Harris v Jones & Ors

In 2005, Mr Harris and Mr Jones each acquired one share in a newly formed company, Zetnet Ltd (“Zetnet”). At that time, there were two issued shares in Zetnet so that Mr Harris and Mr Jones each had a 50% interest in the company. In August 2006, Mr Harris transferred his share to Mr Jones to hold on trust for Mr Harris. From that time onwards, Mr Harris was not a registered shareholder in relation to Zetnet. In the summer of 2007, the relationship between Mr Harris and Jones broke down. In September 2007, Mr Jones participated in a transaction whereby Mr Harris’ interest in Zetnet was reduced from a 50% interest to an interest of 0.1%. At the same time, Mr Jones retained a 39.9% interest in the company. Mr Harris was excluded from the management of the company. On 1^st February 2008, Mr Harris brought a petition under Part 30 of the Companies Act 2006 alleging that the affairs of Zetnet had been conducted in a way that was unfairly prejudicial to him. He asked for an order that Mr Jones be required to buy his shares at a price to be fixed. In July 2008, Mr Jones participated in a sale of all of the shares in Zetnet, without the knowledge or consent of Mr Harris. Mr Harris subsequently brought proceedings arising out of these transactions. Those proceedings and the petition under Part 30 of the 2006 Act were heard together.

At the trial, Mr Harris was represented by Mr Dagnall of counsel and Mr Jones appeared in person. Mr Jones was accompanied by a Mr Pine, a former solicitor. Mr Jones wished Mr Pine to act as a McKenzie Friend and in addition, for Mr Pine to be allowed to act as his advocate. Counsel for Mr Harris did not oppose that application and after considering it in detail, I allowed Mr Pine to address the court as advocate for Mr Jones. Mr Pine applied for an indefinite adjournment of the trial on the grounds of Mr Jones’ physical and mental condition. I declined to grant such an adjournment and the trial proceeded and in due course Mr Jones gave evidence and was cross-examined.

The principal disputes at the trial related to matters of fact. For this reason, before making my findings of fact, I will first refer to the witnesses who gave evidence before me and make my assessment of the reliability of the principal witnesses. I will next set out my findings of fact in detail and then deal with the substantive claims which have been made.

The witnesses on behalf of the Claimant were Mr Harris himself, Mr Simon Clarke, Mr Mark Halliwell and Mr Stephen Jones. The witnesses on behalf of Mr Richard Jones (“Mr Jones”) were Mr Jones himself, Mr John Hyslop and Mrs Lisa Harris. Mr Harris had also served a witness statement from a Mr Gilbert. At the trial, Mr Harris did not seek to rely on Mr Gilbert’s statement but Mr Jones sought to rely on a part of it. Mr Harris did not object to such reliance provided that the court received and considered all of the statement. In that way, Mr Gilbert’s statement was admitted into evidence as hearsay evidence.

As matters turned out there was a certain amount of common ground as to the actions taken by Mr Jones and Mr Hyslop in August and September 2007 and later in relation to the sale of the shares in Zetnet. However, there were disputes of fact as to the conduct of Mr Harris in August and September 2007. Essentially, what Mr Jones and Mr Hyslop said was that Mr Harris had, by his actions, provoked a cash flow crisis within Zetnet and what was done by Mr Jones and Mr Hyslop was their response to that crisis. Mr Harris did not accept what was said about his involvement at that time. The principal witnesses, whose reliability I ought to consider in detail, are Mr Harris, Mr Jones and Mr Hyslop. I will also comment on the evidence of Mr Clarke as there was a challenge to his reliability.

I find I can be reasonably confident in assessing the credibility of Mr Hyslop. Mr Hyslop had signed a witness statement which dealt only with a conversation which he said he had had with Mr Harris as to why Mr Harris transferred his share in Zetnet to Mr Jones. When Mr Hyslop was called to give his evidence in chief, he was not asked by Mr Jones about other matters, even though he was managing director of Zetnet at the relevant times and would have been aware of the detail of what was happening. However, counsel for Mr Harris cross-examined Mr Hyslop in detail about the relevant events. I found Mr Hyslop’s evidence to be very revealing. He gave detailed evidence as to Mr Harris’ conduct at the relevant time. My assessment of Mr Hyslop was that the evidence he gave was generally reliable. It was put to him that he was not an independent witness because he was concerned that he would be sued by Mr Harris in some future proceedings. I do not accept that Mr Hyslop was in any way concerned about that possibility or that his evidence to me was influenced by such a concern. Mr Hyslop was highly critical of Mr Harris but I do not believe that his evidence was motivated by hostility. Instead, it appeared to be reliable evidence as to the difficulties in which Zetnet was placed by Mr Harris. Mr Hyslop gave his evidence in a measured way and he fairly accepted criticisms of the behaviour of himself and Mr Jones. The fact that he had not prepared a detailed witness statement which he merely confirmed in his evidence in chief but rather he gave his evidence in response to questions put in cross-examination suggested to me that Mr Hyslop was genuinely trying to recall and to describe the relevant events rather than sticking to an account which had been spelt out in a witness statement.

A large part of Mr Jones’ evidence was corroborated by Mr Hyslop and I accept that part of Mr Jones’ evidence. Further, there were passages in his evidence where Mr Jones was candid about what he had done, even where it was not helpful to his case. In other respects, I am cautious about Mr Jones’ evidence. He is plainly an interested party and he bitterly regrets the fact that he ever got involved with Mr Harris. That has tended to colour his recollection of events.

As to Mr Harris, some of his evidence related to matters which were not seriously in dispute. However, his evidence in relation to the events of the summer of 2007 and as to his conduct at that time conflicted with the evidence of Mr Hyslop and Mr Jones. I have already stated that I am minded to accept what Mr Hyslop told me about Mr Harris’ conduct. Mr Harris was not prepared to accept any suggestion that he had contributed to the breakdown in the relationship between himself and Mr Jones or that he had caused or contributed to Zetnet’s financial difficulties. On examining the detailed facts, I did not find Mr Harris’s evidence reliable on these matters. Where there is a conflict between the evidence of Mr Hyslop and Mr Harris, I prefer the evidence of Mr Hyslop.

In addition to the above comments about the reliability of Mr Harris as a witness, I also need to comment on a matter which took up some time at the trial. Mr Jones contended that the reason that Mr Harris transferred the legal title to one share in Zetnet in August 2006 was to conceal his ownership of that share from his wife in divorce proceedings which were underway at that time. Counsel for Mr Harris objected to that matter being raised by Mr Jones. Counsel submitted that Mr Harris’ purpose in transferring the share to Mr Jones was irrelevant. It was said that even if Mr Harris transferred the share to Mr Jones in order to conceal his ownership of it in the divorce proceedings, that did not prevent Mr Harris establishing the existence of a trust nor did it affect the extent of Mr Jones’ duties as trustee. At the outset of the trial, I ruled that Mr Harris’ purpose in transferring the share to Mr Jones was not relevant to any question whether Mr Jones was a trustee of the share for Mr Harris and that any such purpose was irrelevant to the extent of the duties which Mr Jones, as trustee, owed to Mr Harris. In this case, Mr Jones made an express declaration of trust of the share and the existence of the trust was admitted in Mr Jones’ defence. There was no scope here for any argument that the trust should not be recognised by reason of any alleged illegality in the purpose behind the creation of the trust. However, I also ruled that Mr Harris’ purpose in transferring the share to Mr Jones as a trustee could be relevant to the question of Mr Harris’ credibility as a witness.

My ruling that Mr Harris’ purpose in transferring the share might be relevant to an assessment of his credibility then gave rise to a further argument. Counsel for Mr Harris submitted that it was not open to Mr Jones to cross-examine Mr Harris about the disclosure he had given in the divorce proceedings nor to lead evidence about such disclosure. Counsel relied on Clibbery v Allan [2002] Fam 261, in particular, at [67] – [74] per Butler-Sloss LJ, dealing with the topic of confidentiality of documents in the Family Division.

In Clibbery v Allan it was explained that documents disclosed in family financial proceedings are to be considered as disclosed under compulsion with the result that the other party to the family proceedings is subject to an implied undertaking not to use the information contained in those documents otherwise than for the purposes of the family proceedings. In the present case, it was said that the information which Mr Jones wanted to adduce and put to Mr Harris in cross-examination had been obtained from Mr Harris’s ex-wife and was based on documents served by Mr Harris in the divorce proceedings. On the facts, some of the material which Mr Jones wished to put in cross-examination was not so derived; some of the material was based on a statement which Mr Harris allegedly made to Mr Hyslop. However, I have considered the question of principle raised on behalf of Mr Harris. At the outset of the trial, I indicated that I would permit an examination of Mr Harris’s purpose in creating the trust of the share, as a matter which potentially went to his credibility, and for that purpose I would hear evidence as to whether Mr Harris did or did not disclose in the divorce proceedings that he was the owner of a share in Zetnet. I will now give my reasons for that ruling.

Before he prepared his witness statement in this case, Mr Harris was aware of Mr Jones’ contention that the purpose of the trust was to conceal Mr Harris’ ownership of the share from his wife in the divorce proceedings. Mr Harris dealt with this allegation in his witness statement. He also served a witness statement from Mr Stephen Jones with the intent of corroborating his own evidence. When Mr Harris later came to give his evidence in chief, he withdrew the paragraphs in his witness statement which dealt with this topic on the grounds that those paragraphs were irrelevant to any issue in the case.

Although the statement of principle in Clibbery v Allan is concerned to prevent misuse of information disclosed under compulsion, Mr Jones was not relying on any matter which was disclosed under compulsion in the family proceedings. He was not seeking to establish a fact which was stated in any document disclosed under compulsion. He wished to establish that Mr Harris had not disclosed the existence of his beneficial ownership of a share in Zetnet. In my judgment, in so far as Mr Jones wished to rely upon the evidence of Mr Harris’ ex-wife to that effect, Mr Jones was not causing the ex-wife to act contrary to the implied undertaking binding her that she would not rely upon a disclosure which had been made under compulsion. Later in the trial, Mr Harris’ ex-wife provided Mr Jones with a copy of the Financial Statement which Mr Harris had served in the divorce proceedings. This was after I had indicated that, if necessary, I would be prepared to relax the implied undertaking as to the use of documents disclosed in the divorce proceedings. It may be that Mrs Harris ought not to have disclosed that document to Mr Jones without a more specific ruling on the question. However, so far as the trial before me was concerned, there was no reference to any fact or matter which was disclosed in that document. The point which was made by reference to the Financial Statement was that Mr Harris had not disclosed his ownership of the share in Zetnet. In these circumstances, I doubt if there was any breach of the implied undertaking discussed in Clibbery v Allan. In any case, as that decision makes clear, the court has power to release a party from the implied undertaking in question. I indicated at the outset of the trial that I would be prepared to release the implied undertaking (to the extent that that was necessary) for the limited purpose of establishing that Mr Harris had not disclosed his ownership of the share in the divorce proceedings. Counsel for Mr Harris submitted that I did not have power to do so. He submitted that only a judge who was dealing with the divorce proceedings, or a judge of the Family Division, could relax the undertaking. In my judgment, I was able to relax the undertaking in this case. In some cases, a judge sitting in the Chancery Division might prefer that a question of this sort should be considered by the judge actually dealing with the divorce proceedings or a judge of the Family Division who was familiar with the practice of that Division. However, in this case, the matters which needed to be considered were straightforward and as the trial judge, I felt that I was in a good position to consider whether any relevant undertaking should be relaxed. It seemed to me to be wholly inappropriate to adjourn the trial so that this point could be considered by a judge who had dealt with the divorce proceedings or a judge of the Family Division.

I have dealt with this matter in a little detail as it took a considerable time at the trial. In due course, I will make findings as to whether Mr Harris was influenced, when he created the trust of the share, by a desire to conceal his ownership of the share from his wife in the divorce proceedings. However, I should stress at this point, when discussing my assessment of Mr Harris’ reliability as a witness, that I would have reached the same conclusion on that subject even if this question of the divorce proceedings had never been investigated at the trial. Quite simply, I prefer Mr Hyslop’s evidence to the evidence given by Mr Harris as to Mr Harris’ conduct in July to September 2007.

Mr Clarke gave evidence by video link. He gave his evidence in a straightforward way. There was a strenuous attack on Mr Clarke’s credibility but I find that I do not have any sufficient reason not to accept his account of his involvement. However, I distinguish Mr Clarke’s evidence as to what actually occurred from what Mr Clarke had to say as to what might have happened if matters had turned out differently. On that latter subject, I have to consider all of the evidence and reach my own conclusion.

It is not necessary to comment separately on the other witnesses. Where it is relevant to do so, I will refer to them later when making my specific findings of fact.

Zetnet was formed on 6^th October 2005 by solicitors, Halliwells LLP, as an off the shelf company. It was originally known as Hallco 1239 Ltd but changed its name to Zetnet on 18^th October 2005. The authorised share capital of Zetnet was £1,000 divided into 1,000 shares of £1 each. Two subscriber shares were issued. The articles of association adopted the regulations in table A in the Schedule to the Companies (Tables A to F) Regulations 1985 (as amended) save insofar as they were excluded or modified by the articles. By article 2(A), it was provided that, subject to the Companies Act 1985, the directors had general and unconditional authority to offer, allot, grant options over or otherwise deal with or dispose of any un-issued shares of the company, to such persons at such times and generally on such terms in the manner as they think fit, save that no share might be issued at a discount. By article 2(B)(i) the directors were generally and unconditionally authorised for the purposes of section 80 of the Companies Act 1985 to exercise all powers of the company to allot relevant securities as defined in section 80 provided that the aggregate nominal value of such relevant securities allotted pursuant to this authority should not exceed the amount of the authorised but as yet un-issued share capital of the company at the date of incorporation. This authority was expressed to expire on the 5^th anniversary of the date of incorporation of the company but the relevant events in the present case occurred before that 5^th anniversary. It was also provided that this authority might be renewed, varied or revoked by an ordinary resolution of the company in general meeting. Article 2(B)(iv) provided that in accordance with section 91(1) of the Companies Act 1985, sections 89(1) and 90(1) to (6) of the 1985 Act should not apply to any allotment of equity securities as defined in section 94 of the 1985 Act.

Section 89(1) of the Companies Act 1985 stated that a company proposing to allot equity securities, as defined in section 94, is not to allot any of them on any terms to a person unless it has made an offer to existing shareholders to allot the same to existing share holders on the same or more favourable terms. Section 90 of the 1985 Act contains provisions as to the manner in which offers required by section 89(1) are to be made to existing shareholders. Section 91(1) of the 1985 Act provides that these provisions may be excluded by a provision contained in the memorandum or articles of the company and that was done in this case by article 2(B)(iv).

Article 4 provided that the directors might in their absolute discretion and without giving any reason refuse to register the transfer of a share to any person, whether or not it was a fully paid share or a share on which the company had a lien and regulation 24 of Table A (which was in different terms) was not to apply.

On 20^th October 2005, the holders of the two subscriber shares transferred those shares so that one share was transferred to Mr Harris and one share was transferred to Mr Jones. Shortly thereafter, Mr Harris and Mr Jones were registered as shareholders holding one each of the two issued shares of the company.

Mr Harris and Mr Jones did not at any time become directors of Zetnet. Mr John Hyslop was appointed a director on 20^th October 2005. Mr Paul Martin was appointed a director on 26^th January 2006. Mr Jones’ son, Mr William Jones, was appointed a director on 31^st January 2006 and he remained a director until 2^nd June 2006.

Zetnet was formed in order to buy certain assets of Zetnet Services Ltd, a company in administration. On 20^th October 2005, Zetnet Services Ltd, in administration, its administrators and Zetnet entered into a written agreement relating to the sale of certain assets of Zetnet Services Ltd. Clause 2.1 of the agreement identified the assets which were sold pursuant to the agreement. By clause 2.2, these assets excluded the book and other debts of Zetnet Services Ltd although, pursuant to clause 9.3 of the agreement, Zetnet was to collect those debts as agent for Zetnet Services Ltd, in consideration of which Zetnet was entitled to retain the first £50,000 of debts so collected. By clause 3.1, the price for the assets was £150,000. By clause 3.4, Zetnet was to pay a further consideration of £100,000 if it should turn out, within three months of the agreement, that the gross turnover of the underlying business during that period had exceeded £250,000. In fact, this event did not come about and no further payment became due pursuant to clause 3.4 of the agreement. The agreement was signed by Mr Harris on behalf of Zetnet. This was authorised by a resolution of the board of Zetnet on 20^th October 2005.

As to the purchase price of £150,000 for the assets acquired by Zetnet, £125,000 was advanced to Zetnet by Mr Jones and £25,000 was advanced to Zetnet by Mr Harris. On 11^th October 2005, Mr Jones e-mailed Halliwells, the solicitors acting for Zetnet in connection with the purchase, that he would advance £125,000 in order to “acquire 50% of the assets of Zetnet Services Ltd on my behalf”. On 18^th October 2005, Mr Harris sent to Mr Jones a copy of the draft purchase agreement. Mr Harris referred to “the initial consideration of £150,000”. He also stated that Harris Technology Ltd, a company controlled by Mr Harris, would raise an invoice for an additional £100,000 against Zetnet. This £100,000 was stated to be in respect of various outgoings and expenses in connection with the purchase of the company. The terms and timing of payment of the invoice of £100,000 was said to be agreed to be the same as the repayment terms for the initial £150,000 purchase consideration. In accordance with this e-mail, following the acquisition of the relevant assets at an initial purchase price of £150,000, Zetnet would owe £250,000. It would owe £125,000 to Mr Jones in relation to the sum advanced by him. It would owe £25,000 to Mr Harris in relation to the sum advanced by him. In addition, it would owe £100,000 to Harris Technology Ltd in relation to “outgoings and expenses”. Mr Harris told me that if the event referred to in clause 3.4 of the agreement had come about then it was Mr Harris, rather than Mr Jones, who would be expected to provide £100,000 to Zetnet to enable Zetnet to comply with clause 3.4. Based on the way matters are expressed in Mr Harris’ e-mail of 18^th October 2005, it does not seem that this contingent liability to pay £100,000 is the same as the subject matter of the invoice to be raised by Harris Technology Ltd. It is therefore not clear what the situation would have been if Mr Harris had been called upon to fund Zetnet’s payment of £100,000 pursuant to clause 3.4 and whether Mr Harris would have been entitled to be repaid that sum of £100,000 in addition to the £25,000 repayable to him and the £100,000 payable to Harris Technology Ltd. As the contingent liability under clause 3.4 of the agreement never crystallised, it is not necessary to examine this point further.

I was also told by Mr Harris that he and Mr Jones considered in October 2005 that it would be difficult for Zetnet, as a new company with no trading record, to obtain credit card facilities from a credit card provider. Harris Technology Ltd was able to resolve that problem for Zetnet. Harris Technology Ltd had an existing arrangement with a credit card provider and those arrangements could be used to collect payments due to Zetnet from its customers. Harris Technology Ltd would pay over the money so collected to Zetnet. Mr Harris stressed that these arrangements on the part of Harris Technology Ltd would involve the latter in some degree of risk. If Zetnet let down a customer who had paid Zetnet by credit card, that customer could make a claim on the credit card provider who could then claim to be indemnified by Harris Technology Ltd. Harris Technology Ltd would in turn expect to be indemnified by Zetnet but if Zetnet were in financial difficulties, Harris Technology Ltd might not be able to recover pursuant to its right of indemnity.

The e-mail of 18^th October 2005 does not identify the “various outgoings and expenses” in return for which Harris Technology Ltd was entitled to invoice Zetnet for £100,000. It seems to me likely that the outgoings and expenses, including any assessment of the risk which Harris Technology Ltd was taking on in relation to a credit card provider, were being very fully and generously compensated by the payment of £100,000.

Mr Jones replied on 18^th October 2005 to Mr Harris’ e-mail of 18^th October 2005. Mr Jones stated that he had not read the draft purchase agreement in detail but he would consider the final draft when it was produced. He also confirmed that he was “more than happy” with the content of Mr Harris’ e-mail.

I find that in October 2005, Mr Jones was aware of the terms of the agreement that was later entered into on 20^th October 2005. Mr Jones was therefore aware that the initial purchase price was £150,000 of which he was advancing £125,000. From Mr Harris’ e-mail of 18^th October 2005, Mr Jones was also aware that Mr Harris and Harris Technology Ltd, between them, were to receive in due course a payment of £125,000, even though Mr Harris was only advancing £25,000.

Mr Jones told me that he was “diddled” by Mr Harris. He also told me that this was part of the justification he had for his later actions in September 2007 which are at the centre of this dispute. I find that Mr Jones was not “diddled” in the sense that he was unaware of the fact that he, on the one hand, and Mr Harris of Harris Technology Ltd, on the other hand, would both receive the same sum of £125,000 from Zetnet. The exchange of e-mails on 18^th October 2005 does not provide any basis on which Mr Jones could have believed that the £100,000 payable to Harris Technology Ltd was the same £100,000 as might, but only might, become payable under clause 3.4 of the agreement. In October 2005, Mr Jones agreed the relevant terms with Mr Harris and had an adequate understanding of what those terms amounted to. However, as I will indicate, by September 2007, Mr Jones had come to believe that these terms were unduly favourable to Mr Harris and he resented that fact and his belief on that point contributed to his conduct towards Mr Harris in and around September 2007.

On 24^th October 2005, there was a board meeting of Zetnet. The minutes of that meeting state that it was attended by Mr Hyslop, William Jones, Paul Martin and Mr Jones. William Jones and Paul Martin are described as sales director and technical director respectively although they had not been formally appointed as directors at that stage. Mr Jones is described as a shareholder. Paragraph 3 of the minutes records an agreement that Zetnet would repay “loans from its shareholders” to the value of £250,000. These loans were to be repaid out of the operating profits of the business on a monthly basis until all the loans were repaid in full. It was estimated that the monthly repayments would be in the region of £20,000 per month. On that basis, it would take a little over one year to repay the loans of £250,000. The minutes also recorded that the business processed over 1,000 credit card transactions to the value of around £20,000 per month. It was also recorded that there were many operational issues to address within the business and that the company needed to grow its business.

On 6^th December 2005, Halliwells sent to Mr Harris certain draft documents which they had been asked to prepare. These were a draft shareholders agreement between Mr Harris, Mr Jones and Zetnet, draft articles for Zetnet, a draft option agreement between Mr Harris, Mr Hyslop and Zetnet and a draft service agreement for Mr Hyslop. The draft shareholders agreement provided for a further 199 shares to be allotted to Mr Harris and 199 shares to be allotted to Mr Jones. None of these documents was in fact entered in to although I was not given any explanation for that fact. Accordingly, it is not necessary to refer further to the draft shareholders agreement or the draft articles. The documents available at the trial did not include the draft option agreement or the draft service agreement concerning Mr Hyslop. There was evidence at the trial that there had been a discussion with Mr Hyslop that he should be given, or possibly granted an option to acquire, 10% of the shares in the company. It seemed to be common ground that matters did not proceed to a point where Mr Hyslop had any contractual entitlement to such rights.

Although these draft documents were never executed, it seems that in January 2006, some steps were taken to allot a further 199 shares to Mr Harris and a further 199 shares to Mr Jones. Although I was not told the detail of how it was achieved, it seems that these allotments were rendered or treated as ineffective and the trial proceeded on the basis that until September 2007, there were only two issued shares in Zetnet.

In June 2006, there was some discussion as to the share which had been vested in Mr Harris. On 21^st June 2006, Mr Gilbert, the company secretary of Harris Technology Ltd e-mailed Halliwells stating that the share vested in Mr Harris should be transferred to Mr Jones “if possible on the same date on which it was originally, in error, put into William’s name.” Although Mr Gilbert referred to there having been “an error” there was no evidence to suggest that there had been an error in October 2005 when a share was transferred to Mr Harris and he was registered as a member of the company. Although Mr Gilbert’s e-mail is not clear, what he appeared to ask Halliwells to do was to arrange for a transfer of this share from Mr Harris to Mr Jones together with an undated form transferring the share back again to Mr Harris.

Also on 21^st June 2006, Mr Gilbert sent a detailed schedule to Mr Harris describing the companies with which Mr Harris was involved. The schedule referred to a number of companies but did not refer to Zetnet. Mr Gilbert’s covering e-mail to Mr Harris of 21^st June 2006 stated: “Zetnet Ltd is wholly owned by Richard Jones, so it does not need to be included.” Mr Harris was asked what the purpose of Mr Gilbert’s schedule of 21^st June 2006 might have been. Mr Harris said he could not recall. It was suggested to him that this schedule was prepared to be used by Mr Harris in disclosing his assets in divorce proceedings in which Mr Harris was at that time involved. Mr Harris denied that suggestion. At a late stage in the trial, I was shown the Financial Statement of Mr Harris in those proceedings. The Financial Statement purported to show the business assets of Mr Harris. The statement is dated 12^th January 2007. It does not refer to Mr Harris being the beneficial owner of a share in Zetnet.

Mr Gilbert’s request on 21^st June 2006 that Mr Harris’s share be transferred to Mr Jones does not appear to have been immediately acted upon. On 11^th August 2006, Mr Jones signed a letter or note addressed to Mr Harris in these terms:

“Re:- ZETNET LTD

This letter is to confirm that I, RICHARD ERIC GRAHAM JONES hold in trust for you or in the event of your demise for your children ONE, (1) share in the above company. This one share representing 50% of the company.”

On 25^th August 2006, Mr Harris executed a stock transfer form in relation to his share in favour of Mr Jones. The consideration money was stated to be nil. The second page of the stock transfer form contained various statements as to why the transfer was not liable to ad valorem stamp duty. Mr Harris signed this page to the effect that the transfer of the share was not by way of sale and he added the words “subscriber share was incorrectly transferred in to the name of W Harris instead of R Jones”. As before, there was no evidence that the transfer of the share to Mr Harris in October 2005 involved any error at that time.

At the same time as Mr Harris transferred his share to Mr Jones, Mr Jones executed a stock transfer form in relation to one share in favour of Mr Harris as transferee. The stock transfer form was undated and the consideration money was left blank.

There was considerable dispute at the trial as to why Mr Harris transferred his share to Mr Jones in August 2006 on terms that Mr Jones was to hold the share on a bare trust for Mr Harris. Mr Jones asserted that this was done so as to enable Mr Harris to conceal his ownership of the share in his divorce proceedings. Mr Harris denied that that was any part of his intention and he told me it was done as a matter of tax planning on the advice of his accountant, Mr Stephen Jones.

In his witness statement, Mr Harris dealt with the allegation that he was trying to conceal his ownership of the share from his wife in the divorce proceedings. He said that his wife was aware during their marriage that he was the joint owner of Zetnet and that he “disclosed my beneficial interest in Zetnet during the divorce proceedings”. When Mr Harris was called to confirm the truth of his witness statement as his evidence in chief, he said that he was withdrawing that statement from his witness statement not because it was untrue but because it was irrelevant to the issues in the case.

Mr Harris’ accountant, Mr Stephen Jones gave evidence that he advised Mr Harris that Mr Harris’ share should be transferred to Mr Jones to be held on trust for Mr Harris. Mr Stephen Jones attempted to describe the tax planning consequences of that action. As I understood his evidence, which was far from clear on the point, Mr Jones was saying that it was in Mr Harris’ interests for the share to be in the name of a third party so that when it was later decided whether it was more tax advantageous for the share to be owned by a company controlled by Mr Harris (possibly with tax losses) or by Mr Harris personally, a decision could be made as to the person on whose behalf Mr Jones would be said to be holding the share. That seemed to me to involve the possibility that when the time came a statement would be made that the share had at all times been owned beneficially by a company controlled by Mr Harris whereas that statement was not true at any time up to and including August 2006.

Mr Harris served a witness statement from his former wife. In that witness statement, she said that she was aware during her marriage that Mr Harris was a joint owner of Zetnet and, further, that during the course of the divorce proceedings, her solicitors were formally notified by Mr Harris’ solicitors of his interest in Zetnet. Mr Harris did not call his former wife to give evidence on his behalf.

Mr Jones, in his witness statement, referred to a conversation which he said he had with Mrs Harris in June 2010. According to Mr Jones, Mrs Harris said she had no knowledge whatsoever of Mr Harris’ interest in Zetnet at the time of her divorce. Mr Jones also said that Mrs Harris said she had signed the witness statement to which I have referred under duress. Mr Jones called Mrs Harris to give evidence on his behalf. She explained that she knew there was a business relationship between Mr Harris and Mr Jones. She had seen payments from Zetnet into Mr Harris’ bank account. She did not know of the position in relation to Zetnet but she was suspicious that he might have had an interest in Zetnet because of the payments showing in his bank account. She said that Mr Harris’ interest in Zetnet was not disclosed in the divorce proceedings. When cross-examined, she stated that she understood Zetnet was a fledgling business and she did not know if it was worth anything. She said that the witness statement to which I referred was signed by her voluntarily and was true.

Mr Jones also called Mr Hyslop, the managing director of Zetnet, who gave evidence that in around August 2006 at a lunch meeting attended by himself and Mr Harris, Mr Harris told Mr Hyslop that he had transferred his share in Zetnet to Mr Jones to be held on behalf of Mr Harris in order to conceal Mr Harris’ interest in Zetnet from his wife in the divorce proceedings.

I have referred to the purpose for the transfer of the share into Mr Jones’ name in August 2006 in a little detail because it occupied a considerable amount of time at the trial. For the reasons which I have already given, the purpose behind the creation of the trust of the share does not affect Mr Harris’ ability to demonstrate that the share was held by Mr Jones on trust for Mr Harris nor does the supposed purpose affect the nature of the duties owed by Mr Jones as trustee to Mr Harris. However, the resolution of the issue might have been material to the credibility of Mr Harris as a witness.

The evidence as to the purpose for the transfer of the share in August 2006 is somewhat tangled and plainly conflicting. It is not easy to make firm and confident findings as to where the truth lies. On the balance of probabilities I find the following:

In July 2006, Mr Harris and Mr Jones, instructed Mr Perkins of G A Associates (Holdings) Ltd (“G A Associates”) to assist them in selling their shareholding in Zetnet. G A Associates prepared a document setting out certain information about Zetnet to assist with a prospective sale of the shareholding. The document was dated July 2006. It contained a “summary of financial information” which referred to current and projected management accounts for the year 1^st October 2005 to 30^th September 2006. These figures showed sales of £1,005,243. a gross profit of £658,010 and a net profit of £352,650. The document spoke in confident terms about the strength of the business of Zetnet. It was said that Zetnet was growing its customer base and it attributed its strong and profitable growth to the quality of its products and services, customer support and resulting low churn levels. The document contained some four pages of monthly figures for profit and loss and a balance sheet for the period October 2005 to June 2006. The assets of the company included debtors standing at some £92,000.

On 4^th June 2006, a potential bidder for the shares in Zetnet, eDirectory.co.uk.plc offered to purchase the shares for one and a half times the turnover of Zetnet for the year 2005. This price was to be paid principally in eDirectory.co.uk.plc shares but with the first £50,000 of that sum being paid in cash. This offer was not accepted by Mr Harris and Mr Jones.

In the period August to October 2006, Mr Harris and Mr Jones were in discussion with another possible purchaser of their shares, namely, Link-Connect Ltd.

In November 2006, Biscit Plc offered to acquire the shares in Zetnet for a cash consideration of £1.21m. Discussions with Biscit Plc continued until in around February 2007 when it went into administration; that company withdrew its offer to purchase on the eve of the administration. Zetnet appears to have offered to acquire certain of the assets of Biscit Plc in administration but that matter did not proceed.

At some point, audited accounts were prepared for Zetnet for the period just in excess of one year from 6^th October 2005 to 31^st October 2006. The copy of these accounts in the documents before me is undated and unsigned. The profit and loss account for that period showed a turnover of £857,851, a gross profit of £496,010, an operating profit of £37,956 and a net profit on ordinary activities before taxation of £37,951. These figures are calculated after deduction of £100,000 which was described as “exceptional administrative costs”. This deduction was not explained in the evidence before me but it is possible that the exceptional administrative costs represented the sum payable to Harris Technology Ltd. The balance sheet in the draft accounts showed net assets of £10,853. The current assets included debtors of £110,420. The accounts stated that the company was controlled by Mr Jones. And that Mr Jones “has a loan balance from the company of £16,800”. Although that phrase is not wholly clear, I interpreted it to mean that the company owed Mr Jones £16,800. As Mr Jones had originally lent £125,000 to the company, it would seem that the greater part of that loan had been repaid. The evidence also suggested that when repayments were made to Mr Jones, Mr Harris or Harris Technology Ltd, received payments of equivalent amount towards the total liability of the company to them of £125,000. That evidence would therefore suggest that by 31^st October 2006, Mr Harris and Harris Technology Ltd had received most of the combined figure of £125,000 due to them.

On 1^st December 2006, Mr Jones on behalf of himself and Mr Harris signed a retainer letter in relation to Halliwells. That firm of solicitors was retained to act for Mr Harris and Mr Jones in relation to the sale of their shareholding in Zetnet. The terms of the retainer were that the solicitors were engaged on a contingent fixed fee basis of £30,000 plus VAT, payable on completion. It was stated that if the transaction did not complete then no fee or disbursement charges would be made. This arrangement caused difficulty in due course.

On 10^th April 2007, ECS, chartered management accountants, wrote to Mr Hyslop of Zetnet stating that they had reviewed the un-audited accounts of Zetnet for the period 1^st November 2006 to 28^th February 2007. The letter attached a profit and loss account for that period and a balance sheet as at February 2007. The management accounts for the four month period were said to show sales of £258,396, a gross profit of £155,990 and a trading profit before tax of £63,175. The balance sheet showed net assets of £74,028. The current assets included debtors of £157,576.

By May 2007, Mr Harris and Mr Jones were in discussion with another potential buyer, Solutrea Ltd which was a subsidiary of a Canadian company. On 8^th May 2007, Solutrea stated that subject to board and exchange approval, it would pay a price for the shareholding of £857,000 or a non-refundable deposit of £35,000. On the same day, Solutrea wrote to Mr Hyslop and Mr Jones expressing concern about one aspect of the business suggesting it would take time and investment to correct the shortcoming.

On or about 25^th May 2007, Solutrea paid to Halliwells, on behalf of Mr Harris and Mr Jones, a non-refundable deposit of £35,000. By 21^st June 2007, Solutrea revised its offer to purchase these shares. A revised offer was made to pay 50% of the purchase price in cash with the rest in shares in Solutrea’s Canadian parent. Later, on 29^th June 2007, Solutrea informed Mr Jones that its parent had decided not to proceed with the acquisition of the shareholding in Zetnet. Solutrea told Mr Jones that it needed to terminate the arrangements with Mr Harris and Mr Jones. On or about 4^th July 2007, Halliwells wrote to Solutrea stating that the matter was at an end and the deposit of £35,000 was forfeited. Although the negotiations with Solutrea appeared to come to a halt in early July 2007, Mr Jones gave evidence that he did continue to discuss the matter with representatives of Solutrea from time to time after that date.

It seems that by around June 2007, Mr Harris and Mr Jones, through Mr Perkins of G A Associates was in contact with another potential buyer namely Universal Utilities PLC, trading as Unicom. At that point, G A Associates had identified an asking price for the shares in Zetnet of £900,000 and Unicom offered the asking price. Its offer was accepted. In June 2007, Unicom instructed its solicitors to draw up a share and purchase agreement and heads of terms for the sale and purchase of the shares in Zetnet were signed on behalf of Unicom on 6^th July 2007. Unicom set about doing due diligence in connection with the intended purchase of the shares in Zetnet. The chief executive officer of Unicom was Mr Clarke, who gave evidence at the trial. He lived in the same area as Mr Harris and knew Mr Harris socially. The introduction of the transaction to Unicom was not made by Mr Harris but was made by G A Associates but it later emerged that Mr Clarke and Mr Harris were both involved and knew each other. Mr Clarke left the detailed progress of the matter and in particular the due diligence to Mr Earle and Mr Eagleton, the latter being the finance director of Unicom.

Mr Clarke told me that Unicom considered that the management accounts provided by Zetnet were inaccurate in that the actual turnover of the company was substantially less than the figure recorded in the accounts. He also told me that Unicom raised questions about the aged debt of Zetnet.

I was shown next to no documentary material as to the communications between Unicom and any representative of Zetnet in relation to the due diligence carried out by Unicom. An exception is an e-mail from Mr Eagleton to Mr Hyslop on 25^th July 2007. This refers to an analysis of turnover as compared with actual receipts from customers. The e-mail refers to cash receipts being less than the reported turnover at an average of £11,321 per month. This meant that if the reported costs in the relevant period were correct the total profits would be reduced from £101,205 to £44,600 and average monthly profits from £20,241 to £8,920. Mr Eagleton asked Mr Hyslop to explain why his analysis was incorrect. I was not shown any answer which Mr Hyslop (or anyone else) gave or attempted to give to Mr Eagleton’s question.

Mr Clarke told me that Unicom had two reasons for being interested in buying the shares in Zetnet. The first was to purchase the turnover and profit and, indeed, to increase that turnover and profit by reason of synergies between the business of Zetnet and the business of Unicom. The second reason was that the acquisition of Zetnet would allow cross-selling opportunities between Zetnet and Unicom. Mr Clarke described the concern expressed to him by Mr Eagleton as to the aged debt position of Zetnet. It seemed to Unicom that Zetnet’s balance sheet was inaccurate and this would mean that the profits of the company were inflated. This meant that Unicom was not willing to pay £900,000 for the shares. Mr Clarke stated that if the issues could be ironed out, the shares in Zetnet might still be worth £700,000. The way the matter was left was that Unicom said that it would not buy the shares for £900,000. Unicom pointed out the errors which caused them concern. Unicom did not try itself to restate the accounts. Unicom stated that it wanted to see proper accounting information which would form part of contractual warranties in any sale and purchase agreement. The onus was placed on Zetnet to go away and present the accounting information in a proper way whereupon Unicom would look at it again. Mr Clarke expressed these views to Mr Harris direct. Mr Harris did not dispute what Mr Clarke was saying but stated that he would go and get the financial information in a proper state and come back to Mr Clarke. Mr Clarke expected Mr Harris to come back to him but he never did. Mr Clarke did not expect Mr Jones to come back to him as Mr Clarke had had limited dealings with Mr Jones. After August 2007, Unicom was involved in a major commercial transaction and did not itself follow up the possibility of buying the shares in Zetnet. Mr Clarke said that if the amendments to the financial information had been in line with Unicom’s expectations then Unicom expected to make an offer of the order of £700,000.

One of Mr Harris’ claims against Mr Jones is that Mr Jones as trustee of one share failed to follow up negotiations with Unicom. In particular, Mr Harris contends that Mr Jones ought to have done what Unicom had requested, namely, restate the accounts of Zetnet. I have found that Mr Clarke explained directly to Mr Harris what Unicom wanted in terms of restated accounts. There was no specific evidence that Mr Harris told anyone at Zetnet that this is what Unicom wanted and that Zetnet should comply with Unicom’s request. In particular, there was no specific evidence that Mr Harris told Mr Jones what Unicom was requesting so that Mr Jones would know that, in order to sell the share he held as trustee for Mr Harris, he ought to procure Zetnet to comply with Unicom’s request. What Mr Harris did was something different. I will make my findings in later paragraphs to the effect that Mr Harris decided that this was the time to withhold from Zetnet monies due to it from Harris Technology Ltd and to insist that Zetnet provide a debenture in relation to the contingent liability of Harris Technology Ltd in respect of credit card payments. Further, I will make findings as to Mr Harris insisting that Mr Hyslop take action to recover aged debt owed to Zetnet, threatening to dismiss Mr Hyslop and threatening to put Zetnet into administration.

In addition, Mr Harris has not attempted to show the court what such restated accounts might have shown. Nonetheless, Mr Harris contends that the restated accounts when shown to Unicom would have persuaded Unicom to make an offer to buy the shares in Zetnet at a price of not less than £700,000, that such an offer should have been accepted and the resulting agreement would have been carried into effect by Unicom.

It is relevant at this point to refer to a number of ways in which the financial position of Zetnet were discussed in the contemporaneous documents around this time. I will refer to these documents in chronological order as I continue to make my findings of fact but it is helpful to bring together at this point a number of matters which emerge from those documents.

I start with an e-mail from Mr Halliwell of Halliwells to Mr Harris and Mr Jones on 19^th August 2007. This was after Unicom had withdrawn its offer of £900,000. Mr Halliwell asked Mr Harris and Mr Jones to pay him fees which he said were due for some ten months of work carried out by his firm. I have already described that on 1^st December 2006, Mr Harris and Mr Jones agreed terms with Mr Halliwell whereby a fixed fee of £30,000 plus VAT would be payable contingent upon completion of a sale of the shareholding. Plainly by 19^th August 2007, there had not been a sale of the shareholding. Mr Halliwell, nonetheless, contended that he was entitled to be paid his fee out of the deposit of £35,000 received from Solutrea. In addition, he commented upon his understanding of the financial position of Zetnet. He said that Zetnet was not worth what Mr Harris and Mr Jones had said it was worth. He said that Zetnet had been fundamentally mismanaged and the misrepresentation as to its worth was so fundamental as to give Halliwells the right to repudiate any contingent fee arrangements.

Mr Jones discussed Mr Halliwell’s e-mail of 19^th August 2007 with Mr Harris and on 20^th August 2007, Mr Jones replied to Mr Halliwell. Mr Jones contended that Zetnet had not been mismanaged and its financial position had not been misrepresented. He then said that Unicom was unable to complete due to the aged debt position but Mr Jones described this as “an entirely normal negotiating stance”. Taken on its own, that comment might suggest that Mr Jones saw the prospect of further negotiations with Unicom. Conversely, it must be remembered that the purpose of Mr Jones’ e-mail to Mr Halliwell was to resist the assertion that Zetnet was not worth what Mr Halliwell had been led to believe.

Mr Harris expressed his own views about the position in relation to Unicom in an e-mail he sent to Mr Jones and others on 27^th September 2007. Mr Harris said that it was clear from the due diligence undertaken by Unicom and subsequent information as to current and aged debtors that there had been significant misrepresentation of the trading position of Zetnet. He referred to the need to have a financial controller assess the cash and turnover figures which Mr Hyslop was producing and he referred to “the significantly worsening debtors position”. He contended that Mr Hyslop had continually lied to Mr Harris and Mr Jones. He added that the performance of Zetnet was appalling, the decline in repeat revenues was massive and the debtors position was unexplainable. He referred to the agreement with Unicom having gone “embarrassingly wrong”. He also referred to the company being “in terminal decline”.

Somewhat later on 28^th November 2007, Berg Legal, solicitors acting for Mr Harris and Harris Technology Ltd, wrote in detail to Aaron & Partners LLP, solicitors acting for Mr Jones. The letter from Berg Legal set out Mr Harris’ version of the relevant events. At paragraph 11 of that letter, Berg Legal referred to Unicom withdrawing from the transaction. At paragraph 12, the letter stated: “Mr Harris felt that any further attempt to promote or sell the business should be withheld pending a review of the financial position.” Paragraph 17 of the letter refers to “a third party” being interested in Zetnet at a price of approximately £700,000. At the trial, it was suggested that this third party must have been Unicom. It is far from clear that that suggestion is right. The fact that the letter refers to Unicom in one place and does not identify the third party as Unicom, suggests that the third party was someone else.

In August 2007, Mr Harris was involved in a very serious car accident and he was seriously injured. Mr Harris was immediately taken to hospital where he stayed for some time and he made return visits to hospital over the ensuing months. Mr Harris’ description of his injuries was that they were very serious and put him out of action in connection with the business of Zetnet for some time. I accept that Mr Harris was very seriously injured and that his injuries and his recovery must have been a priority matter for him. However, the documents do disclose that Mr Harris continued to take action or attempted to take action in connection with the affairs of Zetnet during this period. I will not recount all of the indications in the documents of Mr Harris being involved although when I describe the events which occurred, it can been seen that Mr Harris was taking action in various respects. For example, even in the period immediately after the car accident, Mr Harris and Mr Jones were able to discuss the reply to be sent to Mr Halliwell’s e-mail of 19^th August 2007. A further e-mail from Mr Jones on 24^th August 2007 suggests that Mr Harris and Mr Jones were still in communication. I was also shown a witness statement by Mr Gilbert, the company secretary of Harris Technology Ltd in which Mr Gilbert refers to Mr Harris contacting him in early September 2007 asking him to send an invoice from Harris Technology Ltd to Zetnet for £25,000. That invoice was apparently sent on 5^th September 2007, although I have not seen a copy of it. On 14^th September 2007, Hacker Young (to whom I will later refer) sent an e-mail to Mr Harris referring to “our recent e-mails” which suggests there had been more than one contact between Mr Harris and Hacker Young shortly before 14^th September 2007. On 19^th September 2007, Mr Gilbert wrote to Mr Halliwell at Mr Harris’ request. Shortly before 26^th September 2007, there appears to have been a contentious meeting between Mr Harris and Mr Jones.

I next need to consider the evidence I was given as to the cash flow position of Zetnet in early September 2007. The evidence touched on a number of matters. These included: (1) the debts which Zetnet urgently needed to pay; (2) an issue as to whether Harris Technology Ltd withheld from Zetnet monies that were properly due to Zetnet; and (3) Harris Technology Ltd’s invoice of 5^th September 2007.

The position in relation to debts immediately due from Zetnet is reasonably clear. On 14^th September 2007, Hacker Young wrote to Mr Harris stating that £43,000 was due to HM Revenue & Customs. This figure was supported by the evidence of Mr Hyslop and Mr Jones. The payment was due in respect of VAT. Hacker Young’s e-mail of 14^th September 2007 also refers to £121,000 being due to Legend Communications. I have no reason to doubt that that sum was indeed due although the evidence did not suggest that Legend Communications were pressing for payment. I find that sums were due on a regular basis to Legend Communications and if Zetnet had stopped paying Legend Communications the result could have been very serious. Legend Communications would have been able to cease supplying its services to Zetnet which would result in Zetnet being unable to perform its obligations to its customers. Such an event could result in Zetnet going into a spiral of decline and failure.

I am also able to make findings about the invoice of 5^th September 2007. That invoice is explained by Mr Gilbert in his witness statement. That witness statement was prepared on behalf of Mr Harris but Mr Harris did not call Mr Gilbert and did not serve a notice under the Civil Evidence Act 1995 in relation to his statement. However, Mr Jones wanted me to take into account Mr Gilbert’s statement and counsel for Mr Harris agreed that I could take it into account although I should take it into account as a whole rather than only selected parts of it. Mr Gilbert describes the invoice of 5^th September 2007 being for £25,000 which was the remaining sum outstanding from the total of £100,000 originally agreed to be paid by Zetnet to Harris Technology Ltd. Mr Jones referred to Mr Harris raising “spurious invoices”. I imagine Mr Jones included this invoice in his description. I am sure that Mr Jones persuaded himself that these monies were not due to Mr Harris and he also persuaded himself that Mr Harris had “diddled” him. However, based on the contemporaneous material from October 2005, I find that Zetnet had bound itself to pay £100,000 to Harris Technology Ltd and, accordingly, the sum of £25,000 was indeed due to that company. Mr Gilbert stated that Mr Harris raised the invoice of 5^th September 2007 because he was concerned about the financial position of Zetnet at that stage and wanted to try to secure payment of outstanding monies as soon as possible.

The other issue as to the financial standing of Zetnet concerned the allegation that Harris Technology Ltd was withholding money properly due from it to Zetnet. The sum withheld is said to have been initially some £42,000, later reduced to approximately £36,600. Indeed, at one time, Zetnet sued Harris Technology Ltd in the county court to recover the alleged debt. The debt claimed was at one time joined with the two actions which came before me at this trial but the debt claim was dismissed by Mr Justice Norris on 23^rd February 2011. I understand that the claim was dismissed essentially on the ground that Zetnet had been dissolved. The debt claim was not tried on its merits. For whatever reason, neither party showed me the pleadings in the debt claim. Those pleadings might have been of assistance in determining this issue. In the end, counsel for Mr Harris submitted that in the absence of evidence as to the merits of the debt claimed, I was obliged to make a finding that Harris Technology Ltd had not withheld any monies from Zetnet. In my judgment, I ought to do the best I can on the material which I do have to see if I am able to make a finding as to this issue.

Mr Hyslop and Mr Jones both gave evidence that Harris Technology Ltd had collected monies from Zetnet’s customers pursuant to the earlier credit card arrangement and Harris Technology Ltd had failed to account for those monies. Mr Harris gave evidence that Harris Technology Ltd had not failed to pay over any monies which were due to Zetnet.

As I understood their evidence, Mr Hyslop and Mr Jones placed the time at which the monies were withheld by Harris Technology Ltd as being in the period of August and early September 2007.

This issue as to monies withheld has been referred to in correspondence and in the pleadings in the section 994 petition. On 18^th October 2007 Aaron & Partners acting for Mr Jones stated that Mr Harris should release the money belonging to Zetnet held by Harris Technology Ltd. There does not appear to have been a specific response to that statement. On 10^th December 2007, Aaron & Partners wrote to Berg Legal stating that Zetnet had been in desperate need of funds in September 2007 because Harris Technology Ltd, at Mr Harris’ direction, had refused to account for money collected by Harris Technology Ltd from Zetnet’s customers. Berg Legal replied to this letter on 17^th December 2007. They referred to monies “allegedly withheld by a separate trading entity” but did not explain the matter any further.

The dispute about monies allegedly withheld by Harris Technology Ltd is referred to in the Amended Defence and the Reply in the section 994 proceedings. Paragraph 10.6 of the Amended Defence refers to monies being withheld amounting to approximately £38,000, to the debt claim and also to “a spurious invoice” for £25,000. The Reply refers to this matter in paragraphs 6(b), 8(c) and 18. It is clear from the Reply that Harris Technology Ltd did collect money from Zetnet’s customers and did decline to pay it over to Zetnet. It is clear that Harris Technology Ltd asserted a right of set off against these monies to pay itself the £25,000, the subject of the invoice of 5^th September 2007. I infer that Harris Technology Ltd withheld the credit card monies in the first instance then raised the invoice of 5^th September 2007 to give itself a right of set off against the monies it had withheld. I have already held that the sum of £25,000 was contractually due to Harris Technology Ltd from Zetnet and no point was raised at the trial as to whether a right of set off could be claimed.

However, a question remains as to whether Harris Technology Ltd withheld precisely £25,000 of the credit card monies so that when the set off was exercised, no further sums were due to Zetnet. The sum claimed in the debt claim was £36,640.13. Mr Hyslop told me that the monies withheld were originally some £42,000. Mr Jones told me that the claim for approximately £36,000 reflected the fact that Mr Harris originally withheld more monies but then paid back approximately £7,000 leaving a balance of some £36,000. Mr Harris denied that Harris Technology Ltd had withheld any money at any time. In my judgment, the appropriate findings are that prior to early September 2007, Harris Technology Ltd withheld a sum of approximately £42,000 which had been collected from Zetnet customers. Harris Technology Ltd exercised a right of set off against those monies in the amount of £25,000. Harris Technology Ltd was legally entitled to exercise that right of set off. Harris Technology Ltd later paid some £7,000 to Zetnet, I infer that this payment was much later than the critical events in September 2007. The total sum ultimately withheld was, I find, £36,640.13 against which Harris Technology Ltd was entitled to exercise a set off of £25,000. Allowing for the set off, Harris Technology Ltd wrongfully withheld £11,640.13 although in early September 2007 it was wrongfully withholding a larger sum, approximately £7,000 larger than that figure.

Around this time, Mr Harris asked Zetnet for a debenture to be granted by Zetnet to Harris Technology Ltd. Mr Harris justified that request on the grounds that Harris Technology Ltd might be liable to the credit card provider in certain circumstances. If customers of Zetnet had a claim against Zetnet and those customers had paid by credit card, the customers could claim compensation from the credit card provider who would then claim an indemnity from Harris Technology Ltd. Harris Technology Ltd would then be able to claim an indemnity from Zetnet but if Zetnet were in financial difficulties, Harris Technology Ltd might not be able to collect on its right of indemnity. This matter was also explained by Mr Harris in his e-mail of 27^th September 2007 to Mr Jones and others. Mr Harris accepted that Harris Technology Ltd had not required an indemnity in October 2005 when the original arrangements for credit card payments were made. The reason for the request for an indemnity in September 2007 was said to be because the due diligence undertaken by Unicom and other matters showed that there was a significant misrepresentation of the trading position of Zetnet so that Harris Technology Ltd was subject to an increasing risk of default by Zetnet. Zetnet declined to grant the debentures sought by Mr Harris. If Zetnet had granted a debenture to Harris Technology Ltd and that debenture had satisfied the definition of “a qualifying floating charge” in paragraph 14 of schedule B1 to the Insolvency Act 1986, then the debenture holder would have been entitled to place Zetnet in administration. Mr Hyslop told me that Mr Harris did threaten to put Zetnet into administration. Mr Harris denied that he had ever issued such a threat but I prefer the evidence of Mr Hyslop on that point.

Prior to early September 2007, there was a telephone conversation or conversations between Mr Harris and Mr Hyslop, about which I heard evidence at the trial. Mr Harris was very unhappy about what had emerged in the due diligence exercise undertaken by Unicom and by the fact that Unicom had withdrawn its offer to buy the shares in Zetnet. Mr Harris was very concerned about the financial position of Zetnet. Mr Harris sought to protect Harris Technology Ltd by withholding credit card monies due from Harris Technology Ltd to Zetnet, setting off an invoice for £25,000 against those credit card monies and asking for a debenture in favour of Harris Technology Ltd in relation to a potential liability to the credit card provider. Against that background Mr Harris expressed himself very strongly to Mr Hyslop. Mr Hyslop said that Mr Harris’ behaviour was “obnoxious” and he told Mr Harris that he, Mr Hyslop, would change his mobile telephone number so as not to expose himself to similar conversations with Mr Harris again. Mr Hyslop also decided not to provide Mr Harris with financial information about Zetnet. Mr Hyslop was encouraged to do this when, in due course, he was advised by Hacker Young that, because Mr Harris was not a registered share holder, the directors of Zetnet did not owe an obligation to provide information to Mr Harris. When Mr Harris wanted a financial controller appointed by him to consider the accounting position of Zetnet, Mr Hyslop would not permit the controller to investigate the position. In the conversation or conversations between Mr Harris and Mr Hyslop, Mr Hyslop told Mr Harris that there was a VAT bill which Zetnet had to pay. Mr Hyslop asked Mr Harris to release the credit card monies withheld by Harris Technology Ltd. Mr Harris declined to do so. Mr Harris told Mr Hyslop to collect monies from Zetnet’s debtors. Mr Hyslop told me that Zetnet was doing what it could to collect from its debtors. Mr Harris threatened to remove Mr Hyslop as a director of Zetnet. Mr Harris said that he held a stock transfer form in relation to one share in Mr Jones’ name and Mr Harris would become a shareholder again. Mr Harris said that he would call an emergency shareholders meeting. Mr Harris also told Mr Hyslop that he would seek to put Zetnet into administration.

In early September 2007, Mr Hyslop and Mr Jones regarded the financial position of Zetnet as serious. It did not have the means to pay VAT of £43,000 which was due. Mr Hyslop (and possibly Mr Jones as well) sought the advice of accountants UHY Hacker Young (“Hacker Young”). They advised Mr Hyslop of what was involved in putting Zetnet into administration. In particular, Mr Hyslop was advised that it was open to him to serve a notice of intention to appoint an administrator and that the service of such a notice would give Zetnet the benefit of an interim moratorium pursuant to paragraph 44 of schedule B1 to the Insolvency Act 1986. Mr Hyslop was advised that the service of such a notice would give Zetnet “a breathing space” and time to work out what it could do to resolve its cash flow crisis.

On 7^th September 2007, Mr Hyslop and Mr Martin, acting as the board of Zetnet, had a telephone meeting. A minute of the meeting recorded the advice given by Hacker Young to the effect that Zetnet was or was likely to be unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 and that the directors should consider filing for administration. The board resolved that having regard to the financial position of the company, it would be in the best interests of the company and its creditors for the directors to file for administration. A notice of intention to appoint an administrator was prepared, supported by the statutory declaration of Mr Hyslop and filed with the court on 7^th September 2007. Mr Hyslop’s statutory declaration declared that Zetnet was or was likely to become unable to pay its debts. Mr Hyslop told me that on 7^th September 2007, his intention, or his hope, was to avoid administration but that he wished to have the benefit of the interim moratorium which had been explained to him by Hacker Young. He was criticised by counsel for Mr Harris for giving a notice of intention to appoint an administrator when it was not his firm settled intention to appoint such an administrator, as he hoped he could avoid the appointment. There was discussion at the trial as to whether it was proper for Mr Hyslop to act in the way in which he had done. It is not necessary for me to examine that question. It is sufficient for present purposes to make a finding that Mr Hyslop’s intention when giving the notice of 7^th September 2007 was to obtain a breathing space for the company to explore the possibility of obtaining funding to resolve the cash flow crisis.

Mr Harris became aware of the notice of 7^th September 2007. He contacted Hacker Young. There were some e-mail communications between Mr Harris and Hacker Young which I have not seen. I was however shown an e-mail of 14^th September 2007 from Hacker Young to Mr Harris. This attached management accounts for the period May to July 2007. Mr Harris had obviously asked for “current management information” and these accounts were provided. Hacker Young also told Mr Harris of the debt of £121,000 owed to Legend Communications and of £43,000 to HMRC. Hacker Young asked for Mr Harris to give details of his offer to purchase the business. Mr Harris accepted that he did offer to purchase the business at that time but I was not given any details of what he offered or what he intended.

There was considerable activity on 17^th, 18^th and possibly 19^th September 2007 which led to various transactions which are central to the present dispute. Before reciting the form and contents of the documents that were entered into, I will describe the oral evidence as to these events. Mr Hyslop and Mr Jones told me that they wanted to find a source of money to resolve the company’s cash flow crisis. Mr Hyslop asked Mr Jones to provide the necessary funds but Mr Jones was unable to provide sufficient funds. Mr Hyslop and Mr Jones did not ask Mr Harris to provide any funds. At this point, Mr Paul Martin, the other director of the company, proposed himself and his parents as a source of funding. That proposal was followed up and was eventually given effect. Neither Mr Hyslop nor Mr Jones appear to have tried any other source of funds. The commercial terms that were ultimately entered into with Mr Martin and his parents were negotiated by Mr Jones. Mr Hyslop and Mr Jones sought advice on the courses of action which were open. They sought this advice from accountants, Bennett Brooks, from a firm of solicitors in the same building as Bennett Brooks and then from other solicitors, Aaron & Partners. This advice focused on the fact that only two shares out of the authorised share capital of 1000 shares had been issued. The advice was that the remaining 998 shares could be allotted. It was also pointed out that it was not necessary to make an offer to existing share holders on a pre-emptive basis pursuant to section 89(1) of the Companies Act 1985 because section 89(1) was excluded by article 2(B)(iv) of the Company’s Articles. This meant that it was not necessary to offer shares to Mr Jones as trustee for Mr Harris or, if Mr Harris himself became registered as a member again, it would not be necessary to offer shares to Mr Harris. Mr Jones and Mr Hyslop thought that this cleared the way to an allotment of shares in return for funding. Mr Jones appears to have been considerably encouraged by the advice that Mr Harris was not entitled, directly or indirectly, to a right of pre-emption in relation to the allotment of shares. I find that Mr Jones gave no thought whatever to his duties as a trustee of one share holding the same for Mr Harris. Mr Jones told me that he felt justified in disregarding the interests of Mr Harris for two reasons, firstly, because Mr Harris had created the cash flow crisis and, secondly, Mr Harris had initially duped Mr Jones.

In the negotiations which Mr Jones had with Paul Martin and his parents, it seems that the Martin family initially wanted all 998 shares in return for funding. Later, Mr Jones agreed with the Martin family that the Martin family should provide funds in return for 51% of the total share capital of 1000 shares. Mr Jones and Mr Hyslop then agreed with Paul Martin and his parents the following essential terms. Paul Martin would advance £40,000 and receive 340 shares. Paul Martin’s parents would advance £20,000 and receive 170 shares. The effect would be that the Martin family would have 510 shares or 51%. Mr Jones would advance £10,000 and receive 398 shares. Mr Hyslop would advance £10,000 and would receive 90 shares. It does not appear to be in dispute that Paul Martin and his parents did in the end advance £60,000 between them. There is an issue as to whether Mr Jones advanced £10,000. I accept his evidence that he did. There is no dispute in relation to Mr Hyslop. It is agreed that Mr Hyslop did not advance any sum although he did receive 90 shares.

While all relevant parties were carrying into effect the arrangement about the provision of funding in return for shares, someone at Bennett Brooks suggested that in addition to the funders being issued with shares in the company, the company should treat the funding as a loan made to the company, such loan to be repayable and to be secured by a debenture in favour of the lender.

Various documents were entered into on 17^th and 18^th or possibly 19^th of September 2007. The documents were prepared to give the impression that they had been entered into in a particular sequence. However, I am satisfied on the evidence that these documents to which I will refer were part of a composite transaction.

I will now describe the documents in an order which reflects the dates they bear. There are minutes of a meeting of the directors of the company, attended by Mr Hyslop and Mr Martin, on 17^th September 2007. The minutes record that Mr Hyslop and Mr Martin declared the nature of their interests in the business to be transacted in accordance with section 317 of the Companies Act 1985. The minutes then record proposed loans to be made to the company. The proposed loans were £40,000 by Paul Martin, £20,000 from Mr Martin’s parents, £10,000 from Mr Hyslop and £10,000 from Mr Jones. The minutes then referred to four debentures to be entered into by the company in favour of the lenders. The minutes recorded that the directors considered the debentures to be in the best interests of the company. The directors received a draft resolution from Mr Jones as the sole member of the company approving the grant of the four debentures. The minutes described the meeting being adjourned to enable the sole member resolution to be signed. This then happened, according to the minutes, and the sole member resolution was produced to the meeting. The company then resolved to enter into the debentures and it was noted that the loans were made by the chargees.

On 17^th September 2007, Mr Jones signed a sole member written resolution in accordance with section 381A of the Companies Act 1985. He resolved that the granting of the four debentures be approved.

On 17^th September 2007, the company acting through Mr Hyslop and Mr Martin granted the four debentures. The four debentures are in the same terms save as to the identity of the lender and the amount of the loan. A debenture was granted to Mr Hyslop even though he did not provide a loan. By the debentures, the company covenanted to pay the sums due on demand. The sums due were to bear interest at the Default Rate from the time of the demand until payment. The Default Rate was 1% per calendar month. The debenture was a fixed charge and a floating charge over the undertaking of the company.

On 17^th September 2007, Mr Martin, Mr Martin’s parents, Mr Hyslop, Mr Jones and the company entered into a deed of priority in relation to the secured loan so that the loans ranked pari passu as between the lenders.

On 18^th September 2007, Mr Hyslop as a director of the company allotted 998 shares as follows: 340 shares to Paul Martin, 170 shares to Paul Martin’s parents, 90 shares to Mr Hyslop and 398 shares to Mr Jones. Following these allotments, the Martin family had 51% of the total shareholding and Mr Hyslop had 9%. If one added the 398 shares allotted to Mr Jones to the 2 shares already registered in his name, Mr Jones had 40% of the company.

Before these transactions, the one share which was owned beneficially by Mr Harris represented 50% of the issued share capital of Zetnet. After these transactions, that one share represented 0.1% of the issued share capital of the company.

On 18^th September 2007, the registered office of the company was changed from the offices of Halliwells to the offices of Bennett Brooks. Notice of the change of address of the registered office was filed at Companies House on 20^th September 2007.

No one told Mr Harris of the transactions involving Zetnet on 17^th, 18^th and possibly 19^th September 2007.

On or about 19^th September 2007, Mr Harris asked Mr Gilbert to send the stock transfer form transferring 1 share from Mr Jones to Mr Harris to Mr Mark Halliwell. On 19^th September 2007 Mr Gilbert sent the stock transfer form to Mark Halliwell. Mr Halliwell’s address was the address of his firm in Manchester which was the registered office of Zetnet until 20^th September 2007. Mr Gilbert’s covering letter simply stated that he enclosed the original stock transfer form. Although this letter was later relied upon as a request by Mr Harris as transferee of the share to be registered by the company, that does not appear to have been the purpose of the letter. Mr Halliwell was acting as the solicitor for Mr Harris and all that was achieved by the letter of 19^th September 2007 was that Mr Harris supplied his own solicitor with the stock transfer form. I am not able to find on the evidence that the stock transfer form had been dated by Mr Harris.

Around this time, Mr Jones met Mr Harris at Mr Harris’ home. Mr Jones described the meeting as a tense one. Mr Jones did not reveal what had happened by way of the debentures and the allotment of shares. The meeting became heated and Mr Jones walked out. There is considerable dispute about what happened at this meeting. On 26^th September 2007, following the meeting, Mr Jones sent an e-mail to Mr Harris making five points. He first stated that Mr Harris had tried to coerce him to sign over all Mr Jones’ rights and property in Zetnet to Harris Technology Ltd. He then said that Mr Harris had tried to obtain a debenture over the whole undertaking of Zetnet. Thirdly, he referred to the invoice for £25,000. Fourthly he referred to Mr Harris accusing Mr Hyslop of stealing money from Zetnet. Fifthly, and finally, he said that Mr Harris had tried to call a meeting on 24 hours notice of the shareholders and the directors of Zetnet and also involving a particular named administrator in Manchester, so that the company could be put into administration.

Mr Harris wrote a lengthy e-mail by way of reply on 27^th September 2007. I have already referred to some of the contents of this e-mail when describing the ending of the negotiations with Unicom and the financial position of the company in early September 2007. Mr Harris denied that he tried to coerce Mr Jones in signing over rights and property in the company. He explained why there ought to be a debenture in favour of Harris Technology Ltd. He then commented upon the poor trading position of the company and he was highly critical of Mr Hyslop. He denied that he had ever threatened or suggested that the company be put into administration.

As a result of my earlier findings I am able to find that Mr Harris did ask for a debenture in favour of Harris Technology Ltd, did raise an invoice for £25,000 payable to Harris Technology Ltd, did make highly critical remarks of Mr Hyslop and did threaten or suggest that the company should be put into administration. I am less clear as to what Mr Harris and Mr Jones discussed about a transfer of rights in the company to Harris Technology Ltd. I think it is more probable than not that Mr Harris asked Mr Jones to execute a stock transfer form in relation to one share in favour of Harris Technology Ltd. Although Mr Harris already had a stock transfer form transferring one share to Mr Harris personally, I think it likely that at this point he wanted that share to be transferred to Harris Technology Ltd. I am not able to find on the evidence that Mr Harris insisted that Mr Jones transfer 2 shares to Harris Technology Ltd. I find that somewhat improbable. At this point, Mr Harris believed that only 2 shares in the company had been issued.

On 3^rd October 2007, Halliwells for Mr Harris wrote to Aaron & Partners for Mr Jones. The letter referred to the stock transfer form from Mr Jones to Mr Harris. The letter stated that Mr Harris proposed to date the stock transfer form, arrange for it to be stamped and to submit it to Zetnet for registration. That letter is consistent with my reading of the earlier letter of 19^th September 2007 when Mr Gilbert on behalf of Mr Harris sent the stock transfer form to Mr Halliwell. The form was sent to Mr Halliwell as Mr Harris’ solicitor. The letter of 19^th September 2007 did not involve the sending of the form to the company for registration. Halliwells’ letter of 3^rd October 2007 appears to accept that the form had not yet been submitted to Zetnet for registration. The letter of 3^rd October 2007 invited Mr Jones to commence “cordial discussions” with Mr Harris as to the management and control of Zetnet failing which Mr Harris would have no alternative but to petition the court for an order under section 994 of the Companies Act 2006.

On 10^th October 2007, Aaron & Partners replied to Halliwells. They asserted that Mr Harris had not disclosed his ownership of a share in Zetnet during his divorce and they questioned why Mr Harris was now asserting ownership of a share. That letter is consistent with Mr Jones wishing to deny that he held a share on trust for Mr Harris. On 11^th October 2007, Halliwells wrote again to Aaron & Partners again inviting Mr Jones to commence cordial discussions with Mr Harris in relation to Zetnet. On 18^th October 2007, Aaron & Partners replied to the Halliwells asserting that the running of Zetnet was a matter for the directors of that company.

Un-audited financial statements were prepared for the year ending 31^st October 2007. The profit loss account showed a turnover of £742,132, an operating profit of £55,516 and a profit before tax of £50,607. The balance sheet showed net assets of £65,331. The current assets included debtors of £219,189; this figure was a substantial increase on the figure of £110,420 as at 31^st October 2006.

By late November 2007, Mr Harris had found out about the debentures and the allotment of shares in September 2007. On 28^th November 2007, Berg Legal, acting for Mr Harris and Harris Technology Ltd wrote to Aaron & Partners for Mr Jones. I have already referred to some of the contents of that letter. Berg Legal identified various matters which were said to amount to wrongdoing on the part of Mr Jones and asked for Mr Jones’ proposals, failing which Mr Harris would bring proceedings. Berg Legal stated that Mr Harris had dated the stock transfer form and sent it by letter dated 19^th September 2007 to the company secretary care of the registered office address of the company for registration in the company’s books. I do not think that this statement was factually correct. What happened on the 19^th September 2007, so far as the evidence before me shows, is that Mr Gilbert on behalf of Mr Harris sent the undated stock transfer form to Mr Harris’ solicitor, Mr Halliwell. The letter of 28^th November 2007 then asked Aaron & Partners to confirm that arrangements had been made to register Mr Harris’ share in the company.

On 3^rd December 2007, Aaron & Partners asked Berg Legal for a copy of the stock transfer form transferring one share from Mr Jones to Mr Harris. On 4^th December 2007 Berg Legal sent to Aaron & Partners a copy of the signed stock transfer form. The copy that was sent was not stamped and not dated and the consideration money was left blank.

On 10^th December 2007, Aaron & Partners replied to Berg Legal. I have already referred to some of the contents of that letter. Aaron & Partners accepted on behalf of Mr Jones that Mr Jones held one share in the company on trust for Mr Harris in accordance with the declaration of trust signed by Mr Jones on 11^th August 2006. Aaron & Partners stated that the company had not received the stock transfer form and until it did so it would not be in a position to consider Mr Harris’ request for the share to be registered in his name.

On 1^st February 2008, Mr Harris issued a Petition against Mr Jones and Zetnet pursuant to Section 994 of the Companies Act 2006. Mr Harris asked for an order that Mr Jones should purchase Mr Harris’ share in Zetnet at a price to be determined by the court or such other order as the court might think fit. Mr Jones and Zetnet served a Defence in response to the Petition and denied that Mr Harris was entitled to the relief sought. Mr Harris asked Mr Jones and Zetnet for further information about the funding arrangements in September 2007. The reply was that funding was provided by way of a loan secured by debentures and not by way of equity investment.

In the period up to July 2008, the then share holders in Zetnet, Mr Paul Martin, Mr Martin’s parents, Mr Jones and Mr Hyslop negotiated for the sale of those shares to Breathe Networks Limited. On 15^th July 2008, the shareholders entered into a sale and purchase agreement in relation to all the shares in Zetnet. The purchase price for the shares was stated to be £305,000, to be apportioned between the shareholders. That purchase price was to be paid as to £121,695 to Mr Jones as owner of 39.9% of the shares in Zetnet and as to £305 to Mr Jones, Mr Hyslop and Mr Martin in relation to the one share which was held on trust for Mr Harris. On 2^nd July 2008, Mr Jones had transferred that share to himself, Mr Hyslop and Mr Martin so that the purchase monies of £305 would be received by two or more trustees and would overreach any equitable interest which Mr Harris had in the share. The remaining purchase monies were apportioned as to £103,700 to Paul Martin, £51,850 to Mr Martin’s parents and £27,450 to Mr Hyslop.

Although the vendors of the shares to Breathe Networks Limited made a disclosure statement and gave warranties in relation to that disclosure statement, Breathe Networks Limited was not told that Mr Harris had an equitable interest in any of the shares and equally was not told of the existence of the section 994 Petition. Mr Jones told me that he gave some incomplete information about these matters to Breathe Networks Limited.

Of the price of £305,000 payable by Breathe Networks, some £15,000 was used to pay outstanding corporation tax owed by Zetnet. In addition to the price of £305,000, Breathe Networks Ltd paid £70,000 to discharge the loans which had been made to Zetnet by Paul Martin, Mr Martin’s parents and Mr Jones.

Mr Harris was not told of the negotiations for the sale of the shares to Breathe Networks Ltd nor of the sale and purchase agreement of 15^th July 2008.

By 17^th July 2008, Mr Harris had found out about the sale of the shares to Breathe Networks Ltd. Berg Legal wrote on his behalf to Aaron & Partners acting for Mr Harris and to Breathe Networks Ltd.

On 18^th July 2008, Aaron & Partners wrote to Berg Legal stating that the costs of the sale were some £37,533.40. Thus the net proceeds of sale of £305,000 reduced by £15,000 for corporation tax and further reduced by the cost of the sale produced net proceeds of sale of £252,466.60. Aaron & Partners contended that as the shares in Zetnet had now been sold, the section 994 Petition ceased to be material and Mr Harris was entitled to receive only 0.1% of the net proceeds of sale, that is £252.46.

Breathe Networks Ltd promptly brought proceedings, on 8^th August 2008, against the vendors of the shares. Breathe Networks Ltd alleged there had been a fraudulent misrepresentation and they sought rescission of the sale and purchase agreement, return of all monies paid thereunder together with damages for deceit and other relief. The vendors of the shares served a Defence and made a Part 20 Claim against Aaron & Partners. Although Mr Jones and Mr Hyslop were cross-examined as to the warranties they had given to Breathe Networks Ltd and the advice they had received from Aaron & Partners and the matters pleaded in the proceedings brought by Breathe Networks Ltd, it is not, in my view, necessary to go into those matters. In so far as those matters reflect on the credibility of Mr Hyslop and Mr Jones, I have borne them in mind in assessing credibility. The outcome of the proceedings brought by Breathe Networks Ltd was that they ultimately affirmed the sale and purchase agreement in return for the insurers for Aaron & Partners paying £110,000 to Breathe Networks Ltd. The vendors of the shares retained the purchase monies paid to them under the sale and purchase agreement. The vendors of the shares had retained solicitors, DLA Piper, to act for them in those proceedings. Some fees were payable to DLA Piper but they were paid by Mr Martin senior and Mr Jones did not contribute to the payment of those fees.

In due course, Breathe Networks Ltd took control of Zetnet. However, on 16^th July 2009, Zetnet went into administration. The statement of affairs dated 18^th August 2009 referred to the good will of the company having a book value of £83,750 which was estimated to realise £10,000 and book debts of £10,000 estimated to realise nil. The estimated deficiency as regards non-preferential creditors was £359,061. The list of creditors showed Aaron & Partners as creditors for some £4,500.

The statement of the administrator’s proposals pursuant to paragraph 49 of schedule B1 of the Insolvency Act 1986, dated 18^th August 2009, stated that the business and assets of Zetnet had been sold by way of a pre-pack sale to Breathe Internet Ltd. A desktop valuation of the business on 19^th June 2009 was £8,000 and the business was sold for £10,000.

On 25^th June 2010, the administrator proposed that the administration should come to an end by way of the dissolution of the company. On 1^st October 2010, Zetnet was dissolved.

On 16^th February 2009, Mr Harris brought proceedings against Mr Jones and Aaron & Partners LLP. In the Particulars of Claim as amended and re-amended, Mr Harris put forward allegations as to various breaches of trust by Mr Jones and claimed personal and proprietary relief. Mr Harris’ claim against Aaron & Partners was settled on terms that Aaron & Partners would pay £25,000 to Mr Harris in relation to any liability for damages and costs. The figure of £25,000 was not apportioned between liability and costs. It may be that Mr Harris’ assessed costs of the claim against Aaron & Partners would equal or exceed £25,000. Conversely, it is possible that in receiving £25,000 from them, Mr Harris received something in excess of the costs which he would have been entitled to on an assessment of his costs against Aaron & Partners.

On 24^th March 2010, the administrator of Zetnet assigned to Mr Jones the claim which Zetnet had made in the county court against Harris Technology Ltd for the credit card monies which Harris Technology Ltd had withheld from Zetnet. On 25^th March 2010, Mr Jones gave notice to Mr Harris of this assignment. Mr Jones paid the administrator of Zetnet £500 for the benefit of the assignment. It then transpired that the relevant papers needed to substantiate the claim were held by Aaron & Partners who refused to release them unless they were paid a sum in the order of £5,000. Mr Jones elected not to pay Aaron & Partners and the assignment was rescinded and the £500 was returned to Mr Jones. As I have already stated, following the dissolution of Zetnet on 1^st October 2010, the debt claim was dismissed by Mr Justice Norris on 23^rd February 2011.

On 21^st April 2010, Mrs Justice Proudman gave directions in the two matters which are now before me. She made detailed directions as to the parties’ ability to rely on expert valuation evidence as to the value of the shareholding in Zetnet. On 23^rd February 2011, Mr Justice Norris gave further directions in relation to the serving of expert evidence and he added that it would be open to each party to apply to the trial judge to exclude from the issues to be determined at the trial any issues of share valuation or assessment of any damages or equitable compensation.

At the beginning of the trial, counsel for Mr Harris applied for orders striking out passages in the witness statement served on behalf of Mr Jones and, indeed, passages in the witness statements served on behalf of Mr Harris. Those passages related to the reason why Mr Harris transferred a share to Mr Jones to hold on trust for Mr Harris. Counsel for Mr Harris submitted that the reason why the share was transferred to Mr Jones did not affect Mr Harris’ ability to establish the existence of the trust and did not affect the extent of the liabilities of Mr Jones as trustee. At the outset of the trial, I accepted that submission. However, I declined to strike out the passages in the witness statements as I held that the evidence could bear upon the credibility of Mr Harris which was very much in issue at the trial.

Counsel for Mr Harris also raised with me the directions which had been given by Mr Justice Norris as to the issues of valuation and assessment. Neither party had adduced any expert evidence on those issues. Counsel for Mr Harris, as I understood him, invited me to hear the evidence, but not including any expert evidence, and make my findings on valuation and the amount of compensation. He indicated he would submit that I had sufficient factual material to make all necessary findings. However, he wished to keep open the possibility that if I was not able to make findings in his favour on those matters he would then have the possibility of a second chance at a further assessment hearing supported by expert evidence which he might then wish to call. I indicated that I felt it was unsatisfactory for the matter to proceed in that way, whereupon counsel for Mr Harris elected to make his case once and for all on the evidence at the trial on the basis of which I was to make final findings, to the extent they were justified, as to matters of valuation and assessment.

Mr Harris’ primary claim at the trial was that Mr Jones had acted in breach of his duty as trustee of the share in Zetnet, which he held on trust for Mr Harris. Mr Harris says that Mr Jones acted in breach of his duty as trustee when he participated in the arrangements on 17^th to 19^th September 2007 which led to the dilution of Mr Harris’ shareholding in Zetnet. Before those arrangements, Mr Harris owned 50% of the issued share capital of Zetnet. After those arrangements, Mr Harris owned 0.1% of that share capital.

There is no doubt that Mr Jones did actively participate in the arrangements which were made on 17^th to 19^th September 2007. He negotiated with the members of the Martin family the terms which were given effect by those arrangements. He advanced a further sum of £10,000 to Zetnet as part of the arrangements under which Zetnet was funded to the extent of £70,000. Mr Jones took a debenture to secure repayment to him of the sum of £10,000. Further, in order for those arrangements to be put in place, it was necessary for Mr Jones to sign a sole member resolution. Mr Jones was a sole member and had the ability to sign such a resolution because he held both of the two issued shares, but in relation to one of those shares he held the share as trustee for Mr Harris. Counsel for Mr Harris also submitted that there were a number of things which Mr Jones could have done if he had wanted to prevent the directors issuing 998 shares and granting debentures. In my judgment, it is not necessary for me to discuss those possibilities in view of my findings that Mr Jones actively participated in the arrangements which were made at that time. The arrangements would not have been made if Mr Jones had not actively participated in them.

Mr Jones’ response to the allegation that he acted in breach of trust in relation to the share he held for Mr Harris is that if he had not acted in the way in which he did, Zetnet would have found itself in terminal financial difficulties and the shares in Zetnet would have lost all their value. Accordingly, the submission is that even though 0.1% of Zetnet was virtually valueless, if Mr Jones had not acted as he had done, Mr Harris would not have been any better off.

The question therefore arises: was Mr Jones’ participation in the arrangements of September 2007 the only way of saving Zetnet from collapse? At first sight, the arrangements made by Zetnet were very surprising and unfavourable to it.

Under the arrangements:

Pausing at that point and putting the question of the debentures on one side, the arrangements of September 2007 resulted in Zetnet receiving funding of £70,000 in return for the issue of 998 shares in the company. That valued the company at a little over £70,000. If one regards the issue of shares to Mr Hyslop as a special case, by reference to the original non-contractual promise to issue shares (in fact, 10%) to Mr Hyslop, then Zetnet received funding of £70,000 in return for the issue of 908 shares in the company. That valued the company at a little over £77,000. If one considers the individual funders, rather than looking at the matter collectively, the funding by Mr Paul Martin valued the company at between £117,000 and £118,000, the funding by Mr Martin’s parents valued the company at the same figure and the funding by Mr Jones valued the company at a little over £25,000. These figures are all well below the figures which had been discussed up to September 2007 as a possible purchase price for the company and indeed below the purchase price much later agreed with Breathe Networks Ltd. Further, the funder who had done disproportionately well out of the arrangements was Mr Jones.

Of course, the point does not stop there because it is necessary to take into account the fact that the funding was not only in return for the issue of shares. The monies advanced were treated as loans to the company and the repayment of those loans together with interest was secured by way of debentures. Taking those facts into account, prima facie, 998 shares were issued to persons who made secured loans to the company so that the issue of 998 shares was a kind of facility fee for the making of secured loans. On that basis, the company was being valued at a very modest sum indeed. Of course, it could be argued that the lenders ran the risk that the loans would not be repaid and the debentures would not secure anything of any value. In that case, the issue of the shares could be considered to be the return for the lenders running the risk of not being re-paid. On that basis, the company was being valued at a fairly modest sum.

Approaching the matter as set out above, the arrangements made in September 2007 appear to be decidedly uncommercial.

It might be said that the arrangements in question were justified and commercially explicable on the basis that Zetnet needed funds and that if the arrangements had not been made the company would have collapsed and had no value. Mr Harris seeks to answer that point by saying that if he had been approached by the directors or the company, or by Mr Jones, he would have agreed to lend £70,000 to the company with repayment secured by a debenture. In fact, Mr Harris was not asked to advance £70,000 to the company and so this proposition was never in fact put to the test. However, I have made findings about the stance which Mr Harris was adopting at the relevant time. He was withholding from Zetnet approximately £42,000 due to the company from Harris Technology Ltd. He was putting further pressure on the company by asking for a debenture to secure the indemnity in relation to the credit card payments. Further, he was threatening to put the company into administration. Finally, Mr Harris expressed the opinion in his email of 27^th September 2007 that the performance of the business was “appalling” and that the company was “in terminal decline”. Against this background, I am not able to find that Mr Harris would have provided a secured loan of £70,000 if he had been asked to do. Indeed, I find on the balance of the probabilities that he would not have done so.

Mr Jones does not say that either he or Zetnet tried to obtain funding from any other source. I do not have any direct evidence as to whether there might have been an alternative funder. I am able to find that Mr Harris would not have advanced £70,000 to Zetnet. I am also able to find that the arrangements made in September 2007 appear to be extremely uncommercial and that neither Mr Jones nor Zetnet made any effort to seek funding in some other way. In view of the apparently uncommercial terms of the arrangements of September 2007, in view of the fact that Mr Jones did disproportionately well out of those arrangements, in view of the failure even to try to obtain funding from another source and in view of the hostility on Mr Jones’ part to Mr Harris, I am forced to the conclusion that one of the principal drivers of the arrangements of September 2007 was to dilute Mr Harris’ 50% stake in the company to a negligible 0.1%.

In my judgment, Mr Jones’ participation in the arrangements of September 2007 on terms which were apparently uncommercial, disproportionately favourable to Mr Jones and motivated by a desire to dilute Mr Harris’ stake in the company was not compatible with Mr Jones’ obligations as trustee of the share in the company, held on trust for Mr Harris. Mr Jones had, at least, an obligation not to take unjustified steps to diminish the value of the share and his conduct was a clear breach of that obligation.

Before considering what equitable compensation is due from Mr Jones to Mr Harris by reason of Mr Jones’ breach of trust, I will consider the second main way in which Mr Harris puts his case of a breach of trust by Mr Jones. Mr Harris says that Mr Jones as trustee of one share, held on trust for Mr Harris, was under an obligation to get the best price for that share by selling both issued shares in the company. It is said that Unicom would have bought both shares for £700,000, that Mr Jones was in breach of trust in failing to secure a sale at that price to Unicom and, accordingly, Mr Jones is liable to Mr Harris for half that sum, namely, £350,000.

I have already made my findings as to the negotiations between Mr Clarke of Unicom and Mr Harris and how matters were left by Mr Clarke. I accept Mr Clarke’s evidence that if Mr Harris had procured the restatement of the accounts of Zetnet, Unicom would have looked at the restated accounts and would have considered making an offer by reference to the restated accounts. Zetnet never did provide restated accounts to Unicom. I have not been given reliable evidence as to what the restated accounts of Zetnet would have shown and Mr Clarke was not asked in evidence to state what Unicom’s position would have been if restated accounts, in a form shown to him, had been provided in September 2007, or thereabouts.

Further, although Mr Harris was the person dealing with Mr Clarke, Mr Harris did not ask Mr Jones or the directors of Zetnet to prepare restated accounts as requested by Mr Clarke. Instead, Mr Harris acted to put financial pressure on Zetnet and threatened to put the company into administration. In my judgment, Mr Harris failed to show that Mr Jones as trustee of one of the shares in Zetnet had come under an obligation to Mr Harris to procure Zetnet to prepare restated accounts and to negotiate with Mr Clarke on the basis of those restated accounts.

Further in the absence of evidence as to what properly prepared restated accounts would have shown in September 2007, or thereabouts, and in the absence of evidence as to the attitude of Mr Clarke to a set of accounts prepared in that way, I am unable to find that on the balance of probabilities that Unicom would have offered any particular figure for the shares in Zetnet. Counsel for Mr Harris accepted on the authority of The Law Debenture Trust Corporation plc v Eletrim SA [2010] EWCA Civ 1142, in particular at [45] – [46], that the burden was on Mr Harris to establish what Unicom would have done on the balance of probabilities and he did not advance any case based on an alleged loss of a substantial chance of a sale to Unicom at any particular price. Further, I was not given any expert evidence as to the market value of the shares in Zetnet at any relevant time.

In these circumstances, I find that Mr Harris has not established that Mr Jones was in breach of trust in relation to an alleged failure to sell the shares in Zetnet to Unicom or otherwise to realise the value of those shares.

The result of the foregoing is that I have held that Mr Jones acted in breach of trust in participating in the arrangements of September 2007 but that Mr Jones was not in breach of trust in relation to a possible sale to Unicom or otherwise in relation to the sum realised by the sale of the shares in Zetnet to Breathe Networks Ltd.

In those circumstances, I now need to consider what loss Mr Harris suffered by reason of Mr Jones’ breach of trust. The shares in Zetnet were sold to Breathe Networks Ltd for a net sum of £252,466.60. Prima facie, the price achieved on the sale to Breathe Networks Ltd is the best evidence of the value of the shares. Counsel for Mr Harris pointed to the various prices which were the subject of negotiations in 2007. However, those negotiations did not lead to a completed sale. Counsel for Mr Harris also referred to the price negotiated with Unicom before it withdrew from negotiations. However, Unicom was not in the end prepared to pay that price. Further, I have held that Mr Harris has failed to show that there was an identified lower price at which Unicom would have bought the shares. I was not given any expert evidence as to the value of the shares at any particular point in time. Although I have referred to the figures shown in the profit and loss accounts and the balance sheets from time to time, it is not possible for me to do my own valuation based on those figures. In any event, counsel for Mr Harris contended that the value of the shares was not to be derived from applying a multiple to the predicted profits for a typical year. Further, apart from the fact that Mr Harris was kept in the dark about the sale to Breathe Networks Ltd, counsel for Mr Harris did not draw any attention to any feature of that sale which would suggest that the sale was at an undervalue at the time that it was agreed. Because Breathe Networks Ltd was not informed of the dispute between Mr Harris and Mr Jones nor of the section 994 Petition, it cannot be said that the price paid by Breathe Networks Ltd was adversely affected by such considerations. Accordingly, I conclude that the price agreed on that sale is the best available evidence of the value of the shares at the time of the sale.

Following the arrangements of September 2007 and the sale to Breathe Networks Ltd, Mr Harris became entitled to 0.1% of £252,466.60. If the arrangements of September 2007 had not been made but the sale to Breathe Networks Ltd had still proceeded on the same terms, then Mr Harris would have been entitled to 50% of £252,466.60. Does that mean that Mr Harris has lost 49.9% of £252,466.60?

In answering this question, I need to consider what if anything would have happened if the arrangements of September 2007 had not been made. Would it have been possible for Zetnet to continue without obtaining any funding in September 2007 and to survive so that it could be sold to Breathe Networks Ltd for £252,466.60 in July 2008? I do not think that would have been possible. In September 2007, Zetnet needed funding. Part of that need came from the fact that Mr Harris was putting the company under financial pressure. Zetnet was therefore entitled to do what it could to obtain funding. I have already held that Mr Harris would not have provided the funding. Further, I have held that the arrangements of September 2007 did not represent a commercially sensible attempt to obtain funding.

The only ways of Zetnet obtaining funding in September 2007 would have involved Zetnet borrowing or Zetnet issuing further shares to a funder. The difficulty for the court is that neither party put forward any reliable evidence as to these possibilities. Do I therefore assume that funding would not have been available and Zetnet would have collapsed and Mr Harris’s 50% stake in the company would have lost much or all of its value? Or do I assume that Zetnet would have obtained funding of £70,000 and paid no interest in relation to that funding (as Zetnet did not pay interest when it repaid the £70,000 to Mr Paul Martin, Mr Martin’s parents and to Mr Jones in July 2008)? I conclude that neither of those approaches would be logically or commercially justifiable. I find that this is a case where the court in assessing damages, or equitable compensation, has to do the best it can in deciding what would have happened in circumstances which did not actually come about.

Adopting the approach in the last paragraph, and recalling that the net proceeds of sale of £252,466.60 were after Breathe Networks Ltd had provided monies to repay the funding of £70,000 without interest, I consider that the most reliable approach as to the assessment of the position which Mr Harris ought to have been in, if the arrangements of September 2007 had not been made, is to allow a deduction from £252,466.60 of a sum which would represent an appropriate rate of interest on funding of £70,000 provided in September 2007 and repaid in July 2008. I think that I should allow a generous rate of interest because without funding Zetnet was in a very difficult financial position. Zetnet would have had to negotiate with a commercial lender against that background. Further, in September 2007, because of the financial pressure applied to Zetnet by Mr Harris, Zetnet did not have much time to find a source of funds. Doing the best I can to reflect all of these considerations, I consider that a fair view to take is that after paying interest and financial charges and fees to a funder, the net proceeds of sale in July 2008 would have been reduced from £252,466.60 to, say, £220,000. On that basis, Mr Harris should be awarded equitable compensation so that he receives from Mr Jones, 50% of that figure, i.e. £110,000. To avoid double recovery, a payment by Mr Jones of £110,000 will discharge Mr Jones liability to pay 0.1% of £252,466.60 based on the actual circumstances at the time of the sale in July 2008.

I have referred above to the fact that Mr Harris sued Aaron & Partners for damages by reason of their involvement in the sale of the shares in Zetnet to Breathe Networks Ltd. Mr Harris received the sum of £25,000 from Aaron & Partners in relation to his claim to damages and costs. The question arose at the trial whether Mr Harris should give credit to Mr Jones, in relation to the equitable compensation payable by Mr Jones for all or some part of this £25,000. If any credit were to be given, it could only be in relation to the part of the £25,000 (if any) which was not in respect of Mr Harris’ costs of proceeding against Aaron & Partners. It may be that such part of the £25,000 would be fairly modest. However, in my judgment, Mr Harris is not obliged to give credit for any part of the £25,000. I so hold because the claim against Aaron & Partners was in relation to their involvement in the sale of the shares in Zetnet to Breathe Networks Ltd. The equitable compensation which is payable by Mr Jones to Mr Harris is for the value of Mr Harris’ 50% interest in Zetnet. I have used the sale to Breathe Networks Ltd as evidence of the value of that interest and I have not held that Mr Jones failed to realise a greater value than the value so realised. Accordingly, the payment made by Aarons & Partners was in relation to a different head of complaint to the one I have upheld as against Mr Jones.

Mr Harris also seeks an award of interest at a commercial rate on the amount payable by way of equitable compensation. In my judgment, it is appropriate to award interest. It was agreed that the rate of, and the period of, such interest would be considered following the handing down of this judgment.

In his pleadings, Mr Harris claimed proprietary remedies against Mr Jones in relation to his breach of trust. There was discussion at the trial whether, after the arrangements which were made in September 2007, Mr Jones held 399 out of the 400 shares which were registered in his name on trust for Mr Harris. An alternative analysis would be that Mr Jones held one half of the 398 shares newly allotted to him, plus the 1 share transferred to him in August 2008, on trust for Mr Harris. As I have held that Mr Harris is entitled to equitable compensation for the value of a half interest in Zetnet, it is not necessary to consider whether Mr Harris would have been entitled to the value of 399, or 200, out of 1,000 shares. The only reason to consider these alternative possibilities would be if Mr Harris were to seek a proprietary remedy as regards the proceeds of sale of the shares registered in Mr Jones’ name. However, in his closing submissions counsel for Mr Harris elected not to pursue a proprietary remedy of this kind and I need not further consider that matter.

Mr Harris has also petitioned for relief under Part 30 of the Companies Act 2006, dealing with the protection of members of a company against unfair prejudice. In his petition, Mr Harris has sought an order that Mr Jones be required to purchase Mr Harris’ interest in Zetnet at a price to be determined by the court or such other order as the court thinks fit. Mr Jones contends that Mr Harris is not entitled to any relief under Part 30 of the 2006 Act.

Mr Harris said that the affairs of Zetnet have been conducted in a way which was unfairly prejudicial to the members generally or to some part of its members, including at least himself and that he thereby established the ground stated in section 994(1)(a).

Counsel for Mr Harris addressed me on the issue, or possible issue, as to whether Mr Harris was entitled to petition under section 994. That section primarily allows a petition to be brought by a member of the company in question. In the 2006 Act, the general definition of “member” is contained in section 112. Section 112(1) deals with subscribers of a company’s memorandum. Section 112(2) deals with every other person who agrees to become a member of a company; it is only when the name of such a person is entered in the register of members that such person becomes a member of the company. This is a basic requirement in relation to most of the provisions of the 2006 Act which refer to members of a company and has recently been emphasised by the decision of the Supreme Court in Enviroco Ltd v Farstad Supply A/S [2011] 1 WLR 921; see at [38] – [39].

However, the right to petition under Part 30 of the 2006 Act is not restricted to members within the general definition in section 112. Section 994(2) extends the right to petition to a person who is not a member of a company but is a person to whom a share or shares in the company have been transferred or transmitted by operation of law. The provisions of Part 30 of the 2006 Act apply to such a person as they apply to a member.

In the present case, Mr Harris was a member of Zetnet until he transferred his share to Mr Jones who became registered in relation to it. Thereafter, Mr Harris was not a member as he did not subsequently become registered as a member of the company.

The question of when a person is able to say for the purposes of section 994(2) that a share has been transferred to him has been considered in a number of cases, most recently, in In re McCarthy Surfacing Ltd [2006] EWHC 832 (Ch) where a number of earlier decisions were reviewed. In that case, two registered members of the company had executed transfers of their shares to the petitioner. The petitioner had submitted the transfers to the company for registration but the directors had declined to register the petitioner and he had not been registered as a shareholder. The petitioner had not sought rectification of the share register. It was held that the petitioner was a person to whom the shares had been transferred and he was entitled to petition under the provisions of the Companies Act 1985, which corresponded to Part 30 of the 2006 Act.

In this case, in August 2006 Mr Jones had executed a transfer to Mr Harris of the share which he held on trust for Mr Harris. Although Mr Harris was not thereby a member of the company, he did come within section 994(2) as a person entitled to petition under that section. Nothing that happened later, in relation to the discussion between the parties as to whether Mr Harris had made a valid application to be registered as a member or how the directors would exercise their power to refuse to register him, matters. In my judgment, Mr Harris was a person entitled to present a petition under Part 30 of the 2006 Act.

The next question is whether the affairs of Zetnet had been conducted in a way which was unfairly prejudicial to the interests of Mr Harris. Counsel for Mr Harris relies on three matters in this respect. First, it is said that the dilution in Mr Harris’ interest from 50% to 0.1% was unfairly prejudicial. Secondly, reliance is placed on the exclusion of Mr Harris from the management of Zetnet and the way in which a possible sale to Unicom was conducted. Thirdly, it is said that the mutual trust and confidence between Mr Harris and Mr Jones had been destroyed.

I have already made my findings as to the dilution of Mr Harris’s shareholding. As to the other matters of fact relied upon by Mr Harris, I make the following findings, as to which there was really no dispute. Zetnet was formed as a quasi-partnership between Mr Harris and Mr Jones. The concept of a quasi partnership was considered in detail by the Court of Appeal in Strahan v Wilcock [2006] 2 BCLC 555. It is not necessary to consider the concept further in this case as there was no dispute as to the existence of such a quasi-partnership here. Before the summer of 2007, Mr Harris had been involved in the management of Zetnet and had been provided regularly with financial information as to its affairs. In the summer of 2007, Mr Harris was excluded from the management of the company and was no longer provided with financial information. Zetnet declined to allow a financial controller appointed by Mr Harris to obtain information as to its financial position. The decision to exclude Mr Harris in this way was principally taken by the directors but their decision was supported by Mr Jones. The view was taken that because Mr Harris was not a registered shareholder the company was entitled to prevent him participating in the management of the company and he would not be given financial information. This stance was thought to be appropriate in view of the perception of the directors and Mr Jones that Mr Harris was placing Zetnet in severe financial difficulties as a result of his withholding of monies due from Harris Technology Ltd and other matters. There is no doubt that by the summer of 2007, the original trust and confidence between Mr Harris and Mr Jones had totally broken down.

In view of my findings as to the arrangements made in September 2007 to dilute Mr Harris’ interest in Zetnet from 50% to 0.1%, there is no doubt that those arrangements were prejudicial to Mr Harris. I have found that the arrangements could not be justified in commercial terms. I have also found that the arrangements were made in order to exclude Mr Harris. I was shown the decision in Dalby v Bodilly [2005] BCC 627 where a member’s interest in a company was substantially diluted by reason of an allotment of shares which had no commercial purpose; it was held that this constituted unfair prejudice. In the present case, objectively considered, the dilution of Mr Harris’s interest from 50% to 0.1% was unfair. It cannot be justified even against the background of the difficulties which Mr Harris was causing the company. In my judgment, the arrangements of September 2007 were unfairly prejudicial to Mr Harris.

Having made my findings of fact in relation to the matters relied upon by Mr Harris, and having reached the conclusion in the last paragraph, it is not necessary to consider whether the directors were entitled to exclude Mr Harris on the legal ground that he was not a registered shareholder. As it is not necessary to consider this point and as the case has been argued from a legal standpoint on one side only, I will not discuss further the additional ways in which Mr Harris says that Zetnet was conducted in a way unfairly prejudicial to him. I also do not need to consider any question which might arise, in relation to those ways of putting the case, from the fact that Mr Harris’ own conduct contributed to the difficulties experienced by Zetnet at the relevant time.

Having found that Mr Harris’s petition under Part 30 of the 2006 Act is well founded, the next question arises under section 996. What order should I make to give relief in respect of the matters complained of? Section 996(2) identifies various orders which the court can make. In view of the facts that all of the shares in Zetnet were sold to Breathe Networks Ltd which took free of Mr Harris’ interests in them and that Zetnet has now been dissolved, none of those orders is appropriate. However, under section 996(1), the court can grant such relief as it thinks fit.

In my judgment, the relief which the court ought to grant under section 996 is not more extensive than the order which I will in any event make to award to Mr Harris, by way of equitable compensation for breach of trust, the sum of £110,000 plus interest at an appropriate rate. That seems to me to equate to, or possibly be greater than, the appropriate relief for the prejudice caused to Mr Harris as a result of the dilution of his interest in Zetnet. Further, if the exclusion of Mr Harris from the management of Zetnet and/or the breakdown in trust and confidence were further acts of unfair prejudice, then my decision would be the same. Further, if the shares had not been sold to Breathe Networks Ltd and if Zetnet had not been dissolved and if it remained appropriate to order Mr Jones to buy Mr Harris’ 50% interest in the company, then on the evidence in this case as to value, I would not award more under section 996 than I have awarded by way of equitable compensation plus interest.

The formal order which I will make under section 996 is that there be no further order in addition to the award of equitable compensation plus interest as aforesaid.

As I earlier explained, Solutrea had paid a deposit of £35,000 in connection with a proposed sale to it of the shares in Zetnet. This sum was not returnable when that sale did not proceed. Accordingly, that sum (less any amount due to Halliwells for their fees) was payable to Mr Jones who would hold one half of it on trust for Mr Harris. There was a dispute as to the amount of fees due to Halliwells. That dispute has been resolved by an adjudication which has held that the sum due to Halliwells was £17,625. The balance of £17,375 was initially held in Halliwells’ client account but was later the subject of proceedings in the Altrincham County Court and an interpleader claim. The sum of £17,375 plus interest was ordered to be paid into court. It is convenient to deal with this money in this judgment. In my judgment, Mr Jones is liable as trustee for Mr Harris to pay to Mr Harris one half of those sums.