Roberts v Frohlich & Anor

Onslow Ditchling Ltd (“ODL”) was created as a special purpose vehicle to acquire 6.3 acres of former quarry land at Ditchling (“the Site”) and to develop it as 30 industrial and trading units to be disposed of on a freehold basis. The individuals behind ODL where the First Respondent (“Mr Frohlich”) and the Second Respondent (“Mr Spanner”). They were ODL’s executive directors and each was the holder of a £1 share in ODL (the entire issued share capital). Beyond subscribing for a share Mr Frohlich did not significantly contribute to ODL’s working capital; Mr Spanner lent some £36,000 to procure reports necessary for the obtaining of bank funding.

ODL conducted its activities entirely upon borrowed money. In order to acquire the Site it (i) borrowed £126,000 from Brantridge Holdings Ltd (“Brantridge”) (a company in the ownership and control of a Mr Towning, who also personally lent some money to pay fees and expenses in relation to obtaining other borrowing) and (ii) arranged a term loan of £437,000 with the Bank of Scotland (“HBoS”) (“the Site Loan”). There was still a shortfall; and that was bridged by Mr Frohlich and Mr Spanner selling to Easier plc (“Easier”) for £100,000 the exclusive right to negotiate to acquire shares in ODL. In order to fund part of the development of the Site ODL arranged with HBoS a facility with a limit of £1.5 million (“the Development Facility”).

ODL acquired the Site on the 24 June 2004. The intended main contractor for the development on the Site was Fitzpatrick Contractors Ltd (“FCL”). Certain works relating to the levelling of the Site and to site access had to be undertaken before the development could begin, and that was immediately put in hand. When that was arranged FCL, as instructed by ODL’s quantity surveyors (“Castons”), began to assemble materials and to commence work on the development of the units themselves under a formal “letter of intent” pending signature of a JCT “Design & Build” contract. There was then a dispute between ODL and FCL as to the basis upon which the formal contract contemplated in the letter of intent would proceed: was it intended to be a “fixed-price contract”? Or was it intended to be a “cost plus contract”? The dispute was not resolved. FCL were not paid for the whole of the work they had already done: and in the light of that, and of the dispute over the formal contract, at the end of November 2004 they suspended further work. On 15 September 2005 an adjudicator awarded FCL about £1.6m (subject to adjustment) in respect of work done but not paid for. On 19 September 2005 Mr Frohlich and Mr Spanner appointed administrators of ODL. The administrators sold the Site (ODL’s only real asset) for £1.65m in February 2006 and repaid HBoS the Site Loan, the balance on the Development Facility and interest (in the aggregate sum of £1.42m). The exit route from administration was a liquidation under paragraph 83 of Schedule B1 Insolvency Act 1986. The administrators appointed the Applicant (“the Liquidator”) as liquidator: he had been investigating matters at the behest of FCL since the start of the administration. The Liquidator received the £25,000 that was the proceeds of the administration of ODL’s assets. Putting the FCL claim at the lowest figures used in the administration there was a deficiency as regards unsecured creditors of about £900,000: using the figure determined in the adjudication it is much higher. Besides FCL (by far and away the largest), the unsecured creditors include the professionals who were engaged on the development and in the disputes that arose, and Brantridge.

In these proceedings the Liquidator of ODL seeks relief under two headings. First, he seeks a declaration that Mr Frohlich and Mr Spanner are guilty of misfeasance and breach of duty as directors of ODL by causing, procuring or permitting ODL to commence the development when they knew or ought to have known that it was speculative, inadequately funded, and bound to fail. The legal foundation of this head of claim is said to be that Mr Frohlich and Mr Spanner each owed (i) a fiduciary duty to ODL to act in what they honestly believed was in its best interests; (ii) a duty to ODL at common law to exercise reasonable skill and care in acting as directors, and (iii) “a duty, at a time when ODL was insolvent or insolvency was reasonably foreseeable, to have regard to the interests of creditors”.

In essence, the factual case advanced is that Mr Frohlich and Mr Spanner:-

permitted ODL to commence a project which it is to be inferred they did not honestly believe was in the best interests of ODL because it was speculative, insufficiently funded, and had no realistic prospect of being funded:

deliberately misled HBoS by misdescribing the nature of the development as being undertaken under a fixed price contract for the construction of units that were pre-sold:

permitted ODL to enter into a contract with FCL knowing that there was inadequate existing funding and that any injection of capital from Easier plc was dependant on a conditional contract (whose conditions Mr Frohlich and Mr Spanner knew or ought to have known were unlikely to be capable of performance) so that there never was any realistic prospect of there being sufficient funding to pay FCL:

caused or permitted FCL to continue to work on the Site after the prospective deal with Easier PLC had lapsed: and

caused ODL to commence building works and incur liabilities without first satisfying themselves as to the nature of the contractual arrangements under which the development was to be carried out.

The second head of claim is for wrongful trading in breach of section 214 Insolvency Act 1986 (“IA 1986”). Under this head the Liquidator alleges that Mr Frohlich and Mr Spanner knew or ought to have concluded or around 1 July 2004 (or alternatively on or around 1 September 2004) that there was no reasonable prospect that ODL would avoid going into insolvent liquidation.

If either of those heads of claim is made out then specific sums are sought in respect of the misfeasance and breach of duty, and/or a contribution to the assets of ODL is sought under section 214 IA 1986 . At this trial I am concerned only with whether either head of claim is made out: if it is, then the consequences of that conclusion are to be worked out at a subsequent hearing.

The witnesses called on behalf of the Liquidator (Mr Saunders, Mr Waller, Mr Jollie and Mr Elders) and the Liquidator’s agent himself (Mr Russell) were all straightforward witnesses, seeking to do their best to recall the events in question. The recollection of the FCL witnesses was sometimes assisted by Minutes of meetings; and it was not significantly coloured by the fact that they were former employees of FCL which, as the major creditor in ODL’s liquidation, stands to gain if the action succeeds. As I shall note, some of the evidence at trial differed from evidence given on an earlier occasion: but I have given due weight to that. Despite being well tested in cross-examination I find their evidence generally reliable.

The Liquidator’s agent (Mr Russell) could, of course, not speak directly to the events in question: but he dealt fairly with the points put in cross-examination and in general presented a balanced view. Thus, even though it is the Liquidator’s case that there was wrongful trading from about 1 July 2004, Mr Russell readily said in cross-examination that he could not say that, as at 30 June 2004 ODL should have been wound up because the company was solvent on a balance sheet basis and provided that it did not make commitments which it could not fund on a cash flow basis then it would remain solvent. Again, in the liquidation he did not admit the whole of FCL’s claim to proof, but exercised an independent scrutiny. So it would not be right to treat the Liquidator simply as FCL’s stooge.

Mr Frohlich is a qualified accountant with extensive experience of acting as a director in property companies (going back to 1968). He has previous experience of the development of industrial property units. He produced an impressive CV. He did not come to Court to mislead me: but his recollection was of little assistance and generally unreliable. He denied knowledge of much, denied receipt or sight of many of the key documents, denied responsibility for the creation of significant financial documents and asserted that he did not avail himself of the opportunity to examine the documents in ODL’s files or to speak with Mr Spanner (on what was really the only currently active project on which they were together engaged). On the other hand he professed recollection of events of which there is no trace in the contemporaneous documentary material. Mr Frohlich said that at the end of 2001 he had been involved in an accident; that in 2002-2003 he was taking medication and having treatment and (at trial and for the first time) that he was at times “illucid” and would not have trusted his own judgment; and in 2005 underwent a severe neck operation. This, he said, would account for vagueness during the relevant period. I do not accept that the events which Mr Frohlich identifies had the impact upon him which he asserts: had it been so he would surely have said so earlier so that the truth could be tested. But even on his own account his evidence is flawed. In those circumstances I have found myself unable to place much reliance on Mr Frohlich’s recollection and have been driven to rely on the inherent probabilities as disclosed by the contemporaneous documents and aided by any reliable oral evidence from others.

Mr Spanner had a background in civil engineering. Since 1967 had been involved in property development, being chairman or chief executive of sundry property companies, and latterly creating SPVs to develop (either alone or in partnership) various commercial property projects. Two or three of those had been with Mr Frohlich: and none had so far yielded a cash profit. He made a plainly honest attempt to assist me, engaging with the questions put and giving frank, straightforward answers (including acknowledgements that parts of his witness statement could not be correct). Understandably his grasp of chronology was weak. But it was apparent to me that at times he confused his assessment of what it would be good for ODL to happen with a confident belief as to what would indeed happen, and then to confuse his belief of what would happen with his recollection of what had in fact happened: a move from aspiration to actuality. So, straightforward as he was, I felt I had to approach his evidence with care and to look for support. Where his evidence does not accord with the documents or with inferences properly to be drawn from them, I have relied on the documents and an assessment of what was likely.

Mr Towning’s evidence in support of the Defendants was loyally given. But it was quite evident that he was not fully informed of the precise detail of the project to which Brantridge was lending money, and that from his own perspective he was (naturally) only interested in whether his participation would yield a benefit (payment of his “entrance fee” and a gain from a share purchase by Easier). His assessment of the position from time to time and his recollection of events is therefore ultimately dependent upon what he was told by the Defendants. He was, for example, under the impression (until the Easier deal collapsed) that the project was throughout “fully funded” and that there was a fixed price contract available. Whilst he gave me his honest recollection it was necessary for me always to bear in mind from what it derived.

These are the facts as I find them. In the narrative of events there are three interweaving themes: (a) the arrangements for bank funding; (b) the arrangements for building the development: and (c) the arrangements concerning the ownership of ODL. Each bears upon the analysis of the wrongs alleged to have been done by each of the defendants.

Mr Frohlich and Mr Spanner had been considering an acquisition of the Site since the Autumn of 2002. The existing planning consent permitted the construction of business units totalling 62,000 square feet: but Mr Frohlich and Mr Spanner intended to seek an enhanced permission for 82,000 square feet. Before building could commence the Site had to be levelled, a site access had to be constructed, and s.106 works to the adjacent highway costing £250,000 had to be completed. All these works (to which I will refer as “the enabling works”) required a heavy initial capital commitment before a single unit could be sold. Cash flow was therefore always going to be an issue. It was the intention of Mr Frohlich and Mr Spanner (as expressed in a memorandum of October 2002) to prepare the Site whilst the section 106 works were in hand, to construct the spine road and then to construct the first units, which would themselves be “pre-sold”. They envisaged a rolling development programme: and it was their intention never to be exposed to more than two units unsold. A cash flow forecast founded upon these assumptions (and postulating the first sales within six months of the acquisition of the Site and a total build out in 12 months) showed a peak funding requirement of just under £1,000,000 if the costs of the enabling works and of the construction itself could be kept to £3.5 million.

The basis for that estimate of the construction costs was a casual conversation between Mr Spanner and Mr Patrick Fitzpatrick (the then current Chairman of FCL) at a meeting concerning another project in which the two of them were together personally involved. Mr Fitzpatrick had said “Sheds we could build at £32 per square foot all day”. Mr Spanner treated this as if it were a quotation for business units.

Armed with this proposal Mr Spanner set about finding funding. After an unsuccessful approach to the Bank of Ireland (his own bankers) he approached Mr Dakin at the West London Business Centre of HBoS. In his letter dated 18 February 2003 he described the project in these terms:-

The terms of this letter and memorandum overstated the true position. They recorded Mr Spanner’s aspirations, but did not accord with reality. FCL had not priced the works. Mr Fitzpatrick had in a casual conversation indicated at what price FCL could in general build basic units. But he knew nothing of the Site or its particular features or of the proposed building programme. By February 2003 preliminary discussions had been held with FCL’s contracts team. Those discussions had produced some indicative figures, but there was a great deal of uncertainty both about the ground conditions at the Site and the permitted development itself. FCL had not agreed to enter into fixed price contract on an “as and when” basis. Indeed, Mr Spanner acknowledged in cross examination that FCL was never asked in writing or orally to build only against pre-sales. All its indicative figures were put forward on the footing that FCL would determine the build programme. FCL had not prepared a project appraisal or any costings (indeed the enhanced planning consent had yet to granted, the design was not fixed, the site conditions had not been examined and the structure had not been engineered). Mr Spanner further acknowledged in cross examination that he could not have justified to HBoS the statements he had made, and would have had to say that there was no basis for them. But, he explained:-

On 20 February 2003 ODL was incorporated as a special purpose vehicle to undertake the development. Mr Frohlich and Mr Spanner were its two directors, and each held one of the two issued £1 shares. Neither Mr Frohlich nor Mr Spanner was prepared to put any more risk capital in. Mr Spanner told me that it was his policy and that of Mr Frolich not to invest by way of equity in SPVs although they would, to some extent, lend money (as he did in relation to architects’ fees in connection with the planning application). In fact, in the instant case, neither he nor Mr Frolich was prepared readily to lend to ODL. The Site was available at £525,000 in respect of which a 5% deposit of £26,250 was payable on exchange of contracts. Neither Mr Frohlich nor Mr Spanner was prepared to lend that relatively modest sum to ODL in order to obtain the contract. Instead they arranged with Mr Towning for his Jersey company (Brantridge) to contract to purchase the Site for £525,000 (paying the £26,250 deposit), for Brantridge to sub-sell the Site to another Spanner/Frohlich company (“XCo”) for £625,000 and for XCo to assign the contract to ODL. The commercial effect of this convoluted arrangement was that ODL managed to borrow £26,250 from Brantridge for the period from exchange until completion for a fee of £100,000. If neither Mr Frohlich nor Mr Spanner was to put their own money in, it was the best they could do for ODL.

On 24 March 2003 Mr Spanner renewed his approach to the Bank. He asked for “a maximum loan to value advance on the acquisition and infrastructure and modest assistance with the build costs against specific pre-sales”. He supported his approach with a revised appraisal and this time with a detailed cash flow forecast. Whilst Mr Spanner accepted that the appraisal would have been his work, both he and Mr Frohlich disclaimed responsibility for the cash flow. In my judgment it is likely that it was prepared by Mr Frohlich in consultation with Mr Spanner (since this would be a natural deployment of their respective skills, and I was given no other credible account of its possible authorship).

On the appraisal the purchase cost of the site was now shown at £625,000 (the arrangement with Brantridge having been negotiated): the enabling works were shown as amounting to £840,000: and the construction costs were shown at £3.6 million (excluding professional fees and financing costs). The cash flow assumed a 12 month build period, with usable deposits being received for the first units in the third month. On these assumptions there was a peak funding requirement of £2.2 million in the fifth month of the project. As Mr Spanner’s renewed letter of application stated:-

This application produced indicative terms from HBoS. Since these remained constant (being strengthened in one respect) I will deal with the terms at the point when the formal offer is put. The terms related to a Site purchase loan in a sum of £437,000 (being 70% of the inflated price that ODL would be paying Brantridge, but still leaving a shortfall on the sum due at completion of the purchase of the Site); and to a development loan of unspecified amount. That was because the Bank could not work out the amount of the development loan being sought. In that regard the Bank requested a more detailed cash flow.

At trial the Liquidator’s agent Mr Russell produced an undated cash flow apparently commencing in May 2003 which he said had been provided to him by Mr Frohlich and Mr Spanner in January 2007. Both Mr Frohlich and Mr Spanner denied doing so. But Mr Russell’s recollection is supported by a contemporaneous note and an apparently genuine contemporaneous manuscript endorsement on the document itself. I find that it is a genuine document, produced in answer to HBoS’s request and being part of ODL’s papers that were either created by or available to Mr Frohlich and Mr Spanner in connection with their consideration of ODL’s affairs (and which was in January 2007 handed over by them to the Liquidator). It is probable that it was created by Mr Frohlich from data and assumptions provided by Mr Spanner and in consultation between the two of them. Once again, there is no other credible provenance, and this is a likely deployment of their respective skills. In this cash flow the construction costs were now assumed to be £3.2 million (exclusive of fees) and the project period 20 months, with deposits of £194,000 on pre-sales of £1.9 million (amounting to about a quarter of the development) being received in the third month. Mr Frohlich acknowledges that this last assumption was (with hindsight) “excessively optimistic”: but he did not see it that way at the time. On these revised assumptions the peak funding requirement was £1.5 million.

The cash flow cannot be treated as a representation to HBoS: it was not a statement of what would happen. It represents a set of assumptions which Mr Frolich and Mr Spanner must be taken to have thought were a reasonable basis upon which to assess ODL’s cash requirement for the project.

Being confident that HBoS would make a sufficient offer (although it had not yet done so) and being pressed by the vendors of the Site to exchange contracts Mr Frohlich, Mr Spanner and Mr Towning arranged for Brantridge to exchange contracts on 23 June 2003 (with completion on 18 June 2004) for the purchase of the Site, and the contractual arrangements for its ultimate acquisition by ODL were put in place.

The HBoS offer for the Site Loan of £437,000 was made on 27 June 2003. It was in the sum of £437,000. Apart from standard security terms (including the ordinary debenture over ODL’s undertaking and assets) the following conditions are material:-

On 30 June 2003 HBoS made a written offer relating to the Development Facility in the sum of £1.5 million. The purpose of the loan was identified in these terms:-

The Bank had to be satisfied with the detailed budget and timetable for the works to be concluded:

A quantity surveyor was to be appointed by the Bank:

The architect was to confirm costings and to provide certifications against which drawdowns were to be permitted:

The Development Facility drawdowns were only permitted against pre-sale confirmations from ODL’s solicitors (though what constituted a “pre-sale” was not defined):

Any building work had to be on a fixed price contract:

The Bank had to be satisfied with the demand for the “built to order” units with proof of an initial six pre-sales within 60 days of completion of the land purchase (though “pre-sales” was again not defined):

ODL had to ensure that the amount of the loan outstanding at any time would not be more than 70% of the realisation value of the property charged.

For the project to be viable (i.e. to have a sufficient prospect of profit to justify ODL embarking upon it) the assumptions on which the Development Facility of £1.5 million were thought to be sufficient would have to remain sound; and the terms on which the £1.5 million was available and could be drawn would have to be workable.

At the beginning of July 2003 Mr Spanner gave instructions to FPD Savills Development Department to undertake a valuation of the Site for the benefit of HBoS. On 18 July 2003 Savills produced an estimated market value for the Site of £900,000. This figure was reached primarily by adopting a residual approach based on stated assumptions. The workings were set out in a development appraisal which incorporated a cash flow. The cash flow assumed a five year project period with construction in three identified phases. The Liquidator called no-one from Savills to explain its genesis. I regard this appraisal and cash flow as a theoretical exercise undertaken by Savills to support their residual valuation of £900,000. I am not satisfied that either Mr Frohlich or Mr Spanner told Savills that the project would take that form: in particular, I do not regard a three phase construction programme as ever having been under consideration by Mr Frohlich or Mr Spanner. I am satisfied that their intention throughout was to have a rolling development programme with FCL remaining on Site throughout. (On that approach to the project it would, of course, be absolutely essential to reconcile FCL’s build programme with ODL’s sales programme if the commitment to HBoS only to build such units as were pre-sold was to be honoured).

On 22 July 2003 ODL accepted the HBoS financing offers and held a meeting with FCL to invite FCL to put forward their formal and best bid to be based on drawings and specifications intended to be issued. FCL’s bid figure was to be discussed with ODL’s quantity surveyors (Castons), in particular with Mr Turner. Over the following weeks it was agreed that Mr Turner would develop a cost plan for the project together with FCL, with a view to FCL entering into a “design and build” contract. Whilst a “design and build” contract will frequently be on the basis that the client (ODL) would pay the contractor (FCL) a fixed price, Mr Spanner acknowledged that this was by no means always the case. The intended form of contract does not, therefore, of itself provide a guide as to whether FCL was being invited by ODL to tender for a fixed price contract or, as an alternative, a “cost plus” contract (under which FCL would be paid the cost of building the development plus a percentage for profit and overheads). On the other hand, the fact that FCL was, together with Castons, to draw up a cost plan does not of itself indicate that the ultimate contract was contemplated to be a “cost plus” contract.

FCL’s commercial manager was Mr Saunders. His clear evidence (unshaken in cross examination) was that whilst he was supervising FCL’s negotiations with ODL and with Castons he did not commit FCL to enter into a fixed price contract. He acknowledged that a fixed price contract was, of course, apossibility; but he was clear that FCL could not commit to entering into a fixed price contract unless and until the work required by ODL had been specified and FCL had firm and binding prices from its sub-contractors for that work (since plainly FCL would not assume the risk that sub-contract prices might rise). This is reflected in a letter which Mr Saunders wrote on 30 September 2003 informing ODL that FCL were preparing a tender price and that their bid would consist of lump sums (i.e. fixed prices) for preliminaries and for sub-contract trade packages with “provisional sums for any works [on] which we are unable to finalise costs”, adding a percentage for head office overheads and profits. The ultimate “contract sum” would therefore consist of a mixture of fixed prices and provisional sums and contingencies uplifted by a percentage for overheads and profits. But the status of the “contract sum” itself remained to be determined.

The nature of the process then in hand (and which would constitute the basis of negotiations unless and until the parties agreed that “the contract sum” should become a fixed price) was further clarified in an e-mail which Mr Saunders sent to Mr Turner of Castons on 27 October 2003. This stated:-

The Defendants did not call Mr Turner to give evidence. I therefore have only the account given by Mr Elders. It is his evidence that he told Castons that there was no way that FCL could go forward on the basis of the revised cost plan and that “after some discussion we agreed that we would go forward on a cost plus basis and “value engineer” the scheme to make it an acceptable cost”. In his witness statement he explained the practical consequence of proceeding in this way:-

It is at the end of November and during December 2003 that Mr Frohlich and Mr Towning begin negotiations with the chairman and managing director of Easier plc with a view to putting the ODL project into a joint venture with Easier. Easier was an AIM listed cash shell, and negotiations appear to have opened on the footing that Easier may provide funding for some of ODL’s needs within the structure of a 50/50 joint venture, with Easier buying into the venture on the basis that the Site (then contracted to be purchased from Brantridge at £625,000 but with ODL only having funding of £437,000) was worth £900,000. Such a joint venture arrangement would have enabled Brantridge to recover its investment of £126,500 and would have given an immediate profit to Mr Frohlich and Mr Spanner as the shareholders in ODL.

It was the benefits accruing to Mr Frohlich, Mr Spanner and Brantridge which provided the focus of the negotiations over the following months. As is demonstrated by the contents of a draft board minute of Easier dated 19 March 2004 (which were certainly seen by Mr Towning and Mr Spanner and probably also by Mr Frohlich), the original proposal for a joint venture had matured into a takeover of ODL by Easier (with Messrs Frohlich, Spanner and Towning receiving cash and shares in Easier). The basis on which the takeover was to proceed was that HBoS had provided a Site acquisition loan of £437,000 and a facility of £1.5 million which would finance all of the development works, that the industrial units would be sold and financed “off plan”, that a fixed price build cost of £3.2 million had been received from FCL, that these costs would be funded by the HBoS facility which could be drawn down on a unit by unit basis secured on a contract for sale of the unit, that another Spanner/Frohlich company would be engaged to manage the project for a fee, and that Mr Frohlich and Mr Spanner had undertaken personally to guarantee £1.97 million (sic) of bank debt to HBoS (for which they would need to be indemnified). In essence, therefore, in place of a joint venture it was now intended that Easier should step into the shoes of ODL and take over the benefit of the arrangements which ODL had negotiated and which appeared (on the recited facts) to constitute a self funded project. This is most clearly demonstrated by the summary which was in these terms:-

That is confirmed by the fact that in April 2004 Easier’s general manager sent to those three a cash flow prepared after a visit from Mr Frohlich (and probably Mr Spanner). This, far from showing a need for Easier to inject additional funds over and above those available to be drawn down from HBoS, produced such a positive cash flow picture that the general manager wrote:-

By way of contrast to the optimism of Mr Frohlich and Mr Spanner, Mr Towning (on behalf of Brantridge) was more cautious. On 13 April 2004 he e-mailed Mr Spanner to inform him:-

It is in my judgment no coincidence that on 21 April 2004 Mr Turner of Castons wrote to Mr Spanner to confirm the construction costs for the development. The probability is that Mr Towning’s request for clarity prompted Mr Frohlich or Mr Spanner to request an update on the current position (as the conclusion of Mr Turner’s letter, in which he expressed the hope that he had provided the information required, suggests). The terms in which Mr Turner wrote are crucial:-

The reference to a “target figure” and the “open book” basis (note the words “… also on an open book basis”), the explicit reference to an uplift for profit and overheads and the careful contrast drawn with the “lump sum” agreed for the enabling works to be undertaken by P J Brown show that according to Mr Turner’s expressed understanding FCL was not then agreeing a fixed price contract. The letter was copied to FCL: they did not dissent from its terms. Mr Frohlich said in evidence that he had no doubt that Mr Spanner had seen the letter: and Mr Spanner acknowledged as much, telling me that when he saw the letter it came as a shock to him because he had given instructions to Castons only to negotiate a fixed-price contract and nothing else. Mr Spanner says that he went back to Mr Turner saying that his instructions were and always had been that the contract had to be “fixed price or nothing”; and that he went no further with the proposal for a “costs plus” contract operated on an open book basis with a target figure.

Mr Turner (although apparently available) was not called to confirm this account of events. I therefore have the evidence of Mr Spanner alone; and I disbelieve it. I have already accepted evidence that FCL had made plain to Castons that there was no question at this stage of them being willing to enter a “fixed-price” contract. There is no documentary record of any instructions to Castons to negotiate only a fixed-price contract. There is no record of any complaint to Castons that the negotiations were (contrary to express instructions) being conducted on an “open book” basis. Far from disputing or disregarding the content of the letter of 21 April 2004 Mr Spanner and Mr Frohlich appear to have accepted it and conveyed its contents to Easier, for a draft memorandum for the Easier board records:-

The reference to an “open book” contract is plainly grounded in the documents. The reference to a “target price” expresses what is implicit in Mr Turner’s letter. But the machinery for “overage and underage” comes entirely from Mr Spanner’s evidence; and he could not explain to me how it worked. I do not think it is a complete invention. It was probably a vague idea mentioned in a casual conversation between Mr Spanner and Mr Fitzpatrick well before June 2003 (in the same context as the “fixed price quote”) but never explored formally. It seems to me highly improbable that FCL’s contracts team would have refused to countenance a fixed-price contract and yet would have negotiated on the basis of a target price which they could not exceed. In my judgment the probability is that the explanation given to the Easier board is Mr Spanner’s contemporaneous attempt to square the circle - to reconcile (a) the “fixed-price” contract which was most plainly required by the bank funding (on which Easier was to rely) with (b) the “open book” contract that Castons were actually negotiating with FCL. It might reflect what Mr Spanner aspired to negotiate on a personal basis with Mr Fitzpatrick: but it did not reflect what had actually been proposed to or agreed by FCL.

The attempt was probably inspired by a routine up-dating letter dated 19 April 2004 and written by Mr Dring of Castons to Mr Frohlich which referred to having agreed with FCL “a maximum price of £4,121,951 for the remaining construction works based on the current design information”. But that single reference to “a maximum price” could not reasonably be read as meaning “a fixed price”: and I do not consider it likely that Mr Spanner genuinely read it that way. First, (as the accompanying breakdown made clear) the “maximum price” had been calculated on a “cost plus” basis which allowed 6% for overheads and profit (and nothing for the additional risk of fixing a price). Second, the letter itself (like that of 21 April 2004) drew a conscious distinction between the intended contract with P J Brown for part of the enabling works (which was described as “a fixed price” in the letter of 19 April and “lump sum” in that of 21 April) and that with FCL (which was described as “a maximum price” in the letter of 19 April and as a “target figure” in that of 21 April 2004). The letter cannot be treated in isolation: it has to be read in the context of the entire course of negotiations to date (and, of course in the light of what followed in relation to the Easier negotiations).

On 23 April 2004 Mr Frohlich, Mr Spanner and Brantridge (which had by this stage been allotted a share) entered into an exclusivity agreement with Easier whereby in consideration of a payment of £100,000 the shareholders in ODL undertook not to enter into negotiations with any other party for the purchase of ODL or its business and assets i.e. the benefit of the contract for the purchase of the Site and the benefit of the funding offers by HBoS to ODL which together constituted ODL’s assets. The £100,000 would (together with the Site Loan) be sufficient to enable ODL to acquire the Site (provided that Brantridge agreed to defer payment of the £126,500 to which it was entitled on completion). The period of exclusivity was 90 days (and would therefore expire on 22 July 2004, one month after the date fixed for the completion of the Site purchase). Within that period terms for the acquisition of ODL would have to have been agreed. A draft of the relevant documents already existed, and Mr Frohlich was grappling with the detail and criticising the solicitor’s drafts. It is sufficient for present purposes to note these matters:-

I can now put the Easier contract on one side and revert to the negotiations with FCL. Although Castons had been dealing with FCL’s commercial contracts team no draft contract had actually been presented to FCL for consideration. A meeting was held on 8 May 2004 between representatives of ODL, representatives of FCL and members of ODL’s professional team when “final details were discussed”. The discussion appears to have consisted of a consideration of the planning conditions and how each of them was intended to be addressed. It is clear that significant items continued to be under discussion or awaiting further information (so that it would not have been possible to fix prices even if negotiations had been proceeding on that footing). But the upshot was that Mr Spanner sent to Mr Saunders of FCL what he described as “a Letter of Intent”. Mr Saunders had indicated (given the imminent completion of the Site purchase and thus the proximity of the date on which FCL might be expected to commence work, and the absence of any contractual documents) that there would no question of FCL commencing work without a “letter of intent” (as to which see: Tesco Stores v Costain Construction[2003] EWHC 1487 (TCC)). Mr Spanner’s letter of 14 May 2004 (written on the note paper of “Onslow Investments”, not of ODL) said that:-

Mr Saunders regarded this letter as inadequate for his purposes both because it did not amount to a contractual commitment of any sort and because it was too vague. Mr Spanner’s reference to “a target figure” is, of course, telling. But the reference to “an overage and under performance figure to be agreed” was a puzzle to Mr Saunders. So he consulted Mr Elders who confirmed that there was only a target figure for a cost plus contract conducted on an open book basis, and that FCL could not start work on the basis of the proffered letter.

(I should also pick up on the fact that the letter refers to the “overage and under performance figure” as having “to be” negotiated with “your Chairman and the writer”. Even on Mr Spanner’s own account it was not a concluded arrangement: and the whole tenor of Mr Spanner’s evidence was that this was a provision dependant upon his personal relationship with Mr Fitzpatrick, and not something for FCL’s mainstream contracts team. It would, of course, follow that if Mr Fitzpatrick ceased to be Chairman of FCL and lost the ability to override the normal commercial procedures of the contracts department, then an “overage and underage” machinery could never be incorporated in a contract between ODL and FCL. This Mr Spanner acknowledged. But that very event occurred in mid-May 2004, when Mr Fitzpatrick sold FCL to a Dutch construction group and resigned as Chairman of FCL: as Mr Spanner learned on 18 May 2004, four days after he sent his Letter of Intent).

Upon the rejection of the letter of 14 May 2004 as a basis for working a revised letter was prepared (probably by Castons using a form emanating from FCL) on 8 June 2004 and was signed by Mr Frohlich. This letter (on ODL note paper) confirmed “our intention to enter into a contract with yourselves…based on the scheme/works as defined on drawings sent to you”. But it now continued:-

To this letter FCL responded on 10 June recording:-

This letter from FCL was copied to Castons. In my judgment it is plain that the temporary regime put in place by ODL’s Letter of Intent and FCL’s confirmation is that work done under it is done on a “cost plus basis”. Each party sought at trial to add something to this analysis.

Mr Spanner and Mr Frohlich sought to say that each of them believed that the only point of the Letter of Intent was to enable FCL to fix the price of the fabricated steel.

Mr Frohlich says that he was told by Mr Turner “that it was important to get the order placed….even though the steel did not need to be ordered for many months as the price of steel was going up and [FCL] wanted to keep to the price of the steel in the costs plan”. Mr Frohlich acknowledges that he intended to give comfort to FCL to place the steel order: but he says that he did not intend the Letter of Intent to form the basis for any work to be undertaken. His subjective intention is not relevant to a consideration of the legal effect of the letter according to its terms. But in any event I do not accept Mr Frohlich’s recollection as accurate. Mr Frohlich was quite unable to explain how the price of the steel could be fixed without an order being placed for it, and was equally unable to explain how (if an order for steel was placed by FCL) ODL could escape a contractual liability to pay FCL for it. Nor do I accept his evidence that he did not see the letter of 10 June 2004 or learn of its contents even though it was addressed to him at an office where he had secretarial assistance (and was copied to both Mr Turner and Mr Prime). The improbability of Mr Frohlich despatching his own letter on an admittedly crucial issue but not enquiring after or being informed of the response to it is too great to be given credence.

Mr Spanner says he was abroad at the crucial time, that he does not know the thinking behind the letter of 8 June 2004, that he never saw the letter of 10 June 2004, but that he did understand that the arrangement was that FCL would buy the structural steel. Since he had been the draftsman of the original Onslow Investments letter (which had been rejected) I cannot believe he was so disinterested in the form which the ultimate Letter of Intent took (given that, as he acknowledged in cross-examination, letters of intent are only sought when orders have to be placed and the contractor has to be assured that he will be paid). But Mr Spanner did acknowledge (which Mr Frohlich would not) that ODL was bound to pay the reasonable value of any work undertaken or materials supplied by FCL as authorised by Castons.

For its part FCL sought to argue that once a Letter of Intent in that form was in place then it must follow that the formal contract contemplated in the Letter of Intent would also be on a “cost plus” basis. I do not agree. I find and hold that there was still the theoreticalpossibility that the ultimate formal contract might be placed on a fixed price basis (though plainly that fixed price would, as Mr Spanner acknowledged in oral evidence, be higher than £4,361,273 to compensate for transferring the risk of cost increases from ODL, where it lay under a “cost plus” contract conducted on an “open book” basis, to FCL, where it would lie under a fixed price regime). I further find that on 8 and 10 June 2004 what was then actually contemplated was a formal contract on an open book “cost plus” basis (which was the footing upon which all negotiations had hitherto been conducted). Any amendment to make it a fixed price contract would have involved a very significant change of direction (in effect the abandonment by FCL of its established negotiating position), the provision of exact specifications for all those items that were still awaiting the provision of further information or further design, the negotiation of fixed prices for the term of the contract with all sub-contractors, and a revision to the then-current target figure to reflect the transfer of risk to FCL.

A snapshot of the position in the latter part of June 2004 would show:-

It was in this context that the Site Loan was accepted and drawn down and the purchase of the Site concluded in accordance with the convoluted arrangements to which I have referred (Brantridge agreeing to defer payment of its £100,000 fee). As at completion ODL had creditors of some £293,500. Brantridge had paid third parties about £42,500 and had deferred payment of its £100,000 fee. Mr Spanner had paid third parties about £26,000, and the balance represented financing fees, professional fees (for solicitors, architects, surveyors and engineers) and stamp duty due. Although solvent on a balance sheet basis, ODL had no funds out of which to discharge these liabilities, other than any available drawdown on the Development Facility. What was available was 70% of the costs of the enabling works (up to a maximum advance of £590,000). So theoretically ODL had to pay its existing creditors and at some point find 30% of the cost of the enabling works.

Once ODL became the legal owner of the Site it became possible for the enabling works that were to be undertaken by PJ Brown to commence; and it was envisaged that FCL would begin its part of the enabling works under the Letter of Intent in the week beginning 19 July 2004. A “pre-contract start meeting” was therefore arranged for 28 June 2004, which was attended by Mr Turner of Castons. The minutes prepared by FCL survive. So far as material they demonstrate that many subcontracting quotations had not been received and were being sought by FCL (some on a lump sum and some on a “measured” basis); that FCL had yet to see the revised planning approval and that there remained urgent planning matters to be addressed; that the professionals to be retained under the “design and build contract” remained to be appointed; that the form of contract remained to be finally determined; and that the parties were currently working to the cost plan which had been prepare by Castons in December 2003 (though a revised plan was produced at the meeting itself). Nothing in the material suggests that anyone present at the meeting thought that the formal contract (when entered) would be a fixed price contract: the production of revised cost plans (i.e. “target figures”) by Castons and the obtaining by FCL and the provision to Castons of subcontract quotations for the entire project (not simply for the work immediately to be done under the Letter of Intent) strongly suggest that the “open book” procedure hitherto followed was also contemplated to be the basis of the long-term relationship.

On 2 July 2004 Castons gave FCL written instructions to proceed with the design, fabrication and erection of the structural steelwork in accordance with a quotation from the fabricator dated 18 June 2004 in the sum of £406,771 and to proceed with certain of the enabling works. On 6 July 2004 Castons gave ODL instructions to proceed with the design and installation of metal cladding for the units in accordance with a quotation from the fabricator dated £643,851. The contract sums for the steel represented the total amount due over the entire course of the contract. What was in immediate contemplation was the design and fabrication: not everything would be delivered on Day 1. Each of these contract instructions bore the endorsement “if the above work does not proceed all costs in relation to abortive work will be reimbursed”. FCL was prepared to act on these instructions because it believed (as a consequence of something said by Mr Spanner to Mr Waller of FCL) that the development was “fully funded”: though FCL had not asked to see the funding documents. The instructions related to the building work (not the enabling works); and they related to all the units (not specified pre-sold units). Unless cancelled, the contracts so directed by Castons required FCL to commit to paying £1,050,622 in respect of the construction of the entire development. Mr Frohlich says he was not aware that these instructions had been given. Given that he was in charge of ODL’s finances, that ODL was under pressure from creditors, and that accordingly cash flow was a constant concern it seems to me inherently improbable that neither Castons nor Mr Spanner told him that instructions had been given: and it would be an extraordinary dereliction of duty not to have enquired what use had been made of the Letter of Intent.

I must now revert briefly to the Easier transaction. Immediately before completion of the purchase of the Site ODL’s solicitor had suggested (on 15 June 2004) to Mr Frohlich and Mr Spanner that they should reassess the takeover by Easier of ODL, because now that the planning permission had been granted and the value of the Site assessed at £900,000 it would be possible to refinance the project by raising £630,000 (sufficient to pay off HBoS and all pressing creditors and repay Easier’s exclusivity fee) and then to conduct the development themselves, keeping 100% of the profit. This proposition does not appear to have been considered seriously. In my judgment there are two possible reasons why that was so. Either Mr Frohlich and Mr Spanner put their personal interests before those of ODL and took the view that what they stood to gain personally from the Easier transaction (in cash, shares and the release of guarantees) exceeded their anticipated profit share if ODL undertook the development alone; or they took the view that refinancing the project and obtaining development funding for a sole venture was not as straightforward as their solicitor appeared to think (and possibly also that they doubted the sufficiency of the Site Loan and the Development Facility and saw Easier as a potential additional source of funding and as a means of repaying existing pressing creditors). At all events they pursued the Easier transaction.

On 30 June 2004 an agreement was entered into between Mr Spanner, Mr Frohlich and Brantridge (which was treated as an equal shareholder) on the one hand and Easier on the other for sale of the entire share capital in ODL to Easier for a parcel of cash (£113,000) and shares (£250,000) equal to the value of the Site (£900,000) less the Site Loan (£437,000) and the exclusivity fee already paid. At trial Counsel for the Liquidator was critical of the terms of this agreement and sought to highlight the extent to which it was to the personal advantage of Mr Spanner and Mr Frohlich and to the disadvantage of ODL. This did not form part of the pleaded case and I have disregarded this criticism in my assessment of the issues which I have to determine.

It is necessary to draw attention to five features. First, the agreement was conditional on a number of matters (including the production by the vendors of evidence in a form satisfactory to Easier of an offer by a reputable bank of a development loan in the sum of not less than £1.5 million) and upon the completion of due diligence enquiries. This would of necessity entail scrutiny of whether the conditions attaching to the HBoS Development Facility could be satisfied (since ODL had no other loan offer). Second, the conditions had to be satisfied by 31August 2004 (extendable to 30 September 2004 at the option of Easier). Third, amongst the obligations undertaken by Easier was an undertaking that it would “procure completion of the Development on the most cost-effective basis reasonably possible” (clause 5.5). Fourth, as part of the transaction it was agreed that Easier would pay identified creditors of ODL as at 30 June 2004 (including Mr Spanner and Mr Towning) within a defined period after completion of the takeover. Fifth, at the signing of the contract there was specific disclosure of the existence of unsigned draft JCT contracts (the form of which was not readily apparent from the trial bundle, but which were probably uncompleted blank standard forms sent to ODL on 19 May 2004) and an express statement that there existed “a side agreement with [FCL] in respect of savings on the target sum under the building contract to be shared equally between the parties”. No such document actually existed,

During the course of July it became apparent that all was not well with the Development Facility. The enabling works were in hand and needed to be paid for. Castons certified work to the value of £150,000 and ODL drew two cheques for that sum. HBoS met the cheques to avoid embarrassment, but protested at having to do so. The bank’s view was that it was providing 70% of the funding for the development so that ODL was required to contribute 30% of each certified sum. Mr Spanner and Mr Frohlich said that the position had been misunderstood, and the difficulty was smoothed over (in part because they said the value of the enabling works undertaken was in fact £400,000, only part of which had been certified for payment). However it prompted the bank to state that it would require evidence of the fixed price contract from FCL as well as a copy of the collateral warranty (by FCL in favour of HBoS) “before we fund the build”: and to a ban on the issue of any further cheques, so that ODL was starved of cash.

Fulfilment of this requirement presented a real difficulty. ODL (through Castons) had already ordered over £1 million of steel as part of “the build”: that would eventually need to be funded. The only subsisting contractual arrangement with FCL was on a “cost plus basis” under the Letter of Intent (pending the entry of a formal contract). The only formal contract then under discussion was also on a “cost plus” basis (without even the comfort of any “overage and underage” arrangement negotiated with Mr Fitzpatrick himself). Mr Spanner did not tell the bank that there was no fixed price contract in place with FCL. He simply wrote on 11 August 2004 to express the belief that “all prerequisites are in place” thereby intending (as he acknowledged in evidence) to give the impression that there was a fixed price contract in existence or available.

That same day (11 August 2004) there was a project meeting with FCL attended by Mr Turner of Castons. According to the Minutes of the meeting (which Mr Turner subsequently approved as correct) Mr Turner explained ODL’s perspective on costing of the project as “a target cost of £3.7 million with FCL’s [preliminaries and percentage] on top”. He conveyed a request that there should be a meeting between Mr Spanner and Mr Elders. In my judgment the language used (the record of which was approved by Mr Turner) does not suggest that Mr Turner himself believed (or thought that the board of ODL believed) that a “fixed-price” or “lump sum” contract already existed or was under negotiation. In my view what Mr Spanner sought was a renewed opportunity to shift the FCL commercial contracts team from its established and known position of an “open book costs-plus” contract.

The evidence of Mr Elders was that there was a telephone conversation between himself and Mr Spanner sometime between the 11 and 25August 2004 during which he made plain to Mr Spanner that a “cost plus” basis was the only way forward. Mr Spanner could not recall this conversation. I am satisfied that the recollection of Mr Elders is accurate. It is confirmed (first) by the FCL Minutes of a meeting on 25 August 2004 which record:-

I have no doubt that it was by 25 August 2004 clear as between FCL and Mr Spanner that no fixed-price contract was or would be on offer (though Mr Spanner probably entertained an unfounded optimistic belief that something might turn up). Equally I have no doubt that Mr Turner then understood that what was on offer was a “cost plus” contract to be administered on an open book basis and with a target price (i.e. a price that it was hoped could be achieved by “value engineering” but which was not a fixed upper limit). I would regard it as incredible that Mr Turner should have conveyed to Mr Spanner the impression that a fixed-price contract was available (which each independently knew was not the case). I would equally regard it as incredible Mr Spanner should have kept to himself the crucial absence of a fixed-price contract and not communicated the fact to Mr Frohlich; or that Mr Frohlich himself should not have enquired. Mr Frohlich, Mr Spanner and Mr Turner all understood the reality: a fixed price contract had not been agreed in principle and all that was available was an open book “costs plus” deal. On the other hand I have no doubt that HBoS did think a fixed-price building contract was either in place or was available. As Mr Spanner was to say (in an e-mail of 24 November 2004 to Mr Elders): “our bank has always thought that the contract was in place”.

What was HBoS to be shown? On 16August 2004 Castons’ Ipswich office sent by courier to ODL’s London office copies of completed contract documents (with copies also going to FCL and Mr Turner). The contract relating to the enabling works to be undertaken by PJ Brown was in the unqualified contract sum of £410,770. The building contract to be entered by FCL, however, was stated to be in the contract sum of “£4,784,731 and is a Priced Fixed Contract” (sic). The term “Priced Fixed Contract” is an unusual one. There was no disclosure of Castons’ file sufficient to show its origin: and Mr Prime was not called to say why he employed the term. If the document had been intended to provide for a “fixed price” or “lump sum” contract then one would think that such conventional terms would be used (or alternatively that the contract sum would be unqualified, as in the P J Brown contract). In fact the contract itself was by reference to Castons’ cost plan CP6A in which all the figures are described as “estimates”; and in the version of the contract which is said to be that current on 16 August 2004 Appendix 3 said that the Contract Sum Analysis was set out in the “Prime Cost Estimate”.

It was suggested on behalf of the Liquidator at trial that the term “Priced Fixed Contract” was deliberately obscure, and was promoted by Mr Spanner or Mr Frohlich in order to mislead HBoS. I am not prepared to find either of these men deliberately deceitful in this regard. But I can readily see that the draft might completely have misled a third party (such as HBoS) unaware of the train of negotiation between ODL and FCL: and it was certainly found to be unclear by FCL, who considered it might provide for a fixed price (Mr Saunders viewed it “an apparent fundamental change of ODL’s position”) and consequently sought amendment.

Both Mr Spanner and Mr Frohlich seized upon the terms of the contract as evidencing a continuing belief on their part and on the part of ODL’ s advisers that a fixed-price contract had been negotiated and would be available. I disbelieve their evidence (and Mr Turner of course did not give evidence). I am satisfied that paragraph 63 above is an accurate summation of the position.

Before reaching this conclusion I have, of course, had to reflect upon subsequent events: and I will briefly deal with such as bear on this issue before reverting to the main narrative.

On 7 September 2004 Mr Dring of Castons sent to Mr Spanner (and copied to Mr Turner) a commentary on the current contractual position. This stated:-

At the project meeting on 9 September 2004 FCL’s contracts manager commented that the contract required amendment to make explicit “cost plus contract” provisions. No dissent is recorded. This is a Minute Mr Spanner would have seen: and its terms were approved as accurate at a subsequent meeting on 13 October 2004. That tends to confirm my analysis.

The Minute of 13 October 2004 itself (actually prepared by Castons) records:-

It was a constant theme of the evidence of Mr Frohlich and Mr Spanner that they had been misled by Castons, that what Castons did had been contrary to instructions, and that Mr Frohlich and Mr Spanner were entitled to assume that (whatever they themselves kept from the bank) after Castons had been appointed to act as quantity surveyors for the bank (on instructions I did not see) they would tell the bank all about the true nature of the negotiations between ODL and FCL. None of this was convincing. I reject the idea that Castons acted contrary to instructions. I do not believe that Castons mislead either Mr Frohlich or Mr Spanner. I do not consider that at any time Mr Frohlich or Mr Spanner thought Castons had told HBoS the true position. There is no record of any complaints of this type being made to Castons: and in the liquidation of ODL Mr Frohlich positively assisted Castons in the pursuit of its fees for the work now alleged to have been contrary to instructions, misleading and inadequate.

But I do find that the contract put into circulation by Castons did not correctly record the true state of negotiations. It is unnecessary for the resolution of this case to find that this was occasioned by dishonest conduct on the part of Mr Spanner or Mr Frohlich (in an attempt to mislead HBoS and to trick FCL) and I decline to do so. (Save in relation to HBoS) any confusion generated by the terms of the draft itself had been cleared up by 25 August 2004. It was known and understood that the formal contract being negotiated was not a fixed price contract. It was a cost plus contract conducted on an open book basis with a known target figure. Any subsequent assertion of the existence of negotiations toward a fixed price contract was probably put forward as a negotiating tactic, endeavouring to turn the “target” into a limit with some form being given to the inchoate “overage and underage” provision canvassed in the very distant past and that had been dependent on the no-longer-available personal influence of Mr Fitzpatrick.

I return to the main narrative and address dealings with HBoS and then the Easier transaction.

On 16 August 2004 HBoS had required production of a fixed price contract and the collateral warranties. On 17 August 2004 Mr Frohlich and Mr Spanner met with Mr Dakin of the bank. The bank was shown the form of contract that had been put into circulation by Castons (probably signed on behalf ODL), and told that FCL would soon want to start on the Site. Nobody says that the bank was told (a) that the terms of the contract had not been agreed by FCL; (b) that the current contractual arrangements were governed by a Letter of Intent on a “cost plus” basis; or (c) that under those arrangements over £1 million of orders relating to the building of all units had already been placed. Mr Frohlich says (but Mr Spanner does not) that at that meeting Mr Dakin waived the requirement for there to be pre-sales, said that he had authority to amend the loan conditions without reference to anyone, and that there was no need to record the revised arrangement in writing. I do not accept that this recollection is accurate, on the basis of (a) its inherent improbability; (b) the fact that it is not supported by Mr Spanner (who would surely remember if he had been told that funding of more than £900,000 would be available if a contract could be signed); (c) the fact that it removes from the funding proposition a feature that was given prominence by Mr Frolich and Mr Spanner when pitching for the loan; (d) the fact that it lacks any commercial advantage from the bank’s perspective; (e) the fact that the revised relaxed arrangement is not referred to in any correspondence passing between HBoS and ODL or in any record of any conversation; and (f) the fact that as late as 7 January 2005 HBoS was stressing in correspondence that drawdowns on the development facility were only permitted against “pre-sales” (and requiring proof of funding from prospective purchasers). I am satisfied that all material times “pre-sales” were an integral part of the availability of bank funding for the building (though what constituted a “pre-sale” might have been open to debate).

The actual position as regards pre-sales in the latter part of August and early September 2004 may be summarised as follows. Oakley Property had from July 2003 been retained by ODL to market the development. Following the acquisition of the Site they had prepared (but not launched) a marketing campaign. There was not even a board advertising the development: as late as 13 November 2004 the marketing team was still discussing commissioning one pending the grant of planning permission for the hoarding. Oakley Property had, however, explored interest amongst existing tenants on the adjoining industrial estate. Despite numerous meetings with these potential purchasers there was a marked reluctance to commit to the ODL development. Some regarded termination of their existing leases as problematic. Others thought the new units expensive. The general attitude was that no-one would enter any sort of commitment until the buildings actually went up. (In his written evidence on expert matters Mr Frohlich accepts that this is entirely to be expected in a development attracting small local businesses: see paragraph 3.13 of his 19 August 2010 response). Oakley had also followed up other enquiries. These principally came from those involved in the development itself. The architects had expressed an interest in two units, and had been required to pay a non-refundable reservation fee of £2500 (but there is no evidence that they did so). Mr Towning of Brantridge had expressed interest in three units as investments: but his interest was conditional upon signature of a formal contract, and the dispute over the contract made him unwilling to recommend others to invest. In short, although the retained agents spoke of a “promising level of demand” and encouraged their instruction to commence marketing there was nothing that HBoS could be expected to classify as a “pre-sale” (i.e. as a unit built to order rendering the development “non-speculative”). Nor, on the experience to date and having regard to the nature of the development, were there any reasonable and proper grounds for thinking that such “pre-sales” were imminent. The truth was that ODL had to commence building in order to generate interest: and the funding conditions presented a real obstacle. It was recognition of that which no doubt prompted Mr Spanner to seek to a co-venturer in Welbeck Land Limited (an approach that was rebuffed on 10 September 2004 on the ground that the prices being asked for the units was too high for the local market and that a price reduction would provide insufficient margin to make the project viable).

The Easier transaction stipulated 31August 2004 as the date by which the various conditions had to be satisfied. It was plain by 25August 2004 that they would not be satisfied, that the vendors could not compel Easier to complete, and that the vendors were dependent on Easier seeking to extend time until the “long stop” date. It would also have been apparent that in so far as Easier wanted confirmation of the existence of a fixed-price contract or confirmation of funding from HBoS Mr Frohlich and Mr Spanner would be in no position to provide it. It certainly was apparent to Mr Frohlich and Mr Spanner that ODL’s outside creditors were pressing for payment and had been staved off only by a promise of payment when the Easier take-over went through. When Easier did not complete on 31 August 2004 (and there is no evidence it sought an extension until 30 September 2004) Mr Spanner was therefore forced to instruct ODL’s solicitor to write to Easier offering a further extension of time and seeking a loan of £600,000. That approach was rejected. Mr Frohlich and Mr Towning said in their written evidence that Easier remained keen to complete until mid-September: but I was shown no document which supported this, and the absence of any exercise by Easier of the option to extend the agreement (and the desperate tone of ODL’s letter of 24 September 2004 seeking to keep the transaction alive) strongly suggest that the recollection is false.

This was the context in which Castons gave further instructions to FCL under the Letter of Intent. Between 6 August and 2 September 2004 orders were placed with FCL for £479,893 worth of work (including such major items as the piling mat, pre-cast concrete beams and architects and structural design work) all of which related to the development generally and not to identified pre-sold units being built to order. In total FCL had been instructed to undertake over £1.6 million pounds worth of commitments and preliminary work (far exceeding the £570,000 allowed for the enabling works and in fact exceeding the balance of total Development Facility that would have been available if all pre-conditions had been satisfied). I do not know to what extent FCL had committed itself under these instructions. FCL actually went on site on about 27 September 2004 and physically commenced work, beginning with the construction of the Site compound.

A snapshot at the beginning of September 2004 would show:-

that a “fixed-price” contract had not been agreed in principle and was not under negotiation because FCL had made clear that the “cost plus” basis firmly insisted upon in April 2004 still held good:

that proceeding on a “cost plus” basis exposed ODL to higher risk:

that enabling works had already commenced under the Letter of Intent, which in due course would be certified and would have to be paid for:

that part-paying for the first tranche of the enabling works undertaken by PJ Brown (the VAT was unpaid) had occasioned difficulty with HBoS leading it to assert control over the account (and that there was a further £250,000 of enabling work completed, some of which - about £142,000 - had been certified but remained unpaid):

that access to the Development Facility was dependent upon the waiver, amendment or satisfaction of the funding conditions and that HBoS was pressing for proof of satisfaction (in particular the production of a signed fixed-price contract and collateral warranties):

that ODL was authorising the purchase by FCL of materials and the undertaking of work (which was not enabling work) in connection with the whole Site, and that FCL was about to go on-site:

that there were no actual “pre-sales” and no properly grounded hope of any in the immediate future:

that outside participation was being unsuccessfully sought:

that the Easier deal showed no signs of coming to fruition and could not be brought to fruition without it being demonstrated that the HBoS Development Facility was available;

that pressing creditors were being staved off with the promise that payment would come from the takeover:

that according to the Interim Financial report produced by Castons on 25 August project costs had escalated by £300,000.

On 1 September 2004 FCL issued a valuation containing a breakdown of the sums payment of which was sought: and on the same day Castons certified the sum of £149,763 as due to FCL. Out of what fund could payment be made? A signed “fixed-price” contract could not be shown to HBoS so as to gain access to the Development Facility, nor could any “pre-sales” be demonstrated. The attempt to find a co-venturer failed. Easier had not maintained its interest (and an attempt to revive it failed on 24 September). So ODL said that the certificate was invalid because there was a dispute about the form of the contract (thereby ignoring the contractual commitment under the Letter of Intent). In my judgment this was simply a negotiating device (constricting FCL’s cash flow) designed to put pressure on FCL to agree a fixed-price contract (and thus to unlock the Development Facility). Meanwhile, Castons gave instructions for yet further work to be undertaken by FCL (including work to the value of over £900,000 on 20 October 2004). Eventually FCL provided “a fixed price” costing on 17 November 2004 quoting a figure of £5.9 million (which subsequent tenders received during the administration were to show was not in any way inflated). But it was far in excess of what ODL needed to make the project viable (and made a nonsense of the cash flow forecasts on the basis of which funding had been obtained). So it was rejected. (The Liquidator does not say that building costs in this sum ought to have been known to the Defendants earlier). On 27 November 2004 FCL suspended work (having by then undertaken work and acquired materials to the value of £1.6 million).

None of this was told to HBoS. In fact HBoS was shown some preliminary legal advice (obtained on incomplete instructions) designed to reassure the bank that a fixed price contract was in existence, preliminary advice which (at the time it was shown to HBoS) both Mr Frohlich and Mr Spanner knew had been overtaken by much gloomier advice on fuller instructions. Periodically the bank was persuaded to pay further cheques which, by 1 December 2004, took ODL to the absolute limit of what it could draw without showing a fixed price contract to HBoS (the Site Loan and that part of the Development Facility that could be drawn to pay for the enabling works). On 3 December 2004 the bank’s representative visited what he would have thought was an active site and (on a basis which is not spoken to at all in the evidence and not apparent from the disclosed documents) released some further monies without sight of the signed JCT contract, part of which was used to pay off some of FCL’s outstanding invoices, some £436,000. But the spell did not work again. No more money was released. FCL said that by then they were still owed £1.19 million: and it was that unpaid valuation that was referred to adjudication, and resulted in the award which led to the administration and eventual liquidation.

I have dealt with the latter part of the narrative extremely briefly for three reasons. First, I have already made findings about such post-1 September events as throw light upon events in the period with which I am principally concerned. Second, it is only upon events prior to September 2004 that the Liquidator relies as establishing liability. Third, if liability is established, it is upon the later period that any subsequent enquiry will focus in relation to losses or restitution (and it is not appropriate to make any findings of fact that may influence the second part of the process).

The first ground of liability rests upon misfeasance and breach of duty at common law. Mr Frohlich and Mr Spanner are said to be in breach of their fiduciary duty to act bona fide in the interests of the company and in breach of their common law duty of skill and care because they permitted ODL to commence a development which they knew or ought to have known was speculative, inadequately funded and bound to fail.

An allegation of breach of fiduciary duty involves consideration of the question whether the director honestly believed that his act was in the interests of the company. If the act undertaken resulted in substantial detriment to the company the director has a harder task to persuade the court that he honestly believed it to be in the company’s interest: but the test remains essentially subjective: per Jonathan Parker J in Regentcrest v Cohen [2001] 2 BCLC 80 at [120].

Some further exposition is required where the company (to whom the director owes his fiduciary duty) is in financial difficulties.

When ODL completed the purchase of the Site on or about 24 June 2004 it acquired land worth £900,000: it thereby came to owe HBoS £437,000 and Brantridge £126,500. In addition it had (according to the expert report of Mr Fanshawe and the schedule of creditors attached to the Exclusivity Agreement with Easier) external creditors of about £100,190 and sums due to participants of £86,385. Although Mr Spanner was persuaded by Mr Davies QC’s questioning in cross examination to acknowledge that the Site ought not to have been acquired and that the acquisition of the Site and its subsequent development were interlinked, I accept neither of those propositions.

I am satisfied that both Mr Frohlich and Mr Spanner honestly believed that, at the time when the acquisition of the Site was completed, it was in the interests of ODL to go through with this transaction: and in my judgment it was beneficial. ODL secured for itself a paper profit of £275,000: a realisation of that by an “on-sale” of the site would (even allowing for the costs of realisation) have enabled ODL to pay off its existing creditors and make a profit.

Although it is alleged that Mr Frohlich and Mr Spanner deceived HBoS into making the Site Loan and extending the Development Facility (and that a lack of honest belief in the viability of the entire project can therefore be inferred), I do not think that this is so. In pitching the project to HBoS in order to secure funding offers Mr Spanner certainly misrepresented the true position in saying that ODL had secured a fixed-price building contract and had pre-sold some units: and Mr Frohlich undoubtedly knew that this had been said. But the bank did not rely on these statements of fact, because it crafted its lending conditions (both for the Site Loan and for the Development Facility) in terms which required these statements to be proved true at the appropriate point i.e. when the bank assumed a particular risk. The “deception” of the bank into making the loan offers therefore did not of itself make the funding offers precarious: the only question was whether ODL could fulfil the loan conditions (and to the extent that those conditions were conditions subsequent, requiring fulfilment after the advance had been made, how ODL could cope with a demand for repayment). So far as the Site Loan is concerned the conditions for the making of the advance were, in my judgment in place: and whilst it remained fully secured and with a sufficient “loan-to-value” ratio HBoS was unlikely to call in the loan.

I am not prepared to infer that Mr Frohlich and Mr Spanner did not honestly believe the entry of the Letter of Intent on 8 June 2004 to be in the best interests of ODL. It is right that on their evidence they seem to have given little thought to its terms: but whilst that might call into question their competence it does not demonstrate a lack of honest belief that the step was in the interests of ODL. The Letter of Intent established a contractual relationship with FCL within which all enabling works (save those by P J Brown) could be undertaken (though it did not commit ODL to placing any orders and it did not irrevocably commit ODL to the development).

The Letter of Intent was entered into (as I have found) with the intention that under it orders for structural steel should be placed: and such instruction was given on 2 July 2004. It cannot be (and has not been) suggested that that order was placed by Castons without the authority of Mr Frohlich and Mr Spanner (though Mr Frohlich unconvincingly said he did not know of the actual order until November 2004). Whether the directors gave Castons a specific instruction or merely a general authority is not disclosed by the evidence. The effect of this instruction was (at the least) to commit ODL to pay for the steel when delivered. When the order was placed ODL had no funds in hand with which to meet that future liability. That does not demonstrate a lack of honest belief that placing the order was not in the best interests of ODL. The directors were simply taking a risk that when the time for payment came they would have the money to pay the bill. As well as the “cash flow risk” there was another risk, the “project risk”. Because the order related to the whole of the structural steel it constituted “speculative building” in relation to the entire development: something which (from the outset) Mr Frohlich and Mr Spanner said they would not do because of the evident risk. In ordering the steel Mr Frohlich and Mr Spanner were effectively using creditors’ money as the working capital of ODL for a project they recognised was “speculative”. The Court will therefore readily draw the inference that they cannot have regarded this as in the best interests of ODL, and the directors face a hard task in putting before the Court evidence of sufficient quality to displace that inference.

In my judgment Mr Frohlich and Mr Spanner have succeeded in doing so. I have found the question a difficult one: but ultimately I am satisfied that I ought not to conclude that Mr Frohlich and Mr Spanner were acting in breach of their fiduciary duty. I consider that at the beginning of July 2004 they honestly believed that that when the time came for payment they would have a good chance that the money would be available to pay the bill.

They had, of course, also committed ODL to pay P J Brown for the enabling works being undertaken by that company: but I find that they genuinely believed that HBoS funding would be available for that out of the £590,000 allocated to the enabling works (which it was not crystal clear was subject to a “pre-sales” requirement or to the existence of a fixed price contract for the subsequent building work or to a requirement that ODL had to pay 30% of the value of each certificate). They could honestly view the enabling works as not being a strain on cash and as adding value to the Site. I accept that Mr Spanner thought that the Site would be worth £1.25 million with the enabling works completed.

The question then was: where is the money to pay for the steel structure and cladding to come from? Its primary source was HBoS. That funding could only be accessed by satisfaction or waiver of the loan conditions. Mr Spanner thought that to some degree HBoS could be persuaded to permit drawdown even though there was not full compliance. There seemed to be a degree of interest at the Site which on an optimistic (but honest) assessment might lead to sufficient evidence of “commitment” to persuade the bank that the development was not “speculative”. The formal contract with FCL had yet to be negotiated and there remained the theoretical possibility that a “fixed price” contract could be secured (and if not that then a chance of a contract containing a “target price” with some sort of capping arrangement that would satisfy the bank). There also remained the possibility that Easier would carry through the acquisition (for which it had recently paid a non-returnable exclusivity fee of £100,000) and that, once involved, it would use its resources to protect its investment. I consider the probability is that Mr Frohlich and Mr Spanner thought that, whilst everybody might have to “give” a bit in negotiation, the project could still be brought to a successful conclusion.

By the time one gets to the first half of September 2004, however, it seems to me that the position is entirely different. FCL had by then already been instructed to undertake work to the value of £1.6 million (a sum which exceeded the Development Facility even if fully available). HBoS had demonstrated that it intended to adhere to its funding conditions (and was requiring proof of satisfaction): and Mr Spanner acknowledged (and I find that Mr Frohlich must have known) that HBoS was proceeding on a false premise as to the degree to which those conditions were met. It would not be possible to negotiate with FCL anything approaching a “fixed price” contract. The need for FCL’s build programme to match up with ODL’s sales programme (in order to avoid any speculative building) had not even been addressed in the contract in circulation and had never been put to FCL. The board of ODL had received clear advice as to the risks inherent in proceeding as they were. There were no “presales” (however loosely that term was construed); and there would be none until there was a formal contract with FCL and the buildings were going up. Even the site board advertising the development had not been erected. The “pre-sales” were not only a funding condition: they were a fundamental assumption of the cash flow upon which the whole viability of the project was based. Attempts to find a co-venturer failed on the basis that the project was not viable. The Easier transaction had petered out: there was no longer the faintest hope of supplementary funding from that source. Those creditors who had been waiting for the takeover to provide a source of funds for payment of their debts would now inevitably begin to press for payment: and they had reached £300,000 (excluding FCL and PJ Brown). The only proper inference to draw is that Mr Frohlich and Mr Spanner cannot honestly have believed that a continuation with the work already ordered and the placing of fresh orders was in the interests of ODL (meaning, because of the parlous state of the company’s finances, effectively the paramount interests of ODL’s creditors). However irrational the directors’ optimism it cannot have survived these reverses save by wilful blindness - a deliberate decision not to enquire or consider lest an unpalatable truth be exposed. The only honest thing to do was to stop the development – at the very least, temporarily whilst a review of existing and intended commitments was undertaken and HBoS appraised of the true position.

Mr Spanner said that he was an optimist and believed things could be pulled round: he said there was interest in the project from other banks (and in particular Lloyds Bank at Guildford). (By contrast, Mr Frohlich said he did not think that there had been any formal approaches to any other banks). Mr Frohlich said that Mr Towning and Brantridge were behind the project and they could be looked to as a source of funding. Mr Frohlich said that he and Mr Spanner were people of substance (as was evident from the bank accepting a guarantee of £500,000 from them): there was always the possibility that they could make up the shortfall. None of this causes me to doubt my conclusion that from mid-September at the latest Mr Fohlich and Mr Spanner were not acting bona fide in the best interest of ODL and its creditors.

The realistic availability of funding from any other bank is not supported by any document. Mr Towning was not going to enter any commitment until “all the ducks were in a row”, in particular until the formal contract was sorted out. That is why he kept his available funds out of ODL. The placing of additional orders for work in September and October was not accompanied by any introduction of funds from Mr Frohlich or Mr Spanner: and they desperately pursued Easier (who were going to relieve them of their guarantee liabilities). If there had been a genuine belief in the availability of alternative funding Mr Frohlich and Mr Spanner would not have stooped to deceiving HBoS as to the nature of the legal advice being received about the existence of a fixed price contract.

I therefore find and hold that certainly from 14 September 2004 Mr Frohlich and Mr Spanner were in breach of the fiduciary duties which they owed ODL in failing (as those acting bona fide in the interests of ODL would have done) (a) to call a halt - to seek to suspend performance of the unperformed parts of existing contracts and to refuse to authorise the placement of any further orders; and (b) to disclose to FCL the funding status of the project and to disclose to HBoS the contractual status of the project.

I turn to consider whether there is a breach of the duty to ODL to exercise reasonable skill and care (a question which is to be answered by reference to the law as it was before the coming into effect of the Companies Act 2006). In doing so I accept the submission of Mr Russen QC that it is important to recognise this as a duty to ODL to employ reasonable skill and care in the performance of the functions of a director of ODL (and to resist the temptation simply to treat it as if it were a duty to the creditors of ODL to see that they did not suffer loss). But if the solvency of ODL was doubtful then the functions of the director fall to be performed in that context. His skill and care would be called for in relation to acts which might threaten the continued existence of the company. The acts which a competent director might justifiably undertake in relation to a solvent company may be wholly inappropriate in relation to a company of doubtful solvency where a long term view is unrealistic.

At trial it was accepted that the requisite degree of skill and care which Mr Frohlich and Mr Spanner respectively should have exercised is that stated in s.214(4) Insolvency Act 1986: namely, that of a reasonably diligent person having both (a) the general knowledge, skill and experience that might reasonably be expected of a person carrying out the same functions as were carried out by Mr Frohlich and Mr Spanner in relation to ODL and (b) the general knowledge, skill and experience that each actually had (see Re Loquitur Limited[2003] 2 BCLC 442 at 490).

Mr Frolich and Mr Spanner were the only directors of ODL. They did not have formal roles assigned to them. Mr Frohlich was a professionally qualified accountant with substantial experience of property development. Mr Spanner was a professionally qualified engineer with long experience of property development. Because of their individual qualifications, Mr Frohlich focused upon financial aspects and Mr Spanner upon the acquisition and development proposals. Because of a common experience of property development and because of the issues that arose in relation to the Site (which were an interweaving of funding and construction contract issues) they worked together. Each was exposed to the same guarantee liability. Neither had any cause to mislead the other or to withhold information from the other, and they shared the same office accommodation, in which (according to their evidence) they operated a simple filing system affording ready access to the key documents. Whilst their mastery of details in their respective spheres might have differed, in terms of fundamental understanding and working knowledge of the constituent elements of the project each ought to have been fully informed. If either asserts ignorance it can only be because he did not take even the little trouble necessary to ascertain the true position. If either asserts that he did not know what the other was doing or saying it can only be because he did not bother to take advantage of the readily available opportunities for communication.

The business of ODL was straightforward. It concerned a single project, dealings with one bank, one additional participant, two contractors, and a small professional team. The single project was the acquisition of a site with planning permission, and the building and sale of 30 industrial units: it was not complex. By the choice of its directors ODL became involved in a possible takeover by Easier (which involved dealing with the representative of the Easier board and a firm of solicitors). ODL’s business and affairs required little time and attention for competent management.

In my judgment no reasonably competent director, equipped and placed as Mr Frohlich and Mr Spanner each was, would have continued with the development after early to mid-September 2004, in particular by letting FCL continue with the steel contracts and go on to the Site and commence work. First he would have appreciated that the time horizon for the company was extremely short. The pressing creditors stood at some £300,000. The contractor principally charged with the enabling works had been paid the certified value of the first tranche of those works (but not the VAT) and had undertaken much further work currently due for certification. Second, he would have appreciated that significant further liabilities were about to be incurred. FCL (charged with the balance of the enabling works and with all of the preliminaries for the development) was due to go on site at the month end and had held its first on-site meeting on 13 September 2004. Orders had been placed for structural steel and cladding for the entire development. Third, he would have understood that against these accumulated and immediately prospective liabilities ODL had no cash resources. Fourth, he would have understood (for all the reasons summarised in paragraph 88 above) that there was no realistic prospect of getting cash to pay the bills because the funding conditions could not be met and the funding assumptions realised. Fifth, he would have readily appreciated that to carry on and to pretend to key stakeholders that there was no problem was neither proper nor viable, particularly if it depended upon concealing from the contractor the bank’s position (and vice versa). Sixth, he would have understood (as Mr Frohlich acknowledged to be the case) that there would have been no problem in stopping everything pending an assessment of the response to marketing. Seventh he would have known that costs had escalated (so far as FCL was concerned from £4,784,371 on the June 2004 cost plan to £5,084,849 in the August 2004 Interim Financial Statement) since the funding package had been negotiated, and those extra costs would have to be covered either by additional borrowing or by additional “pre-sales” (unless ODL was simply not going to pay its debts as an when due).

By (say) 14 September 2004 Mr Frohlich and Mr Spanner were plainly acting in breach of duty (and I so hold as an alternative to the holding I have made in relation to misfeasance).

The more difficult question is whether it is possible to hold Mr Frohlich and Mr Spanner liable for breach of duty at any earlier date: for example, when (one month after acquiring the Site) they permitted Castons to place the steel orders on 2 and 6 July 2004. My attention was not drawn to the steel contracts themselves: so it remains uncertain what was the time scale for design, then fabrication, then delivery, and what the payment obligations were. The Liquidator’s case is that ODL’s directors were in breach of duty because (a) they caused ODL to commence the development on a “speculative” basis; (b) there were no resources to fund any lack of sales; (c) there was no realistic prospect of the project being funded: and (d) (so far as relevant) the Easier Share Sale Agreement was conditional and the directors ought to have known the conditions were incapable of fulfilment or unlikely to be fulfilled.

The development was of course “speculative” in the sense that there were risks attached. But as the Liquidator recognises, risk is an inherent part of economic activity. The development was also “speculative” in the sense that the units were not being built for identified customers. This is undoubtedly a material factor, because from the outset the directors had been at pains to demonstrate that this risk was to be reduced by “building to order”. But this does not of itself establish that the directors were negligent. One needs to know

It is also correct that there were no identified resources to make good any lack of completed sales. This is a material factor. The completion of sales and the availability of the sale proceeds for funding the build were key assumptions in the cash flow which supported the funding proposal (though, oddly, the HBoS terms of funding were not consistent in their approach to the use of such monies). Some £700,000 of the cash flow is represented by contractual deposits released to ODL during the currency of the build. Competent directors would, in the light of their development experience, think about whether (even in the absence of “pre-sales”) sales might occur anyway during the currency of the development. They would consider whether the bank might vary its funding conditions: and they would think about how likely alternative funding was. Mr Spanner and Mr Frohlich say they did so. Mr Spanner says that the messages he was originally receiving from Oakley were positive (even if purchasers did not wish formally to commit); that he thought HBoS would be accommodating; and that once Easier were involved (whatever the original basis of their involvement) they would use their £5 million free cash to protect their investment (they having just paid £100,000 to secure exclusive dealing rights). I think he probably did read the situation in that way: and without knowing the detail of the dealings with Oakleys, HBoS and Earlier at that point it is going to be difficult to characterise that reading as careless.

The same factors feature in a consideration of whether there was any realistic prospect of the development being funded and whether there was any real hope of the conditions in the Easier contract being satisfied. But the principal factor governing the availability of funding and the satisfaction of the Easier conditions is the availability of a contract that HBoS would regard as “fixed price” – whether that was a true fixed price contract or a contract with a target price subject to some form of capping. After the Letter of Intent such a contract remained a theoretical possibility: and the opportunity to seek it would arise when the formal contractual documents were presented.

Difficult as the question is, I have in the end reached the clear view that I cannot hold Mr Frohlich or Mr Spanner negligent at the beginning of July. The Liquidator has not demonstrated that they were incompetent in permitting Castons to place orders for the design, fabrication and erection of structural steel and cladding (according to an unknown timetable and subject to the possibility of cancellation). In essence, allowing the development to continue at that point required a judgment about what was likely to happen in the immediate future. Would there be sufficient money to pay when the bills in due course arrived? A decision whether that judgment was negligent requires an assessment conducted without the benefit of the hindsight afforded by the knowledge that the bank would insist upon the strictest compliance with the funding conditions, that market interest would not ripen into contracts or reservations with a commitment fee, and that the Easier deal would lapse. In making such assessment the Court is asking whether it has been established that no reasonably competent director could have made the judgment about the future that was made by Mr Frohlich and Mr Spanner. To my mind it has not been so established. They took a risk. They misjudged that risk (in part, but only in part, because they did not take care to see the precise liabilities that were being incurred under the Letter of Intent: in part because they were optimistic). But misjudgement is not of itself negligence.

Having found Mr Frohlich and Mr Spanner to have been in breach of their fiduciary duty and in breach of their duty of care in September 2004 (and I have put the date of 14 September 2004 as a convenient date for the purposes of the next stage of the enquiry) I must now determine whether they should be relieved of that liability. I see no grounds upon which I can properly exercise the jurisdiction conferred by s.1157 Companies Act 2006 (re-enacting s. 727 of the 1985 Act) in respect of the misfeasance and breach of duty which I have found: and the matter was not the subject of sustained argument.

In the light of my findings on misfeasance and breach of duty I can deal with the “wrongful trading” claim relatively shortly. The requisite elements of liability are set out in s.214 Insolvency Act 1986. The question is whether (at or about 1 July 2004 or at or about 1 September 2004) Mr Frohlich or Mr Spanner knew or ought to have concluded that there was no reasonable prospect that ODL would avoid going into insolvent liquidation: and in deciding that question account is to be taken not only of what they respectively know but what they ought to have known or ascertained as reasonably diligent people discharging their respective functions and having the general knowledge skill and experience which each had: see Re Produce Marketing Consortium [1989] BCLC 520 at 550.

In my judgment each ought to have concluded at or about 1 September 2004 (certainly by (say) 14 September 2004) that there was no realistic prospect of avoiding an insolvent liquidation. By this date ODL was in fact insolvent on a balance sheet basis, as each could have established by drawing up the most rudimentary account and comparing it with the Savills valuation (even if uplifted by the certified value of the enabling works completed to date). It simply could not have met all its debts and liabilities (let alone the additional expense of a winding up). On debts immediately due for payment (and assuming that expenditure on enabling works was reflected £1 for £1 in an increase in the value of the Site) there was a significant shortfall. There were immediate liabilities of £192,000 in respect of enabling works completed by P J Brown and further contingent liabilities in respect of work done but not certified. There were contingent liabilities arising from preliminary works, the steel and other contracts placed by Castons with FCL. ODL was also insolvent on a “cash flow” basis. Existing preliminary creditors (who were expecting to be paid on the Easier takeover) would immediately demand payment. The bank was adopting a highly restrictive approach to funding. There was no hope of a fixed price or “capped” contract being offered by FCL. There was no hope of satisfying that funding condition. The Easier deal had collapsed. The attempt to interest a co-venturer collapsed. The cash flow which purported to demonstrate the viability of the project simply did not hold good on any reading in the events which had happened. With their actual skill and experience as property developers, and employing the general analytical and assessment abilities to be expected of directors participating in financial oversight and project management of a new build development, they ought to have concluded that there was no reasonable prospect of avoiding entering insolvency liquidation. Their continuation with the development after (say) 14 September 2004 constitutes wrongful trading.

What drove Mr Frohlich and Mr Spanner at this stage was wilfully blind optimism; the reckless belief that, provided they did not enquire too deeply into the figures, provided ODL did not let on to FCL that there was no funding and did not let on to HBoS that there was no fixed price contract, then something might turn up (if only because FCL and HBoS could be sucked into the development to such a degree that, in order to salvage something, they would crack under pressure and would “share the pain”). But the hope that “something might turn up” was on any objective view groundless and forlorn. Insolvent liquidation was all but inevitable.

I therefore find and hold that as from 14 September 2004 ODL was trading wrongfully, using credit extended to it by suppliers to trade when (but for their wilful blindness) they ought to have concluded that there was no realistic prospect of ODL avoiding insolvent liquidation.

I will hand down this judgment on 18 February 2011. I do not expect the attendance of legal representatives. I will on that occasion adjourn the question of costs and any other applications arising out of this judgment to a date to be fixed through the usual channels.