Jewson v Heatspace Ltd

This is a judgment on an application that I heard last Tuesday, 19 June 2007. It is one by which the claimant, Phillippa Jewson, asks for a continuation in modified terms of injunctions earlier granted by Blackburne J and Pumfrey J, which, as modified, I have continued pending this judgment.

The story is as follows. On 9 May the claimant applied to Blackburne J for an injunction restraining the defendants, Heatspace Limited and John Wright, from dealing with the proceeds of the sale by Heatspace of the issued shares in Eastfield Management Limited to Select Service Partner Limited. The application was made without notice to either respondent of its date or time, although the claimant had informed them on the morning of the previous day, 8 May, that, absent the giving of a requested undertaking, she would be applying that afternoon for injunctive relief, which in the event she did not. The application was supported by her statement of 8 May. She there said that she was a director and shareholder of Heatspace and that the purpose of her application was to restrain any distribution of certain company funds to her co-directors and shareholders until the size of her own shareholding and the amount of the outstanding directors’ loans were quantified.

By way of background, the claimant explained in her evidence that Heatspace was incorporated in 2000 and that, at the first board meeting held on 4 October, it was resolved that she, Mr Wright (the sole principal in Wright & Co, solicitors), Robert Robinson and Michael Napier would be directors. Each was to have 25 of the 100 £1 issued shares. Each was also to lend Heatspace £150,000, or £600,000 in all. The claimant did not explain the nature of Heatspace’s business, but it appears that it was intended to operate in the property field.

In February 2001 Heatspace used the £600,000 so lent to buy Eastfield Management Company Limited, Eastfield’s main asset being the head lease of commercial premises at the Old Parcel Office Richmond Station (“the premises”). The purchase price of Eastfield was £600,000. Following the purchase, all four Heatspace directors also became directors of Eastfield.

The matter then became complicated when the four directors agreed that a new company, Richmond and Surrey Auctions Limited (“Richmond”), would run the premises. The claimant disclaims knowledge of the legal arrangement that Richmond had with Eastfield, although one might think that she ought to know what it was, but she says that she agreed to run Richmond on terms that she would receive no remuneration for doing so, but would instead be rewarded by receiving an additional 25 shares in Heatspace. She says that, to that end, a board resolution of Heatspace was passed in June 2001 awarding her the further shares but, despite that, she still does not have them. Her assertion to be entitled to such further shares is now disputed, but for present purposes I accept that she has at least a good arguable case for an entitlement to them. It is supported by a letter dated 21 January 2002 from Mr Wright to Mr Alesbury of Pumphrey Kennedy, Heatspace’s accountants, enclosing a copy of some board minutes of 27 June 2001 and asking him to arrange for the issue of a further 25 Heatspace shares to the claimant, so making her shareholding 50 out of a total of 125, or 40%. That letter was, however, less than clever, because the enclosed board minutes were those of Richmond, as Mr Alesbury pointed out in his reply to Mr Wright, correctly explaining to him that the issue of further shares in Heatspace was a matter for the directors of Heatspace rather than for those of Richmond. Mr Alesbury had, however, no qualms about producing a like resolution for the directors of Heatspace to sign, although I presume they did not sign it.

At an unidentified later date Richmond went into voluntary liquidation. The claimant says that at that point her own company, Kew Auctions Limited (“Kew”), took a tenancy at will of the premises, paying £1,000 a week. Her evidence is that she paid this to Eastfield, so giving Eastfield a rental profit of about £25,000 a year. She says the arrangement was to continue for two and a half years.

The claimant then refers to certain further events that occurred in 2001 and 2002, when the four Heatspace directors agreed that they would finance the purchase of two shops in Richmond Hill for £300,000. They were to lend the money to Heatspace, which would purchase and then re-sell the shops at a profit. When that happened the loans would be repaid and the remaining profit would be applied in paying off the four original loans totalling £600,000 that the directors had made when Heatspace was first established.

The claimant says that the Richmond Hill shops were duly purchased and then sold for £700,000. She says she then “received back my original loan monies plus some profit element from [Mr Wright] who acted as conveyancing solicitor in the purchase and sale.” She cannot remember the exact amount. I understand her reference to “my original loan monies” to be to the loan she provided towards the Richmond Hill purchases, not to her original £150,000 loan. Her evidence provides no assistance as to the amount of the “profit element,” which I understand to be a reference to whatever distribution was made after the repayment of the loans made for the purchase of the two shops.

The claimant then continued, with similar imprecision, by saying that she has recently discovered that the directors’ loans “may well not have been reduced by the Richmond Hill sales.” I understand her there to be referring to the original loans totalling £600,000, although one might think that she would at least have some idea of whether, or to what extent, her own loan had been repaid. She says she has tried to obtain the information from Mr Wright, but none has been forthcoming. She says its importance is that “it affects the level of monies to be returned to me and my fellow directors by virtue of the amounts to be repaid as directors’ loans before there is a division of the profits according to our shareholdings, which in my case now appears to be challenged.”

The claimant then explained the present position as follows. In December 2006 Kew ceased trading from the premises. She says she had paid £70,000 to Eastfield in advance rent, but is aware that only £20,000 has been applied in payment of rent. She does not know what has happened to the remaining £50,000 and she says Mr Wright will not tell her. I have difficulty in understanding what that evidence means. She then explained the particular matter that led to these proceedings. On 1 May 2007 she received notice of a board meeting to be held on 2 May, at which a sale by Heatspace of Eastfield to Select Service Partner Limited was to be voted on. Her response was to inform Mr Wright that she did not propose to attend the meeting. She asserted in her letter that her share of the net proceeds should be not less than 40%, and she assessed the net proceeds to be £400,000 less a retention of £20,000 and less costs. She made it clear that she did not intend to lend any co-operation to the proposed sale of Eastfield.

On 8 May a firm of solicitors wrote on her behalf to Wright & Co. They were Cooper & Whiteman, although their role in this litigation is a mystery to me. Mr Becker, counsel for the claimant, described them as acting merely as a “postbox” and he appears to have done all the letter writing, drafting and litigating himself, a matter which was subjected to criticism by Mr Lennard, counsel for Heatspace. The essence of the letter was that Mr Wright had made it clear that Heatspace did:

“… not recognise the substantial Director’s loan made to [Heatspace] by our client at the time of Eastfield’s acquisition of the lease of the Richmond property, nor are they prepared to acknowledge the additional shares in Heatspace due to our client pursuant to a further agreement between the parties. As a result, you have made it clear to us that our clients [sic] will not receive reimbursement in respect of her Director’s loans and payment in respect of her shareholding in Heatspace upon the company’s sale of its shares in Eastfield.”

The letter invited Heatspace’s undertaking by 1 pm on 8 May not to make any distribution of the Eastfield sale proceeds pending resolution of the dispute, failing which the claimant would that afternoon seek injunctive relief in the Chancery Division.

The response from Wright & Co on the same day was that the sale proceeds would be held to Heatspace’s order and distributed as resolved upon by the directors and shareholders, the writer adding his understanding that Heatspace would “pay some of the directors’ loans before any form of dividend can be paid….” The writer invited the claimant to produce “documentary evidence of any payments made on the original acquisition of the shares by Heatspace in Eastfield and she should produce this evidence without further delay.” The undertaking that the claimant had requested was not offered. The sense of the reply was, therefore, that Heatspace did not recognise the claimant’s original loan contribution as £150,000, and her claim to the extra 25 shares in Heatspace is also in dispute. Later in the day, Mr Wright, on behalf of Heatspace, did offer an undertaking to hold the proceeds of sale for 14 days pending a resolution of Heatspace, but the offer was made on the condition that the claimant gave a cross-undertaking to resign as a director of Eastfield, which she was not prepared to do.

Against that background the claimant applied to Blackburne J on 9 May for an injunction restraining dealings by Heatspace and Mr Wright with the £400,000. She accepted that a sale of Eastfield had been resolved upon at that price and did not seek to prevent its completion. What she did want to prevent was the feared misapplication of the £400,000 pending the resolution of the dispute. Her expressed concern was that Mr Wright would distribute the £400,000 to Heatspace’s shareholders before the size of her shareholding and outstanding loan was determined, in which event she might face difficulty in recouping for herself any inequitable overpayment that might have been made to her co-directors and shareholders. The practical importance of the point to the claimant is that, as she understands it, the Eastfield shares are Heatspace’s only asset. I was told at the hearing last week that the completion of the sale had not yet happened, but was due to take place today.

The claimant’s application was supported by a skeleton argument prepared by her counsel, Mr Becker. It asserted that she could be entitled to recover up to £160,000 if she is entitled to 50 shares (40% of £400,000), although only £80,000 if she was not entitled to the additional 25 shares (20%). I understand the basis of the 20% figure to be that there are 125 issued shares, but that she is only entitled to 25 of them, or 20%. That leaves open who is entitled to the other 25. Leaving aside the fact that the calculations appear to ignore the 20% retention of the £400,000, which might be needed to answer liabilities arising under the sale agreement, and also the costs of the sale, they do not recognise that the first call on the net proceeds will include the loans, so far as still outstanding, of all four directors and only then will there be any question of any dividend being payable. The evidence before Blackburne J appears to have made no attempt to explain what that indebtedness might amount to, perhaps because the clamant did not know.

Blackburne J granted an injunction over 16 May restraining Heatspace, and it alone, from dealing with the £400,000 proceeds of sale. As the price of that order, the claimant undertook to issue a claim form forthwith and to file and serve a supplemental statement by 16 May “dealing with, amongst other things, evidence of her means to support any order the Court may make as to damages.” The order also records that Mr Becker agreed to supply Heatspace’s solicitors with a note of the hearing, although that particular part of the order does not appear to have imposed any direct obligation on the claimant personally. The order was perfected on 10 May, and served on Mr Wright.

By 16 May the claim form had still not been issued, despite the terms of the undertaking to Blackburne J. On that day the claimant did, however, make the further statement she had promised to make. In relation to her means, she said in paragraph 5:

“At the hearing on 9^th May, I gave an undertaking as to damages. I was not expecting to give details of my finances when the Judge asked my counsel what I was worth, but I stated then that I had assets of £50,000. I would like to confirm that I have assets of approximately £50,000 made up of savings.”

She said that on 16 May Mr Wright had stated categorically that he was not prepared to give an unconditional undertaking to hold the disputed money. She also noted in paragraph 12 that she had been advised that an application notice, giving three days’ notice, should have been issued and served for 17 May, the return date, and she expressed her sorrow that it had not. She asked for the injunction to be continued until 23 May. An exhibit to her witness statement included a copy letter of 16 May from Mr Wright to the apparent effect that Heatspace disputes her assertion that she advanced £150,000 for the purpose of the acquisition of the Eastfield shares. Her position is that she is in no doubt that she made such a loan, although she claims that she did so by paying it offshore to a Mr John Davies.

The claimant’s application came back before Pumfrey J on 17 May, Wright & Co having been informed of that only on 16 May, which was short and inadequate notice. Pumfrey J continued the injunction against Heatspace until after 22 May. He was aware that, despite the undertaking to Blackburne J, no claim form had yet been issued. He reflected that in paragraph 5 of the order, which reads:

“Costs reserved, save that UPON it being noted that the Claimant had failed to comply with her undertaking, given to the Court on 9^th May 2007 to issue a Claim Form forthwith the costs of issuing the said proceedings and of the application of this day shall not be claimed hereafter.”

The claim form was then issued on 18 May. It joined Mr Napier and Mr Robinson as third and fourth defendants. It asserts that the claimant is a 40% shareholder in Heatspace and that, contrary to her previous understanding, the four original directors’ loans had not been reduced following the sale of the Richmond Hill shops. It continued:

“The Claimant therefore claims the difference between her 40% share of the net sale proceeds and the 2nd to 4th Defendants assessment of her shareholding. The Claimant further brings a derivative action on the 1st Defendant’s behalf for the loss sustained to the company by reason of the 2nd, 3rd and 4th Defendants failure to ensure the reduction of the Directors loans by the application of the net profits of sale from the aforementioned Richmond Hill properties in 2001/2002. In all her allegations the Claimant will plead that there have breaches [sic] of shareholder agreements, negligence and conspiracy. Value: Due to lack of pre-action disclosure by the Defendants the claimant cannot at the date of issue accurately assess the value of her claim but estimates it to be in the region between £80,000 and £100,000.”

On 22 May, and by consent, Pumfrey J continued the injunction until 19 June, when its further continuation was argued before me. Mr Becker again represented the claimant, and Mr Lennard represented Heatspace. In the meantime the claimant had sought to apply a little more focus on the nature of her case. In a letter of 13 June to Rooks Rider, solicitors for Heatspace in the litigation, she asserted that her husband had discovered that the Richmond Hill properties had been sold for £800,000, although there is no evidence as to how that discovery is said to have been made or on what it is based. She appeared to accept in that letter that each director had received £162,500 out of the proceeds. That was based on figures provided in a letter of 23 May from Rooks Rider which in fact suggested that each had received £163,000. Working, however, on the basis of four payments of £162,500, that totalled £650,000 and the claimant raised the question, which has not been answered, as to what had happened to the remaining £150,000 of the alleged £800,000 sale price.

Of more direct relevance, however, is this. If she accepts that each director received £162,500 out of the Richmond Hill sale proceeds, that would have repaid each director’s £75,000 loan towards the purchase of the shops, including the claimant’s, and the balance of £87,500 must be presumed to have been applied towards the repayment of each director’s original loan of £150,000, including the claimant’s. The claimant had earlier described the excess payment over and above the repayment of the £75,000 loan as a profit payment, but there is no reliable evidence to suggest that it was a dividend payment and the presumption must be that the balance of the payment to each director was towards repayment of their original loans of £150,000. On that basis the claimant is still owed £62,500 towards that loan, as is each of the other directors. Their total outstanding indebtedness is therefore £250,000. If that is repaid out of the £400,000, that would leave a balance of £150,000, which could be distributed as a dividend. If the claimant is right that she is entitled to a 40% shareholding, her dividend ought to be in the order of £60,000.

Accordingly, she has an arguable case that she has a direct personal interest in £122,500 of the proceeds of the Eastfield sale. This calculation takes no account, however, either of the fact that £20,000 of the £400,000 is to be set aside as a retention, or of the costs of the sale. On the other hand, nor does it take account of the claimant’s assertion that £150,000 of the Richmond Hill sales proceeds are unaccounted for. If she is right in that assertion and does have a 40% interest in Heatspace, she may perhaps have an arguable claim in respect of 40% of that sum, or £60,000. On her figures, that would put her total interest in Heatspace’s assets at about £182,500. If, however, the figures are reworked on the basis that in fact each director received £163,000 out of the sale of the Richmond Hill shops, the likely calculation indicates that she is still owed £62,000 in respect of her original loan and has an arguable 40% interest in the surplus of £152,000, or £60,800, a total interest of £122,800. On the other hand, the unaccounted for surplus of the sale proceeds of the Richmond Hill shops would then be only about £148,000, of which her 40% share would be £59,200. On these figures that would put her total interest at about £182,000. I record, however, that Mr Becker, both in his skeleton argument of 18 June and proposed draft order, put at only £140,000 the suggested upper limit of the amount of the proceeds that were to be subject to any continued injunction.

At the hearing on 19 June, Mr Becker submitted that I should continue the injunction granted by Pumfrey J until after judgment or further order in the reduced sum of £190,000. Heatspace has not sought to answer any of the claimant’s points with evidence as to what has actually happened in the conduct of its affairs. As regards evidence, it has confined itself to exhibiting the party and party correspondence between 18 May and 14 June, most of which, with the exception of the provision of the figures in the letter of 23 May, was devoted to a criticism of the manner in which the claimant had conducted the litigation. Rooks Rider cannot be accused of descending into the detail of the merits of the substantive issues raised by the claimant.

Mr Lennard’s submission by way of opposition to the continuation of any injunction was confined to two main arguments. First, that by reason of various procedural shortcomings the claimant had disentitled herself to a continuation of the injunction. Secondly, that there was no sufficient evidence of a threat by Heatspace to misapply any of the £400,000 when received and so there was no justification for any injunction anyway.

In support of the first submission, Mr Lennard made various points. The first was the claimant’s failure to honour her undertaking to Blackburne J to issue the claim form forthwith. She did breach that undertaking, although it was one whose performance was primarily a matter for her lawyers rather than herself personally, a factor to which it is relevant to have regard in considering the extent to which it should result in the serious consequences that Mr Lennard now urges. She was still in breach by the time the matter came before Pumfrey J on 17 May and he recognised her default in this respect by depriving her of part of her costs, but he did not regard her default as depriving her of the right to a continuation of the injunction. The claimant then promptly cured the breach by issuing the claim form. In those circumstances I regard as disproportionate the suggestion that I should now take the disciplinarian view that Mr Lennard urges. In P.S. Refson & Co Ltd v. Saggers and Another [1984] 1WLR 1025, Nourse J, in similar circumstances, did not regard the failure to honour such an undertaking as depriving the claimant of the right to a continuation of the injunction, although he did reflect the court’s disapproval by disallowing certain costs, as Pumfrey J did in this case. Mr Becker submitted, and I agree, that it would be unfair for the court to punish the claimant twice for this default.

Next, it is said that no note of the hearing of 9 May was provided to the defendants until 18 June. That is true, but the only agreement to provide one was that of counsel, Mr Becker, not of the claimant personally and so I do not see why that default should be held against her in the extreme way for which Mr Lennard contended. Equally, however, Mr Becker’s agreement was in relation to the conduct of the claimant’s own application and she cannot shake off all responsibility for his shortcoming.

Then it is said that the claimant did not comply with the undertaking to file and serve by 16 May the further statement as to her means. The claimant did make her further statement by 16 May, and there dealt with her means in the manner I have quoted. It is said she did not do so adequately, but I consider that she did. I agree that her explanation lacked detail and did not identify the particular account or accounts in which her savings are held, and I accept that it would have been better if it had. But I would not regard that aspect of her statement as falling sufficiently short of the requirements of Blackburne J’s order to justify a holding that she is in breach of it.

There are, however, two further points about that statement. First, according to Mr Becker’s belated note of the hearing before Blackburne J, it was also supposed to include a statement that the original offer of £360,000 for the Eastfield shares had been raised to £400,000. It does not, however, do so, which does appear to be a default, although it can be said in mitigation that that particular piece of information appears to be essentially collateral to the substantive issues raised by the claimant’s application. Nevertheless, the judge did require that information to be included. Secondly, it is pointed out that a copy of the statement was only faxed to the defendants on 17 May, which was a day late for due compliance with the undertaking. Again, it can be said that that default was primarily that of the claimant’s lawyers, although I accept also that that is not by itself an answer to the complaint against the claimant in this respect. Accepting, as I do, that the claimant must herself also bear personal responsibility for these two defaults as well as some responsibility for Mr Becker’s failure promptly to provide a copy of the note of the hearing of 9 May, I nevertheless do not regard them as of sufficient magnitude to deprive her of the right to any continued injunctive relief that she may be entitled to. But I also consider that they cannot simply be airbrushed away, and I take the view that they were inexcusable faults which ought at least to be reflected in some appropriate way in relation to the costs of this application.

Next it is said that the claim form, once issued, was not served with any promptness. It is accepted that there was no undertaking to do so, but the point is made that it was unreasonable not to do so. I agree that it ought to have been served more promptly than it was but, again, the omission to do so was primarily the fault of the claimant’s lawyers. The omission involved no breach of any order to which the claimant was subject and I would not regard the delay in this respect as precluding her from continued relief if she is otherwise entitled to it.

As to that, I have had some uncertainty as to the precise legal basis on which the claimed injunction is sought (the upper limit of it now being confined to £190,000), a matter on which I had no comprehensive argument. I am unconvinced that there is any arguable derivative claim in the present circumstances. To the extent that the claimant sues as a creditor, it can be said she has no proprietary interest in the £400,000, any more than an outside creditor of Heatspace would have such an interest. On the other hand, to the extent that she has a prospective interest in the dividend payable to her and others out of the £400,000 after the proper debts of Heatspace have been first discharged, I consider that she can be said to have an interest analogous to a proprietary interest sufficient to entitle her to an order directed at protecting any threatened misapplication of the assets out of which that dividend ought in due course to be paid. Unless some appropriate injunctive protection is provided, the claimant will in practice be likely to find it difficult to recoup any losses that any misapplication of the assets will cause her. In addition, the claimant is a director of Heatspace and I see no reason why, as such, she should not be entitled to restrain an arguably improper disposition of Heatspace’s assets.

Mr Lennard submitted that there is no sufficient evidence of any risk of a misapplication of the £400,000 to justify an injunction. But in my judgment there is justification for an inference that, absent a protective order, the defendants will be likely to distribute the £400,000 without providing for the claimant’s claims. They have not answered her evidence on the merits of the case. They claim to dispute that she ever put up her original £150,000, but have not sought to meet her evidence that Eastfield was originally bought for £600,000, of which she put up 25%. They dispute that she became entitled to an extra 25 shares in Heatspace and at least Mr Wright wrote a letter in 2002 positively admitting that she was so entitled, yet they have not explained in evidence the basis on which they now challenge this part of her case. As I have said, the correspondence from Rooks Rider is almost wholly devoted to criticisms of the claimant’s procedure in relation to this litigation, preferring apparently to avoid any discussion of the merits; and whilst some of that criticism may well be justified, I consider that the claimant is entitled to conclude that, absent interim protective relief, the defendants have a current agenda that is adverse to her interests. I record, however, that shortly before the hearing Heatspace did offer an undertaking to retain £100,000 of the proceeds of sale on terms as to costs. That offer was not accepted and no offer of protection in any greater sum has been offered on any terms.

I propose, therefore, to continue the injunction previously granted, although in a modified amount. I have come to the conclusion that there is no evidence before the court that entitles it to conclude that the claimant has made out any arguable case that the sum of £150,000 of the Richmond Hill shops proceeds is unaccounted for. That being so, I propose to ignore that element of the calculations to which I have previously referred. I will continue the injunction until after judgment or further order in the meantime in the reduced sum of £123,000.

I have dealt with the costs of the main application, and I have given my ruling that I make no order as to costs on it.

There is, however, a separate matter which does, I consider, require separate consideration. That is that on Friday 22 June, Mr Becker, on behalf of the claimant, applied to me to defer the giving of this judgment for some uncertain period so that further negotiations might take place, an application which was opposed, for which I saw no justification and which I dismissed. I reserved until today the costs of that application. Mr Kirby, who then appeared for Heatspace, did not have a costs schedule, and that is no criticism of him, because the application was brought on fairly short notice.

I am now asked to order the claimant to pay those costs and to assess them. I do propose to order the claimant to pay those costs. I can see no reason why, that misconceived application having been brought and dismissed, she should not pay the costs.

I am asked to assess costs in the quite astonishing figure, as it seems to me, of £1,747, plus value added tax of some £305: accordingly, something over £2,000 for a brief 15 minute application, which was of the simplest nature, although admittedly Mr Kirby, who had not previously been instructed, had to attend and necessarily first had to find out something about the case in order to make intelligent observations to the court.

Nevertheless, even taking account of that, I regard the figure as globally wholly disproportionate for an application of that order and I propose to assess costs in the round sum of £1,000, including value added tax, and that will be paid within 14 days.