to telephone into the meeting, the connection had been severed. Efforts to call him back had been unsuccessful. It was resolved that the Claimant would be offered a non-executive directorship provided that he resigned as executive chairman before the AGM and that the minutes of the 12 December 2003 board meeting be amended to make this clear; but that if the Claimant did not resign, his position as executive chairman would be terminated.

64. On 23 December 2003, the Chestereton AGM took place. The Claimant remained absent in Iran. The Claimant was re-appointed as a director; the appointments of Mr Robeson and Mr Constable as directors automatically terminated. Following the AGM, there was a Chesterton board meeting which had been adjourned from earlier in the day. At the board meeting, (as already mentioned) Mr Webster declared his loan to the Claimant for the first time. Mr Robeson and Mr Constable were reappointed as directors. It was resolved that the Claimant be replaced as executive chairman by Mr Robeson and that the Claimant should remain as a non-executive director.

65. It is the Claimant's position that David Rowland used his absence in Iran as an opportunity to seize control of Chesterton and PAL for himself, beginning with the December notice of demand, followed by his removal as executive chairman of Chesterton and then as a director of Chesterton. Generally, the Claimant is convinced that he is in effect the victim of, in the Claimant's words, a coup d'état, orchestrated by David Rowland to remove him from Chesterton to enable Mr Rowland to take control himself. The Claimant undoubtedly is aggrieved at the fact that he finds himself in his current predicament as a result. A great deal of the Claimant's written evidence was to this effect. However, whilst the Claimant's feeling is, I am sure, genuine, I am equally sure that his belief that Mr Rowland is the cause of his misfortune is misplaced. I accept Mr Robeson's and Mr Rowland's evidence to the effect that their concern was the protection of their investment and nothing more.

Events in 2004

66. On 6 January 2004, there was another Chesterton board meeting. The Claimant attended by telephone for part of the meeting and sought unsuccessfully to justify his position and his reappointment as executive chairman. By now, however, his remaining support on Chesterton's board had been lost. The resolution was rejected by four votes to one, with only the Claimant voting favour.

67. On 13 January 2004, David Rowland held another meeting with the Claimant and this time with Mr Constable also. According to Mr Rowland, he expressed his annoyance at the Claimant's alleged leasing of three luxury cars at Chesterton's expense and the fact that he had taken a two month advance on salary before going to Iran. Apart from agreeing that Mr Rowland had said that he could not understand why he had gone to Iran, the Claimant dismissed Mr Rowland's account of the meeting as "rubbish" and stood by his evidence about the meeting in paragraphs 126 to 132 of his statement dated 5 October 2004 and said that he told Mr Rowland he wanted to nominate his four directors onto the board. I am sure that expressive language was used by Mr Rowland at the meeting and that Mr Rowland exercised a degree of coercion to try to persuade the Claimant to resign as a director.

68. On 15 January 2004, David Rowland met with Mr Webster and Mr Taylor, in Mr Robeson's presence, to make clear his support for Mr Robeson and any proposals Mr Robeson might make. Mr Robeson had expressed to David Rowland his concern that Mr Webster was involving Mr Constable in meetings with senior staff without advising Mr Robeson. Mr Robeson had only recently found out that Mr Webster had in fact made a loan to the Claimant and it was obvious to Mr Rowland by this time that something was seriously wrong with Chesterton's business.

69. On 16 January 2004, there was another Chesterton board meeting, this time attended by Mr Robeson and Mr Taylor and also, by telephone, the Claimant, Mr Constable and Mr Webster. At the meeting, again by four votes to one, the Claimant was removed as a director of Chesterton. That decision following a discussion about the Claimant's dealings with Mr Alemi.

70. Mr Alemi's own evidence, which I accept, was that he had often loaned the Claimant money on an unsecured basis and without documentation to enable the Claimant to make property purchases in return for a share of the profits on resale. In particular, in about June 2003, he advanced monies totaling £170,000 to the Claimant for the purchase of two properties in St John's Wood Terrace and a block of flats in St John's Wood called Sheringham. He disputed that his salary increase from £25,000 to £65,000 per annum on 27 August 2003 was in any way related to his or a mutual friend's loans to the Claimant. He accepted that he had not disclosed the fact that the Claimant was indebted to him until his meeting with Mr Robeson on 15 January 2004. He denied any discussion with Mr Robeson about having loaned the Claimant £500,000.

71. According to Mr Robeson and the board minutes, the Claimant told the board at this meeting that he was "aware that another director (who would recognize the reference) had been involved in questionable financial dealings but he would not dwell on this". The Claimant's evidence was that he did not himself use the expression "questionable financial dealings".

72. On 20 May 2004, Skillglass served further demands on PAL under the Facility Agreement and on the Claimant under the Guarantee which related specifically to PAL's failure to repay the balance of the second tranche of the loan and also to various other breaches of the Facility Agreement.

73. On 17 September 2004, Skillglass served further demands on PAL under the Facility Agreement and on the Claimant under the Guarantee which related specifically to PAL's failure to repay the third tranche of the loan on 9 July 2004 and also to the other breaches of the Facility Agreement.

74. Against this background, I turn to consider the preliminary issues ordered by the Court of Appeal to be tried.

SKILLGLASS' ENTITLEMENT TO SERVE THE OCTOBER NOTICE OF DEFAULT AND THE DECEMBER NOTICE OF DEMAND

75. The first issue is whether Skillglass was entitled to serve the October notice of default. The parties were agreed that Skillglass' entitlement to serve the December notice of demand stood or fell with the October notice of default. The first indication that the validity of the October notice of default was in dispute came in a letter dated 10 March 2004 to Skillglass from the Claimant's solicitors, Taylor Wessing, when it was alleged that Skillglass had never agreed the revised forecasts provided to it by PAL.

76. A breach of clause 20.1 would be an Event of Default under clause 23.1.2 of the Facility Agreement. However, under clause 23.2, prior to the expiry of the Certain Funds Period, Skillglass was not permitted to exercise its rights under clause 23.2.1 and 23.1.2 which the October notice of default stated were being exercised unless there had been a Major Default which was continuing and had not been waived in writing by Skillglass.

77. The Claimant submitted that the October notice of default was invalid because, at the time it was served (1) there was no breach of clause 20.1; (2) any breach of clause 20.1 did not constitute an Event of Default since the revised forecasts provided for by the Side Letter had not by then been agreed or deemed to be agreed; (3) the Certain Funds Period had not expired; and (4) there was no Major Default; and because, at and shortly after the time it was served (5) Skillglass assured PAL (and the Claimant himself) that they need not be concerned about nor take any action in relation to it.

Event of Default by reason of a breach of clause 20.1

78. As already stated, clause 20.1 of the Facility Agreement required PAL to ensure that the consolidated profits before tax and the operating cashflow of its group did not adversely vary by more than 15% of the relevant financial projections set out in the Business Plan (as defined) against which PAL's financial condition was to be measured. However, by the Side Letter the parties agreed that the original forecasts in the Business Plan would be replaced by revised forecasts and that until such time as the revised forecasts were agreed or deemed to be agreed or if earlier prior to the expiry of the Certain Funds Period a breach of clause 20.1 would not constitute an Event of Default and Skillglass would not have any rights to enforce its security in respect thereof.

79. The Defendants accepted that, at the time that the October notice of default was served, the revised forecasts had not been agreed. However, they submitted that, by that time, PAL and Skillglass were estopped by convention from denying that the revised forecasts had been agreed and consequently that a breach of clause 20.1 would constitute an Event of Default.

80. Mr Robeson's evidence was that, rather than the parties working to the two-stage deadline for the production of revised forecasts by 25 July 2003 and the agreement of those figures by 8 August 2003 in accordance with the Side Letter, it came to be understood by all concerned that only a single stage would be required, namely that PAL had to produce a set of revised forecasts to Skillglass by 6 August 2003. That shared understanding was based on a letter dated 11 July 2003 from Ms Jane Schnider of Taylor Wessing, acting for PAL, to PAL's directors in which it was stated that:

" In accordance with the side letter regarding the Business Plan, [PAL] must produce revised forecasts regarding Chesterton and deliver these to [Skillglass] together with copies of the information upon which [PAL] has relied in the production of forecasts by 6^th August 2003."

81. According to Mr Robeson, the directors of PAL had no reason to believe that Taylor Wessing had not correctly identified PAL's obligations under the Side Letter. The Taylor Wessing letter was discussed at PAL's board meeting of 23 July 2003 attended by all the directors, except Mr Carter, and also by the Claimant and Ms Schnider and no-one questioned the accuracy of the letter as regards the date or procedure for producing revised forecasts. The minutes of the meeting formally record that the revised forecasts relating to the Business Plan were being prepared. The board acted on the letter rather than going back to the documents and accepted the letter as good advice and acted on it.

82. Revised forecasts were sent by Mr Briggs of PAL to Mr Constable on 6 August 2003 and, according to Mr Robeson, were thereafter treated by PAL and Skillglass as the contractual measure of PAL's performance. In this regard, the Defendants submitted that since Mr Constable was a director of Skillglass as well as a director and chief executive of Resurge, through him Skillglass shared Taylor Wessing's and PAL's understanding as to the timetable and procedures required in relation to the preparation of revised forecasts.

83. Mr Robeson's evidence was that PAL and Chesterton thereafter gave effect to the Side Letter's requirements by preparing monthly management accounts in respect of July 2003 onwards in a form which incorporated a schedule headed "Management Accounts – Resurge Formats". As he stated in paragraph 34 of his witness statement:

" The reference to Resurge derives from the fact that Skillglass is a wholly-owned subsidiary of Resurge. As required by clause 20.1 [of the Facility Agreement] these 'Resurge Formats' included a line entitled 'Total Contribution' (a term not previously used as a performance measure in Chesterton's management accounts) and showed the variance from the revised forecast in respect of the figures in that line. The only reason for incorporating the schedules in the 'Resurge Format' was so that the revised forecasts could be tested against the figures in the management accounts. Copies of the monthly management accounts including the schedules were distributed by PAL to Skillglass on or before the 21^st of the succeeding month. There was never any suggestion that the revised forecasts which appeared in the 'Management Accounts – Resurge Formats' were subject to any further review or agreement. They were treated by all concerned as the contractually applicable figures".

84. On 21 August 2003, Mr Briggs sent Mr Constable the July management accounts which included the "Resurge Format" with a total contribution line and showing the variance from the revised forecast. On 19 September 2003, the August management accounts in the same format were distributed. By email dated 17 October 2003, Mr Briggs, drew the attention of the Claimant and Messrs Ardley, Taylor and Webster (and also Mr Hamilton Comely) to the variances in excess of 15% in the draft September management accounts. A week later, on 24 October 2003, Mr Briggs drew the Claimant's attention by email to the fact that the variances gave rise to a breach of clause 20.1. The Claimant submitted that Mr Brigg's comments in that email were mistaken. The October notice of default was served three days later.

85. There then took place on 28 October 2003 the PAL board meeting at which the receipt of the October notice of default was noted. The Claimant did not attend the meeting but draft minutes of it were circulated to him and others on 10 November 2003.

86. The Claimant's evidence was that PAL and Skillglass recognized that it was not feasible to prepare and submit revised forecasts to Skillglass within 28 days of the offer becoming unconditional and then agreeing such forecasts within a further 14 days. However, he was asked by Mr Constable to provide some figures only as a "guide" for monitoring purposes to which PAL would not be held. It was agreed that the production and agreement of revised forecasts would be delayed until after the sale of the FM business. He submitted that it made no sense for there to have been only a single stage procedure since that implied that Skillglass would accept any revised forecast provided to it; that the figures provided by PAL to Skillglass were not in the same format as the Business Plan, did not include any cashflow projections and were not in fact agreed; and that neither Taylor Wessing's letter dated 11 July 2003 nor the 23 July 2003 PAL board minutes constituted evidence of any shared understanding but were in fact entirely consistent with his explanation of events.

87. I prefer the Defendants' evidence, which is supported by the contemporaneous events described above. Those events are also not in my judgment consistent with the figures provided to Mr Constable on 6 August 2003 having been merely a guide for monitoring purposes to which PAL would not be held and there is nothing to support the Claimant's evidence as to what he said was agreed with Mr Constable.

88. In my judgment, based on that evidence and the events in question, PAL is estopped by convention from denying that the revised forecasts had been agreed. An estoppel by convention may arise where both parties to a transaction act on an assumed state of facts or law, the assumption being either shared by both or acquiesced in by the other: Chitty on Contracts (29^th edition, 2004) Vol 1, paragraph 3-107. As Lord Denning MR stated in Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd [1982] QB 84, at 121C-E:

" If parties to a contract, by their course of dealing, put a particular interpretation on the terms of it – on the faith of which each of them – to the knowledge of the other – acts and conducts their mutual affairs – they are bound by that interpretation just as much as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not – or whether they were mistaken or not – or whether they had in mind the original terms or not. Suffice it that they have, by the course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it."

89. The assumed state of affairs in the present case was that, as set out in Taylor Wessing's letter dated 11 July 2003, the requirements of the Side Letter would be met by the provision by PAL to Skillglass of revised forecasts in a single stage by 6 August 2003, which is what occurred. The fact that the letter may have misinterpreted the requirements of the Side Letter does not prevent the estoppel arising, since it can arise even where the assumption is based on a mistake made by the party relying on it and acquiesced in by the other party. It is also immaterial to the existence of the estoppel that it may, as the Claimant submitted, have made no sense for there to have been only a single stage procedure or that that the figures provided by PAL to Skillglass did not include any cashflow projections.

90. There can be no doubt that PAL acted on that assumed state of affairs in the manner already indicated. If PAL had not assumed that Taylor Wessing's letter of 11 July 2003 set out what was required under the Side Letter, it is improbable that the allegation that Skillglass had never agreed the revised forecasts provided to it by PAL should first have been made in Taylor Wessing's letter dated 10 March 2004 to Skillglass sent on the Claimant's behalf. PAL itself has not itself made that allegation, in particular at any time during the period when the Claimant remained in control of it. So far as Skillglass is concerned, I accept the Defendants' submission that since Mr Constable was a director of Skillglass, through him Skillglass shared PAL's understanding.

91. I also reject the Claimant's submission that there was not, as a matter of fact, any breach of clause 20.1. Mr Briggs was not mistaken in stating the contrary in his email of 24 October 2003 to the Claimant.

Expiry of the Certain Funds Period

92. The Claimant also submitted that, at the time the October notice of default was served, the Certain Funds Period had not expired. If that submission is correct, then unless there had been a Major Default which was continuing and had not been waived in writing by Skillglass, the notice of default was invalid.

93. As already stated, by clause 1.1 of the Facility Agreement, the Certain Funds Period was defined, so far as is material, to mean the period from 16 April 2003 to whichever was the earlier of (i) the date on which the offer for Chesterton "lapses or is withdrawn" ; or else (ii) the date which was 220 days from the date of the offer, that is, 6 December 2003. The Claimant submitted that the offer was not "withdrawn" within the meaning of paragraph (i) of the definition but closed, which was not the same thing; and that, accordingly, the Certain Funds Period continued in accordance with paragraph (ii) of the definition until 6 December 2003 and had therefore not expired when the October notice of default was served. The Defendants submitted that the offer was "withdrawn" within the meaning of paragraph (i) of the definition on 29 August 2003 in consequence of PAL having given 14 days' notice on 15 August 2003 that the offer would "be closed", after it had been declared unconditional by PAL but had not been accepted by all of Chesterton's shareholders. It was rightly not submitted by the Defendants that the offer had "lapsed".

94. The Defendants submitted that the ordinary and natural meaning of the phrase "withdraw an offer" is that the offer, having been made, is declared by the offeror to be no longer open for acceptance, which is what happened in the present case after 29 August 2003 as the result of PAL's notice of 15 August 2003; that there was nothing in the offer documentation or Facility Agreement to displace that meaning; and that the ordinary meaning did not produce absurd or uncommercial results.

95. The Defendants relied on the purpose of a certain funds period being to ensure that a bidder has sufficient resources available to it to satisfy full acceptance of the offer as required by rule 24.7 of the City Code on Takeovers and Mergers. To achieve that purpose, a certain funds period has to run from the date the offer is announced until whichever is the later of the date when the offer closes or the date when the compulsory acquisition of minority shareholders has been completed but did not need to extend beyond the later of those two dates. If the Certain Funds Period in the present case only expired on 6 December 2003, it was fulfilling no role in the period after 29 August 2003 when the offer was no longer open for acceptance by those shareholders who had not by then notified their acceptance of the offer.

96. According to the Defendants, the absence of any continuing role for the Certain Funds Period after 29 August 2003 was further demonstrated by paragraph (iii) of the definition, under which the Certain Funds Period might end "if the Borrower issues the notice pursuant to section 429 of the [Companies] Act [1985] in relation to the Offer, the date referred to in section 430(5) of the Act". The notice referred to is the notice to compulsorily purchase minority shareholdings which may be given where acceptances reach the 90% level. The date referred to in section 430(5) is the date six weeks later when the offeror is required to pay to the company the consideration for the shares compulsorily acquired, to be held on trust for the shareholders. At that date, no further money can be required in order to pay accepting shareholders and it brings the Certain Funds Period to an end, even though the offer has become unconditional.

97. The Claimant advanced no positive submissions why paragraph (ii) of the definition might apply. In particular, I received no submissions from either party on the relevance of the 220 day period referred to in paragraph (ii), other than an indication by the Claimant, based on an email from Halliwell Landau, that it might be a standard period for a certain funds period to allow for the possibility of paying for shares offered for sale by shareholders to the offeror after an offer has formally closed. The Claimant's position was that paragraph (ii) applied because paragraphs (i) and (iii) did not. However, in support of his construction of "withdrawn" in paragraph (i), the Claimant did rely upon a letter dated 16 April 2003 from Skillglass to PAL dealing with certain fees payable by PAL in connection with the Facility Agreement which was envisaged by clause 24 of the Facility Agreement ("the Fees Letter"). The Defendants accepted that the Fees Letter is a legitimate aid to the construction of the Facility Agreement. In his closing submissions the Claimant also relied on clause 6.2 of his undertaking dated 16 April 2003 and the fact that there was a drawdown under the Facility Agreement on 3 September 2003, after the date when the Defendants now say that the Certain Funds Period had expired.

98. The Fees Letter made provision for the payment of a £997,000 arrangement fee on the first Drawdown Date and of an "abort fee". Clause 2 of the Fees Letter provided:

" In the event that the Offer lapses or is withdrawn, or in the event that the Offer is not made, an abort fee shall be payable to [Skillglass] in an amount of £518,600 to be paid on the earlier to occur of (i) the expiry of the Certain Funds Period or (ii) the date on which [Skillglass] notifies [PAL] that it is aware that the Offer will not be made … ."

99. The Claimant relied on the fact that no abort fee was ever demanded by Skillglass or paid by PAL as showing that the offer had not been "withdrawn" within the meaning of paragraph (i) of the definition of the Certain Funds Period in the Facility Agreement.

100. The Defendants submitted that, in the context of the Fees Letter, "withdrawn" was being used in a different sense and that, having regard to the nature of the security for the abort fee, the relevant withdrawal had to have occurred before 8 July 2003 in circumstances where the offer had not been declared unconditional. They pointed to the fact that clause 24 of the Facility Agreement related only to the payment of an arrangement fee and was silent on the payment of an abort fee.

101. In my judgment, the Certain Funds Period expired on 6 December 2003 in accordance with paragraph (ii) of the definition of the expression in clause 1.1 of the Facility Agreement. I reject the Defendants' submission that it expired on 29 August 2003 in accordance with paragraph (i) of the definition.

102. My reasons for that conclusion are:

(1) Where a defined period has been laid down for the acceptance of an offer and that period expires without the offer having been accepted, it is not an ordinary and natural use of language to say that the offer has been "withdrawn". The ordinary and natural use of "withdrawn" is that the offeror, prior to the expiry of the period in question, has ceased to continue to make the offer open for acceptance. It is in that sense that the offer would have been "withdrawn" within the meaning of paragraph (i) of the definition.

(2) The Defendants derive no assistance from the passages relied on in Chitty, Vol. 1, paragraphs 2-086 to 2-089. Those passages do not justify a wider meaning being given to "withdrawn" in the present context. Paragraph 2-086 and the cases referred to in the text appear to me to be to the contrary effect.

(3) I accept that the purpose of a certain funds period is to ensure that an offeror has sufficient resources available to it to satisfy full acceptance of the offer and that the necessity for PAL to have sufficient resources available to it to satisfy full acceptance of the offer ceased on 29 August 2003. However, the purpose of the Certain Funds Period is not thwarted by it not expiring until 6 December 2003. The absence of any need for the Certain Funds Period in the period after 29 August 2003 is not a sufficient reason for construing "withdrawn" in the way contended for by the Defendants.

(4) It may be slightly anomalous but it is neither absurd nor uncommercial that the Certain Funds Period continued beyond 29 August 2003. It was not suggested that the continuation of the Certain Funds Period beyond 29 August 2003 had any adverse practical consequences. In particular, Skillglass' fees were unaffected since they were determined and incurred in advance and not dependent upon the length of the Certain Funds Period; and PAL was not prejudiced since, if the certain funds in question were not required, they would not have been drawndown, irrespective of the duration of the Certain Funds Period. Also, without funds being in fact available, even if they were not required to be certain funds for the purposes of rule 24.7 of the City Code, it might have been impossible for PAL to acquire shares offered to it after 29 August 2003.

(5) Even if the Defendants' submissions with regard to the Fees Letter are correct, it does not follow that "withdrawn" in paragraph (i) of the definition of the Certain Funds Period must be construed in the way contended for by the Defendants.

Major Default

103. In the light of my conclusion that, at the time the October notice of default was served, the Certain Funds Period had not expired it becomes necessary to determine whether, as the Defendants submitted, there had been a Major Default which was continuing and had not been waived in writing by Skillglass. If not, the October notice of default was invalid. The Claimant submitted that the issue whether there had been a Major Default falls outside the scope of the preliminary issues ordered by the Court of Appeal to be tried. However, that cannot be correct because the determination of that issue is essential to the determination whether or not Skillglass was entitled to serve the October notice of default.

104. As already stated, the expression "Major Default" was defined to mean any Event of Default under clause 23.1.3(b) (to the extent that it resulted from a breach of any of clauses 21.8.2, 21.8.5 and/or 21.8.9) and clauses 23.1.7 to 23.1.10 of the Facility Agreement. The breach of clause 20.1 itself is not, therefore, a Major Default.

105. The Defendants relied upon a breach of clause 21.8.2 of the Facility Agreement as giving rise to a Major Default. Clause 21.8.2 provided that PAL shall make full disclosure to Skillglass in writing as soon as practicable of all information which comes to its attention and which is or was material to any decision whether to waive any condition of the offer. An irremediable breach of that provision constitutes a Major Default. The Defendants submitted that the Claimant paid Mr Constable a bribe of £150,000 in order to procure the waiver of the 90% acceptance condition, and that this clearly constituted a material matter, of which prompt disclosure in writing ought to have been made by PAL to Skillglass, at least before the initial drawdown by PAL on 9 July 2004. If those matters are established, the breach was clearly irremediable and indeed the Claimant did not submit otherwise.

106. There are thus two aspects: Was a bribe paid? If so, was PAL in breach of clause 21.8.2 in not disclosing it?

The £150,000 payment by the Claimant to Mr Constable

107. Under clause 21.8.6 of the Facility Agreement, it was provided that PAL would not, without Skillglass' prior written consent, declare the offer for Chesterton unconditional as to acceptances at a level of acceptances of less than 90% of the shares to which the offer related. Also, under clause 16.1 of the loan facility agreement between Rowland Capital and Skillglass, Skillglass undertook not to agree to the waiver of that requirement without Rowland Capital's prior written consent. It was common ground that Rowland Capital in fact gave that consent, whether or not in writing.

108. By the middle of June 2003, the level of acceptances was just short of the 90% required in order for the offer to go unconditional but, at its board meeting on 27 June 2003, Skillglass nevertheless resolved to give its consent to PAL declaring the offer unconditional. On that date, the offer was declared unconditional and Mr Constable and Mr Robeson were appointed directors of PAL as the nominees of Resurge. PAL's board at this time therefore consisted of those persons, together with Mr Webster and Mr Taylor as the Claimant's nominees and Mr Carter as PHP's nominee.

109. The Claimant's evidence was that the offer had gone unconditional on 26 June 2003. In so saying, he was basing himself on the fact that the letter whereby Mr Constable, for and on behalf of Skillglass, had written to PAL giving its consent bore that date. It is unclear whether Mr Constable did provide PAL with the letter on that date, in anticipation of the Skillglass board meeting the next day, or else whether the letter was backdated following the Skillglass board meeting the next day. Either way, the minutes of a PAL board meeting held on 26 June 2003 at 7.26pm record the fact that Skillglass' consent had by then been obtained.

110. The Claimant's evidence was that he had arranged for himself and Mr Webster to meet Mr Gavin Black, the outgoing chief executive of Chesterton, on the morning of 27 June 2003 at Claridges for a chat and that Jonathan Rowland asked whether he and Mr Constable could also see the Claimant at Claridges that morning.

111. Mr Webster agreed with the Claimant's evidence in paragraph 144 of his witness statement dated 5 October 2004, and I accept, that:

" I arrived at Claridge's and met the outgoing CEO, Gavin Black and Mr Webster to go through the handover process. Then I noticed Jamie Constable and Jonathan Rowland sitting at another table in the corner waving at me. When I finished with the handover discussions I went to Jamie Constable and Jonathan Rowland and they asked me to sit and have breakfast with them. I said I could not as I had to go over to the solicitors to sign some completion documents."

112. The Claimant's witness statement then continues:

" 145. I was then asked by Jonathan Rowland if I could lend £200,000 to them. He said 'look you don't need the money you borrowed from Ted [Webster] now so let's use it'. I was reluctant but they said that they were working on a very good project and that they would return the monies very soon. Eventually I was persuaded to lend £150,000 to them. When I went to write the cheque for Jonathan Rowland he told me to make it payable to Three V Corporate Venturing."

(In fact, the Claimant's cheque dated 27 June 2003 was drawn in favour of "Three V Venture Corporation"). When cross-examined about this part of his evidence, the Claimant said that he could not fully recollect what was the "project" but that it was something to do with motor racing. He did not know why Jonathan Rowland and Mr Constable had decided it was a "very good" project. He did not ask how the monies would be returned or what would be the trigger for repayment. He did not seek interest or any loan documentation. While it was correct that he had only known them for a matter of months, he was dealing with them on a daily basis, he knew that Jonathan Rowland's father was a very wealthy man and he was conscious of the fact that they had agreed to lend PAL very much more and could set-off the monies against sums owed by PAL. He was pestered by Jonathan Rowland into making the loan.

113. Jonathan Rowland's evidence was that, at the meeting, the Claimant handed "some files or papers" to Mr Constable. He did not see the Claimant hand over any cheque to Mr Constable and the first he knew of the £150,000 payment was when his father contacted him to inform him of it after his father's meeting with Mr Constable on 19 January 2004.

114. Mr Webster's evidence was that a few days after the £150,000 payment by the Claimant was made, the Claimant told him one evening in the office that he had made a cash payment to Mr Constable and Jonathan Rowland at Claridges on the morning of 27 June 2003 in return for Skillglass' consent to the offer for Chesterton going unconditional. According to Mr Webster, the Claimant expressed disgust to him that Mr Constable and Jonathan Rowland were hoodwinking David Rowland. Mr Webster was clear from his conversation with the Claimant that the money was a bribe. Unsurprisingly, Mr Webster felt uncomfortable about what he had been told. Somewhat surprisingly, it did not however cross his mind at that time that the payment might have come from his loan made to the Claimant.

115. Jonathan Rowland is a keen motor-racing driver. David Rowland's evidence was that he was in London in July 2003 when his son mentioned that he was due some racing sponsorship monies from Mr Constable of which he (Jonathan Rowland) did not want his then wife to know because she disapproved of his motor racing activities. David Rowland then told Mr Constable to make the payment to Rowland Capital, which Mr Rowland used as a family management company, and Mr Constable wrote out a cheque dated 17 July 2003 for £75,000 to Rowland Capital drawn on the account of an entity called Three V Corporate Venturing LLP ("Three V"), of which the partners are Mr Constable and a Mr Peter Ward, a close business associate of Mr Constable.

116. David Rowland gave evidence that Mr Constable flew unannounced to Guernsey to meet with him on 19 January 2004. Mr Rowland's evidence, in paragraphs 42 and 43 of his witness statement, was that:

" 42. Mr Constable arrived at my house, and became very emotional, which was out of character for him, telling me that he had been adopted. He said that he had done a very silly thing which he had never done before in his life. He said that he had taken a payment from Mr Jafari-Fini, as a result of which he had allowed the deal to go through i.e. Mr Constable clearly confessed to accepting a bribe from Mr Jafari-Fini. The payment that Mr Constable said that he had taken from Mr Jafari-Fini was in the sum of £150,000, and was made on 27^th June 2003 (i.e. the date on which PAL's Offer for Chesterton was declared unconditional) and it was paid by cheque.

43. Mr Constable asked what I thought he should do. I said that I would not be involved in a cover-up of any wrongful payments to Mr Constable by Mr Jafari-Fini, and that I would do nothing to compromise myself. I told Mr Constable that if he had money that belonged to Skillglass, he should give it back to Skilglass. Mr Constable said that he could describe the moneys as a security deposit, and I said that in that case he should pay the money to Skillglass together with a sum representing the interest that Skillglass was charging to PAL on the loan. Mr Constable then said that he wanted to resign from Resurge."

117. In cross-examination, David Rowland expanded on that evidence. He said that he told Mr Constable that the monies had to be disgorged and paid to Skillglass and the Claimant given credit for the interest PAL had been paying in the meantime on the loan, so as to ensure that Mr Constable did not in any way benefit. He was shocked and disgusted and wanted nothing more to do with Mr Constable. He was conscious of the repercussions for Chesterton (and therefore of the risk to the monies invested in PAL) if it came out that the Claimant had made a bribe. He also "went ballistic" with his son, who denied any knowledge of the payment made to Mr Constable.

118. Jonathan Rowland's evidence was that in January 2004 he made a payment of £82,500 from his and his then wife's joint bank account to Three V. His explanation for the payment was that in July 2003 Mr Constable had made available £75,000 to him to sponsor his motor-racing activities. The money had never come into his possession, however. He mentioned to his father that Mr Constable had some of his money but was vague about it because of his father's unsympathetic attitude towards his motor-racing and because he did not want to disclose the existence of the monies to his wife, from whom he was separated. He said that when his father then saw Mr Constable in about mid-July 2003, he got Mr Constable to write a cheque to Rowland Capital for £75,000. He never received the monies because his father withheld them to cover losses he (Jonathan Rowland) had made on various share dealings.

119. Following the meeting between his father and Mr Constable on 19 January 2004, he was concerned that the £75,000 paid to Rowland Capital was in some way associated with the £150,000 payment received by Three V from the Claimant. He wanted nothing further to do with the money because he regarded it as potentially tainted and so arranged for £82,500 (being £75,000 plus interest) to be repaid to Three V, to be paid on to Skillglass with an equivalent credit to PAL's borrowings.

120. On 21 January 2004, Three V paid £165,000 to Skillglass in part repayment of PAL's borrowings. Mr Constable also wrote on that day on a Three V letterhead to the Claimant confirming that the security deposit held by it against a default on the Claimant's loan had been paid to Skillglass. On 3 February 2004, the Claimant replied stating that he was surprised to receive the letter "now that I have demanded the repayment of my personal loan of £150,000 to your company 'Three V Corporate Venturing LLP'". There was no evidence of any previous demand for repayment of any such loan having been made by the Claimant.

121. On 17 March 2004, David Rowland again met with the Claimant at the Carlton Tower hotel. Jonathan Rowland was also present for part of the meeting. David Rowland refused to provide any further assistance to the Claimant.

122. After his son had left the meeting, Mr Rowland raised with the Claimant the matter of Mr Webster's loan. According to Mr Rowland, the Claimant said at the meeting that Mr Webster knew the loan was going to be used in order to induce Mr Constable to allow the acquisition of Chesterton to go through. The Claimant's evidence was that he told Mr Rowland only that the loan was known to all parties. I am not satisfied that Mr Rowland's recollection about this is correct but, even if it is, I reject the truth of the Claimant's statement alleged by David Rowland to have been made to him that Mr Webster knew that the loan would be used by the Claimant to bribe Mr Constable. Mr Webster did not know this.

123. David Rowland also raised with the Claimant the matter of the alleged bribe to Mr Constable. According to Mr Rowland, the Claimant admitted to having made the bribe. Mr Rowland pointed out in cross-examination that it was the Claimant himself who had told him, in the Claimant's own words, that he had to make the payment to get the deal through. The Claimant's evidence was that he categorically denied to Mr Rowland that the £150,000 payment had been made as a bribe to his son or Mr Constable and stated that Jonathan Rowland had forced him into lending the money.

124. Mr Constable is not a party to these proceedings and did not give evidence. It is important to emphasise that in making such findings as are necessary for the purposes of this judgment he has had no opportunity to give his version of events. However, his absence as a party and as a witness is not a reason for not making such findings, which will in any case not be binding on him.

125. The Defendants submitted that the £150,000 payment by the Claimant was a bribe paid to Mr Constable out of Mr Webster's loan provided to the Claimant, in order to influence Mr Constable in the performance of his roles as managing director of Resurge and a director of Skillglass.

126. The Claimant strenuously denied the allegation of bribery. He did not dispute the fact that he made a payment of £150,000 to Mr Constable (by the cheque dated 27 June 2003) but maintained that it was an interest-free loan repayable on demand. He pointed in particular to the facts that (1) Mr Constable himself, in his letter of 21 January 2004, did not say that the payment was a bribe but referred to it as a security deposit; (2) Mr Constable was in no position to influence Rowland Capital's decision to waive the 90% acceptance requirement; (3) the boards of PAL, Skillglass and Rowland Capital all agreed to the offer going unconditional at an acceptance level less than 90%; and (4) the reference at the 16 January 2004 Chesterton board meeting to the questionable financial dealings (not, according to the Claimant, the expression which he used himself) of a director was a reference to Mr Webster's £250,000 loan to him and not to Mr Constable having accepted a bribe.

127. The Claimant's explanation of the background to his loan of £150,000 to Mr Constable was that he knew that, from the proceeds of the sale of his shares in Chesterton he would be able to subscribe for £1.3 million of shares and he needed a further £936,000 to subscribe for the total amount of shares for which he could subscribe under the Investment Agreement, namely 2,236,000 shares. He had made arrangements to borrow £250,000 from Mr Webster and was expecting £650,000 from "another transaction". Unfortunately, the other transaction fell through and he was only left with Mr Webster's loan. Jonathan Rowland and Mr Constable suggested that, as he did not have the full amount, he should instead pay £50,000 for the right to exercise an option to buy the shares in the next year. Then, after completion, they asked him what he intended to do with the balance of the monies borrowed from Mr Webster and asked whether they could borrow £200,000. He refused but eventually agreed to advance £150,000 as an interest-free loan repayable on demand.

128. In approaching the question whether the Claimant bribed Mr Constable, I have had regard to the statements of the Court of Appeal in Hornall v. Neuberger Products Ltd [1957] 1 QB 247. The burden of proof rests upon the Defendants. The standard is the civil standard of the balance of probabilities. However, having regard to the serious nature of the allegation being made, in assessing whether or not the Defendants have discharged the burden resting upon them, the degree of probability must be commensurate to the seriousness of the allegation being made and is therefore a high one.

129. In my judgment, adopting that approach, I find that the Claimant did bribe Mr Constable. My reasons for this conclusion are:

(1) I accept Mr Webster's evidence regarding the conversation he had with the Claimant a few days after the £150,000 payment was made. I found Mr Webster to be an honest and straightforward witness. Where his evidence differed from that of the Claimant, I preferred it. There is no reason why the Claimant would have invented the matters which he told Mr Webster if they had not occurred. The Claimant submitted that if a person has paid a bribe, he does not go around talking about it. That may generally be the case but it is not what happened here. The Claimant had no particular concern about speaking with Mr Webster about it at the time.

(2) I accept David Rowland's evidence generally and, where it differed, preferred it to that of the Claimant. Mr Rowland was a forthright, plain-talking witness who was not afraid to speak his mind. He displayed in the witness-box a degree of hostility towards the Claimant, no doubt in part because he had backed the Claimant financially and felt he had been let down and in part because of the Claimant's own stated belief that Mr Rowland engineered a coup d'état to wrest control of Chesterton from him. Mr Rowland was, however, a truthful witness. In particular, I accept his account of his meeting with the Claimant at the Carlton Tower hotel on 17 March 2004.

(3) The Claimant sought to impugn Mr Rowland's evidence by reference amongst other things to the fact that the £150,000 payment is not mentioned in Mr Rowland's witness statement made on 13 October 2004. I accept Mr Rowland's explanation that this because he was later asked by Resurge's lawyers to clarify the position with regard to the £150,000 and not because the allegation was in effect concocted at a late stage and was without substance. In the course of his cross-examination of Mr Rowland, the Claimant also accused Mr Rowland for the first time of having improperly shared in the money paid into the Rowland Capital account on 17 July 2003. There is no basis for that allegation and I reject it. The fact that it was made in my judgment reinforces the lack of credibility of the evidence given by the Claimant.

(4) I also accept Mr Rowland's uncontradicted evidence about his meeting with Mr Constable in Guernsey on 19 January 2004. It was a very grave matter for Mr Constable, a professional man, to make the confession to Mr Rowland which he did. It would have been an equally grave matter for Mr Rowland to have made up that evidence. In my judgment, Mr Constable's flight to Guernsey was prompted by the Claimant's comments at the Chesterton board meeting three days previously about the questionable financial dealings of another director. I reject the Claimant's evidence that he did not use those words or words to that effect. I also reject his evidence that he was referring not to the bribe to Mr Constable but to Mr Webster's loan to himself.

(5) The Claimant's evidence that the £150,000 payment was a loan is not plausible and I reject it. I find that there was no discussion about a loan at his meeting with Jonathan Rowland and Mr Constable at Claridges on 27 June 2003. It was also not Jonathan Rowland's evidence that the Claimant had been requested to or had made a loan at the meeting with the Claimant and Mr Constable at Claridges on 27 June 2003. Mr Webster's loan to the Claimant was at an exceptionally high rate of interest. It made no sense for the Claimant to lend part of that money on to Mr Constable on an unsecured and interest-free basis, with no certainty about when the money would be repaid and no clear idea even about what the money was being lent for or the viability of the project in question. This is particularly so in circumstances where, based on Mr Alemi's evidence, the Claimant was borrowing other monies at the time. Three V's payment of £165,000 to Skillglass on 21 January 2004 in part repayment of PAL's borrowings is also not consistent with the Claimant having made a loan but is consistent with the disgorgement of a bribe.

(6) The Claimant's explanation for making the loan is also implausible. It was not suggested by Mr Constable either in his letter of 24 January 2004 that the payment was a loan. (It was also no part of the Claimant's case that the payment was, as Mr Constable stated in his letter of 24 January 2004, a security deposit held by Three V). The Claimant submitted that if a person pays a bribe, he does not do so by a cheque. That is, however, what happened here. A cash payment may not have been possible but in any event I consider that the Claimant had no particular concern at the time about making the payment by cheque.

(7) There was a considerable incentive for the Claimant to ensure that Skillglass' consent was obtained to the offer going unconditional when it did at an acceptance level below 90%. It was virtually inevitable that the 90% acceptance level was not going to be achieved by 30 June 2003. Without Skillglass's consent to the offer going unconditional at below that level, PAL would have become liable to pay substantial fees, such as the abort fee under the Fees Letter, for which Skillglass held security from the Claimant in the form of cash and Chesterton shares; and the bid costs under clause 14.1.2 of the Investment Agreement. I cannot accept the Claimant's evidence that it was not important for him that the offer should go unconditional.

Individually and cumulatively, these considerations lead inexorably to the conclusion which I have reached.

130. I have not placed reliance on Jonathan Rowland's evidence. I found him to be an unsatisfactory witness. He was less than forthcoming in his evidence. The Defendants themselves invited me to treat his evidence with circumspection where it was not corroborated by other evidence. I accept that there is no evidence that he was connected to Three V but I am sceptical about his evidence that he was unaware of the £150,000 payment made to Mr Constable until he was told about it by his father in January 2004. It is, however, unnecessary to make any findings in this regard, or as to his evidence about what did occur at his meeting at Claridges on 27 June 2003 with the Claimant and Mr Constable or as to whether he was a recipient of the payment along with Mr Constable.

Breach of clause 21.8.2 of the Facility Agreement

131. The question which then arises is whether, in not disclosing the bribe, PAL was in breach of clause 21.8.2 of the Facility Agreement. Clause 21.8.2 is particularly wide in scope since it applies to information not only which is material to Skillglass' decision whether to waive any condition of the offer but also which was material to any such decision.

132. The Defendants submitted that the bribe constituted a material matter, of which prompt disclosure in writing ought to have been made by PAL to Skillglass, at least before the initial drawdown by PAL on 9 July 2004. Mr Constable did not himself disclose it to his fellow director of Skillglass, Mr Brierley, at the 27 June 2003 Skillglass board meeting, which took place within a few hours of the payment. It only came to light following the Chesterton board meeting on 16 January 2004, which was convened in order to consider removing the Claimant as a director.

133. The £150,000 payment to Mr Constable was in my judgment clearly information material to Skillglass' decision whether or not to waive the 90% acceptance level for the offer to go unconditional and which, if it came to PAL's attention, was required to be fully disclosed to Skillglass under clause 21.8.2. This is apparent not least from Mr Brierley's statement. The Claimant did not suggest otherwise.

134. The key issue is whether the payment did come to the attention of PAL. The Defendants submitted that PAL became aware of it on two grounds: first, when the Claimant told Mr Webster about it a few days after 27 June 2003; and, second, as soon as the Claimant agreed to make the payment.

135. The applicable legal principles are well-known. The general principle, set out in Bowstead & Reynolds on Agency (17^th edition, 2001), Article 97(1), is that the law may impute to a principal knowledge relating to the subject-matter of the agency which the agent acquires while acting within the scope of his authority. By way of exception to that principle, where the agent is acting in fraud of the principal and the matter about which the agent has knowledge is relevant to the fraud, that knowledge is not to be imputed to the principal, see Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, at 261 per Buckley LJ.

136. Applying those principles, the first matter is whether the knowledge of the bribe and the circumstances acquired by Mr Webster at about the end of June 2003 from his conversation with the Claimant is to be imputed to PAL. The Defendants submitted that the answer is yes. Mr Webster was a PAL director and there is no basis for suggesting that his authority was in any way limited such that the knowledge acquired by him was only acquired while he was acting outside the scope of his authority. The Claimant submitted that Mr Webster's knowledge was irrelevant because Skillglass' consent to the offer going unconditional was obtained by PAL on 26 June 2003 and the payment to Mr Constable was made the following day. In his written closing submissions (referred to later) the Claimant also submitted for the first time that Mr Webster's knowledge should not be imputed to PAL by reason of the exception to the general principle to which I have just referred.

137. I reject the Claimant's submissions. His attempt to dissociate the payment from the decision that the offer should go unconditional is wholly artificial. Even if it is the case that Skillglass' consent and PAL's decision were given on 26 June, Skillglass' consent was given in anticipation of the payment which had undoubtedly already been agreed actually being made to Mr Constable. Also, the Skillglass board meeting which resolved to give consent to the offer going unconditional only took place shortly after the payment was made. As Mr Brierley makes clear in his statement, he was proceeding at the board meeting on the basis that Mr Constable had declared no personal interest in the decision whether or not consent should be given to the offer going unconditional; but that, had he known of the payment to Mr Constable he would have been concerned and would have raised the matter with the board of Resurge. Also, Mr Webster was not acting in fraud of PAL.

138. The second matter is whether the Claimant's own knowledge of the bribe is to be imputed to PAL. The Defendants again submitted that the answer is yes. Although not a director of PAL, the Claimant was its major shareholder who held himself out as having authority to instruct Taylor Wessing on PAL's behalf. The Claimant's pleaded case is that he worked closely with PAL's directors, attended its board meetings and was involved in its day-to-day management and in particular acted on behalf of PAL in receiving the representations alleged by him to have been made by Mr Constable to the effect that PAL need not be concerned by the October notice of default. I am not satisfied that the Claimant's own knowledge of the bribe is to be imputed to PAL. Although not a director of PAL, the Claimant acted as its agent for certain purposes. However, he had no authority from PAL to agree the payment to Mr Constable. It is in my judgment not possible to conclude that the Claimant's knowledge of the payment to Mr Constable related to the subject-matter of his agency or was acquired while the Claimant was acting within the scope of his authority.

139. The Claimant submitted that Mr Constable was in no position to influence Rowland Capital's decision to waive the 90% acceptance requirement and that the boards of PAL, Skillglass and Rowland Capital all agreed to the offer going unconditional at an acceptance level less than 90%. I do not consider those matters to be relevant to the issue to be decided. First, the issue is whether the bribe is or was material to Skillglass' decision whether or not to consent to the offer going unconditional and not whether the decision resulted from the bribe. Second, Mr Constable was in a position to influence Skillglass' decision and the evidence establishes that Rowland Capital would have gone along with whatever Resurge and Skillglass decided. Third, Mr Brierley's evidence shows that the decision at least might have been different if he had been made aware of the bribe at the 27 June 2003 board meeting. The Claimant further submitted that as Mr Constable was a director of Skillglass and Resurge, any knowledge on his part imputed to PAL would also be imputed to the Defendants. That would, however, only be the case where Mr Constable was not acting in fraud of PAL, whereas I have concluded that he was.

140. In the result, PAL was in breach of clause 21.8.2 of the Facility Agreement and so a Major Default had occurred and was continuing. It was not submitted by the Claimant that there had been any written waiver of that Major Default. Indeed, there could not have been since Skillglass was unaware of its occurrence until January 2004.

Skillglass' assurances

141. This leaves finally to be determined whether, as the Claimant submitted, Skillglass is nonetheless not entitled to rely upon it because of assurances given to PAL on two occasions to the effect that it could safely be ignored. The Claimant's pleaded case, in paragraph 54 of the Amended Particulars of Claim dated 9 November 2004, is that:

" Shortly before service of the October notice of default, Mr Constable (who was a director of both Skillglass and Resurge) telephoned the Claimant's personal assistant, Margaret [Morrow], to tell her that a notice was being sent to PAL but that the Claimant should not be concerned. The Claimant later telephoned Mr Constable and told him that the October notice of default was invalid having regard to paragraph 7 of the Side Letter. Mr Constable said that it was being sent merely to fulfil obligations owed by Skillglass to Rowland Capital and that PAL need not take any action over the notice and should just forget it. He used words to the effect of 'don't worry, we are not calling in the loan, this is just to keep the old man [i.e. Mr [David] Rowland] happy'. Similar assurances were given by Mr Constable at a meeting of the board of Chesterton and by Mr Robeson (another director of Skillglass and Resurge) at a meeting of the board of PAL."

142. In this regard, the Claimant's evidence was that Mr Constable had left a message for him in late October 2003 with Ms Morrow that he should not be concerned about the notice and should ignore it. Ms Morrow accepted in cross-examination that on 27 October 2003 she took a call from Mr Constable for the Claimant. However, she could not recall Mr Constable telling her that the Claimant should not be concerned about the notice and stated that if she had been told this she would have regarded it as an important piece of information which she would have recorded. In fact, there is no record of any such information having been given to her by Mr Constable. In my judgment, Ms Morrow was a patently honest witness with no axe to grind. I accept her evidence and find that Mr Constable did not tell her that the Claimant need not be concerned about or could ignore the October notice of default. The Claimant also gave evidence that he subsequently telephoned Mr Constable and received the same assurances. I reject that evidence too.

143. The Claimant further gave evidence that, at the PAL board meeting on 28 October 2003, Mr Robeson told the board that the October notice of default was just a matter between Rowland Capital and Resurge which had since been resolved, that it did not affect PAL and that PAL had nothing to worry about. Mr Robeson denied that he said anything to that effect. His evidence was supported by Mr Briggs. I accept Mr Robeson's and Mr Brigg's evidence on this. There would have been no possible reason for Mr Robeson to have made any such statement, which would have been wholly inconsistent with the terms of the October notice of default and with the minutes of the meeting. It would also have been inconsistent with what Mr Robeson said, and which I accept, was the purpose of the October notice of default, namely to act as a wake-up call to the Claimant – to try to get him to become fully involved with PAL and to ensure moving forward that PAL was operated in the way intended, in circumstances where, as things stood, the Claimant had resigned as a director, had not nominated his quota of directors that he was entitled to nominate under the Investment Agreement and appeared to be neglecting the running of Chesterton at the level of the PAL board of directors.

144. The Claimant also submitted that the absence of any discussion about the October notice of default was consistent with everyone regarding it as a mere formality about which PAL need not be concerned. I reject that submission. In my judgment, the absence of any discussion about the October notice of default was because it was correctly taken to have been validly served.

Summary

145. In summary, PAL was in breach of clause 20.1 of the Facility Agreement. That breach constituted an Event of Default under clause 23.1.2. Although the October notice of default was served at a time when the Certain Funds Period had not expired, a Major Default had occurred and was continuing which had not been waived in writing by Skillglass.

146. Therefore, under clause 23.2, Skillglass was entitled to serve the October notice of default and so also the December notice of demand. This answers the preliminary issue in relation to the declaration referred to in paragraph 1(a) of the schedule to the Court of Appeal's order.

147. In those circumstances, it is unnecessary to deal with the Defendants' alternative submission that, if the October notice of default is invalid, PAL is estopped by convention from denying its validity because of the acceptance of it at its board meeting on 28 October 2003 (and because Skillglass assumed it to be valid amongst other things by service of the December notice of demand). Had it been necessary to determine this issue, I would have decided that there is such an estoppel, in view of my rejection of the Claimant's submission that the absence of any discussion about the October notice of default at the meeting was consistent with everyone regarding it as a mere formality about which PAL need not be concerned.

148. My conclusion that Skillglass was entitled to serve the October notice of default also provides the answer to the other preliminary issues ordered by the Court of Appeal to be tried. This is because the question of the Claimant's entitlement to the other declarations and orders referred to in paragraphs 1(b) and (c) and 2 to 7 of the schedule to the Court of Appeal's order only arises on the basis that Skillglass was not entitled to serve the October notice of default.

149. However, because I heard the evidence and full argument on those other issues, it is right that I should express my views on them, albeit relatively briefly and in summary form.

THE OTHER ISSUES

150. On the assumption that the October notice of default was invalid, the Claimant submitted that the loan under the Facility Agreement did not become due and payable, Skillglass was not entitled to exercise its security rights and the Defendants were not entitled to claim to be beneficially entitled to PAL's shares in Chesterton and to act as if they were entitled by ousting him from his position at Chesterton and exercising control of Chesterton for its own ends.

151. The Claimant submitted that if the October notice of default was invalid, it amounted to a repudiation of the Facility Agreement and of the security documentation which was or which should be deemed to have been accepted, so bringing those agreements to an end. That submission is, in my judgment, inconsistent with the Court of Appeal's decision in Concord Trust v The Law Debenture Trust Corporation plc [2004] 2 All ER (Com) 737, subsequently upheld by the House of Lords; [2005] UKHL 27, in particular at paragraphs 36 and 37. If invalid, the October notice of default was not a repudiation of the Facility Agreement but is of no contractual effect: see Jonathan Parker LJ's judgment in that case, at paragraphs 71 to 78. I disagree with the Claimant's submission that the reasoning in Concord does not extend to the subsequent actions taken to enforce Skillglass' security, which the Claimant classified under the two broad heads of the assertion of ownership of shares in PAL and of PAL's shares in Chesterton and the use of the shares to take control over PAL and Chesterton. I also disagree with the Claimant's submission that Concord does not apply because of the proviso to clause 23.2 of the Facility Agreement: that submission wrongly presupposes that the October notice of default was served in breach of the Facility Agreement unless, which in my judgment is not the case, the proviso can in some way be read as amounting to an undertaking by Skillglass not to serve an invalid default notice.

152. Skillglass' alleged breaches of its security documentation relied upon by the Claimant are identified in paragraph 63 of the second Amended Particulars of Claim dated 3 June 2005 as being the procurement of the appointment of Mr Robson and Mr Constable as directors of Chesterton; the procurement of the termination of the Claimant's service contract as executive chairman of Chesterton and his removal as a director of Chesterton; the exclusion of the Claimant from having access to PAL's and Chesterton's premises and from information relating to their affairs; the prevention of the Claimant appointing PAL directors and challenging the validity of the October notice of default and the December notice of demand; and the prevention of the implementation of the Claimant's reverse premium proposal involving the assignment of Lily Hill House by Chesterton to PAL which would have provided PAL with funds with which to repay its borrowings from Skillglass.

153. It is to be noted that it is no part of the Claimant's pleaded case either that Skillglass voted the Claimant's shares in PAL contrary to the Claimant's instructions or PAL's shares in Chesterton contrary to PAL's instructions; or that the mere assertion of ownership of shares in PAL or PAL's shares in Chesterton constituted breaches of the security documentation, although the Claimant in his closing submissions sought to advance arguments to that effect. In any event, Skillglass did not do so.

154. The changes in the composition of Chesterton's board were not the result of Skillglass' enforcement of its security. I accept the Defendants' submission that they were steps taken by the Chesterton board acting in Chesterton's best interests in the circumstances which prevailed at the time, in particular those relating to the financial position of Chesterton in the period from about October 2003 and the Claimant's absence from England during December 2003 and the difficulty in communicating with him at that time. It is unnecessary to consider various complaints made by the Defendants about the circumstances in which the Claimant arranged for Mr Alemi's salary to be increased and the Claimant's alleged personal use of company cars and I make no findings in respect of those matters.

155. It was unclear from the Claimant's closing submissions whether he was pursuing the allegation that he was excluded by Skillglass from having access to PAL's and Chesterton's premises and from information relating to their affairs. To the extent that he is, it is factually unsubstantiated.

156. It is also factually incorrect for the Claimant to allege that he was prevented from appointing PAL directors or challenging the validity of the October notice of default and the December notice of demand. He eschewed the opportunity to appoint more PAL directors or himself to return to PAL's board. There was nothing to stop PAL challenging the October notice of default or the December notice of demand had it chosen to do so at the time but it is clear that it did not and, as I have already found, the absence of any challenge was not on the basis that PAL could safely ignore the October notice of default.

157. A great deal of evidence was led and argument addressed on the subject of the proposed Lily Hill House transaction of which the Claimant alleged that Skillglass prevented the implementation. This was one of the alternative arrangements for obtaining cash in order to meet PAL's repayment obligations considered at the PAL board meeting held on 28 October 2003 and which the board approved, subject to clearance of any tax and legal issues.

158. Mr Webster regarded the proposal as a non-starter to which no PAL director could properly agree because there seemed no sense in PAL acquiring the long-term liability of the Lily Hill House lease in return for a one-off premium and because, if that were to happen, Chesterton's financial position would not allow for the sums to be passed over to PAL and then to Skillglass. Unlike Mr Taylor, whose experience lay in residential property, Mr Webster and Mr Ardley were very experienced in the field of commercial property and regarded the reverse premium concept as unviable. It also seemed unlikely that the landlord would have given permission for the transaction. Mr Webster's view was that there was no prospect of PAL fulfilling its January 2004 repayment obligation under the Facility Agreement and he advised the Claimant (although this was denied by the Claimant) both to try to renegotiate the terms of the Facility Agreement and that, as a director of Chesterton, he could not approve the payment of any reverse premium. He had no wish to be involved in such schemes and could see a developing conflict of interest between PAL and Chesterton in this regard. For those reasons and because of general dissatisfaction with the situation at PAL, he therefore resigned as a director of PAL on 19 September 2003. Mr Ardley resigned as a director of Chesterton on 7 January 2004.

159. Mr Briggs also considered that Chesterton could not properly have passed the money to PAL. Mr Robeson's evidence too was that the proposed Lily Hill House deal was not something which could properly have been sanctioned by the boards of either Chesterton or PAL.

160. The Claimant, on the other hand, gave evidence and submitted that the proposed Lily Hill House transaction was fully justified. He pointed amongst other things to cashflow forecasts prepared in November and early December 2003 indicating that Chesterton would be in a position to make the payment of £3 million for the reverse premium; the statement in the December management accounts that at 31 December 2003 net borrowings were £1.8 million against a £6 million facility, meaning that more than £4 million was available to make the reverse premium payment; the fact that £3 million provision had been made in Chesterton's accounts and independent valuations for the reverse premium had been obtained from independent agents; and the consideration that PAL was reducing its own liability to Skillglass by the payment of £3 million.

161. I prefer the Defendants' evidence. It is clear to me that, from the practical viewpoint, the Lily Hill House transaction was not viable and would not have been sanctioned by the Chesterton board even if it would have been sanctioned by the PAL board. Quite apart from these and other practical difficulties, to which Judge Rich QC referred in paragraphs 25 to 28 of his judgment given on 15 October 2004, I consider that the transaction would, in the circumstances, have fallen foul of the statutory prohibition on financial assistance in Part V Chapter 6 of the Companies Act 1985 – a conclusion which Chadwick LJ regarded as likely when giving judgment in the Court of Appeal (paragraph 51). In particular, I do not accept the Claimant's submission that unless the transaction reduced Chesterton's net assets, it could not constitute illegal financial assistance.

162. Further, there is no evidence that the decision not to proceed with the Lily Hill House transaction was the result of the enforcement by Skillglass of its security documentation.

163. Even if Skillglass was in breach of the security documentation, given that it was acting on the basis that it was entitled to act in that manner because the October notice of default was valid, as indeed PAL itself was also acting, its conduct was not repudiatory: Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699.

164. Also, it is trite law that an unaccepted repudiation is "a thing writ in water" and confers no legal rights: Howard v Pickford Tool Co Ltd [1951] KB 417, at 421 per Asquith LJ. The Claimant submitted that the issue of the present proceedings constituted his acceptance of the repudiation and that PAL should be deemed to have accepted the repudiation. In my judgment, the acceptance would have to be by PAL and not by the Claimant. The Claimant's primary submission with regard to PAL's position was that PAL should be deemed to have accepted the repudiation because otherwise the Defendants would have been able to take advantage of their own wrong in usurping ownership and control of PAL, but for which the Claimant would have been able to take formal steps to communicate acceptance to the Defendants. I reject that submission. First, there has to be an acceptance of a repudiation. There is no concept of deemed acceptance. Second, I have already rejected the allegation that the Defendants usurped ownership and control of PAL upon which the submission is founded. The Claimant's alternative submission, relying on Vitol SA v Norelf Ltd [1996] AC 800, in particular at 811-812 per Lord Steyn, was that acceptance could be found in PAL's failure to perform the Facility Agreement. However, as is clear from the passage relied upon, an acceptance by a failure to perform can only occur where conduct clearly and unequivocally conveys to the repudiating party that the aggrieved party is treating the contract as at an end. In Vitol, it was held that a seller's conduct in selling to a third party goods which it had agreed to sell to the buyer under a contract which the buyer had repudiated did amount to an acceptance of the buyer's repudiation. In the present case, however, PAL made repayments to Skillglass under the Facility Agreement on 23 January 2004 and 12 March 2004. In my judgment, those payments demonstrate PAL's affirmation of the Facility Agreement and are inconsistent with the Claimant's submission.

165. For those reasons and also because clause 7 of the Guarantee provided that Skillglass was free to act or omit to act as it chose without affecting the Claimant's liability thereunder, the Claimant's liability under the Guarantee remained.

166. That leaves the question of Skillglass' demands made under the Facility Agreement and Guarantee made on 20 May 2004 and 17 September 2004, without prejudice to the October notice of default and December notice of demand.

167. It is common ground that the second and third tranches of the loan in respect of which those demands were made were not paid. The only real argument advanced by the Claimant why those demands were not valid was that the Facility Agreement had by then come to an end because of PAL's acceptance or deemed acceptance of Skillglass' repudiatory conduct – an allegation which I have already rejected.

168. The Claimant also sought to dispute that there was any default in repayment on the basis that the reverse premium transaction would have gone through if he had remained in control which would have resulted in the repayment of the balance of the second tranche; and that there would have been left a sum of £2 million then to be repaid in July 2004. His evidence was that he had made arrangements for this to be repaid by the sale of shares in a Hong Kong joint venture for approximately that amount and other activities. I reject those submissions. I have already determined that the probability was that the Lily Hill House transaction would not have been viable. Also, the evidence about the additional funds from the Hong Kong joint venture is too vague to be treated as reliable and would not have repaid the third tranche without the Lily Hill House transaction having gone through. Most importantly, it is the undisputed fact that the second and third tranches were not fully repaid.

169. I would therefore have decided, if necessary, that the 20 May 2004 and 17 September 2004 demands were valid. In those circumstances, it is unnecessary to consider the other matters relied upon by the Defendants to justify the service of those demands.

.

170. For completeness, I should record that, following the conclusion of the hearing, the Claimant made a written application for permission to supplement in writing his written and oral closing submissions made at the hearing. He based his application essentially on the fact that, as a litigant in person opposed by experienced counsel and solicitors and faced with the demands of the trial and the allegations raised in Skillglass' Amended Defence and Counterclaim, he had not been sufficiently prepared on the last day of the hearing to be able to meet fully the Defendants' submissions. The Claimant made it clear that he was not seeking a further hearing and would not oppose the Defendants having an opportunity to respond if so advised. I indicated on 26 December 2005 that I would allow the Claimant to provide me and, at the same time, the Defendants' counsel with the further written submissions he wished to make and that the Defendants would then have the opportunity to respond to the application, stating whether they objected or else responding on any questions of law that might arise. I further indicated that I would rule on the application in the course of this judgment.

171. On 29 December 2005, the Claimant provided his further written closing submissions (dated 27 December 2005). Amongst other things these raised for the first time the submission that the schedule to the Court of Appeal's order for the trial of the preliminary issues was erroneous. The Defendants responded on 6 January 2006, objecting or responding to the Claimant's further written closing submissions and dealing with the new matters arising therefrom.

172. Although the Defendants objected to parts thereof, they have been able to respond to them. In those circumstances, it would have been wrong not to allow the Claimant to rely on his supplementary written closing submissions and I have taken them into account, together with the Defendants' response, in arriving at my decision.

173. There is one particular matter arising out of the Claimant's supplementary written closing submissions which remains to be dealt with. The Claimant submitted in them for the first time that the schedule to the Court of Appeal's order was erroneous. The Claimant submitted that paragraph 7 of the schedule should have been concerned not with the question whether, if he was not discharged from liability under the Guarantee, Shares Charge and Properties Charge, he was entitled to a declaration that no valid demand had been made under the Facility Agreement and accordingly that those securities have not become enforceable; but with the quite different question whether he was entitled to damages or equitable compensation for breach of those securities and the Nominee Declaration (presumably) dated 27 June 2003. The "error" was said to arise because the "amended claim form that was put before the judge in the course of the hearing below" to which Chadwick LJ referred in paragraph 59 of the Court of Appeal's judgment was a reference to the addendum to the claim form dated 14 May 2004. It was, submitted the Claimant, paragraph 15 of that addendum (relating to his entitlement to damages and equitable compensation) which the Court of Appeal intended to be tried as a preliminary issue and not paragraph 14 thereof which was in the terms of paragraph 7 of the schedule to the Court of Appeal's order.

174. If the Claimant's submissions were well-founded, it is extraordinary, even making full allowance for the fact that the Claimant has appeared in person, that they should only have been raised at the time they were, in his supplementary written closing submissions served after the conclusion of a seven day hearing. Whether they are well-founded or not, I have to proceed and have proceeded on the basis of the Court of Appeal's order as it stands. It is not for me to go behind the order made by the Court of Appeal.

175. In any event, although it is inappropriate for me to decide the issue, it appears abundantly clear from the Defendants' response on this matter and the judgments of Judge Rich QC at first instance and of Chadwick LJ in the Court of Appeal that the Claimant has misunderstood the basis on which the Court of Appeal based the schedule to its order: it was based not on the addendum to the claim form dated 14 May 2004 at all but on a revised addendum circulated during the hearing before Judge Rich QC which was available to the Court of Appeal and which, in paragraph 15, was in the terms of paragraph 7 of the schedule to the Court of Appeal's order. It also seems to me unsustainable for the Claimant to suggest that the issue of his entitlement to damages and equitable compensation was capable of determination as a preliminary issue or could have been regarded by the Court of Appeal as such. That issue, apart from being in all likelihood inherently unsuitable for trial as a preliminary issue, would have been incapable of determination without the issue in the terms of paragraph 7 of the schedule to the Court of Appeal's order being determined first. As Chadwick LJ remarked in paragraph 59 of his judgment, the preliminary issues were intended to raise the questions whether the various notices were valid and, if not, what was the effect, if any, of the invalidity on the enforceablity of the Facility Agreement and the security documentation. This also appears from paragraph 21 of Judge Rich QC's judgment.

176. The Claimant's submissions relating to paragraph 7 of the schedule to the Court of Appeal's order were, to some limited extent, foreshadowed by the submission in his oral closing, on which he did not expand at the time, that paragraph 7 did not refer to the demands dated 20 May 2004 and 17 September 2004. However, it seems to me that it is precisely those demands to which paragraph 7 refers. It does not refer to the October notice of default because that is the subject of paragraph 1(a) of the schedule and the only other relevant demands under the Facility Agreement are those made on 20 May 2004 and 17 September 2004.

CONCLUSION

177. In the result, the answer which must be given to the preliminary issues set out in the schedule to the Court of Appeal's order is that: The Claimant is not entitled to the declarations and orders referred to in paragraph 1(a) to 7.

178. I shall hear the parties on the question of costs. I shall also hear PAL and the parties on the question left over from the start of the hearing on the question of the costs of the witness summons issued against it by the Claimant.