Mullarkey & Ors v Broad & Anor

Mr Mullarkey, Mr Goodman and Sedgemere Estates plc (“Sedgemere”) allege fraudulent misfeasance by Mr John Broad (“Mr Broad”) as a director of Southill Finance Limited (“Southill”), which went into creditors’ voluntary liquidation on 6 January 1995. Southill was originally incorporated as First Guardian Finance Ltd, but to avoid confusion I will call it Southill throughout. A claim arising out of the activities of Southill was also made against Mr Broad’s son, Mr Ian Broad; but that claim was compromised very shortly before the trial began. The allegations of misfeasance concern:

The transfer by Southill of a property 18 -20 Mill Road, Burgess Hill, West Sussex without payment to Mr Mullarkey and Mr Broad causing a loss of at least £88,000 plus interest.

The payment of sums by Southill to Mr Broad and his son Ian and/or companies connected to them, namely:-

The sum of £36,941 paid to Gentlesound Limited;

The sum of £13,195 paid to Capital Design and Advertising Limited;

The sum of £45,543 paid to GSL Design & Print Limited.

The sum of £2,823 paid to ABF Associates Limited;

The unexplained sum of £296,778 paid to unidentified recipients.

As well as denying the allegations of misfeasance, Mr Broad also says that the three claimants have no right to bring the claim. A claim may be brought by a creditor of the company concerned. It is common ground that neither Mr Mullarkey nor Mr Goodman were creditors of Southill when it went into liquidation. However, they bring their claim as assignees of the rights of Sedgemere Estates (London) Limited (“London”) and Guardian Foundations (Southern) Limited (“Southern”). They have recentlytaken an assignment of the rights of Sedgemere. Mr Broad says that none of these companies was a creditor of Southill when it went into liquidation.

Mr Brockman of counsel appeared on behalf of the claimants for the first two days of the trial. But at the start of the third day he appeared only to say that his instructions had been withdrawn; following which he himself withdrew. Thereafter the claimants appeared in person. Mr Goodman presented their case. Mr Broad appeared in person throughout the trial.

The events with which this claim is concerned took place many years ago. Some of the claims involve detailed figurework. Not only are the financial and other records incomplete and in some cases inconsistent with each other, but also, not surprisingly, the witnesses could not recall the details of what the figures represented after this lapse of time.

Guardian Subsidence Control Limited (“GSCL”) was incorporated in about 1979. Mr Broad became involved with GSCL in or about 1981. By 1985, Mr Broad controlled 55 per cent of the issued share capital of GSCL, those shares being held by Republic Capital Holdings Limited (itself a wholly owned subsidiary of Sears Field Limited a company controlled by Mr Broad and in which he held a majority shareholding). Mr Mullarkey held the remaining 45 per cent of the issued share capital in GSCL. GSCL was the holding company of a group of companies known as the “Guardian Subsidence group”. The “Guardian Subsidence group” provided property subsidence control services (e.g. underpinning). The “Guardian Subsidence group” provided its services through a series of operating subsidiaries covering particular geographical areas.

First Guardian Finance Ltd (later to be called Southill Finance Ltd) was incorporated on 16 October 1984. At that time GSCL owned its entire issued share capital. Mr Mullarkey and Mr Broad were the first directors of Southill. Part of its intended purpose (although not one that was fully realised) was to use funds available from the operating companies within the Guardian Subsidence group to buy plant and machinery for use of those operating companies, and thus keep finance costs “in house”. This appears to be supported by the minutes of a meeting held on 2 July 1990. It was also intended that Southill would make property and other investments with surplus funds. This seems to be borne out by Southill’s purchase of 18-20 Mill Road.

On 11 May 1987, Broad & Mullarkey Limited (“BML”) was incorporated. The entire issued share capital of BML was owned equally by Mr Mullarkey and Mr Broad. On 1 December 1988 Guardian Foundations Limited, (later to be called Sedgemere Estates Plc) (“Sedgemere”) was incorporated. Sedgemere’s then entire issued share capital consisted of 2 ordinary shares of £1 each, both of which were held by BML. From about 1988, Sedgemere acted as the parent company of a group of companies known as the “Guardian Foundations group”. The “Guardian Foundations group” also provided property subsidence control services. The “Guardian Foundations group” initially provided its services through a series of unincorporated operating divisions but, subsequently, provided its services through a series of operating subsidiaries covering particular geographical areas.

From about 1989, the business of the “Guardian Subsidence group” was gradually wound down over a period of several years and new property subsidence control business was thereafter conducted by the “Guardian Foundations group”.

In 1990, GSCL transferred the entire issued share capital in Southill to BML. Consequently, Southill ceased to be a member of the “Guardian Subsidence group”. Certain operating subsidiaries in the “Guardian Foundations group”, particularly Guardian Foundations London Limited (later renamed Sedgemere Estates (London) Limited) (“London”) and Guardian Foundations Southern Limited (“Southern”), generated cash surpluses from their trading activities. On the other hand, Sedgemere as the parent company in the “Guardian Foundations group”, which did not trade but which provided thehead office facilities for the entire “Guardian Foundations group”, was substantially overdrawn. Monies from the cash rich subsidiaries was transferred to Southill; and from Southill to operating companies (and the parent company) that were in need of cash. Southill began to fulfil a treasury management function to the “Guardian Foundations group”. In the exercise of its treasury function for the “Guardian Foundations group”, Southill would receive loans from London and Southern and would provide loans to Sedgemere. One of Mr Broad’s sons, Ian Broad, was an employee and, from 1991, a director of Southill. The treasury management function provided by Southill was performed by Ian Broad. Southill charged Sedgemere, as the holding company in the “Guardian Foundations group”, for Ian Broad’s services in providing that treasury management function. According to Mr Broad and Mr Ian Broad, this function was undertaken at the insistence of Barclays Bank plc, the bankers to the “Guardian Foundations group”. There is some evidence to support this claim. However the transfers of money were intermittent and on some occasions did not appear to have any real purpose since the money ended up, after a circular journey, in much the same place as that from which it began. Mr Broad recognised that Southill did not have real justification for its existence and that, he said, is why it stopped trading in 1993.

On 26 January 1990, Sedgemere was re-registered as a public limited company. In or about 1991, Sedgemere issued 39,998 ordinary shares of £1 each to BML and 2500 ordinary shares of £1 each to each of four directors of operating subsidiaries of the “Guardian Foundations group”. Consequently, BML then held 80 per cent of the issued share capital of Sedgemere and a director of each of four operating subsidiaries of the “Guardian Foundations group” held 5 per cent of the issued share capital of Sedgemere.

Until 1992 the operating subsidiaries within the “Guardian Foundations group” included Southern and London. However, in 1992, in preparation for a proposed, but never realised, floatation of the “Guardian Foundations group”, the entire issued share capital in Southern was transferred to Associated Energy Services PLC (“Associated Energy”) in return for an issue of shares by Associated Energy to Sedgemere. As a consequence of that issue of shares, Sedgemere held 69.8 per cent of the issued share capital of Associated Energy.

In 1993, the financial affairs of the “Guardian Foundations group” and Southill were reorganised. According to Mr Broad, that reorganisation resulted in the repayment of all loans made by London and Southern to Southill and the repayment of all loans made by Southill to Sedgemere. By 1994, following that reorganisation, he says that Southill owed no sums to London or Southern and Sedgemere owed no sums to Southill; apart from amounts outstanding in respect of Ian Broad’s treasury management services that Southill had provided by to Sedgemere. This is one of the issues in the case.

On 23 February 1994, Mr Mullarkey resigned his directorship of Southill leaving Mr Broad and Mr Ian Broad as its directors and another of Mr Broad’s sons, Martin Broad, as its secretary. In July 1994, Barclays Bank appointed an administrative receiver over Sedgemere. Thereafter, the “Guardian Foundations group” collapsed. In July 1994, London was ordered to be wound up. In November 1994, Southern was ordered to be wound up. In January 1995, Southill was ordered to be wound up. In December 1999, Sedgemere was dissolved and its name struck of the register of companies, although it was subsequently restored to the register.

Section 212 of the Insolvency Act 1986 provides:

is or has been an officer of the company,

… or…,

to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or

to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.”

The liquidator has not brought any claim against Mr Broad. He reported to the Official Receiver that although he had his suspicions, he had not found any evidence of wrongdoing. The Official Receiver has taken no further action. The claimants have standing to bring this claim if they are (or are the assignees of) one or more creditors of the company. It is common ground that neither Mr Mullarkey nor Mr Goodman was a creditor of the company. They derive their claims from London Southern and Sedgemere. So the question is: were London, Southern or Sedgemere creditors of Southill?

The statement of affairs prepared as at 6 January 1995 when Southill went into liquidation showed only the Inland Revenue, BMW Finance, Mr Broad and Mr Ian Broad and Arrow Finance as its creditors. Neither London, Southern nor Sedgemere are listed among the creditors. Mr Ian Broad’s report to creditors said that in 1993 all “inter-company accounts were discharged”. However, the claimants say that that statement was not accurate, and that Southill still owed money to all three of these companies.

Whether Southill did or did not owe money to these companies is not an easy question to answer. It depends on establishing the inter-company balances. Barclays Bank, the group’s bankers, commissioned a report from an independent firm of accountants, Smith & Williamson, who reported on 22 February 1994. In the course of their report they said:

These comments do not inspire confidence in the accuracy of the partial figures with which I have been provided.

On 26 September 1992 Mr Steven Ponsford, the managing director of London, sent a memo to Mr Broad. With that memo he also sent Mr Broad a schedule of what he said Southill owed London. The total was £321,989.30 plus interest amounting to £21,734.28. On 2 January 1993 Mr Ian Broad wrote to Bajer Munslow Messias, a firm of accountants who had been Southill’s auditors, and who were continuing as auditors of the Guardian Foundations group. He said that Southill owed London £336,478.82 and that it owed Southern £249,000. The figure for the indebtedness to London probably relates to the end of year figures as at 30 June 1992 and is close to the figure that Mr Ponsford had given three months earlier. Mr Ponsford says that based on his examination of the bank statements of London covering the period between July 1991 and June 1994, he can say that London paid Southill £671,989.30, which has never been repaid. The management accounts of London include a balance sheet as at 30 September 1992. The current assets do not include any debt owed by Southill; but they do include a debt of £249,224 owed by “Head Office” which I take to be a reference to Sedgemere. However, the management accounts for London also include a balance sheet as at 31 December 1992. This includes as one of the company’s current assets a debt of £671,989.30 attributed as “Interco 1st Guardian”. This is probably a reference to Southill. I do not know why there is this discrepancy between the two balance sheets.

In a memorandum dated 2 February 1993 Mr Broad wrote:

The book entries that were made following this memorandum purported to substitute Sedgemere for Southill as London’s debtor. According to a spreadsheet entitled “Guardian Head Office Audit (December 1993) (which, again, I take to be a reference to Sedgemere) Sedgemere owed London £607,519.45. The figure is close to (although not the same as) that referred to in the memorandum of 2 February. London’s balance sheet as at 30 June 1994 (as shown in its management accounts) does not include among its current assets any debt owed by Southill. By contrast it does list among its current assets a sum of £309,994 owed by Sedgemere. I do not know how the debt due from Sedgemere to London reduced substantially over the previous six months. I have not seen a balance sheet with a later date. None of the balance sheets to which I have referred has been audited.

In the Smith & Williamson report, dated 22 February 1994, Southill was shown as an inter-company creditor (not debtor) in the sum of £704,000. How the debit balance of £486,000-odd at the beginning of the previous year had turned into a credit balance of £704,000 is unexplained.

I am not satisfied that at the date of the liquidation of Southill London was among its creditors. The debt that Southill formerly owed London appears to me to have been the subject of a novation which had the effect of substituting Sedgemere as London’s debtor following the memorandum of 2 February 1993 and the change in the balance sheets of London and Sedgemere.

Southern is sometimes referred to in the documents as “Croydon”. The minutes of a management meeting on 24 November 1992 record that monies transferred to Southill then stood at £362,163. This figure tallies with the balance sheet as at that date shown in the management accounts. The debtor is given as “Interco Grdn Finance” which I take to be a reference to Southill. The minutes of another meeting held on 3 March 1993 record that cash flow was positive “with the exception of the months in which Head Office have “raided” the account e.g. £105k to [Southill] in October”. The October towhich that minute refers must have been October 1992. The management accounts show an increase in the debt of this amount (although in September rather than October 1992). It is still attributed to Southill (despite the “raid” having been by “Head Office”). The management accounts include a balance sheet as at 30 November 1992. That includes among the company’s current assets the sum of£364,707 owed by Southill. The balance sheet in the management accounts as at 31 December 1992 shows the same debtor, but the debt has risen to £367,251.

In his memorandum of 2 February 1993 to Mr Anderson in the accounts department Mr Broad wrote:

The figure of £345,000 does not tally with the figures recorded in the minutes of meetings or the management accounts, although they are close. Once again the intended effect of the book entries that were to be made following the memorandum was to substitute Sedgemere for Southill as Southern’s debtor.

Southern’s balance sheet in the management accounts for 31 December 1993 include a current asset of a debt of £375,284 owed by “Head Office”. It includes no debt owed by Southill. I have not seen a balance sheet with a later date. According to the spreadsheet entitled “Guardian Head Office Audit (December 1993) Sedgemere owed Southern £5585,806. The figures do not tally. But the balance sheets of both companies are at one in that Sedgemere (rather than Southill) was Southern’s debtor. Again, none of the balance sheets that I was shown has been audited.

I am not satisfied that at the date of the liquidation of Southill Southern was among its creditors. The debt that Southill formerly owed Southern appears to me to have been the subject of a novation which had the effect of substituting Sedgemere as Southern’s debtor following the memorandum of 2 February 1993 and the change in the balance sheets of Southern and Sedgemere.

In his memorandum of 2 February 1993 to Mr Anderson Mr Broad wrote:

This memorandum contemplates that at the end of the accounting exercise Southill would owe Sedgemere £861.30. Sedgemere would, therefore, remain a creditor of Southill, but for a much reduced amount. However, according to the spreadsheet entitled “Guardian Head Office Audit (December 1993), Southill owed Sedgemere £377,577.04 as at December 1993. I have not seen any later balance sheet. Nor have I seen any evidence of repayment. This spreadsheet is not audited.

Not without hesitation, in view of the long lapse of time, and the incompleteness of the record, I conclude that it is more probable than not that at the date when Southill went into liquidation it did owe Sedgemere all or part of the debt shown as due in December 1993. Sedgemere was, therefore, a creditor of Southill and is entitled to bring this claim.

I am also satisfied that Mr Goodman and Mr Mullarkey are the assignees of Sedgemere’s claims. They are therefore entitled to pursue the claims.

In opening the case, Mr Brockman accepted that if the claimants cannot establish fraudulent breaches of duty, then the claims face serious limitation problems. This is because section 212 of the Insolvency Act 1986 creates no new causes of action; and time runs from when the underlying cause or causes of action arose: Cohen v Selby [2001] 1 BCLC 176; Re Eurocruit Europe Ltd [2007] EWHC 1433 (Ch). It is, however, clear that if a fraudulent breach of trust is established, then no limitation period applies: Limitation Act 1980 s. 21 (1). Although this section speaks of a fraud or fraudulent “breach of trust”, the same principle applies (or applies by analogy) to fraudulent breaches of other pre-existing fiduciary obligations: Gwembe Valley Development Co Ltd v Koshy (No 3) [2004] 1 BCLC 131. Mr Brockman (and after him Mr Goodman) thus put the case on the basis of fraudulent breach of trust alone.

Fraudulent breach of trust, in this context, requires proof of dishonesty. As Millett L.J. explained in Armitage v Nurse [1988] Ch. 241:

In the same case Millett L.J. held that section 21 (1)(a) of the Limitation Act 1980 applied only to cases involving dishonesty. The key, therefore, is dishonesty, which in Armitage v Nurse Millett L.J formulated as follows:

This formulation was accepted as correct in the Gwembe Valley Development Co Ltd case. However, the boundaries of dishonesty have been somewhat mobile over the last few years. In Twinsectra Ltd v Yardley [2002] AC 164 a majority of the House of Lords laid down what was described as a “combined test” of dishonesty, which was partly objective and partly subjective. The test was controversial; and in Barlow Clowes v Eurotrust International Ltd [2006] 1 All ER 333 the Privy Council “explained” what had been decided in Twinsectra. The question of dishonesty arose again in Abou-Rahmah v Abacha [2006] EWCA Civ 1492. Rix LJ appears to me to have proceeded on the basis that the explanation of Twinsectra in Barlow Clowes represents the current state of English law, since he concentrated on what was said in Barlow Clowes about the degree of knowledge necessary to found dishonesty (although other passages in his judgment are more guarded). Arden LJ said in terms that Barlow Clowes represents English law and should be followed. Pill LJ said that it was not necessary to resolve the question of the impact of Barlow Clowes on Twinsectra; although he also said that he agreed with the reasons for dismissing the appeal given by Arden LJ. In my judgment I, as a judge at first instance, ought to follow the lead of Arden LJ and apply Twinsectra as explained in Barlow Clowes.

On this basis, the claimants must establish that Mr Broad:

Acted in a way that was contrary to normally acceptable standards of honest conduct;

Was conscious of (or deliberately turned a blind eye to) those elements of the transaction in question that made his participation fall below those standards.

They need not, however, establish that Mr Broad knew or gave any thought to what amounted to normally acceptable standards of conduct.

In the context of this case this means that the claimants must prove that Mr Broad used his powers as a director of Southill in a way that he knew was contrary to Southill’s interest or was recklessly indifferent to whether the use of his powers was in Southill’s interests or not; and that he was conscious of (or deliberately turned a blind eye to) the elements of the use of his powers that made the use of them contrary to Southill’s interests.

In Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 Millett L.J explained clearly the difference between different causes of action involving breach of fiduciary duty. He said:

In Belmont Finance Corporation Ltd. v. Williams Furniture Ltd . [1979] Ch. 250, 268 Buckley L.J. said:

In Armitage v Nurse Millett L.J. having cited this passage continued:

In Paragon Finance plc v D B Thakerar & Co he said on the question of pleading:

In a case where the complaints relate to things that happened for the most part over fifteen years ago, it is, I think, all the more important that the allegations of dishonesty be clearly and distinctly pleaded.

I explained to Mr Goodman more than once in the course of his cross-examination of Mr Broad that if he wished to allege dishonesty against Mr Broad the charges of dishonesty had to be squarely and individually put to him. As May L.J. observed in Vogon International Ltd v The Serious Fraud Office [2004] EWCA Civ 104:

In my judgment the burden of proof lies on the claimants in establishing the fraud that they allege. Mr Goodman suggested that where the misfeasance of a company director is concerned, it is for the director to justify his conduct rather than for the complainant to prove his case. Mr Goodman referred me to the decision of Harman J in Re Barton Manufacturing Ltd [1999] 1 BCLC 740. That was a case where the company had made gifts, and Harman J said that it was for the directors to explain why the making of gifts could have been in the best interests of the company. I do not consider that that case in effect reverses the burden of proof in all misfeasance cases; still less where the allegation is one of fraud.

Finally, under this head, I should say something about the standard of proof. Mr Goodman quite properly referred me to Hornal v Neuberger Products Ltd [1957] 1 QB 247 where the Court of Appeal held that in civil proceedings the standard of proof is that of the balance of probabilities, even where the allegation is one of fraud. However, as the court pointed out in that case the standard is not inflexible; because the degree of probability required to prove an allegation may vary with the seriousness of the allegation. Lord Nicholls of Birkenhead explained this at greater length in Re H and Others (Minors) [1996] AC 563, 586:

In his final written submissions Mr Goodman made allegations of a widespread dishonest “cover up” by Mr Broad of his previous misdeeds. He advanced a theory about how a sophisticated fraud had been committed by the use of multiple cheques; and how Mr Broad deliberately failed to produce company accounts in order to cover up his misappropriations. None of this was alleged in the pleaded case; and none of these charges of dishonest concealment had been put to Mr Broad in cross-examination. I will not therefore consider much of the voluminous written material that Mr Goodman included as part of his final submissions. The only allegations of fraud and dishonesty that I should properly consider are those that have been specifically pleaded against Mr Broad and put to him in cros-examination.

In my judgment the only pleaded allegations of fraud against Mr Broad are those contained in paragraphs 83 and 86 of Mr Goodman’s witness statement (which was ordered to stand as Particulars of Claim). Shorn of those claims that have been abandoned, they read as follows:

Paragraph 83 does not allege that Mr Broad did not intend the debts to be repaid; and does not allege that he had no reasonable grounds for believing that the debts would be repaid.

Paragraph 85 of the Particulars of Claim alleges that the company was “simply a vehicle” by which Mr Broad “transferred funds from fellow group subsidiaries in order to make advances to himself and/or companies under the control of his family and such advances were unauthorised and involved on each occasion an inexcusable breach of his duty to the company.” I do not consider that this allegation amounts to an allegation of fraud against Mr Broad. The fact that a breach of duty is inexcusable is consistent with honest conduct. The epithet “inexcusable” leaves it in doubt whether it is merely intended to add pejorative emphasis to the complaint. The reference to “advances” suggests that these sums are also alleged to be loans rather than gifts. Again the paragraph does not allege that Mr Broad did not intend the debts to be repaid; and does not allege that he had no reasonable grounds for believing that the debts would be repaid.

Paragraph 88 alleges fraudulent breach of trust and fiduciary duty against Mr Ian Broad. The particulars of the allegation of fraud against Mr Ian Broad specify certain acts that he is alleged to have done “jointly” with Mr Broad. But those particulars do not, in my judgment, allege fraud against Mr Broad himself. They do not allege that Mr Broad had knowledge that his son was acting fraudulently; or that he deliberately turned a blind eye to his son’s fraud. Moreover, as Millett L.J. pointed out, an allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact is consistent with an inadvertent failure to make disclosure and is not itself a charge of fraud. It will not support a finding of fraud even if the court is satisfied that the failure to disclose was deliberate and dishonest.

Mr Rawlinson, the sole principal of Rawlinson & Co, prepared and audited Southill’s accounts for the period to 30 June 1991 and the year to 30 June 1992. He was called by the claimants. He said in evidence that he had prepared and followed an audit programme. He verified the accounts by reference to the evidence that was then available. That programme included the compilation of a full list of creditors and debtors, which would have been in his working papers. It would also have included an examination of the bank statements and the cash book entries. He would have verified the figures and discussed them with Mr Ian Broad. If he had found any evidence of payments to directors or their families he would have queried them and required explanations. He found no such evidence. However, after the lapse of time of over 15 years his working papers were no longer available. They were routinely destroyed after seven years. I accept his evidence which I regard as important. In a letter to Mr Goodman dated 3 August 2005 Mr Rawlinson said:

Mr Rawlinson was called as a witness of fact. Neither side called any expert accountancy evidence (nor was there a single joint expert). The case papers ran to some 11 lever arch files, many of which included undigested bank statements, draft accounts and management accounts of uncertain provenance, most of which were neither looked at nor referred to during the course of the trial. This is a case in which it would have been of great benefit to the court to have been assisted by impartial expert evidence. I have only been given a partial picture, even allowing for the fact that many of the relevant documents are no longer available.

Southill transferred 18 and 20 Mill Road to Mr Broad and Mr Mullarkey on 31 May 1989 for a statedconsideration of £135,000. The transfer was by deed. According to the completion statement, Manchester Building Society made an advance of £100,000, part of which was used to redeem an existing mortgage and the balance (after deduction of costs) amounting to £48,355.82 was to be paid to Southill. That should have left £38,549.65 due to Southill from Messrs Broad and Mullarkey which was intended to be left outstanding. There was no formal security given for that debt.

Southill’s accounts for the year to 31 December 1989 show the sale of the property in Note 5 to the accounts for £135,000. Trade debtors are shown in the accounts as £95,143.

The Inland Revenue raised a number of queries about the accounts and, in particular about the sale of the property and the trade debtors. On 20 July 1992 Bajer Munslow Messias, who had been the company’s auditors for the year to 31 December 1989, wrote to Mr Broad. They said that the trade debtors of £95,143 included £88,900 due from Messrs Broad and Mullarkey for the sale of the property. It can be inferred from this that the balance of the advance by the Manchester Building Society was not in fact paid to Southill; but that it was also left outstanding. The auditors asked Mr Broad “whether you require this to be disclosed and what is the position on repayment”. On 18 March 1993 Mr Broad replied that he and Mr Mullarkey “no longer are indebted to” Southill. The Inland Revenue did not give up. In response to further questions that they raised Mr Ian Broad wrote to the auditors on 21 April 1993. He said that the trade debtors included £84,958.57 “due by Broad & Mullarkey” plus interest; but he added:

The auditors duly passed this information on to the Inland Revenue; but that only provoked more questions. Not only was the inspector incredulous that a debt owed by two of the company’s directors had been shown as a trade debt; but he also pointed out that the failure to show amounts owed by directors separately was a breach of the Companies Act. He asked for details of the dates and amounts of repayment. Mr Broad and his son met the auditors on 23 November 1993. Following that meeting Mr Ian Broad wrote to the auditors suggesting the following response to the Inland Revenue:

This explanation is not readily intelligible; but the thrust of it is that the debt was due and outstanding both at 31 December 1989 and at 1 February 1993. What is said to have happened to it in the interim is far from clear. The inspector was also puzzled and continued to ask questions. He wanted to know what liabilities had been transferred to the partnership. The question was passed on to Mr Ian Broad who replied on 21 January 1994 that:

The auditors wrote to the Inland Revenue on 24 January 1994. They said:

How a liability can be transferred from a limited company to a private individual without any documentation is entirely unclear. But that is not all. The year to 30 June 1992 began in June 1991. Yet by June 1991 both GSC Management Services Ltd and Guardian Subsidence Control London Ltd had gone into liquidation. The statement of affairs of GSC Management Services Ltd, signed by Mr Broad on 15 April 1991, shows Southill as a creditor of that company to the extent of £575, whereas if the statement to the Inland Revenue had been truthful it should have been a debtor. There is no trace in the liquidator’s records of any further dealings between GSC Management Services Ltd and Southill (and none would have been expected); and no record of any so-called transfer of liability. Nor was any realisation recovered from Mr Broad. The same statement of affairs shows Mr Broad as a creditor of GSC Management Services Ltd to the extent of £578.

The true position, therefore, is that the original debt due from Mr Broad and Mr Mullarkey to Southill remained outstanding; and the story about an assumption of liabilities and the subsequent reinstatement of the debt was simply a smokescreen. For present purposes, however, the essential point is that Mr Broad and Mr Mullarkey owed Southill just under £85,000 in early 1994.

Southill went into liquidation in January 1995. Mr Ian Broad swore the statement of affairs on 6 January. Book debts were shown as assets of the company. They amounted to £58,676. The meeting of creditors was held on 6 January 1995. Both Mr Broad and his son Ian Broad attended; the former described in the minutes as “Director and Creditor”. The statement of affairs showed him as a creditor to the extent of £4,562. The report to the meeting said of book debts:

There was no mention of the debt of £85,000 owed by Mr Broad and Mr Mullarkey, which cannot of course have been contained within the overall figure of £58,676 for the totality of the company’s book debts. In later correspondence with the liquidator Mr Broad wrote on 14 June 1996. The Inland Revenue were still pressing inquiries about the transfer of the property, now arguing that the property had been sold at an undervalue. Mr Broad said to the liquidator:

In the result the liquidator made no recoveries from book debts, as his final report to creditors stated. Mr Broad voted to accept the liquidator’s final report; and it was duly accepted. Thus Southill’s winding up was completed without Mr Broad having revealed the existence of the debt due from him and Mr Mullarkey to the company.

The pleaded case in relation to the property at 18-20 Mill Road is that Mr Broad fraudulently “transferred the property” to himself and Mr Mullarkey without paying for it. It is not suggested that the purchase price of £135,000 was an undervalue. There is no material, therefore, upon which it would be right for me to conclude that, in principle, a sale of the property for £135,000 was not for the “proper benefit” of the company. It is the case, on the facts, that Southill received some part of the purchase price, in that its mortgage was discharged. But it did not receive the balance of some £85,000. However, it was not put to Mr Board that, at the time of the purchase, he and Mr Mullarkey had no intention of ever paying the balance. The debt that they owed to Southill did not disappear; and was a debt recoverable by the company by action. The mere fact that a director owes money to the company is, on the face of it, a contravention of section 330 of the Companies Act 1985 which prohibits a company from making a loan to one of its directors. However, the breach of duty consisting of procuring the company to make the loan in the first place took place as long ago as 1989. It is a breach of duty which is committed whether or not the director ever intends to repay. However, in my judgmentthe mere fact that a director takes a prohibited loan from a company if which he is a director is not of itself fraudulent. If he never intends to repay it might be fraudulent; but that was not the case that was either pleaded or put.

Dishonestly concealing from a liquidator the existence of a debt owed by a director to the company would be a fraudulent breach of fiduciary duty. But again that was not the case pleaded. Fraudulent concealment was pleaded against Mr Ian Broad (paragraph 88 (7) of the Particulars of Claim); but not against Mr Broad himself. The pleaded case against Mr Broad in this respect is consistent with inadvertent failure to disclose.

As an allegation of fraudulent breach of trust against Mr Broad, the pleaded case fails. I do, however, find that the debt owed by Mr Broad and Mr Mullarkey to Southill has not been extinguished. But I heard no argument on whether it was statute barred or whether (if potentially statute barred) the limitation period might have been extended by fraudulent concealment. None of these questions were raised on the pleadings.

Gentlesound Ltd was a printing and stationery company run by Mr Broad’s son Martin Broad. Mr Broad himself was a director of the company from (at the latest) May 1993 to March 1993. On 22 June 1993 Gentlesound resolved to wind itself up. The statement of affairs as of that date shows that when it went into liquidation it owed Southill £36,941.

According to the only annual return within the case papers (for 1992) there were two issued shares in Gentlesound; one held by Mr Broad, and the other by his son Martin. Both Mr Broad and Mr Ian Broad said that Gentlesound did a lot of printing work for companies in the Guardian Foundations group; and I did not understand that to have been challenged. In his witness statement Mr Ian Broad said that because Gentlesound was expected to receive a lot of work from the Guardian Foundations group, it was decided that Southill should acquire 50 per cent of the share capital of Gentlesound, and thus potentially participate in its profits. Mr Broad gave evidence to the same effect. However, neither Mr Broad nor Mr Ian Broad was able to say when (if ever) the acquisition of the share capital took place. But both of them said that the loans made by Southill to Gentlesound were made because of the agreement to acquire half of its share capital.

Mr Broad also added that Gentlesound was owed money by other companies in the Guardian Foundations group and that it made sense for Southill to lend money to Gentlesound which other Guardian companies ought to have paid it. This last explanation did not, in my judgment, make a great deal of sense, because if other companies within the Guardian Foundations group owed money to Gentlesound it would have made more sense for Southill to have lent the money to them, so that they could have paid their debts, rather than creating a parallel debt owed by Gentlesound to Southill.

It was not put to either Mr Ian Broad or to Mr Broad himself that their evidence that it had been agreed that Southill should acquire half the share capital of Gentlesound was false. It is true that there is no documentary evidence that the allotment of shares ever took place. But the documentary evidence, after this lapse of time, is incomplete. There is evidence that the acquisition of Gentlesound was under consideration in 1990. A memorandum from Mr Mullarkey to Mr Broad of 10 September 1990 said that Gentlesound was not a member of the group “and as yet no decision has been made as to whether we would want a Printing and Stationery company within the Group”. By May 1992 Mr Mullarkey was complaining that Gentlesound had been acquired without his knowledge. Paragraph 67 of the Particulars of Claim also alleges that according to an annual return made to Companies House by Gentlesound Southill owned half its issued share capital, although no date is pleaded. I infer therefore that at some time between September 1990 and May 1992 Gentlesound did become a member of either the Guardian Foundations group or the Broad & Mullarkey group.

Mr Goodman prepared an analysis of Southill’s bank account from 19 June 1991 to 4 October 1994. That analysis shows many payments into the account having been made by Gentlesound (e.g. £1,000.05 on 12 July 1991, 12 September 1991, 14 October 1991, and 14 January 1992; £592.68 on 5 August 1991, 4 September, 3 October 1991, and 5 February 1992). There are many other recorded payments by Gentlesound. These support Mr Broad’s evidence that Gentlesound was repaying its loans from Southill. Mr Rawlinson, who was Southill’s auditor, said that he had checked the company’s debtors when he did the audits for 1991 and 1992 and had found no evidence of any irregularity. Unfortunately his working papers were not longer available. The making of loans to a group company does not raise the same suspicions as an unsecured loan to an outsider. It was not put to Mr Broad or to Mr Ian Broad that at the time when the loans to Gentlesound were made they had no intention that they should ever be repaid; or that they had no reasonable grounds for believing that they would be repaid. The regular payments by Gentlesound to Southill would not have supported such a suggestion.

In that state of the evidence I am not prepared to find a fraudulent breach of duty on the part of Mr Broad. This part of the case fails.

Capital Design and Advertising Ltd was another company that provided print services to the Guardian Foundations group. The annual return for 1992 shows that 58 shares were held by Southill and that the remaining 48 issued shares were held by Mr Alastair Fulton. It was therefore a group company. Mr Fulton was a friend of Mr Mullarkey. He was not a member of Mr Broad’s family. Mr Ian Broad and Mr Fulton were its directors. Capital Design and Advertising Ltd went into insolvent liquidation in October 1992. The statement of affairs showed that it owed Southill £13,195.

Mr Goodman’s analysis of Southill’s bank account (to which I have already referred) shows regular payments by Capital Design and Advertising Ltd of £119.23 (see e.g. 25 July 1991, 20 August 1991, 22 August 1991, 29 August 19915 September 1991, 26 September 1991, 3 October 1991, 31 October 1991, 21 November 1991, 12 December 1991, 5 March 1992). A more substantial payment of £1,175 was made by Capital Design and Advertising Ltd on 2 March 1992. These payments (and the fact that Mr Fulton was not a member of Mr Broad’s family) do not support the case that Southill was simply giving money to businesses run by Mr Broad’s children.

Again I refer to the evidence of Mr Rawlinson that he had checked the company’s debtors when he did the audits for 1991 and 1992 and had found no evidence of any irregularity. Again, the making of loans to a group company does not raise the same suspicions as an unsecured loan to an outsider. Again it was not put to Mr Broad or to Mr Ian Broad that at the time when the loans to Capital Design and Advertising Ltd were made they had no intention that they should ever be repaid; or that they had no reasonable grounds for believing that they would be repaid. The regular payments by Capital Design and Advertising Ltd to Southill would not have supported such a suggestion.

In that state of the evidence I am not prepared to find a fraudulent breach of duty on the part of Mr Broad. This part of the case fails.

ABF Associates Ltd was said by Mr Brockman in opening the case to have been an independent company to which Southill lent money. His written opening alleged no specific dishonesty relating to any loans to this company. No cross-examination was directed to loans to this company; and Mr Goodman did not refer to it in his final written submissions. I have assumed that the allegation relating to this company has been abandoned.GSL Design & Print Limited

GSL Design & Print Limited was another printing and stationery company run by Martin Broad. Its annual return from 1992 showed 50 shares (half its issued share capital) as being held by Southill. Mr Martin Broad held the other 50 shares. It was therefore a group company. GSL Design & Print Limited went into insolvent liquidation in June 1993. According to the statement of affairs, it owed Southill £26,895.

r Goodman’s analysis of Southill’s bank account shows payments made by GSL Design & Print Limited into Southill’s bank account (e.g. three payments on 21 April 1992 of £3,363, £4,789 and £7,005 respectively followed by matching payments out to it also on the same day). These are certainly curious transactions, but they do not support the case that Southill simply gave its money away.

The real complaint that was put to Mr Ian Broad in cross-examination was that given the failure of Gentlesound it was imprudent to lend money to GSL Design & Print Ltd without taking security. This may well be true, but it does not establish a fraudulent breach of duty. There was also a suggestion that Southill might have guaranteed the obligations of GSL Design & Print Ltd. But no guarantee was produced; Mr Broad denied that he knew anything about it; and anyway the giving of a guarantee was not a pleaded complaint.

Again I refer to the evidence of Mr Rawlinson that he had checked the company’s debtors when he did the audits for 1991 and 1992 and had found no evidence of any irregularity

In that state of the evidence I am not prepared to find a fraudulent breach of duty on the part of Mr Broad. This part of the case fails.

Southill’s audited accounts for the period to 30 June 1991, which Mr Rawlinson prepared, show as part of the company’s current assets debtors amounting to £472,635. Note 6 to the accounts reveal that £434,631 of this total was attributable to “loans”. The identity of the borrowers is not revealed by the accounts. On the other side of the balance sheet, the accounts show as part of the company’s current liabilities creditors amounting to £383,787. Note 7 to the accounts reveals that £351,239 of this total was attributable to “loans”. The identity of the lenders is not revealed by the accounts. The accounts were signed off on 26 February 1992.

At about the same time that Mr Rawlinson was preparing Southill’s accounts, the accounts of the Guardian Group were being prepared by Bajer Munslow Messias. On 21 January 1992 Mr Rawlinson wrote to them in response to a query about inter-company balances. He said that “we propose to incorporate into the current assets and liabilities” of Southill at 30 June 1991 the following:

These figures do not tally with the figures that were actually incorporated into the audited accounts a month later. In his oral evidence Mr Rawlinson confirmed that the figures referred to in his letter (which he proposed to incorporate into the accounts) were not in fact incorporated into the accounts as audited. But after this lapse of time, and the loss of his working papers, he was unable to remember thereason. Bajer Munslow Messias prepared working papers for the purpose of the group consolidated accounts. I was shown a spreadsheet which contained figures for inter-company balances as at 30 June 1991. The figures shown on that spreadsheet representing Southill’s position do not tally with the figures given by Mr Rawlinson. The only figure common to both appears to be the sum of £321,989. Mr Rawlinson said that that was a sum that Southill owed to GSC London Ltd (as his letter says). The spreadsheet shows it as due from Southill to Guardian Foundations London Ltd. These are two different companies. A further working document contains a schedule of “other debtors”. Against Southill’s name is the figure of £296,778. This, I was told by Mr Goodman (by way of submission rather than evidence), is a calculated figure. It is arrived at by starting with the total of loan debtors shown in Southill’s own accounts (£434,631) and subtracting two amounts (£132,579 + £5,274) owed to Southill by Guardian Foundations plc and Capital Plant respectively. How these figures tally with those given by Mr Rawlinson in his letter of 21 January 1992 was not explained. Nor, as it seems to me, do they tally with all the information contained on the spreadsheet. Be that as it may, it is the claimants’ case that the sum produced by that calculation, namely £296,778, represents loans to third parties (i.e. persons or companies outside the group). This figure found its way into the draft consolidated accounts for the group. It has been assumed that the final accounts were in the form of the draft that appears in the case papers. I have not seen the final audited accounts.

I was also shown a partial set of Southill’s management accounts as at 31 January 1991. This contains a list of current assets. There is a figure of £171,621 described as “Debtors’ Control Account” of which no further details are given. But the same list also records debts owing to Southill by Switchpine Ltd; Norris Business Group Ltd and Howard Associates Ltd. The significance of these debts was not explored in evidence; and I know nothing about these companies.

It is not possible, on the materials now available, to ascertain the identity of the borrowers. Mr Goodman says that I should draw the inference that the payments to unidentified third parties are in reality payments to Mr Broad and his family.

However, Mr Rawlinson, who audited Southill’s accounts, said that he found no evidence of irregularities. He would have compiled a schedule of debtors and identified them all; but his working papers have been destroyed. After a lapse of 16 years he could not remember the details. Nor could Mr Broad. Nor could Mr Ian Broad. I am not surprised. Both of them, however, said that they had done nothing wrong. Although a number of sheets of the working papers of Bajer Munslow Messias have survived and are included in the case papers, there is nothing to suggest that Bajer Munslow Messias suspected any impropriety. It was not pleaded against or put to Mr Broad that he had deliberately concealed anything from Mr Rawlinson or from Bajer Munslow Messias. In addition, as I have said, some of the debtors were in fact identified in management accounts, but the significance of the debts was not explored. Some of the payments may also have been made to the individual companies (Gentlesound, Capital Design and Advertising, ABF Associates and GSL Design & Print) with which I have already dealt.

In addition, the monies about which the claimants complain are recorded in the accounts as loans. It is not therefore a case in which the directors are alleged to have used company monies on personal expenditure and to have dishonestly passed off the expenditure as a legitimate corporate business expense. In that sort of case the accounts will not show anything due to the company. Here by contrast the loans appear among the company’s current assets. On the face of it they are therefore repayable by the borrowers. That makes a charge of dishonesty much more difficult to sustain unless it is alleged (which it was not) that the directors knew (and perhaps intended) that the loans would never be repaid.

Although the extent of the loans to persons and companies outside the group may raise suspicions, suspicions are not proof. The relevant papers which would have contained the explanations have now been lost or destroyed; and I do not consider that it would be fair to infer from Mr Broad’s inability to explain the details 16 years later that he exercised his powers as a director dishonestly.

This part of the case therefore fails.

The final allegation is that Mr Broad instructed the accounting staff of the Broad and Mullarkey group to conceal Southill’s indebtedness to Guardian Foundations London Ltd by instructing that certain book entries be made. The instruction is contained in a written memorandum dated 2 February 1993 from Mr Broad to Mr Ross Anderson in the accounts department of the Guardian group. I have mentioned this memorandum before.

This is an odd allegation of misfeasance. Misfeasance is usually a breach of duty which deprives the company of some asset or which causes it a loss. This allegation, however, is an allegation that Mr Broad concealed one or more of the company’s liabilities. If the concealment was effective it would have resulted in an amelioration of the company’s financial position, not a deterioration. If it was ineffective it would not have changed the company’s position. Carrying on business with intent to defraud creditors can result in liability under section 213 of the Insolvency Act 1986. But that is not the claim that is pursued, and it could only have been pursued by the liquidator.

The relevant parts of the memorandum of 2 February 1993 read as follows:

It is not easy to follow the precise transactions and book entries that Mr Broad was contemplating. After 14 years he could not give an explanation of the details, but he did say that the figures came from workings that Mr Anderson had supplied to him and which he had had no reason to doubt. The workings have not survived. From the perspective of London, what was envisaged was that whereas at the start of the process London was owed £671,989 by Southill, at the end of the process it would still be owed £671,989; but its debtor would be Guardian Foundations plc (i.e. Sedgemere) rather than Southill. London’s accounts would, therefore still show the debt as a current asset. Unless, therefore, there was a difference in value between the chose in action represented by Sedgemere’s obligation to pay and Southill’s obligation to pay, its net asset position should have been the same. No difference in value was pleaded or proved. At the start of the process Southill owed London £671,989. At this stage in the process Southill’s debt to London is replaced by a debt of the same amount to Sedgemere. What then appears to happen is that in satisfaction of that debt Southill assigns to Guardian Foundations plc debts owed to it by Sears Field, GSC Tarapave and GSC Eastern. That leaves a balance of £800,861.30. What then appears to be contemplated is that £800,000 will be “cancelled out”. Although the memorandum is not entirely clear, what seems to be envisaged is that the sum of £800,000 will be set off against sums owing by Guardian Foundations plc to Southill. Mr Broad thought that this was what he had in mind, although he could not really remember; and he thought that the figure of £800,000 was one that Mr Anderson had given him. His use of the phrase “of course” at the end of the quoted part of the memorandum does suggest that what was proposed did not come as news to Mr Anderson. I have not, however, seen evidence upon which I could conclude that Sedgemere owed Southill £800,000.

It seems likely that these entries could not have been effective. GSC Tarapave had gone into liquidationon 21 January 1991. Its statement of affairs revealed a small debt to Southill, but nothing approaching £174,616. GSC Eastern had also gone into liquidation on 1 July 1992. It was not, however, established that Mr Broad knew (or remembered) the amounts of these debts when he came to write his memorandum on 2 February 1993. Even if he had, the real complainant would have been Guardian Foundations plc which would have made itself liable to London in return for an assignment of non- existent or worthless debts.

It also seems as though Mr Anderson made some mistakes in his accounting. In a subsequent exchange of correspondence between Mr Messias of Bajer Munslow Messias and Mr Broad in June 1994, Mr Messias said that Mr Anderson had incorrectly attributed to Broad & Mullarkey Ltd a loan owed by Sedgemere which should have been attributed to Southill.

I have not been persuaded that in initiating these book entries Mr Broad was guilty of dishonesty or that the entries caused any loss to Southill. This part of the case also fails.

I dismiss the application.