Templeton Insurance Ltd & Anor v Brunswick & Ors

Templeton Insurance Limited (C1) and Knox D’Arcy Operations Limited (C2) (collectively Cs) claim against Mr Ralph Brunswick (D1) for allegedly dishonest breaches of contractual obligations and of fiduciary duties, which breaches are alleged to be fraudulent or to constitute fraudulent breaches of trust on the part of D1.

Cs’ pleaded case against D1 alleges that :

The particular allegations as to the £0.5million are that over the period 17.6.05 to 16.12.05 (Footnote: ¹) D1 diverted funds belonging to Cs from C2’s bank accounts as bonus payments totalling £363,244.67 plus associated tax and NI totalling £136,585.71. The aggregate value of the claim against D1 is £499,830.38 before interest. Repayment was demanded orally on behalf of C1 on 26.5.06 and formally in writing by C1 on 27.6.06.

Cs further allege that D1 failed to disclose the bonus payments to Cs.

As particulars of fraud indicative of D1’s dishonesty, Cs allege that (1) D1 knew that he had no entitlement to a bonus payment; (2) D1 misled C1’s board as to his entitlement; (3) D1’s subsequent conduct points to his guilty mind; and, (4) over the period 2002 to 2005 there were other instances of dishonest conduct on the part of D1 concerning or affecting Cs.

Although not addressed in the evidence or argument during the trial, it occurs to me that, if D1 was not entitled to the bonus payments, the tax and NI payments may be (or might have been) recoverable from the appropriate authorities. If Cs succeed, this is a matter which may be considered further in the course of working out the order to be made.

D1 maintains that he was entitled to the bonus payments and he denies Cs’ claim. D1 bases his defence on contractual entitlement and, if and to the extent required, formal ratification by C1’s Board.

He contends that all bonus payments, and the associated tax and NI payments, were open and processed in the ordinary way through Cs’ books and records. He asserts his entitlement to the bonus payments and his honesty.

When this action was commenced, Cs’ claims were framed in breaches of contract and of fiduciary duties. Allegations of dishonesty and fraud were added on amendment to overcome D1’s reliance on the operation of s.281(3) of the Insolvency Act 1986 (respectively s.281(3) and IA 1986) raised by his Defence (Footnote: ²).

D1’s case, pleaded and argued by Mr Cullen, his counsel, also takes the point that claims for breaches of contract and of fiduciary duties are not saved by characterisation as ‘fraudulent’ because s.281(3) only preserves actions founded in fraud, i.e. the tort of deceit, and/or fraudulent breaches of trust.

Cs’ claim against Mrs Elizabeth Brunswick (D2), who is D1’s wife, was not foreshadowed by a letter before action or other prior warning. The claim is now put on the basis that, on 25.5.06, D2 knowingly received the bonus payments, that is the £363,244.67, as part of a transfer of £500,000 from a joint account maintained by D1 and D2 with the Bradford & Bingley Building Society (B&B) to a newly opened account in her sole name with the Britannia International Bank (BIB). D2 denies knowing receipt.

Cs’ claim against D2 initially alleged dishonest assistance on her part and that D2 had acted in concert with D1. These allegations were abandoned prior to trial, although – as Ms Lucas, D2’s counsel, fairly observed – an attempted revival appeared to be under way during the trial. However, it is clear from the closing submissions of Mr Booth QC, who appeared with Mr Beever as Cs’ counsel, that the claim against D2 is advanced in knowing receipt.

By amendment, Cs allege that the route by which the bonus payments were transferred to an account in D2’s sole name was by D2 permitting D1 to make decisions and operate joint accounts. Cs aver that because (as they allege) D1 was fraudulent, D1’s knowledge is to be attributed or imputed to her. This is expressly asserted by reference to principles of the law of agency but said to be for the purpose of rendering her liable for knowing receipt.

There is no plea in the Re-Amended Particulars of Claim that D2 was a principal and D1 her agent. There is a prayer for damages, but this is as an alternative to equitable compensation for knowing receipt. That being noted, Cs’ Opening Submissions launch (almost) immediately into an assertion of agency so as to fix D2 with the knowledge of D1 as her agent.

There is, by amendment, a further plea that D2 in any event received the bonus payments as a volunteer and was thereby unjustly enriched rendering her liable to account to Cs for the benefit received. This allegation is aimed at the difference, described by Cs’ counsel as a shortfall, between the bonus payments (£363,244.67) and the sum paid into the BIB account and later transferred to D3 (£324,000) (Footnote: ³). In other words, the purpose is to fix her with personal liability for bonus payments paid into a joint account in the names of D1 and D2 but not later paid into the BIB account, which was in her sole name, and onwards to D3.

The relief claimed against D2 is based on knowing receipt (monies being received and held on constructive or resulting trust), restitution as a result of unjust enrichment, and tracing in equity.

Cs’ claim against Mr Jonathan Booth (D3), as trustee of the estate of D1, is based upon D3 being “the current recipient of … the £363,244.67” (Footnote: ⁴). At the PTR and applications hearing on 3.11.11, D3 was given permission to amend his Defence so as to make clear that he intended to maintain a neutral stance in respect of Cs’ claims. Consequently, D3 was neither represented nor present at the trial. D3’s counsel at the PTR, Mr Berragan, made clear that D3 was willing to attend the trial to give evidence should that be requested by any party; it was not.

Bearing in mind Cs’ case that the sum flowing from D1 and D2’s joint accounts to the BIB account was £324k, I assume that Cs’ contention is in fact that D3 is the current recipient of that sum rather than the full net bonus sum (£363,244.67).

These proceedings were commenced on 24.2.10, more than 4 years after the last of the bonus payments. During part of that intervening period, namely from 2.4.08 to 10.11.09, D1 was a bankrupt, hence D1’s reliance on s.281(3).

The trial was originally fixed for hearing in March 2011, for which hearing a 5 day estimate had been given to the Court. On 7.2.11, HHJ David Cooke vacated this fixture on the basis that the trial would be re-listed as from 1.9.11 with a revised time estimate of 10 days. At a hearing on 30.6.11, I gave Cs permission to file and serve Re-Amended Particulars of Claim, gave directions for disclosure and further factual witness statements to be served and filed, and extended the trial estimate by a further 2 days. On 3.11.11, hearing applications and a PTR, I made a further order for disclosure by Cs, and gave permission for further factual witness statements to be served and filed.

I also note that, at the hearing on 3.11.11, Cs requested and were given permission to expand the then draft trial bundle from about 26 lever arch files to a number in excess of 30 (in the event 32) to add material that Cs wished to have available to cover any answers that might be given by D1 during cross-examination. I note this for reasons including that it evidences Cs’ attention to the documentation that Cs required to advance their claims.

Although this case concerns parties having their centre of main interests or domicile and residence on the Isle of Man (IoM), events which took place on the IoM, contracts or arrangements said to have been made between IoM parties and (very largely) to have been performed on the IoM, and monies paid, transferred and held on the IoM, the action was commenced in the High Court of Justice in England and, notwithstanding that D1’s pleaded defence contains an averment as to Manx law (#12), the parties are agreed that the law to be followed and applied is English law, that is the law of England and Wales.

The burden of proof rests on Cs and the standard of proof is the civil standard, namely the balance of probabilities. There is no enhanced standard where, as here, a claimant alleges dishonesty or culpable knowledge on the part of a defendant; “there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not” (Footnote: ⁵), see In re B (Children) [2009] 1 AC 11, speeches of Lord Hoffmann ##12-15 and Baroness Hale ##31-32.

Determination on the balance of probabilities also involves having regard, to whatever extent is appropriate in the particular case, to any relevant inherent probabilities and improbabilities (Footnote: ⁶).

When reaching a decision as to the facts, a judge will apply common sense to the written and oral evidence, to the available contemporaneous documentary evidence, to any relevant circumstantial evidence (for example the fact of and reason for or the absence of documentary material), and to the demeanour, motivation and overall impression of the parties and the witnesses.

Sometimes the result will be obvious and sometimes a judge will have to work through the material presented during the trial, bearing in mind and ‘weighing’ the particular circumstances of the case, in order to reach a decision by reference to the above set in the context of the pleaded allegations and the relevant and applicable law.

This approach should enable a judge to decide where the truth lies; but, if not, the judge is not allowed to sit on the fence and may then have to rely upon the burden of proof (Footnote: ⁷).

Where fraud is alleged it is for the claimant to prove that the defendant either knew that he was not entitled to act as he did or that he did not believe that he was entitled to act as he did, Derry v Peek (1889) 14 App Cas 337, Lord Herschell at p.368.

In the context of considering lack of belief, Lord Herschell drew attention to the importance of distinguishing between not caring about the truth (and therefore having no real belief) and being careless but nevertheless having an honest belief (Footnote: ⁸), and to the risk of blurring the distinction between carelessness and fraud and equally holding a man guilty of fraud whether his acts can or cannot be justly so designated (Footnote: ⁹).

Lord Herschell concluded that knowledge or belief is to be evaluated by asking whether a reasonable man would be likely under the circumstances so to believe (Footnote: ¹⁰). The test was there formulated as an objective one applied to the circumstances of the particular case, which could include subjective elements.

Almost a century later, in the latter part of the last century, the test for dishonesty now applied in criminal cases was settled in R v Ghosh [1982] QB 1053; it is in two stages, part objective and part subjective : (1) Was what was done dishonest according to the ordinary standards of reasonable and honest people? (2) If so, did the defendant realise that what he was doing was dishonest by those standards? For a prosecution to succeed, the jury must be sure that the answer to both questions is in the affirmative.

This represents a step beyond the civil law test applied in Derry v Peek, and it is to be noted that the defendant’s own standards of honesty are irrelevant. Thus, where the prosecution establishes that a defendant knows that what he did would generally be regarded as dishonest, a defence that the defendant does not regard it as dishonest himself will not save him from conviction; but, a credible attestation that he did not know that what he did would be generally regarded as dishonest would be a defence to the element of dishonesty in a criminal charge.

As to courts exercising the civil jurisdiction, in Royal Brunei Airlines v Tan [1995] 2 AC 378, the Privy Council considered dishonesty in the context of accessory liability of the director of an insolvent travel agency who applied money received on trust for an airline in meeting the agency’s liabilities and advised that, in this context, “ … acting dishonestly … means simply not acting as an honest person would in the circumstances. This is an objective standard. … Honesty, indeed, does have a subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. … However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. … Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others’ property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he hear something he would rather not know, and then proceed regardless” (Footnote: ¹¹).

In Twinsectra Ltd v Yardley and others [2002] 2 AC 164 the House of Lords considered the position and liability of a solicitor (S1) acting for a borrower (Y) where S1 had refused to give a personal undertaking to a lender (T) to apply the loan funds (£1m) only towards the purchase of property by Y and who had later received funds from another solicitor (S2), who had given such an undertaking to T. S1 had paid the funds out in accordance with Y’s instructions taking no steps to ensure that the funds were applied as required by the undertaking. In the event, some £350k was applied in breach of the undertaking and lost, and S2 was declared bankrupt. T sued S1 for accessory liability (dishonest assistance in S2’s breach of trust). The trial judge (Carnwath J, as he then was) found S1 to be misguided but not dishonest. The Court of Appeal concluded that the trial judge had erred in law by dismissing the action notwithstanding findings that S1 had “shut his eyes” to the requirements of the undertaking (“the details”, “the problems”, and “the implications”) and that in so doing S1 had been dishonest in accordance with the Royal Brunei Airlines test, and allowed the appeal. In the House of Lords, Lords Slynn, Steyn, Hoffmann and Hutton reversed the Court of Appeal’s decision and reinstated the trial judge’s dismissal of the claim; Lord Millett dissented.

Given the difference of view between the trial judge and the Court of Appeal, Lord Slynn considered but decided against recommending a retrial, concluding that weight should be given to the trial judge’s conclusion as to S1’s honesty after hearing him give evidence at length (Footnote: ¹²). Lord Hoffmann explained his disagreement with the view of Lord Millett by reference to the Royal Brunei Airline principles “requir[ing] more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing the ordinary standards of honest behaviour” (Footnote: ¹³). Lord Hoffmann considered that what the trial judge had meant by “shut[ting] his eyes” was not “deliberate abstinence from inquiry in order to avoid certain knowledge of what one suspects to be the case” but “[taking] a blinkered approach to [S1’s] professional duties as a solicitor or bur[ying] his head in the sand. … neither of [which] would be dishonest” (Footnote: ¹⁴).

Lords Slynn, Steyn and Hoffmann all agreed with Lord Hutton’s formulation of the test for accessory liability as “the combined test” by which both knowledge and dishonesty are essential ingredients (Footnote: ¹⁵).

By the combined test, the House of Lords approved as the test in a claim where fraud is alleged a requirement that the claimant must prove (1) that the conduct of the defendant in issue was dishonest by the ordinary standards of reasonable and honest people and (2) that the defendant realised that by those standards his conduct was dishonest.

In Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2006] 1 WLR 1476, Lord Hoffmann, giving the advice of the Board of the Privy Council, explained that “[a]lthough a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards” (Footnote: ¹⁶). Acknowledging an element of ambiguity in his and Lord Hutton’s speeches in Twinsectra, Lord Hoffmann explained that the test as formulated in Twinsectra “meant only that [the defendant’s] knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. It did not require that he should have had reflections about what those normally acceptable standards were” (Footnote: ¹⁷).

In Abu-Rahman v Abacha [2007] 1 Lloyd’s Rep 115, the Court of Appeal approached the issue of dishonesty by applying Twinsectra as explained or clarified in Barlow Clowes. In so doing, Arden LJ observed that the Court of Appeal should follow Barlow Clowes. Accordingly, in her judgment, Arden LJ held that a claimant is not required to prove subjective dishonesty, in the sense of consciousness on the part of the defendant that the transaction is dishonest; that dishonesty is established if the claimant proves that the defendant knows of the elements of the transaction which make it dishonest according to normally acceptable standards of behaviour (Footnote: ¹⁸); and, that the test of dishonesty is predominantly objective : did the conduct of the defendant fall below the normally acceptable standard? Arden LJ acknowledged that there are also subjective aspects to dishonesty whereby the conduct in issue is to be assessed in the light of what the defendant actually knew at the time, as distinct from what a reasonable person would have known or appreciated (Footnote: ¹⁹); and, concluded that the law as laid down in Twinsectra as interpreted in Barlow Clowes represents the law of England and Wales (Footnote: ²⁰).

More recently, in Starglade Properties Ltd v Nash [2010] EWCA Civ 1314, the Court of Appeal had to consider whether a sole director and shareholder’s (N) disregard of a side letter he had signed on behalf of his company promising to hold certain monies received on trust for the claimant (S) and application of the monies in paying (and, because the company was insolvent, preferring) creditors of the company was dishonest. After referring to Royal Brunei Airlines, Barlow Clowes and Abu-Rahman, the trial judge expressed the test for dishonesty as follows : “the defendant must be guilty of conduct which transgresses normally accepted standards of conduct i.e. conduct which all normal people would regard as dishonest” (Footnote: ²¹). The trial judge found that most people would not know whether, as a matter of law, a company director may prefer some creditors over others and that in the absence of advice or actual knowledge as to the law, the preference did not transgress generally accepted standards of commercial behaviour (Footnote: ²²).

The Court of Appeal held that the test was incorrectly expressed as “conduct which all normal people would regard as dishonest”; the correct test was the ordinary and not the unanimous standard of honest behaviour (Footnote: ²³).

The Court of Appeal found that the trial judge had asked himself the wrong question and had approached the test of dishonesty from the wrong perspective. In particular (1) he had not addressed the question whether the relevant conduct of N (knowing that the company was insolvent but could pay a dividend to creditors and then seeking to frustrate S by paying the creditors in full) was dishonest; and, (2) the fact that N was an honest witness had no bearing on the honesty of his conduct under consideration (Footnote: ²⁴). The deliberate removal of assets from an insolvent company so as to defeat the just claim of a creditor is not in accordance with the ordinary standards of honest behaviour, and a director could not think otherwise notwithstanding his lack of knowledge of the law (Footnote: ²⁵).

It is important to note that there is a difference between deliberate conduct and dishonest conduct, and, therefore, between a deliberate breach and a dishonest breach whether of contract or fiduciary duty. A breach may be deliberate in the sense (1) that the defendant intended to behave as he did but did not appreciate that a breach would occur or (2) that the defendant behaved as he did appreciating that a breach would occur; neither breach, not even the latter, would necessarily be dishonest. For a breach to be dishonest, there must be more. The conduct in question must be shown to be a breach, and the breach must be shown to be wanting in honesty or deceitful, the yardstick for which is : “normally acceptable standards” of honesty.

S.281(1) provides that upon discharge from bankruptcy a bankrupt is released from all the bankruptcy debts. However, s.281(3) provides that discharge does not release the bankrupt from any bankruptcy debt incurred in respect of any fraud or fraudulent breach of trust to which he was a party.

The definition of bankruptcy debt in relation to a bankrupt, at s.382(1) IA 1986, includes “any debt or liability to which he is subject at the commencement of the bankruptcy”. It is immaterial whether the debt is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion (s.382(3)). The meaning of liability includes a liability to pay money or money’s worth, including … any liability for breach of trust, any liability in contract, tort … and any liability under an obligation to make restitution (s.382(4)).

In Mander v Evans [2001] 3 AER 811, Ferris J held that for the purposes of s.281, “fraud” means actual fraud and does not include constructive fraud, which covers a wide range of conduct which may be regarded as unconscionable but does not necessarily involve actual dishonesty.

In Woodland-Ferrari v UCL Group Retirement Benefits Scheme [2002] BPIR 1270, Ferris J considered the meaning of fraudulent breach of trust in the context of s.281 and held that there must be deliberate conduct involving also an element of dishonesty (Footnote: ²⁶).

Where a trustee consciously acts beyond his powers (e.g. by making an investment known to be unauthorised), there is a deliberate breach of trust. However, if done in good faith and in the honest belief that the investment is made in the interests of the beneficiaries, the breach of trust is not fraudulent (Footnote: ²⁷).

S.281(3) does not recognise or preserve beyond discharge from bankruptcy a debt or liability unless it is founded in fraud or fraudulent breach of trust to which the bankrupt was a party. The touchstone in each case is that actual dishonesty on the part of the bankrupt is a necessary ingredient.

True it is that an allegation of ‘fraudulent breach of contract’ does not convert a claim founded in contact to a claim founded in tort. Further, as pointed out by Millett LJ (as he then was) it is also the case that there is no generalised tort of fraud (Footnote: ²⁸).

However, ‘fraud’ is a familiar concept in English law, for example, being recognised by statute as a ground for postponing the commencement of limitation periods (s.32 of the Limitation Act 1980) and for extending liability to persons knowingly carrying on an insolvent company’s business with intent to disadvantage its creditors (s.213 IA 1986), and being required to be specifically set out in the particulars of claim where a claimant wishes to make an allegation of fraud (CPR 16PD.8 #8.2). Moreover, “fraud or fraudulent breach of trust to which the trustee was a party or privy” is a statutory ground for disapplying the limitation periods (s.21(1)(a) of the Limitation Act 1980).

The epithet ‘fraudulent’ added to the phrase ‘breach of contract’ is intended to signify that actual dishonesty on the part of the defendant is a feature of the particular breach of contract alleged.

The epithet ‘fraudulent’ added to the phrase ‘breach of fiduciary duty’ is equally intended to signify that actual dishonesty on the part of the defendant is a feature of the particular breach of fiduciary duty alleged.

In Gwembe Valley Development Co. Ltd (in receivership) v Koshy and others (No.3) [2004] 1 BCLC 131 the determinative issue on the appeal was whether or not a breach of fiduciary duty was fraudulent; specifically, was it a case of simple non-disclosure by a director or one of deliberate and dishonest concealment? (Footnote: ²⁹) The breach of fiduciary duty was held to have been deliberate and dishonest with the consequence that it was treated as, or analogous to, a fraud or fraudulent breach of trust so as to disapply the statutory limitation periods (Footnote: ³⁰).

In my judgment, a ‘fraudulent breach of contract’ or a ‘fraudulent breach of fiduciary duty’ is as capable of coming within the meaning of the word ‘fraud’ at s.281(3) as is the tort of deceit. The purpose of s.281(3) as a qualification to s.281(1) is to prevent a person from using the process of bankruptcy or invoking his bankruptcy and discharge therefrom as a medium for becoming free from debts and liabilities resulting from his actual dishonesty. In other words, s.281(3) is an anti-avoidance and preservative provision aimed at continuing the rights of a creditor who has been defrauded by the bankrupt. Thus, ‘fraud’ as the gateway to the application of s.281(3) and a route through the barrier imposed by s.281(1) is not satisfied by establishing ‘fraud’ in the equity sense (‘against conscience’ or ‘unconscionable’). To pass through the gateway and remain on the road to recourse against the discharged bankrupt, a creditor must prove ‘fraud’ in the common law sense; this is not to be understood as restricting access only to bankruptcy debts founded in the tort of deceit, but rather as a reference to debts tainted by actual dishonesty.

That analysis and conclusion is entirely consistent with the approach and analysis of Ferris J and the thrust of his decisions in Mander and Woodland-Ferrari.

To the extent that Mr Cullen submitted on behalf of D1 that Cs have no cause of action against D1 because he is not sued for the tort of deceit (fraud in a Derry v Peek sense) and that there is no scope for a claim founded in fraudulent breach of contract and/or fraudulent breach of fiduciary duty, and, therefore, that Cs’ claim is defeated by the operation of s.281(3), I reject that submission for the reasons given above. In so doing, I also observe - but make clear that this is not part of my reasoning - that so far as I am aware no application was made to the Court prior to the trial for the claim to be struck out or for defendant’s summary judgment or for the determination of a preliminary issue.

There are factual issues, which I shall address, as to whether or not there was a contractual relationship between C2 and D1, and as to the precise terms of any contract between each of Cs and D1. These issues will require me to bear in mind principles relevant to the formation of a contract and to the identification of a contract’s terms, whether express or implied, and to the construction of such terms. I was not expressly referred to any general or specific principles of contract law, except in the context of contracts of employment, but I make clear at this point that when considering the relationship between each of Cs and D1, and in particular, what if any contractual right he had to a bonus, I shall have the general principles of contract law in mind.

As to contracts of employment, Mr Cullen’s bundle of authorities for D1’s case included extracts from Harvey on Industrial Relations and Employment Law. Both he and Mr Booth QC, for Cs, referred to and relied upon these extracts.

Where, as here, there is no formal written contract of employment, or at least no such contract in evidence, the Court will not make a bargain for the parties, but it will strive to interpret the bargain, if any, they have made.

In an employment context, where a promise has been made and relied upon it is likely to be construed as being intended to have contractual effect. Harvey, at Chapter 2 section D #29, which concerns implied terms in the context of employment contracts, notes that much greater use may have to be made of implied terms than with commercial contracts. In particular, Harvey observes that where an individual has actually worked for an employer for a significant period, no tribunal will hold that there was no employment contract at all merely for want of written terms. Thus, the tribunal may have to find the terms by having greater regard to post contractual dealings and, if applicable, the treatment of other similar employees.

Again, in the context of employment, the Court is to be open to the possibility – depending upon the particular facts of the particular case – that the terms of the contract may have to be identified and determined by reference to a combination of letters, oral exchanges, and evolution by conduct over time; in support of this proposition Harvey cites a passage from the speech of Lord Hoffmann in Carmichael v National Power plc [2000] IRLR 43 at #33. Whenever subsequent conduct falls to be considered, the Court must also bear in mind that it may not evidence what was agreed at the time, but may reflect some change of mind (which may be unilateral or mutual). Thus, an alternative possible relevance of subsequent conduct is as evidencing an implied variation of the original terms.

As to duties under an employment contract, I take it as uncontroversial that an employee owes his employer a duty to provide loyal and faithful service, which would include acting in good faith and honestly in all dealings with the employer’s assets (including money). It does not, however, follow that there is an obligation to serve only that employer or an unqualified obligation not knowingly to do anything to the prejudice or loss of the employer.

Correspondingly, I take it as uncontroversial, that an employer owes an employee a duty to pay whatever remuneration has been agreed.

Finally for present purposes, while the particular circumstances of an employer / employee may give rise to fiduciary obligations on the part of an employee, such obligations are not inherent in the nature of the relationship itself, Nottigham University v Fishel [2000] QB 1462.

A person who is a director of a company owes that company a number of duties, some of which are fiduciary (e.g. good faith and honesty) and some of which are not (e.g. skill and care).

Cs allege that the fiduciary duties owed to each of them by D1 as a director were:

D1’s pleaded case does not admit that the above is a correct statement of the fiduciary duties of a director, but does not put forward an alternative formulation.

The core characteristic of a fiduciary relationship is that it is one of trust and confidence, and the distinguishing obligation of a fiduciary is loyalty. Fiduciary duties are imposed upon a director for the benefit of the company’s members, present and future, and, to an extent, its creditors.

In Bristol and West Building Society v Motthew [1998] Ch 1, Millett LJ (as he then was) identified single-minded loyalty as the distinguishing obligation of a fiduciary. The features of this core duty include :

For a recent endorsement of this formulation by the Court of Appeal I was referred to Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (in administrative receivership) and others [2011] EWCA Civ 342 (Footnote: ³²). As examples of breaches of fiduciary duties by a director, Lord Neuberger MR cited : exercising powers of management or control otherwise than in good faith and in a way believed to be in the interests of the company (breach of (1)), and making an unauthorised profit through the use of his position as a director, whether or not acting in good faith (breach of (2) and (3)) (Footnote: ³³).

I do not unreservedly adopt the formulation expressed by Cs in their pleaded case; in particular, the contention that a fiduciary owes a duty of ‘full disclosure of any misconduct’ was not supported by reference to authority; however, the other duties said by Cs to be D1’s fiduciary duties are clearly in step with established authority as to the features of a fiduciary’s duty.

I also observe that while the duties are rigorous, their application in a particular case must take into account, rather than override, the facts and circumstances of that case.

It is trite law that a director of a company is not a trustee as such, not least for the obvious reason that, in the ordinary course, the office requires, as part and parcel of directing and managing the company’s business, decisions to be made on a commercial basis and risks to be taken with the company’s assets beyond those which a trustee may properly take.

However, it is well established that the position of a director is closely analogous to that of a trustee and that a breach of fiduciary duty by a director may be treated as a breach of trust, and further that a director who is himself the recipient of a company’s property in breach of fiduciary duty holds that property on trust for the company as a constructive trustee, JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 (Footnote: ³⁴); the reference to constructive trustee is here in the sense of pre-existing duty rather than in the sense of arising in consequence of the transaction impugned.

That a dishonest breach of fiduciary duty by a director may be recognised and characterised as a fraud or a fraudulent breach of trust is clear from Gwembe Valley Development Co., as noted above.

The claim against D2 is framed primarily in knowing receipt. Both Mr Booth QC, leading counsel for Cs, and Ms Lucas, counsel for D2, referred to BCCI (Overseas) Ltd v Akindele [2001] Ch 437. In that case, the Court of Appeal identified the essential elements of knowing receipt by reference to a passage from the judgment of Hoffmann LJ (as he then was) in El Ajou v Dollar Land Holdings plc [1994] 2 AER 685 at p.700; they are :

In Akindele, Nourse LJ acknowledged that while a knowing recipient will often be found to have acted dishonestly, it is not, and never has been, a pre-requisite or an essential element of knowing receipt (Footnote: ³⁶).

After a detailed review of the authorities on knowledge in the context of knowing receipt, Nourse LJ concluded that : “All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt”; in so doing Nourse LJ recognised that a test in this form would not, any more than any other test, avoid the difficulties of application (Footnote: ³⁷).

It is important to note that the test is not whether the fact or the circumstances of receipt by the defendant is/are unconscionable, but is whether the defendant’s state of knowledge renders retention of the receipt unconscionable. Thus, liability cannot be determined without having regard to the defendant’s knowledge.

As an example of the application of the test, there is, of course, the judgment in BCCI itself in which Nourse LJ reviewed the trial judge’s findings when considering the defendant’s state of knowledge (first at the time of the 1985 agreement, and then at the time of the divestiture agreement) (Footnote: ³⁸).

For a further application of this approach, Ms Lucas referred to Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Rep 341, in which HHJ Chambers QC, sitting as a Judge of the High Court, observed that Akindele “makes it clear that dishonesty is not necessary to a finding of knowing receipt. It is also pretty clear that the type of knowledge that is required is actual rather than constructive knowledge” (Footnote: ³⁹).

It does not seem to me that the third element as described in El Ajou or the test formulated in Akindele focus on or require a state of knowledge of a particular quality. Rather, a trial judge is required to consider (1) what the evidence establishes the defendant knew, and (2) whether that renders retention of the claimant’s assets unconscionable.

If, in his reply to Ms Lucas’ closing submission (Footnote: ⁴⁰), Mr Booth QC meant to submit that where the facts and circumstances have the appearance (or even reek) of unconscionability, knowledge on the part of the defendant must follow (“matters kick in”), I reject that submission. An application of the test in that way would be back to front and thoroughly misconceived.

Mr Booth QC referred to and relied upon Underhill and Hayton’s Law of Trusts and Trustees at #99.38. Ms Lucas also relied upon this paragraph, which states :

“If a transferee of trust property is a volunteer, then the property will remain burdened with the beneficiaries’ equitable interest, whether or not he has notice of the trust, because a volunteer has no equity against a true owner. Where, therefore, the trust property can be followed into the hands of a volunteer, who still has it at the time of the claim, an order for restoration will be made against him. Moreover, a volunteer will also be personally liable to account to the beneficiaries as a constructive trustee if after acquiring knowledge of the trust he dissipates the trust property so that no proprietary tracing claim lies against him”.

Three points are to be noted from this passage :

In this context, Ms Lucas referred to Carl Zeiss Stiftung v Herbert Smith (No.2) [1969] 2 Ch 276 at p.293A-E for the proposition that knowledge of the fact that a claim is made that assets are trust property does not equate to knowledge that those assets are as a matter of fact trust assets. That is a fair reflection of the passage referred to in the judgment of Danckwerts LJ; however, it would also be right to acknowledge that Danckwerts LJ identified a number of complicating factors as the basis for rejecting the submissions on behalf of Carl Zeiss that the allegations in the statements of claim were to be assumed to be true for the purpose of fixing the defendant with knowledge.

Thus, in each case where there has been a disposal or a dissipation, it will be a matter of considering whether the matters said to give rise to the knowledge did in fact constitute knowledge of the trust.

Agency is raised by Cs in this case to establish (1) knowledge by attribution or imputation between spouses in the context of receiving monies into and operating joint bank accounts, and (2) fixing one spouse with the (alleged) knowledge of the other to establish unconscionability for knowing receipt (Footnote: ⁴¹) in respect of funds paid into that joint account.

To support the submission of imputation or attribution of knowledge, Mr Booth QC referred to Item Software (UK) Ltd v Fassihi [2005] ICR 450, in which the Court of Appeal (Footnote: ⁴²) referred to the principle of the law of agency that information received by the agent in the course of his agency is to be imputed to the principal, and to the fraud exception to that principle by which an agent committing a fraud on the principal is not under a duty to disclose his wrongdoing to the principal.

However, that reference was not intended to be and was not a citation of the full principle.

As is clear from Bowstead and Reynolds on Agency, 19^th edition, Article 95(1) : the law may impute knowledge relating to the subject-matter of the agency which the agent acquires while acting within the scope of his authority. As a matter of principle, imputation is neither automatic nor absolute and its application is generally confined to knowledge acquired while acting within the scope of authority. The extent of any imputation of knowledge will vary according to the particular circumstances; thus (1) where an agent is authorised to enter into a transaction in which his own knowledge is material, knowledge acquired outside the scope of his authority may also be imputed to the principal (Art 95.2); and (2) where the principal has a duty to investigate and make disclosure, material facts which the agent might be expected to tell the principal may be imputed (Art 95.3).

By way of example of the operation of this principle in the context of a joint bank account, Ms Lucas referred to Heperu Pty Ltd v Belle [2009] NSWCA 252 in which the New South Wales Appeal Court held that the scope of authority to operate a joint bank account will not, of itself or without more, extend to the deposit or withdrawal of funds misappropriated from third parties, with the result that the joint account holder will not be liable beyond the scope of the authority given to the other account holder as agent.

Having thus referred to the principles of law most relevant to Cs’ claims against D1 and D2, I turn next to the parties and the witnesses.

Cs are wholly owned subsidiaries (Footnote: ⁴³) of Knox D’Arcy Holdings Limited (KDHL). The group of companies of which Cs form part was referred to by the parties as the Knox D’Arcy group (KD group). The KD group has been described as comprising a large number of companies. KDHL’s financial statements describe Cs as being amongst its principal subsidiaries. The principal activities of the KD group appear to be management consultancy, investment (both holding and management), and property investment.

KDHL is an IoM company, as are many of its subsidiaries, including Cs. KDHL also has subsidiaries registered in the BVI, England, Switzerland, South Africa, and elsewhere. There are also associated companies in other jurisdictions. From the evidence, I have the impression that during the 1990s KD group’s core activities, consultancy and investment, were carried on mainly in or from the IoM and South Africa; and, that by 2003 the core activities had expanded, largely as a result of the growth of C1, so that insurance had become a material part of KD group.

There are a number of other companies outside KD group’s group structure but under the same ultimate beneficial ownership. These include a Jersey registered company referred to as ‘Lacewood’, which was described as the insurance broking arm of KD group, and its 100% subsidiary Legal Risks Management Limited (referred to in the evidence as LRM).

Notwithstanding the corporate structure defined by shareholdings, for business purposes KD group is said by Cs to be organised and/or analysed and measured for management purposes by reference to divisions. This is, at least in part, because many consultancy and investment projects were and are undertaken through special purpose vehicles.

Another feature of the way KD group is organised is that group banking arrangements for receipts and payments are centralised with recharges being effected through intra-group accounting. KD group’s purpose is to maximise the efficient use of cash. C2’s functions include holding and operating bank accounts for KD group companies. Although this applied generally, there seem to have been at least 2 exceptions : (1) Byrne Fleming, a South African consultancy acquired from the receivers of its holding company, Doctus plc, in the 1990s and which was wound down between 1997 and 2002, and (2) C1 which, being an insurance company, was subject to cash and solvency regulations and monitoring. C1 therefore had its own bank accounts for insurance business but was embraced within KD group’s banking arrangement for some purposes, including payroll.

In consequence, employees of C1 were in fact paid by C2 with the cost being recharged by an intra-group accounting adjustment. There is evidence that these payroll arrangements for C1 were revised during the course of 2005 in relation to salaries.

KDHL’s other principal subsidiaries include at least two companies registered as Knox D’Arcy Limited (KDL), one in South Africa the other in the IoM (Footnote: ⁴⁴). D1’s unchallenged evidence is KDL (IoM) was his original employer when he joined KD group in 1991 and that at all material times until 30.6.06 he remained an employee of KDL or, at any rate, that his payslips were issued by KDL (which is also confirmed by D1’s T14 official tax deduction statement for the fiscal year 2005/2006 (Footnote: ⁴⁵)). This may go some way to explaining Cs’ and their legal representatives’ apparent lack of clarity, even at the conclusion of Cs’ closing submissions, as to the contractual and employment position of D1.

Cs’ evidence (that of Mr Richard Steele (RS)) is that the ultimate beneficial owner of KD group is the Steele family through trusts (the Trusts). D1’s evidence and case is that RS is KD group’s beneficial owner. For the purposes of the matters in issue before me, the two are indistinguishable and any reference in the evidence before me or in this judgment to the Trusts or the Steele family is in substance a reference to RS.

In or about the latter part of 1994, D1 suggested to RS that KD group set up an insurance company. RS agreed to D1’s suggestion. The result was that C1 was established as an IoM company with an initial investment as paid up share capital of £500k. Investment at this level was to provide a sufficient capital base for C1 to undertake insurance business, it also provided ample reason for RS to take an interest in C1’s business and performance.

It is common ground between Cs (for this purpose RS) and D1 that D1 was to devote the majority of his time and effort to establishing C1 and developing it into a profitable insurance business.

It is also common ground between Cs (RS) and D1 that there was an arrangement between RS and D1 from the outset, that is before the formation or acquisition of C1, that D1 was to be motivated to make a success of C1 and, irrespective of the attribution of any part or the whole of his salary to such work, to be rewarded for his efforts by a 10% entitlement. There is disagreement as to the precise terms of the arrangement, whether the arrangement constituted a binding agreement, and, if so, how the 10% entitlement was to be measured and implemented. Such disagreement is at the core of these proceedings.

There is no dispute between Cs and D1 that D1 was in a contractual relationship with C1; however, there are issues as to D1’s status as an employee and the terms of their agreement.

There is no dispute that, from the outset and at all material times, day to day management and direction of C1 was in the hands of D1. Indeed, D1 was appointed or assumed the title of executive chairman of C1 and was at all material times an executive director of C1.

Other officers were appointed to C1. KPMG Audit LLC, KD group’s auditors, were engaged as C1’s auditors. Over time, non-executive directors with appropriate specialist expertise were appointed, including Mr Roger Barrs (RB) a chartered accountant (qualified in 1977) with specialist insurance audit and board experience; Mr Basil Hardie (BH) a chartered insurer since 1975 and an experienced insurance official; and, from 15.8.03, Mr Philip Ellerton, an experienced insurance official and underwriter whose career in insurance began in 1961, now deceased.

In addition, as a company transacting insurance business, C1 was regulated by and reported quarterly to the IoM Insurance & Pensions Authority. There is also evidence that the FSA monitored C1 to ensure that it was trading with rather than trading on the mainland.

D1 was not the only executive director of C1. Mr Anthony Corlett (AC), who gave evidence as a witness for D1, joined C1 as an employee in about 2000 and was an executive director from 2003 until his departure in 2006. Another or other executive directors had preceded AC.

At least until the arrival at C1 of Mr Stephen Winrow (SW), KPMG or other accountants were also engaged, as and when required and on an outsourcing basis, to assist in the maintenance of C1’s financial records and its management and regulatory reporting. SW joined C1 as financial accountant in about December 2002 and later became a director of KD group companies, but not of C1. He is a qualified and experienced chartered accountant and chartered insurer with financial reporting computer skills. SW’s arrival strengthened C1’s management team at operational level. Using his accounting and insurance expertise and experience, SW reviewed and revised accounting policies and procedures, and introduced revised and improved financial accounting and reporting systems. SW was one of Cs’ witnesses.

The financial information (management accounts and financial statements, including consolidated accounts) in the trial bundle record - and this was also the tenor of evidence given by SW, which I accept - that by the end of 2002 (at the latest) C1 had become a key contributor to KD group’s growth and prosperity.

C1’s financial statements for the year ended 31.12.02 reported an audited profit for the year in order of £570k, accumulated reserves in excess of £1.5m, and net assets in excess of £2m; for the year ended 31.12.03, the reported profit was in excess of £1.6m, accumulated reserves in excess of £3m, and net assets in excess of £3.6m; for the year ended 31.12.04, the reported profit was £2m, accumulated reserves exceeded £5m, and the net assets increased to almost £5.7m; and, for the year ended 31.12.05, the audited financial statements signed off on 29.6.06 (on the day before D1’s departure and before restatement), reported net profit of £3.1m, accumulated reserves in excess of £8m, and a further increase in net assets to £8.8m. At all material times, C1’s assets included significant balances of cash at bank (£13.6m at 31.12.05).

C2 is an investment management company, incorporated in the IoM. C2 is C1’s immediate holding company, and is itself a direct subsidiary of KDHL .

At all material times D1 was a director of C2. Whether he was also an employee of C2 is an issue between those parties.

C2’s presence as a party is explained by the fact that it was used to hold funds belonging to KD group companies and to make payments on behalf of such companies. Cs’ pleaded case is that the bank accounts from which the bonus and related tax and NI payments the subject of these proceedings were made were C2’s bank accounts.

RS describes himself as a management consultant.

RS’s expertise is reflected in the principal activities of the KD group which, disregarding the business of C1, were and are management consultancy and investment. The latter activity includes (1) selecting companies or identifying commercial ideas with potential for profitable growth and disposal at a gain, and (2) investing in such ventures, encouraging and monitoring profitable growth, again with a view to the realisation of a gain.

RS maintains an office and a home in Johannesburg, as well as an office and a home in London. This is consistent with KD group’s strong business links with South Africa.

The impression I have of RS’s involvement in KD group’s affairs is that (1) he has, or develops, objectives for all activities and projects undertaken by any KD group entity; (2) he monitors progress towards achievement of those objectives, intervening as he considers appropriate to further and achieve or ensure achievement of those objectives; and, (3) he reserves the making of crucial business decisions (whether and how much to invest, when and on what terms to realise) to himself, but is otherwise prepared to delegate to executives who have proven their quality.

This impression is derived from, amongst other things, evidence about (1) the acquisition and operation of Byrne Fleming and the extraction of cash from South African businesses, (2) the circumstances in which C1 came to be formed, (3) communications between RS and SW about devising tables or schedules to provide specific financial information and financial reporting, (4) communications between RS and Mr Duncan Taylor (DT) of Nelsons Solicitors, a long standing acquaintance or friend from university days and RS’s legal adviser, about negotiations with D1, and (5) the evidence of D1’s non-executive directors as to the importance of RS’s wishes to the Board’s decisions. RS’s evidence, including his oral evidence during cross-examination by Mr Cullen, is also consistent with this impression (particularly his use of the 1^st person singular in the context of corporate decision making processes).

It is clear from the evidence that RS takes care to avoid placing himself in a position of formal authority in companies under his or the Trusts’ ultimate beneficial ownership. However, as noted above, RS makes sure that his overall authority and his objectives are communicated to and understood by those responsible for bringing those objectives to fruition. Thus, for the purposes of the proceedings before me, I find that RS was in fact regarded and behaved as the ultimate beneficial owner of KD group, including of Cs, and that he in fact exercised ultimate and, whenever he considered it appropriate, direct control over KD group, including Cs. The evidence does not indicate or suggest that this exercise of control was effected through the medium of KD group’s group structure (ie by direction from the holding company); rather it was by direct intervention by RS.

The correctness of this finding is supported, without material contradiction, by the evidence of D1 and of all Cs’ witnesses; for example, SW referred to RS as “the big daddy boss” and “the ultimate boss”. RS’s direct and active interest and involvement in the affairs of KD group companies is also effectively confirmed by D2’s evidence - given with the entirely credible expression and demeanour of a long suffering spouse – about the fact (rather than the content) of frequent and lengthy work telephone conversations between D1 and RS in the evenings and at weekends.

It is apparent from the evidence that, at all material times, RS’s busy work schedule was not by any means based in one location. However, as was also made clear by SW, financial and management material concerning Cs intended for RS’s attention was posted or faxed to RS’s London office and RS’s secretary would, or was expected to, bring such material to his attention, and would routinely confirm to SW that she had done so following receipt of material from him.

From all of this, and bearing in mind the totality of the evidence, it is fair to conclude that RS also took a direct interest in and effectively made all important decisions of principle for and on behalf of KD group, including as to remuneration whether concerning salary levels or bonuses (Footnote: ⁴⁶). This did not necessarily involve RS in approving the precise amount of individuals’ packages, but did involve him specifying or agreeing the approach to be taken. Bearing in mind that KD group’s core businesses are management consultancy and investment, and further that C1’s business (insurance) is also a service industry business, the importance of remuneration and bonuses to the functioning of KD group is unsurprising; apart from capital to deploy in start-up or development of such businesses, the key resource for KD group was and is people.

Although RS sought at times to give the impression that he may not have paid any particular attention to management material concerning C1, I am satisfied that by 2003 at the latest (1) RS not only had good reason to but also did in fact take a close interest in C1’s business and performance, and (2) C1 had become a priority to RS because he could see that C1 had become well established and the initial investment of £500k was beginning to yield significant returns. The evidence as to the origination and content of the so-called ‘X Tables’ (referred to below) is an important indicator of RS’s focus of attention and interest in C1.

RS is described by D1 as a shrewd and successful businessman, and as a tough negotiator not averse to moving the goalposts. The structure and success of KD group attests to the description of RS as a shrewd businessman, and the Nelsons Solicitors’ file relating to negotiations between RS and D1 over the period 2003 to 2006 evidences the latter description. So too does RS’s oral evidence; for example, during cross-examination about D1’s claimed bonus entitlement, RS supported his statement that payment of any bonus was entirely at his (RS’s) discretion with the observation that “Bonuses are uncertain. Bonus schemes are only effective if they don’t pay out”.

As a witness, RS appeared to be very intelligent, articulate and determined; he was attentive throughout the trial, and gave his oral evidence with soft-spoken composure.

RS stated during cross-examination that conventional financial statements and reports, including management accounts, are not as important to him as other financial information and measures. One such other measure is regular and reliable information as to cash available for withdrawal or alternative use, termed ‘free cash’. RS’s evidence is that ‘free cash’, calculated as defined by him, provides a more prudent measure of available funds than would appear from conventionally prepared management accounts or audited financial statements.

RS said that he required this information in respect of C1 on a regular basis so as to know what sum was available for withdrawal without damaging its business and for investment elsewhere if an acquisition opportunity came to his attention at short notice. Mr Booth QC put this proposition to D1 in cross-examination on the footing that free cash represents funds available for investment in “what [RS] decides is a good bet” (Footnote: ⁴⁷).

C1’s 2002 audited financial statements, which were signed off on 11.4.03, revealed its emerging prosperity. In the ordinary way these will have been, and no doubt were, sent to RS. However, statutory accounts, like conventional management accounts, did not provide the management and financial information in which RS was really interested. To address RS’s information requirements about cash, KD group, including C1, already had in place a system of quarterly cash flow reporting (‘cash sheets’).

By early 2003, SW had taken over C1’s accounting function and production of the cash reporting for KD group. SW’s evidence is that, from 2003, in addition to reporting to D1 as his line manager, SW also reported regularly by fax directly to RS; examples in the trial bundle include SW’s written evidence that he sent RS C1’s draft management accounts for the 1^st quarter of 2003, and a fax front sheet dated 9.7.03 under cover of which SW sent RS the cash sheets for the 2^nd quarter of 2003.

Shortly after 9.7.03, SW met RS at his London office. Although SW dates this meeting as probably 17.6.03, I am satisfied that this is a mistake stemming from a dating error on a fax front sheet from SW to RS, which SW misdated as Monday 4.7.03 whereas the correct date is Monday 4.8.03. My reasons for so finding are that (1) 4.7.03 was not but 4.8.03 was a Monday, and (2) the trial bundle also contains two other fax sheets from SW showing a misdating at that time (Tuesday 5.7.03 followed by a front sheet correcting the date to Tuesday 5.8.03). The fax message correctly refers to the meeting between RS and SW as having occurred on 17.7.03.

I pause here to refer to RS’s and SW’s evidence about the arranging of and reason for this meeting. RS said that D1 arranged this meeting after RS had said, at a lunch meeting between RS and D1 in April or May 2003 (Footnote: ⁴⁸), that he wanted to understand more about C1’s business. RS’s evidence is that he had not met SW before this and could not recall ever having spoken at the telephone. SW’s written evidence is that in or around late May 2003 D1 informed him that RS was getting more interested in C1 and that he wanted to meet SW about taking over the task of producing KD group’s cash reporting and that SW then telephoned RS and made an appointment to meet him. Elsewhere in his written evidence SW describes, in some detail, having previously been introduced to RS at C1’s 2002 Christmas party. It is unnecessary to set out or summarise that evidence, but it is credible and I accept that the event as described by SW is an honest recollection from his perspective of an unpleasantly memorable experience; I also recognise that from RS’s perspective it may have been an inconsequential experience readily forgotten. I therefore accept SW’s evidence that he telephoned RS to arrange the meeting in preference to RS’s evidence to the contrary. However, (1) as to D1’s statement to SW about taking over the cash reporting, I think it more likely that the tenor of D1’s explanation about cash reporting was that RS wanted to discuss development of the cash reporting; and, (2) as the meeting occurred on 17.7.03 not 17.6.03, I am not confident that SW’s dating of his phone call to RS as May 2003 is accurate and leave open the possibility that it may have been later (June or possibly early July).

As to RS’s reasons for the meeting, the reason given in evidence by RS (to understand more about C1’s business) is consistent with (1) D1’s explanation to SW as found above, and (2) SW’s written evidence describing what had occurred at the meeting (RS wanted more frequent cash reporting and expansion of the range of analysis tables to management accounts). Thus, the purpose of the meeting, as between RS and SW, was for RS to explain to SW the further reports he wanted SW to prepare.

During or shortly after the 17.7.03 meeting, SW concluded that the further information RS required could be provided by 4 schedules which would supplement the management accounts in the format he (SW) had produced at C1. SW then designed these schedules, designating them ‘X Tables’ so that they could be composed efficiently by drawing information from C1’s and KD group’s computer based accounting records. SW’s description of these schedules may be summarised as follows :

The starting point of Table 3X is a summarised form of C1’s profit and loss account and balance sheet extracted from its accounting records which SW then subjected to the effect of the specific adjustments required by RS. Information as to C1’s actual payroll and administrative costs met by other KD group companies was available to SW from his involvement with KD group’s cash reporting and was substituted for round sum provisions. Table 3X was then formatted to produce 3 lines of information particularly required by RS :

The principal explanation for the difference between balance sheet net assets and free cash is that for free cash (1) receivables (deferred income and prepayments/debtors) are not taken into account at all whereas full account is taken of all provisions and accruals, and (2) ENCs are deducted as if they were cash payments.

SW’s (erroneously dated) fax to RS of 4.8.03 further evidences the importance of C1’s real profit (termed real result on Table 3X) and free cash to RS. In order to provide a reliable picture of the current position as at 2003, SW had to prepare a 3X Table showing C1’s real profit and free cash from commencement of business in 1995 to date. SW also refers to the future provision of accounts accompanied by 3X Tables showing real profit and free cash on a fortnightly basis. SW acknowledged that, in the event, 3X Tables were never produced on a fortnightly basis. However, there is no reason to doubt that, from the 4^th quarter of 2003, they were produced quarterly as part of the management accounts. There is evidence that, from mid-2005, they were produced on a monthly basis. Once SW had integrated the format for the X Tables into C1’s accounting systems, monthly or more frequent production of Table 3X would not have been an onerous reporting task.

The above account of the development of X Tables, and Table 3X in particular, is largely based upon SW’s evidence on this topic, which was clearly and cogently given, and which I accept.

RS’s evidence about 3X Tables concerning C1 is that free cash was of particular interest to him as management information. It is clear from the layout and content of the 3X Tables that RS was also interested in profit expressed as a ‘real result’ : that is the accounting profit adjusted to ensure (1) that all costs properly attributable to C1 but in fact borne by other KD group companies were allocated to C1, and (2) that profit was measured after giving priority to a 10% p.a. return on KD group’s initial investment. In his oral evidence, RS explained this adjustment as the sort of return that a private equity investor would expect.

RS’s stated reason for wanting a free cash schedule relating to C1’s business (to know how much money could be withdrawn for other investment without damaging the business) also provides an insight into the level of RS’s de facto control over KD group.

RS was cross-examined about the receipt of X Tables incorporated by SW into C1’s management accounts. His evidence was that he did receive them from time to time, but was generally not very interested in C1’s management accounts. RS rejected the proposition that C1 was a major contributor to KD group after 2003. Mr Cullen reminded him that KD group results for post 2003 periods had been sought but refused. RS then accepted that C1 had undoubtedly made a major contribution to turnover, but not necessarily profit. He stated that when passing through the London office he would look at, but not scrutinise or analyse, C1’s management accounts. Having reached that point, RS did then accept that one of the figures he would have looked at was free cash and that it was a possibility that if a Table 3X was missing from the management accounts he would have been on the phone to SW to chase it up. When asked to confirm that Table 3X was invented by SW, RS’s answer was “As I understand it, yes”.

I find RS’s attempt to distance himself from involvement in the creation of, receipt of, and knowledge of the contents of 3X Tables unconvincing. RS is a busy businessman. Of course, that means that he has many important business matters to deal with on an ongoing basis. However, that fact also reinforces my view that RS is not a man to waste time calling for a meeting at which he specifies the creation of 4 specific management information schedules and tasks a senior and well remunerated employee with the design and regular production of such schedules, only to pay the schedules passing attention on an occasional basis. The process of reviewing C1’s management accounts for the information regarded as important would not take long.

As to whether or not Table 3X provides objectively useful information about cash available to RS for alternative investment, D1 pointed to a number of flaws in this proposition including (1) the inclusion of a notional adjustment not reflecting an actual business cost inevitably leads to distortion of a true measure of available funds, albeit that the error is on the side of prudence; (2) no account at all (not even by way of notional provision) is taken of any participation by D1 not even an entitlement which RS acknowledged (“10% of whatever we made on our investment”) calculated on a basis acceptable to RS; and, (3) not even a cross-check is required to solvency or other regulatory requirements applicable to C1 as an insurance company. During cross-examination, D1 put forward a 4^th reason, namely that withdrawal of cash, even if reinvested through C1 in non-cash assets (eg property) and even if allowable for regulatory purposes, would place C1 at a significant disadvantage in a competitive market place and quickly cause C1 to go into run off. D1’s examples of such disadvantage (including about competing for business with Allianz) appear logical, but they are based on an assumption that RS would have a continuing interest in C1 after cash was withdrawn, which might or might not be the case.

Whilst it appears that the usefulness of the 3X Table as a measure of cash available for withdrawal or alternative investment is, objectively, open to question, I accept that RS did in fact have this purpose in mind when specifying the information he required to SW. However, whilst it was the only purpose stated to SW, that is not to say that this was the sole purpose in RS’s mind.

D1 gave evidence, which he acknowledged as based on supposition on his part, that Table 3X was devised specifically because RS recognised that D1’s 10% entitlement had become a reality and for the purpose of calculating his entitlement on an ongoing basis. In this context, I note and accept SW’s observation that he could understand that D1 might reasonably have held that belief; reasons why SW would have considered that this was a rational supposition on D1’s part include (1) that Table 3X is in fact designed to produce an adjusted measure of profit, and (2) as a chartered accountant with years of specialist experience in insurance, the objective illogicality of ‘free cash’ calculated according to Table 3X as a measure of funds actually available for withdrawal would not have been lost on SW. D1 would also have recognised these factors and, in addition, had worked closely with RS for at least a decade and would have appreciated that RS would turn his mind to D1’s entitlement as the days of it not crystallising “any time soon” were over.

I note D1’s evidence that after he left C1, RS’s requirement for 3X Tables ceased; however, I do not accept D1’s supposition that the calculation of his bonus was the sole purpose of the 3X Table.

The evidence as to the genesis and content of Table 3X set in the context of the then current circumstances leaves me in no doubt that it was intended to serve the dual purpose of providing what RS regarded as important management financial information about cash availability and forming a basis for the renegotiation of D1’s 10% entitlement. This is also borne out by the use to which Table 3X was put in later negotiations between RS and D1.

Finally in this section of my judgment, it is necessary to record certain views I have formed and to make certain findings as to Cs’ disclosure, Cs’ witnesses’ evidence, and certain of Cs’ documents verified by statements of truth.

Cs’ disclosure was the subject of sustained complaint prior to trial. On 3.11.11, I heard an application on behalf of D1 and made further disclosure orders, including for evidence as to steps taken to fulfil the standard disclosure obligation.

Evidently, Mr Colin Manning (CM), C1’s underwriting director, who was appointed as C1’s company secretary on 18.10.07 and therefore has no direct knowledge of the material events, was tasked with responsibility for disclosure. Both he and RS were cross-examined about Cs’ approach to disclosure. During cross-examination, CM accepted that the approach actually taken to searching for archived hard copy material was incomplete by the standards Cs had set for themselves, which were by no means onerous. In addition, Mr Cullen also made sustained criticisms of Cs’ approach to disclosure of electronic documents.

Cs countered these criticisms on the basis that D1 had destroyed or removed hard copy documents and had installed Evidence Eliminator software on his computer at C1. However, during the trial I was not referred to evidence proving the installation or addressing effect of Evidence Eliminator. All that happened was that, during cross-examination, D1 was asked whether he had ever used a programme called Evidence Eliminator to remove data from his computer at C1’s offices, to which he replied that he had not.

As to the destruction or removal of documents by D1, RS was adamant (1) that written contracts of employment based on a standard form with restrictive covenants were common place within KD group at the time when D1 joined in 1991; (2) that D1 was employed under such a contract; (3) that it was signed in his (RS’s) presence at his home; (4) that it would (or should) have been kept on a file at Cs’ IoM offices; and, (5) that, as it could not be located, it must have been destroyed or removed by D1 before he left.

RS supported his oral evidence that D1 was subject to such a written contract of employment during cross-examination by referring to litigation against former employees in South Africa (Messrs Jones and Jamieson), and stating that subsequently KD group sought to ensure that everybody who joined as an employee signed a contract of employment containing restrictive covenants.

D1 maintained that he was never a party to a written contract of employment with any KD group company. As to RS’s evidence, (1) D1’s unchallenged written evidence, which pre-dated RS’s oral testimony, was that the Jones Jamieson litigation occurred after D1 had joined KD group; and, (2) no written contract of employment from that period for any other employee, whether pro-forma or actual, was produced in evidence by Cs notwithstanding that RS stated during cross-examination that he was sure that a version of the 1991 contract could be found.

Given the absence of corroborative evidence that Evidence Eliminator was in fact installed by D1 or prior to his departure and of actual written contracts of employment for any KD group company, and also bearing in mind Cs’ failure to challenge D1‘s written evidence about the timing of Messrs Jones and Jameson’s departure, I reject Cs’ case and RS’s evidence and I accept D1’s evidence.

It follows that I decline to find that D1 was ever a party to a written contract of employment with any KD group company or that from 1991 D1 was subject to restrictive covenants as terms of his employment by any KD group company.

On the evidence before me, I find Cs’ case and RS’s oral evidence as to D1 being party to a written contract of employment to be unreliable and to be intended (1) to deflect responsibility for Cs’ inadequate disclosure onto D1, and (2) to bolster the allegations of general dishonesty in business affairs and propensity to defraud made by Cs against D1.

Mr Cullen’s cross-examination of CM demonstrated that the very limited and almost random searches actually carried out by or on behalf of Cs could not fairly be characterised as meeting the duty of search under CPR 31.7.

Cs’ search for documents for standard disclosure is to be contrasted with their industry in gathering and incorporating in the trial bundle documentation intended to assist in cross-examining D1 as to his general dishonesty in business affairs and propensity to defraud.

No less importantly, the integrity of Cs’ witnesses’ written evidence and documents verified by statements of truth was materially undermined during cross-examination.

By way of example, (1) SW retracted a number of statements made in his written evidence as facts within his own knowledge, accepting in so doing Mr Cullen’s proposition that the source of such statements was RS; (2) Ms Kay Cregeen (KC) accepted under cross-examination by Ms Lucas that she could not in fact speak to any of the allegations concerning D2 in the Re-Amended Particulars of Claim which she had verified with a statement of truth. On the contrary, KC said that she had done no more than spend about 10 minutes reading through the document before signing it, and she had not applied her mind to how she would be able to say that she knew that the facts alleged and verified by her were true; and, (3) Mr Kenneth Wells (KW), who replaced D1 as a director of C1 and became managing director on 8.11.06, agreed during cross-examination by Ms Lucas that he had no knowledge of the further information relating to D2’s alleged knowledge which he had verified by a statement of truth. KW seemed to think that the assertions were justifiable because he had no knowledge to the contrary and he assumed them to be true.

Cs’ regrettable approach to the making of allegations, to disclosure and to evidence leaves me no alternative but to approach the task of analysing the case against Ds with considerable caution and reservation.

This caution and reservation is, in my judgment, particularly applicable to the evidence of Cs’ principal witness, RS. In this context, in addition to the matters already referred to, I note and bear in mind that others of Cs’ witnesses identified RS as the source of allegations and evidence which they then verified on oath without having any valid basis for so doing.

Of course, one or two examples standing alone would not necessarily justify a cautious approach. However, the overall tenor of Cs’ approach to pleadings, disclosure, and evidence leaves me with no alternative but to conclude that winning is regarded by Cs (in this context : RS) as more important than adhering to an obligation to tell the truth. That is not of itself fatal to Cs’ claims, but it does mean that I have to approach Cs’ case in a way that simply should not be necessary.

D1 is now in his mid 50s. He qualified as a chartered accountant in 1983 and then worked for an insurance company on the IoM before joining KD group, as an employee of KDL, in 1991. By 1993, D1 had become a very important executive within KD group and had been appointed a director of many KD group companies. D1’s high standing within KD group will only have been earned by impressing RS; the formation of C1, following D1’s suggestion, is a reflection of RS’s high regard, at the time, for D1’s commercial abilities and work ethic.

D1 was in charge of day to day management of C1 from the outset and was quickly appointed, or assumed the title of, executive chairman. D1 was required to and did devote the majority of his available time to the development and growth of C1, which included working long hours encroaching into evenings and weekends as a matter of routine (and in this respect I reject the suggestions in Cs’ evidence to the contrary and unhesitatingly accept and base this finding on D2’s evidence). The evidence is consistent with a finding that D1’s commitment and drive were the principal ingredients of C1’s growth.

The arrangements as between D1 and RS/Cs in relation to D1’s involvement in C1 and the events between 2003 and 2006 fall to be considered in the context of the issues to be decided. However, I record at this stage that, in the aftermath of D1’s resignation (effective as from 30.6.06), D1 has lost or thrown away virtually all that he worked for and achieved. He has been disqualified as a chartered accountant; he has been banned for life by the FSA from holding office; he has been made bankrupt; and, he has been involved in and lost other litigation in the Commercial Court (which he attempted to defend as a litigant in person and apparently without the trial bundle because he could not afford to pay some £11k required by his former solicitors as a copying charge for the 200 volume trial bundle) in which adverse findings were made as to his integrity.

I have found that D1’s assertion that Table 3X was created solely for the purpose of calculating his bonus entitlement is incorrect. However, a mistake or a misconception is not the same thing as a lie; and I have found that the calculation of D1’s bonus did have a bearing on the creation of Table 3X. While this may go to the reliability of D1’s suppositions or judgment, it does not go to his integrity.

D1’s integrity was subjected to prolonged attack by reference to matters not directly related to the bonus payments the subject of these proceedings and not forming the basis of any pleaded claim for relief, albeit that many were connected with C1’s business. This form of collateral attack was completely unnecessary because the honesty or otherwise of the bonus payment transactions in question fall to be considered by the application of normally accepted standards of honesty to the particular circumstances of the transactions. If a rogue pays for goods with a forged banknote which has been given to him as change in an earlier legitimate transaction, the fact that he is a rogue has no bearing on any dispute as to the validity of the later contract for goods. Thus, the fact that D1 acknowledged that he had lied in other matters and been involved in “some pretty horrible stuff” likewise has no impact on the judgment I have to make about the bonus payments.

Given the seriousness of the allegations against D1 and the gravity of the reservations already expressed about Cs’ evidence, particular care is necessary in considering and evaluating D1’s evidence (1) to ensure that it is not simply accepted because Cs’ case and evidence is riddled with flaws, and (2) to ensure that it is properly evaluated in the context of such other evidence as there is that is both relevant to Cs’ claims and reliable.

D2 is now in her early 50’s. By training she is a teacher and she now works part-time for a zoo on the IoM. For some years she gave up her career as a teacher to remain at home full-time raising a family.

In my judgment, D2 gave her evidence honestly. Unsurprisingly, she was nervous as she took the oath, but both from her demeanour while answering Mr Booth QC’s questions in cross-examination and from the articulation and content of her answers, I am satisfied that her responses to the questions put were entirely straightforward.

However, it does not follow from this that the case against her fails.

Mr Keith Wardell (KWa) was, at the material times, the managing director of IGI Group Ltd, an English insurance company. He was cross-examined on the basis that a substantial number of C1’s clients “ended up” with IGI as a result of information provided by D1 and AC, which proposition KWa substantially refuted in some detail. KWa was also cross-examined about and explained paying a sum of money through an account in D1’s name, and business conducted between IGI and Hansel (a company in which D1 and subsequently AC were involved after leaving C1). He was introduced as a witness to give evidence as to some of the alleged other instances of dishonest conduct on the part of D1 concerning or affecting Cs.

AC also gave evidence as a witness for D1. AC joined C1 as an underwriter in 2000, became an executive director in 2003, and left (after D1) in 2006. In cross-examination, AC agreed that D1’s bonus entitlement was in a different category from bonuses paid to other employees of C1. In response to cross-examination about not having a written service contract, AC said that he had not asked for a written service agreement. In cross-examination, AC did not agree that C1’s failure to provide such an agreement was the fault or responsibility of D1; and, he identified another executive to whom that responsibility would probably have been delegated had the provision of a written contract become an issue.

AC was cross-examined at length about the receipt by C1 of $371k from Godwin Higgins (GH) said to relate to bloodstock insurance and the payment out of that sum, said to be by way of refund, to Security Guarantee Consultants Ltd (SGC), which was part of the same group as GH and in which D1 had an interest. When it became clear that the purpose of Mr Booth QC’s questioning was not confined to the alleged other instances of dishonest conduct on the part of D1 concerning or affecting Cs, but was, or included, attempting to extract an admission from AC that as a director he had failed in a duty to make an independent decision about the propriety of the repayment to SGC as distinct from GH, I intervened to ask whether this was an issue in ongoing proceedings brought by Cs against AC in the IoM and was told that it was, at which point I informed AC that he need not answer that question.

Mr Booth QC then referred briefly to the pleadings in that case (Footnote: ⁵⁰) from which it appears that in August 2011, i.e. as this trial loomed, Cs made a claim against AC for monies including €300k, €200k and $371k in respect of which Cs seek collateral findings against D1 in these proceedings but no relief, and the bonus payments totalling £499k the subject of Cs’ claims in these proceedings. The claims against AC are made on the basis that AC’s role in the authorisation of these matters and payments was in breach of fiduciary duty and/or in breach of contract and/or negligent. Bearing in mind the passage of time between the relevant events and the issue of the proceedings against AC (Footnote: ⁵¹) and the proximity in time between the issue of the IoM proceedings and this trial, I think it unlikely that the issue of the IoM proceedings is unconnected with the fact that AC had come forward as a witness for D1.

I pause here to observe that the Re-Amended Particulars of Claim in the proceedings against D1 were verified on 15.7.11 by CM and KC, and the Particulars of Claim in the IoM proceedings against AC were verified less than 3 weeks later, on 4.8.11, again by CM and KC. Notwithstanding this proximity in time and the central importance in both pleadings of the bonus payments made by Cs to D1 and the related tax and NI payments, it is remarkable that the particulars in these cases refer to payments being made by different companies (Footnote: ⁵²). This reinforces my views about the need to treat Cs’ approach to disclosure and evidence in the proceedings before me with considerable reserve and caution.

In so far as relevant to the proceedings before me, what cross-examination of AC established was (1) that in the late spring of 2005, which AC accepted could be May/June 2005, D1 announced that he had agreed a deal with RS as to his 10% bonus entitlement; (2) that AC accepted that statement as true; and further, (3) that AC believed that SW had calculated D1’s bonus in accordance with the terms of that deal. AC agreed with Mr Booth QC that he (AC) would not have had any direct knowledge about what, if anything, D1 and RS had actually agreed. On this point, there is uncontentious evidence before me that the lines of communication between AC and RS were limited to (1) AC sending documents to RS (notably Board packs and, on 25.5.06 following a request from RS to D1, a spreadsheet showing payments of bonuses by C1 during 2005 which included more than £200k to C1’s staff and more than £460k to D1) and arranging renewal of KD group’s professional indemnity policy, and (2) AC and RS being on the same table at the KD group Christmas party in 2002. Questioned about why, when preparing C1’s Board minutes, AC stated the amount of D1’s bonus in words rather than figures, AC denied that D1 had made such a suggestion and explained that when referring to large numbers on documents with a bank he generally typed words and numbers.

Having heard and observed KWa and AC give oral evidence, I have no reason to reject their evidence.

As to Ds’ disclosure, no material shortcomings were drawn to my attention and I have no reason to make an adverse finding or observation in that regard.

I have already found that D1 did not enter into a written contract of employment when joining KD group as an employee of KDL in 1991. There is no evidence of a later written employment contract or service agreement being entered into between any KD group company and D1. I have accepted D1’s evidence that his contract of employment was at all times oral and was with KDL (IoM); indeed, DT’s notes (Footnote: ⁵³) about the structuring of D1’s bonus arrangement make several references from December 2003 onwards to D1 being an employee of KDL and the need to novate D1’s employment with C1 or for a new service agreement to be negotiated and executed with C1 and D1 as the parties. RS also referred to D1 being employed by KDL.

There is no evidential basis to support Cs’ contention that D1 was a party to a contract with C2. C2 was responsible for payment of D1’s salary, but that was a matter of administrative convenience within KD group rather than the consequence of a contractual relationship.

Notwithstanding C1’s (by RS and DT) acknowledgment in 2003 that D1 was an employee of KDL rather than of C1, Cs’ pleaded case is that there was a contractual relationship between each of Cs and D1 pursuant to which D1 owed the duties of an employee to Cs. On behalf of D1, Mr Cullen submitted that it was bizarre that although Cs’ pleaded case is founded upon such a contractual relationship, the relevant terms of such contracts (other than employee duties) are not pleaded or spoken to in Cs’ written evidence. Indeed, but for Mr Cullen’s cross-examination of RS, the only material informing the Court as to the terms of any contract would have come from D1.

Mr Cullen’s cross-examination of RS on this topic occupied much of the afternoon of 22.11.11 and is enlightening :

The common thread of RS’s evidence is that D1 was “entitled to 10% of whatever … we made on our investment, as opposed to the operating profit of the entities” and after “I explained it as profit on our investment … [D1] agreed”. By reference to RS’s evidence, there is no reliable basis for a finding that RS stipulated that D1’s entitlement would not crystallise pending actual repayment to KD group of its investment (with or without a 10% p.a. return on capital). Further, there is no basis for importing such a condition by construction or implication.

D1’s written evidence is that, in the autumn of 1994 during a business trip to South Africa with RS, he proposed that KD group should develop an insurance business with a start up capital of £500k, and that immediately upon their return a detailed discussion lasting a couple of hours then took place at RS’s London flat during the course of which it was agreed that D1 would manage the company and would receive a bonus based upon 10% of profits and 10% of any gain should the company be sold. D1 said that he did not require this to be reduced to writing because RS did not put such things in writing and, at that time, D1 trusted RS.

In cross-examination, D1 acknowledged that, when identifying profit, adjustment would have to be made to C1’s accounts for ongoing expenses relating to C1’s business but not paid by or charged to C1. This is an adjustment which, in context, would reasonably be understood as being an element of what was meant by the word profit and would feed through as an adjustment in calculating any gain.

D1 also acknowledged that C1 had a continuing policy of not distributing profits as dividends, but he distinguished that policy from his right to claim his reward or entitlement.

Further, it is no part of D1’s case that he would be entitled to 10% of the capital invested. His case and evidence is that RS and he agreed that he would be entitled to 10% of any profit or gain on an incremental basis (which he later came to learn is termed “high to high”), which necessarily implies that (1) the initial investment would have to be covered albeit not repaid, (2) losses would have to be covered before an entitlement arose, and (3) profit on which bonuses had been paid would be disregarded when calculating later entitlements. These are adjustments which, in context, would reasonably be understood as being elements of what was meant by the phrase profit or gain. Equally, profit would reasonably be understood in the circumstances to be a reference to audited profit after making appropriate provision or adjustment for overheads (payroll and administration costs) borne by other KD group companies. In the ordinary way such provision, if not a feature of ongoing management accounting during a financial period, would be a year end adjustment made during the course of an audit.

I am satisfied that in 1994 there was a preliminary discussion between RS and D1 in South Africa followed by a more detailed and lengthy discussion in London about the establishment of C1, D1’s role within C1, and the basis upon which D1 would be rewarded. Having heard and observed both RS and D1 give evidence, I prefer and I accept D1’s account. I make this finding based on my assessment of the direct evidence (written and oral) given by each of RS and D1. I attach weight, negatively, to the contradiction and confusion in RS’s evidence and, positively, to the clarity and consistency in D1’s evidence; in so finding, I have not taken into account against RS my overall reservations about him as a witness.

I find that the upshot of the 1994 discussions was that agreement was reached between RS and D1 that (1) KD group would establish an insurance company (in the event C1) with an initial capital of £500k; (2) D1 would be responsible for the management of C1 and would devote substantially the whole of his working time to the development of C1; (3) in exchange or as consideration for which he would continue to be an employee of KDL on his existing terms and, in addition, would be entitled to a 10% share of the profits made by C1 and 10% of any gain upon the sale of its shares or business; (4) in understanding what was meant by profits and gain, a deduction would be made for any ongoing expenses of C1’s business paid or met by other KD group companies and not otherwise recharged to C1; (5) KD group’s capital investment would not be treated as part of profit or gain; and, (6) the benchmark for profit would be C1’s audited profit, with the result that D1’s entitlement to be paid would be understood to arise upon the signing off of C1’s annual report and financial statements. There was no agreement to or mention (at that time) of the deduction of a 10% p.a. return on capital as a prior charge in arriving at the profit or gain the subject of D1’s 10% entitlement.

I do not consider that this finding is undermined by D1’s much later statement (made on oath on 30.10.08) during his bankruptcy that the arrangement was a “gentleman’s agreement”.

At the time when the 1994 agreement was made, C1 was not incorporated, or, if it was, it was not part of the KD group. Neither Mr Booth QC nor Mr Cullen addressed me on the basis that any binding agreement would have been a pre-incorporation contract or as to the application of the law relating to pre-incorporation contracts to the facts of this case. By reference to the passages cited from Harvey and to counsels’ submissions as to the relevance of conduct, and further bearing in mind that it is Cs’ pleaded case that D1 owes Cs contractual duties as a servant, I find that the terms of the 1994 agreement between RS and D1 became the terms of a contract between C1 and D1 as a result of conduct.

Additional terms of this contract were that D1 would serve C1 loyally and faithfully and would act in good faith and honestly in all dealings with C1’s assets (including its money).

The agreement between RS and D1 and D1’s subsequent conduct managing C1 do not form a basis for the implication of an employment contract between C2 and D1. C2 asserts the existence of such a contract between itself and D1. D1’s defence puts the allegation of a contractual relationship between C2 and D1 in issue, avers that he was an officer of C2 and that he performed limited duties as such, and denies that he was chief executive of C2.

In contrast to the position as between C1 and D1, C2 was already part of KD group in 1994. Neither Cs’ pleadings nor the evidence to which I have been referred point to any proposal, discussion, negotiation, agreement or conduct by reference to which an employment contract or service agreement between C2 and D1 may be identified or implied. There is simply no foundation to support Cs’ assertion and Mr Booth QC’s submission that there was a contract between C2 and D1, whether or not including terms as to loyalty, good faith and honest dealing as a servant.

As an officer of C2, D1 will have owed fiduciary duties to C2, but such obligations are insufficient to support a claim in contract.

That Cs’ claims in contract had not really been considered was confirmed during Mr Booth QC’s reply closing submissions (Footnote: ⁵⁴) which came, in the end, to a qualified concession that Cs “have not thought through the nature of the relationship”.

In these circumstances and by reference to Cs’ pleaded case, I consider that (1) there is at least a proper basis (subject to the impact of s.281) for a claim by C1 against D1 based on alleged breaches of an implied contract, however the claim as pleaded and supported by Cs’ evidence makes reference only to 3 duties allegedly owed by D1 to Cs jointly and omits any reference to the facts and matters alleged to give rise to a contract or to any other relevant terms or matters; and, (2) C2’s claim in contract against D1 is misconceived.

This conclusion, of course, has no bearing on the allegations of fraudulent breach of fiduciary duties.

C1’s report and audited financial statements for the year ended 31.12.02 were signed off on 11.4.03. C1 made a profit for the year in excess of £570k, had net assets in excess of £2m, and had accumulated distributable reserves of some £1.5m.

Also on 11.4.03, D1 arranged to pay himself a bonus of £55,787.96. This sum is proximate to but less than 10% of the audited profit (£57,046.30). D1 says in his written evidence that this was based on his recalculation of “real” profit. He readily accepted in cross-examination that he no longer possesses his actual calculation. Whether the calculation or a copy is amongst Cs’ documents is a matter on which I am not able to make a finding one way or the other with any confidence. I do not regard the absence of D1’s calculation as significant, in part because any dispute as to the taking of this bonus was, on RS’s evidence, quickly resolved on the basis that RS put it behind him, so, even if D1 might have had some initial reason to retain his calculation, on RS’s evidence this had passed by the end of May 2003. In addition, it is clear from the 3X Tables under the column for 2002 that provision was made in C1’s audited accounts for wage and administration costs paid for C1 by KD group (£150k) and that, when reviewed by SW for the purpose of creating 3X Tables (Footnote: ⁵⁵), this figure was increased (by £73k). It is therefore quite logical that D1 was conscious of the fact that the provision in C1’s audited accounts did not take the full amount of all attributable costs into account, and that his £20k adjustment to audited profit was made with this in mind. I therefore accept D1’s explanation as to the calculation of the 2003 bonus.

KC reported the fact that D1 had taken this bonus to RS. In her written evidence, KC makes no reference to this. KC’s written evidence is to be compared or contrasted with RS’s written evidence (both prepared in draft by Cs’ solicitors and both verified on the same day) that KC reported this fact to RS because she was “suspicious”. In her oral evidence, KC stated that she recalled being uneasy or suspicious about the payment because it did not go through the usual channels, by which she meant that it was paid gross and to a payee other than D1, and for that reason she telephoned RS. She had no other recollection, and had to be led into this recollection by being reminded that Avalon Trust was the payee. Viewed in the round, the fact that a substantial bonus payment was to be made to D1 did not strike KC as surprising, let alone suspicious.

RS’s oral evidence is that KC sat on the fact that a bonus had been paid to D1 for a while before informing him later in April or in May. RS does not refer to any delay on KC’s part in his written statement. Moreover, in his written evidence, RS refers to being informed that the bonus was paid gross to Avalon Trust by D1 at a lunch meeting at L’Oranger restaurant arranged to discuss the bonus; there is no mention by him of having previously been given this information by KC.

As already stated, in general terms, I do not consider either KC or RS to be reliable witnesses. In the absence of corroboration by contemporaneous documents, I must evaluate their evidence by also having regard to inherent (im)probabilities : (1) I have no reason to doubt that on a day to day basis fulfilling her normal tasks as an office manager KC is competent, conscientious and efficient; indeed, she has held a management position at C1 for a number of years during which there was significant growth; (2) faced with the task of authorising a payment which caused a feeling of unease, it is inherently improbable that an employee such as KC would “sit on it for a while”; (3) thus, it is probable that KC informed RS of the payment to Avalon Trust on or shortly after 11.4.03, and in any event well before May 2003; and, (4) any delay beyond a day or so was entirely on RS’s part while he considered how best to address the suddenly real and present (as opposed to distantly theoretical and not “any time soon”) prospect of substantial annual bonus payments accruing due to D1 in addition to his KD group salary and bonus package. That RS sought to explain away the passage of time while he considered how to tackle D1’s bonus entitlement also tends to confirm my conclusion that RS and D1 had made a binding oral agreement in 1994.

Pausing here, what is also to be gathered from this evidence is that KC did not consider an issue as to D1’s bonus to be a matter for C1’s Board (RB and BH), but was an issue for RS personally.

D1 disputes that there was a lunch meeting at L’Oranger in April or May 2003. His evidence is that he does not recall any untoward discussion with RS at or around that time. From RS’s perspective, after the payment in April 2003, there would be no accounts on which D1 could base a further bonus until 2004. Thus, RS had time to develop a strategy to address D1’s bonus; and, while RS may have been, as he said, furious at the time, his fury will not have been about being cheated by D1 but about having failed to readdress D1’s bonus entitlement at an earlier stage.

I do not need to consider the alleged discussion at a L’Oranger lunchtime meeting because I think it unlikely that this meeting took place in April or May 2003. My principal reason (for this purpose I disregard entirely my general view of RS as an unreliable witness) is that RS is a shrewd businessman and would not be likely to act in haste, unless under pressure of time. Thus, his desire to gain a better understanding of C1 and how he might be able to renegotiate D1’s 10% entitlement is likely to have preceded rather than followed a meeting with D1 about bonuses. I have found that Table 3X was intended to serve the dual purposes of arming RS with information to use in a renegotiation of D1’s 10% entitlement as well as, or in addition to, providing information as to available or free cash. This information first came to RS on 4.8.03 and, in my view, will have preceded any dialogue between RS and D1 about D1’s bonus or 10% participation, whether over lunch or otherwise.

In principle therefore, following the signing off of the 2003 accounts, D1 was contractually entitled to a bonus in the order of £55k gross, and to be paid that sum on 11.4.03. While the fact and amount of the 2003 bonus are not in issue, the timing of and procedure for payment of this bonus may be of some relevance to these proceedings.

In April 2003, C1 had 3 directors : D1, RB and BH. I have not been referred to evidence that C1’s board considered this bonus, even as a formality. Equally tellingly, there is no evidence that RS drew the fact that D1 had paid himself a £55k bonus to the attention of either RB or BH. Indeed, their only observation in their written evidence about the events of 2003 is that as from August 2003 D1 was appointed company secretary of C1 in addition to being executive chairman.

In my judgment, the significance of this absence of comment by RS is that it tends to confirm that (1) the taking of the bonus (both as to amount and timing) was within the ambit of the binding agreement reached with RS in 1994 and the implied contract between C1 and D1. Were that not the case, RS would at least have required a system to be introduced under the supervision of the other directors or KC (as office manager) whereby any bonus for D1 would be referred by them (or one of them) to him personally for authorisation; and, (2) whatever the position might be as a matter of company law, in 2003, neither RS nor D1 regarded formal prior approval or ratification by C1’s Board, or even informal notification of C1’s non-executive directors, as a relevant procedure. What mattered was what had been agreed between RS and D1

Following the creation of the X Tables by 4.8.03, SW sent and RS received C1’s management accounts incorporating X Tables on a quarterly basis for the remainder of 2003 and throughout 2004.

In December 2003, D1 approached RS and asked for a salary increase from £71k to £100k and a written contract of employment. These requests were made at a meeting in London on 8.12.03. It was this meeting which probably occurred over lunch at L’Oranger restaurant. In relation to salary, RS required D1 to research information about comparable salaries and, subsequently, D1’s salary was increased to £93k, with the further £7k being attributed to the value of D1’s benefits in kind; this was implemented as from February 2004. In relation to a written employment contract, RS suggested engaging DT, which was acceptable to D1. The meeting over lunch and request for a written contract also provided RS with an opportunity to commence renegotiation of D1’s 10% entitlement. RS raised alternative approaches to D1’s participation. From DT’s notes of a later conversation with RS, it appears that RS recounted explaining his approach to D1 as 10% of “anything we make, whether revenue or capital”, with “anything we make” being defined by reference to free cash.

On the following day, 9.12.03, D1 telephoned DT and outlined his understanding of the longstanding existing agreement between himself and C1/RS, and points for discussion (e.g. phantom or real shares to represent D1’s 10% interest). Against DT’s attendance note recording D1’s entitlement to share in C1’s profit (Footnote: ⁵⁶) : “Also – bonus of 10% of profit”, DT has written a further note referring to “Free cash”. It is not clear whether this was added during the conversation with D1 or during a later conversation with RS. DT’s note also records mention of “Director’s fee – p[ai]d annually – w[ith]in 7 days of public[ation] of audited ac[count]s”; I take this to be a reference to the mechanics for payment of D1’s bonus entitlement, and note that the payment interval acknowledged by D1 is annual with a long-stop date for payment linked to the deadline for filing accounts.

RS also telephoned DT, and DT noted RS’s position as “10% of net proceeds (ie after deduction of £0.5m initial funding)(+ interest). DT discussed the terms described by D1 with RS. RS may have described his position to DT by using the term “free cash” and this may have prompted the annotation against DT’s record of his conversation with D1.

On 19.12.03, DT had a further discussion with RS during which RS described his more considered view of D1’s entitlement as “10% of whatever we make out of [C1] - div[idend]s, bonus, proceeds of sale etc (after ded[uction] of [KD group] cap[ital] + 10% pa)(+ rep[aymen]t of loan a/c bal[ance]s)”. Although RS described his position to DT as being “broadly the same” as D1’s, DT did not share that view and declined to describe RS’s proposal in that way when communicating it in writing to D1 under cover of a letter dated 23.12.03.

In fact, DT wrote separately to each of RS and D1 enclosing a synopsis of points he understood to be relevant to the identification of D1’s 10% “participation” in C1’s profit and capital gain. The synopsis noted that as D1 was employed by KDL his bonus arrangement would probably need to be structured as a director’s fee, and that : “the basic terms of the understanding appear to be fairly straightforward – essentially [RS] and [D1] have agreed that [D1] should be entitled to a 10 per cent share of any upside generated as a result of his work in the insurance business”. DT’s synopsis noted that RS intended that D1’s 10% should be of “anything we make, whether revenue or capital”, measured by free cash and that D1 saw his participation as 10% of any profit made and a 10% interest in the proceeds of any sale or listing. The synopsis also set out DT’s bullet point list of matters for discussion.

Over the next 3 months, D1 chased DT for a draft agreement. Nothing was forthcoming because, unknown to D1, DT was awaiting instructions from RS on a memorandum sent only to RS on 27.2.04.

D1’s written evidence is that, in the spring of 2004, SW presented him with a 3X Table which, D1 says, SW described as “a new formula approved by [RS] for calculating [D1’s] bonus which was intended to reflect profitability accurately and thus produce a fair bonus calculation”. This is the basis upon which D1 contends that in the spring of 2004 the agreement as to the method of calculating his 10% bonus entitlement was varied from audited profit to free cash.

The relevant 3X Table is likely to have been that incorporated in the management accounts for the 4^th quarter of and year ended 31.12.03, which accounts were the basis for the draft 2003 financial statements. As the financial statements were signed off on 30.4.04, the underlying management accounts must have been in circulation during the spring of 2004. These accounts showed a substantial increase in annual profit to £1.65m, net assets in excess of £3.65m, and accumulated distributable reserves of some £3.15m.

Table 3X to the 2003 management accounts showed a real result for the year in excess of £1m, but an accumulated real result of only £117k (i.e. less than the £557k on which D1 had been paid a bonus in 2003) and free cash remained a negative balance (£6.67m). These results do not disclose an entitlement to a bonus whether measured by reference to real result or by reference to free cash/change in free cash.

SW denies D1’s version of events on the basis that he did not make the statement attributed to him and would not have done so because (1) RS neither discussed D1’s bonus with him nor charged him with any such duty of communication; (2) by the spring of 2004, the X Tables were not a “new formula”, rather they had been devised in mid-2003, integrated into C1’s management accounts and reporting systems, and previously provided to and discussed with D1; and, (3) RS’s stated purpose for what became Table 3X had been to receive information about cash available for withdrawal and alternative use.

In his written evidence, D1 refers to SW discussing X schedules with him (Footnote: ⁵⁷). From the context, it is appears that this is a reference to discussions in 2003.

Further, the note about D1’s participation sent by DT to D1 on 23.12.03 makes clear that RS was looking to approach D1’s entitlement by reference to ‘free cash’. Thus, it is likely that at their lunch meeting on 8.12.03, RS did mention ‘free cash’ as a basis he had in mind for calculation of D1’s 10% entitlement going forward and that, at the conclusion of that meeting, D1 understood, at least conceptually, what RS meant by free cash.

All of this pre-dates SW’s supposed presentation of a “new formula” to D1 in the spring of 2004.

In addition, it is inherently improbable that RS would use SW as a conduit through whom to communicate a message as to his (RS’s) agreement to or approval of a new basis for calculating D1’s entitlement at a time when both D1 and RS had agreed to involve DT in the preparation and finalisation of a written agreement and DT was in fact being used as a channel of communication. Moreover, there is credible evidence, which I have accepted, of a settled pattern of frequent lengthy telephone conversations between D1 and RS. If RS had a position or decision to communicate to D1, he would have done it directly or through DT.

Viewed in the context set out above, it is inconceivable that D1 was not provided with management accounts incorporating the X Tables prior to the spring of 2004.

As to RS’s purpose for Table 3X as stated to SW, RS had no need to explain, and is unlikely to have explained, his additional purpose for requiring a schedule calculating free cash to SW at their meeting on 17.7.03; it was sufficient for RS to explain his purpose as requiring information about cash availability. Moreover, it is not obviously apparent from the content or layout of Table 3X that it is designed to arrive at a figure on which to base a bonus calculation. Thus, it is inherently unlikely that SW would have reached this conclusion unprompted.

The true factual position is that, by the spring of 2004, D1 was well aware of RS’s likely line of approach to renegotiation of his 10% entitlement. D1 had correctly deduced that the question for him was whether to accept the redefinition when formally proposed or to attempt to stand his ground on the original agreement. Being no fool, D1 recognised the, as he put it, “fait accompli”.

On 18.3.04, DT wrote to RS and reported that D1 was becoming impatient with and frustrated by RS’s delay (a view with which DT expressed sympathy) and wanted to proceed to formalisation as quickly as possible (a point which DT urged on RS), and that D1 had said, several times “I just want to know where I stand”.

During April 2004, there appears to have been some internal drafting activity at Nelsons Solicitors, and there may have been further communication with RS; but, there does not appear to have been any written communication with D1 during that month.

In these circumstances, there is no sufficient evidential basis for a finding that, in the spring of 2004, D1 and RS/C1 made a binding agreement by which the method of calculating D1’s 10% entitlement was varied from use of audited financial statements to Table 3X. It may have been on the cards, but it did not become a done deal. I therefore reject D1’s contention and evidence to that effect.

Of course, neither the fact that there was a common intention or agreement to agree a written contract, nor the fact that RS was intent upon renegotiating D1’s entitlement meant that D1’s existing contract with C1 was terminated or became unenforceable.

C1’s report and audited financial statements for the year ended 31.12.04 were signed off on 8.4.05. These show further increases in annual profit, net assets, and accumulated distributable reserves.

Table 3X to the management accounts for the year ended 31.12.04 shows, under the 2004 column, a real result for the year in excess of £2m. On a cumulative basis this produces a real result of £2.25m (exceeding the £557k profit on which D1 had taken a bonus in 2003) but free cash still remained a negative balance (£1.22m), as had been the case for all previous quarters of 2004.

These circumstances, put in the context of the findings I have already made, are consistent with the following findings as to the position as at 8.4.05 : (1) D1 had not abandoned, but was not minded at that time to insist upon, adherence to the existing contractual arrangement about his bonus (10% of audited profit, adjusted as necessary to charge for C1’s payroll and other administrative costs met by C2, paid annually); (2) D1 knew and accepted that the calculation of his entitlement was under consideration by RS and that a renegotiation was in progress, the outcome of which was likely to be that his 10% entitlement was to be calculated by reference to free cash; but, (3) there had been no actual agreement to that effect between D1 and RS.

The free cash position changed during the 1^st quarter of 2005. Table 3X to the management accounts as at 31.3.05 produced a real result in excess of £1.35m for the quarter and a cumulative real result of some £3.6m. Crucially, free cash at last produced a positive balance (in excess of £2.14m). At least in principle, D1’s entitlement to a bonus had become a reality whether calculated by reference to conventional accounts or free cash; but, on either basis, there had been no negotiation or agreement about payment being at intervals other than annual following approval (signing off) of audited financial statements.

D1’s written evidence is that, in June 2005, SW presented C1’s management accounts for the quarter to 31.3.05, including a 3X Table, and calculated that the results gave rise to a bonus entitlement of £158,912.04. D1 had no recollection of whether or not SW told him that RS was aware of the 3X Table and the bonus due, but supposed that it was very likely that SW had discussed the bonus with RS before informing him (D1) because (1) the X Tables were prepared for RS’s use; (2) SW discussed financial matters with RS on a regular basis; and, (3) the bonus was a substantial sum and SW is cautious by nature. In other words, D1’s case is that he was presented with schedules confirming a present entitlement to payment of a bonus which he was told or reasonably supposed and understood had already been approved by RS.

D1’s written evidence continues that SW had prepared a Table 3Y, in order to compute the bonus payable at 20.6.05, and, after showing this Table to D1, passed it to C1’s payroll clerk, Mrs Janthea Taylor (JT), who deducted tax and processed the net sum (£130,200.67) for payment by electronic transfer on 20.6.05.

SW‘s written evidence is that prior to 20.6.05 he had provided a copy of the management accounts incorporating Table 3X without any annotation to each of RS and D1; and that, subsequently, he and D1 spoke, and he (SW) then added notes to the face of Table 3X and composed Table 3Y. SW also said that once the notes were added to Table 3X they became part of its format which meant that a positive act (deletion) would be required if the notes were not to be an automatic feature of every Table 3X subsequently produced. SW said during cross-examination that he did not send either the revised Table 3X with the additional notes or the newly created Table 3Y to RS.

The annotation runs to 17 lines and begins “The purpose of [Table 3X] is to convert the financial and management accounts to a report that confirms (sic) with the rest of [KD group] reporting” which requires “that non cash intangible assets are not recognised and each unit must carry all its appropriate costs”. The notes provide a general description of the difference between the result lines in Table 3X and C1’s conventional accounts, and also state that the principal use of the figure computed for change in free cash is “to compute chief executives’ (sic) bonuses”.

In his written evidence, SW asserted that D1’s written evidence was obviously untrue as it contradicted an earlier passage in his (D1’s) written evidence; in cross-examination SW agreed that there was no such contradiction, and withdrew his written evidence to that effect.

RS had maintained in cross-examination that he did not see a Table 3X with the annotation added by SW until 2006. SW supported RS’s evidence to this effect. SW said that, in June 2005, D1 had said that he (D1) “was dealing with [RS] about bonuses. And the issue was not that [RS] wouldn’t get accounts, but that [RS] wouldn’t get those notes because [D1] was dealing with it. And [D1] didn’t want me arguing about notes with [RS]. And [D1] said he told [RS] about his bonuses. So that was fair enough with me”. Mr Cullen asked SW to confirm that RS continued to get accounts without the notes, to which SW replied that he did not send any further accounts until he sent the October 2005 management accounts to RS as part of a booklet or Board pack for a December 2005 meeting. This is also somewhat confused or confusing because RS did not attend Board meetings and the evidence is that RS received a copy of Board packs after the Board had met.

There is a further inconsistency or logical flaw in SW’s written evidence concerning this period. At #53 and #56 of his statement, SW acknowledges that D1 told him that negotiations about the bonus were still pending and that he understood that they might still be jeopardised if he was to be involved, but at #54 SW refers to being asked to prepare monthly accounts and schedules to enable D1 to take his bonus on a “monthly catch up basis”. Thus, if SW is to be believed on this aspect of his evidence, notwithstanding that he was by then an experienced chartered accountant and a responsible senior manager at C1, and - in D1’s opinion - a cautious man, SW seems to have considered it entirely normal and appropriate for substantial payments to be made on account of an obligation which was still under negotiation and, therefore, in reality a contingency.

I regard SW’s evidence in support of RS’s about suspension of the routine despatch of C1’s management accounts as muddled and unreliable. I accept that SW did not resend the 1^st quarter 2005 management accounts to RS after the notes had been added and Table 3Y had been composed. That was because he had already sent the original version to RS and the notes he composed described his understanding of Table 3X’s original purpose (following his instructions from RS) and further use (following a discussion with D1).

Table 3Y was created as a memorandum document to compute D1’s bonus and to operate as the source document by reference to which payment would be authorised at C1 for action by C2. That D1 should be entitled to a 10% bonus calculated by some measure of C1’s performance would come as no surprise to SW or anyone else at C1. Table 3Y was not created on instructions from RS, and SW would not necessarily assume that he should include it as another Table in the management accounts sent to RS.

In my judgment, it is improbable that SW simply stopped sending management accounts to RS given that Table 3X was created in order to provide specifically required information to RS.

Further, I regard RS’s evidence that he did not receive such management accounts as unreliable. If financial reporting designed to meet RS’s specific requirements suddenly stopped arriving, he would be likely to want to know why. Given that, by all accounts, RS had received a version of Table 3X as at 31.3.05 showing positive net free cash, it is unlikely that (1) even disregarding the negotiations with D1, monitoring cash available for withdrawal had become of little importance to RS; and, (2) bearing in mind those negotiations, consideration of the real impact of D1’s participation was likewise unimportant to RS.

Thus, I find it probable that SW continued to send management accounts to RS incorporating X Tables. I also find it probable that on each occasion RS will have reviewed the 3X Table. RS will have seen the notes added to the face of Table 3X. If RS read those notes, he would not have disagreed with the descriptive element and is unlikely to have found the reference to D1’s bonus surprising in the context of the ongoing negotiations.

That still leaves for decision the question of whether the course of conduct in June 2005 gave rise to a variation to a legally binding arrangement between D1 and C1 or created such an arrangement.

I do not accept D1’s reasons for supposing that RS had discussed D1’s bonus entitlement with SW and that SW was in effect RS’s messenger to confirm a bonus agreement because (1) there is no evidence of RS discussing financial matters or his use(s) for Table 3X with SW after 4.8.03, and in cross-examination SW maintained (which evidence I accept) that he had not spoken to RS for some time and had had not even received a comment in response to the management accounts that had been sent to RS as part of the regular financial reporting; and, (2) the facts that the bonus is a substantial sum and SW is a cautious person are reasons why SW would not take the lead in formulating the calculation of D1’s bonus entitlement.

I also prefer SW’s evidence about the creation of Table 3Y to D1’s on the ground of inherent probability. SW had no reason to create a 3Y Table or to annotate the 3X Table entirely of his own accord. If RS had required Table 3X to be annotated, that is likely to have been part of the original brief to SW or would probably have arisen as an observation in response to an earlier Table 3X; also, if SW had decided to add the notes, it is at least as likely as not that the notes would have been incorporated in the appendix to Table 3X rather than added to the face of the Table. If Table 3Y had been created as a result of instructions from RS, SW would have made that clear to D1, and it is unlikely that D1 would have been unable to recall and describe the event, even at this remove in time. More tellingly, D1 would not have omitted to confront RS with that fact in May 2006 when RS/C1 first sought repayment of the bonus payments.

In my judgment, D1’s evidence provides an unlikely account of the basis on which his entitlement to be paid his bonus at frequent intervals during a current year (monthly on a catch up basis) was established. In making this finding, I note and acknowledge that KD group had an established practice of paying employees quarterly bonuses, and that a special arrangement for D1 would not have set a precedent (RS refers in his evidence to a special arrangement for a key executive of a KD group trust company). However, frequent periodic payment (whether as a new procedure or as a change from an agreement for annual payment) cannot be plucked from the ether, it must have some identifiable foundation, and that advanced by D1 is not credible.

I therefore find that, as at 20.6.05, D1’s entitlement to a bonus had not been agreed or varied on terms entitling him to immediate payment of a bonus calculated by reference to 10% of free cash as at 31.3.05 or at monthly (or even quarterly) intervals thereafter calculated by reference to positive changes in free cash reflected in current year management accounts.

D1 says that he then spoke to RS about and agreed his entitlement, and that that they also agreed that a written agreement would be executed within 4 weeks. The evidence does not support a finding that this conversation occurred on or before 20.6.05; D1’s evidence was that it occurred on 21.6.05 or 22.6.05, and Mr Cullen cross-examined on the basis that it took place on 22.6.05.

That such a conversation took place is consistent with what D1 told DT when they spoke on 22.6.05. DT’s attendance note records that D1 informed DT that D1 had spoken to and agreed with RS that a written agreement would be formalised within 4 weeks (also noted as “20 July”) on the basis of 10% of profits “paid as we go” and 10% of capital gain.

Also on 22.6.05, RS telephoned DT and confirmed that he had had such a conversation with D1. Later that day, DT sent D1 a client care letter in which he confirmed his conversation with RS.

Given that (1) RS had promulgated free cash as the basis for renegotiating D1’s 10% entitlement; (2) 3X Tables had become a regular feature of C1’s reporting to RS and D1; and, (3) D1’s recognition of the fait accompli (evidenced by his not seeking or taking a bonus by reference to the 2004 or 2005 audited accounts), it is reasonable to (and I do) conclude that RS and D1 mutually understood that D1’s 10% entitlement to a bonus on profits and a share in any capital gain would be calculated by reference to Table 3X and that during that conversation RS and D1 reached a consensus as to the method by which D1’s 10% entitlement was to be measured. In addition, the mutual understanding was that payment of a bonus need not await realisation of a capital gain but would be periodic.

Whether or not that consensus amounts to an enforceable agreement, whether free standing or varying the existing oral agreement between D1 and RS and/or the consequential implied agreement between D1 and C1, is a more complex question.

Cs’ case is, or includes, that because D1 had requested a written agreement and because other matters (a ‘golden parachute’, notice periods and restrictive covenants) were still under negotiation there was no binding agreement as to D1’s 10% entitlement. Without conceding that a consensus was reached, Cs’ case is that until there was a duly executed written employment contract between C1 and D1, nothing was agreed or enforceable. Cs’ case proceeds on the premises that (1) there was no pre-existing agreement between D1 and either RS or C1 and (2) both D1 and RS/C1 were working towards a written agreement. As to (1), I have made contrary findings that, as a matter of fact, RS was aware that he and D1 had made an agreement in 1994 and that, as a matter of law, C1 became bound by an implied agreement in the like terms. As to (2), that was a constant refrain on behalf of Cs, but I was not referred to evidence of any such agreement or contemporaneous assertion in writing.

D1’s response is that (1) by accepting Table 3X as a fait accompli he was making a significant concession; (2) this concession could not constitute consideration for a further detriment (the imposition of restrictive covenants); and, (3) negotiations about a golden parachute would not constitute consideration because it was only raised in the context of notice periods and restrictive covenants.

In my judgment, as at 22.6.05, D1 honestly considered (1) that he had reached a binding and enforceable agreement with RS/C1 as to the method by which his 10% entitlement would be calculated, which method varied or replaced the original arrangement; and, (2) that his accrued bonus entitlement was almost £159k as shown by Table 3Y. I also accept and find that D1 honestly believed that the agreement as to his revised entitlement did not have to be incorporated in a written contract in order to become binding. That is not to say that D1 would be surprised by a subsequent attempt by RS to renegotiate this agreement, but it is to say that D1 was confident that he could stop any such attempt in its tracks by reminding RS, and if necessary DT, that agreement had been reached. However, a finding as to D1’s honest belief is not the same thing as a finding that an enforceable agreement existed.

In cross-examination, D1 was pressed on the footing that during his conversation with RS (on 22.6.05) he did not tell RS that on 20.6.05 he had taken some £130k on account of a 10% profit or bonus entitlement. D1 agreed that it would be odd if he had not informed RS, thought that he must have informed him, but could not actually recall having done so. Other than D1’s supposition by deduction, there is no evidence to support the proposition that D1 actually did tell RS at that time about taking a bonus payment. Given my rejection of D1’s case that payment of the bonus on 20.6.05 followed an agreement as to entitlement, I am unable to conclude that it is likely that, on 21.6.05 or 22.6.05, D1 did in fact inform RS that he had already taken a bonus payment.

On the evidence before me, I am unable to find that (1) D1’s use of the phrase “paid as we go” was sufficiently explained or elaborated upon by D1 on 22.6.05 that it was or should have been be reasonably understood to mean that the crystallisation of a bonus entitlement apparent from Table 3X for the 3 months to 31.3.05 meant not only that an entitlement had accrued but also that it was immediately due for payment, or (2) that the phrase itself signified to either RS or DT that the intervals of payment were to be reduced from annual to monthly (or quarterly). Indeed, the evidence is to the contrary. My reasons are as follows :

As a matter of construction or implication, the objective meaning of the phrase “paid as we go” would fall to be considered in the context of : (1) an oral agreement as to a director’s bonus entitlement or fee; (2) the ongoing negotiation of a range of other terms, (3) following intention to incorporate all terms in a comprehensive written agreement; and, (4) known relevant background that (a) from the outset, the bonus entitlement had been payable at yearly intervals by reference to audited financial statements, (b) schedules to be used for computation of the bonus were prepared quarterly and could easily be prepared monthly based on unaudited accounts, and (iii) the intermediary charged with producing a draft document to reflect what the parties agreed in their discussions had not recorded that either party had specified payment at monthly intervals. Without more, “paid as we go” would not reasonably be understood to mean or imply : paid monthly.

On or shortly before 20.7.05, C1’s management accounts were prepared for the period to 30.6.05. The version in the trial bundle includes X Tables and a Table 3Y, which shows a bonus payment having been made to D1 on 20.6.05 (£158k gross) and a bonus payment payable to D1 on 20.7.05 (£140k gross). On 21.7.05, D1 received £115k as a further bonus payment net of tax and NI. On 25.7.05, C2 paid £49k in respect of tax and NI to the IoM tax authorities on the bonuses already paid to D1.

DT’s file, as disclosed, indicates that over the course of 28.7.05 to 1.8.05, D1 and DT exchanged comments and e-mails. It was at this point that D1 raised quarterly payment of bonuses with DT. D1 and RS also had a long telephone conversation on 1.8.05. D1 went on holiday on 1.8.05 for a fortnight; RS’s holiday then overlapped with part of and continued after D1’s holiday, until 22.8.05; and, DT’s holiday also overlapped in part and continued until 30.8.05. There is no evidence that an agreement as to payment intervals was made during this period.

Over the course of the week ended 19.8.05, papers were prepared for a regular meeting of C1’s Board to be held on 26.8.05. It was at this point that D1 instructed SW to prepare management accounts for C1 on a monthly basis, giving rise to management accounts for the 7 months to 31.7.05. That this was a new departure for which SW had not already put a system in place is evidenced by a number of typographical errors (eg misstating the period on Table 3X as cumulative for 6 months). The agenda, which was signed off by D1, makes no reference to approval or ratification of his bonus. However, D1 knew and intended that 3X and 3Y Tables would be incorporated in the management accounts bound into the Board packs sent to the non-executive directors.

At the Board meeting, D1 raised his own bonus entitlement and bonus payments to AC and to C1’s staff under any other business. In his evidence, D1 recalls being congratulated on a job well done by RB and BH; PE was not present and, being a co-authoriser of payments, AC already knew about D1’s bonus. Following the meeting, in accordance with the usual practice, the non-executive directors retained their Board packs. Ordinarily, SW would gather up AC’s and D1’s copies, holding one copy on file as a permanent record and forwarding the other to RS; on this occasion, SW had to chase D1 for his copy in early October 2005 in order to forward it to RS. SW says that D1 did not give him the Board pack; D1 says that he did. I think it unlikely that D1 would hold onto the Board pack because it would be a straightforward task for SW to either photocopy AC’s copy which SW kept as a permanent record or to print and collate the accounting documents from C1’s electronically stored data and files, or even to request and borrow a copy from a non-executive director for copying.

It seems that AC prepared the original draft minutes, which did not include any sums reported and approved as bonuses. RB asked for the amounts, even if only the total, to be included, which AC added in words.

Monthly management accounts and 3Y Tables were prepared for August, September, October and November 2005, which showed further bonus entitlements and monthly payments to D1. The management accounts to 31.10.05 formed the basis of the accounting information for the Board pack and Board meeting on 12.12.05. At this meeting, the August Board minutes were approved and signed, and would have formed part of the material to be sent by SW to RS. SW says he believed he sent this pack without checking it and was told in or after June 2006 by RS that the August minutes were omitted. I doubt, and do not accept that RS did not receive the Board pack and minutes of the 26.8.05 Board meeting from SW.

Whether or not the Table 3Y forming part of the 26.8.05 or the 12.12.05 Board packs to be forwarded to RS was included is a more difficult question. It would have been odd for it to have been omitted by SW as this would require extraction of a Table he had prepared and which he understood to be uncontroversial. Extraction by D1 (before handing his copy to SW for forwarding to RS) is a possibility and would not bode well for D1; another possibility is that RS simply did not turn over the page from the appendix to Table 3X to Table 3Y. What I am sufficiently clear about to make a finding on the balance of probabilities, is that at no point during these months (June to December 2005) did D1 expressly draw RS’s attention to the fact that he was receiving bonus payments on a monthly basis. Further, at no time did D1 inform DT in terms that the prospective or operative payment interval for his bonus was monthly.

The 2005 year end passed. Management accounts were prepared which formed the basis for the draft annual financial statements to be subjected to audit by KPMG.

In the meantime, in the early part of 2006, the Oxus trial had taken place. D1 says that this caused him to be in close contact with RS over a period of several weeks. There is no evidence that payment of his bonus was discussed or even mentioned. D1 says that over the course of this period he considered his own career options, took legal advice on his position, and decided to have one final attempt at securing a written contract with C1. To this end he had a draft contract prepared which proposed a 20% bonus entitlement and a £1.5m golden parachute. To reinforce the seriousness of his intention to bring matters to a head, D1 sent a letter of resignation to C1, to KDL and to RS on 17-18.5.06. D1’s notice was to expire on 30.6.06. D1 also telephoned DT and informed him of his resignation and the fact that this would be likely to prompt a regulatory review in addition to the (nearly concluded) annual audit by KPMG.

I do not regard this as evidencing uncertainty on D1’s part as to the existence of a binding agreement for a bonus calculated by reference to free cash. Rather, I consider that it evidences D1’s frustration at RS’s continual attempts to “move the goal posts” and the consequential delay caused to the negotiation of other terms.

On 19.5.06, during a discussion between RS and D1 about D1’s letter of resignation, D1 informed RS that KPMG wanted RS to approve C1’s bonuses for the year. RS says that D1 told him that the bonuses were approximately £50k. I consider that to be improbable because D1 knew that the bonuses paid to C1’s staff were almost £200k, and he would have had no reason to misstate those bonuses. On 22.5.06, KPMG (Footnote: ⁵⁹) (at RS’s request) and, on 25.5.06, AC (Footnote: ⁶⁰) (at D1’s request) faxed schedules including details of D1’s bonuses to RS. On the next day, 26.5.06, RS telephoned D1 to demand repayment of the bonuses at a meeting to take place in London on the following day; D1 refused repayment and suggested a meeting later that day as RS was present on the IoM. RS telephoned D1 at home that evening during which D1 maintained his entitlement to the bonuses taken.

Over the course of June 2006, RS and D1 had several conversations and meetings the tone and subject matter of which ranged from the possibility of continuing to work together to criminal and civil proceedings being taken against D1. On 27.6.06, D1 received a formal letter from C1 demanding repayment of £443k taken as bonuses, €200k and the £55k 2003 bonus. On 28.6.06, RS and D1 met and RS proffered a draft of a compromise agreement by which D1 would keep the sums the subject of the repayment claimed in exchange for restrictive covenants; D1 declined on the basis that RS had agreed to his bonuses.

On 29.6.06 C1’s report and financial statements for the year ended 31.12.05 were signed off. D1 was omitted from the list of directors but was referred to in the directors’ report as having resigned on 29.6.06 (Footnote: ⁶¹). D1 was also referred to in the notes to the financial statements concerning related parties as follows : “Included in amounts due from related parties are amounts totalling £443,112 (Footnote: ⁶²) representing unauthorised payments made to [D1], a director of [C1]. Formal demand has been made for the repayment of these amounts”. In C1’s financial statements for the following year (signed off on 12.12.07) the related parties note makes no reference to D1 and the narrative and figures set out in the note make no reference to D1 and are incompatible with D1 being treated as a debtor of C1.

Whether and, if so, to what extent D1’s bonus payments were provided for in C1’s accounts as part of the administrative costs is unclear. The schedule faxed by KPMG to RS on 22.5.06 (Footnote: ⁶³) indicates that 80% of D1’s salary and bonus payments were charged to C1. However the total figure produced by this schedule (£804k after a further arbitrary deduction of £150k) does reconcile readily to a total annual charge for administration costs of £890k, which sum includes other administrative costs exceeding £200k.

On 30.6.06 D1’s resignation became operative and he ceased to have any further involvement in KD group’s affairs. By mid-July 2006, RS had proposed a revised compromise agreement on a take it or leave it basis. D1 did not take it. From that point in time, at the latest, it was open to C1 and C2 to commence the proceedings that were actually commenced, almost 4 years later, on 24.2.10.

Before drawing the strands of this final section of the facts concerning Cs’ case against D1 to a conclusion, I should also briefly refer to the restatement of C1’s audited accounts for the year to 31.12.05 effected in the financial statements for the year to 31.12.06 by adjustment of the 2005 comparative figures.

Cs’ case is that, by reason of erroneous accounting policies adopted while C1 was under D1’s stewardship, the profit for 2005 was materially overstated and instead of making a profit in excess of £3.1m C1 had, on a correct true and fair view, sustained a loss in excess of £0.5m. The effect on free cash was to leave C1 in negative free cash at all material times (Footnote: ⁶⁴).

C1’s position is that restatement of C1’s accounts approved by its auditors was a matter of record which the Court is bound to accept and has no power to consider or go behind. In an ordinary case, such a submission may well be correct; but, this is not an ordinary case.

SW gave evidence that, from 2003 onwards, he had considered the policies adopted by C1 and had reviewed them on an annual basis with the auditors, KPMG, who were satisfied with the suitability of the policies for the insurance business being conducted.

The revised policies were introduced by KW after he had replaced D1 and had become managing director of C1. When adjustments to the 2005 results were proposed to KPMG during the course of the 2006 audit, KPMG’s considered and firm response was that no prior year adjustment was required. In other words, KPMG did not consider that there had been a material error in the 2005 accounts as signed off on 29.6.06.

In cross-examination, particularly of KW, Mr Cullen demonstrated (1) that the adjustment in fact effected had been arbitrarily implemented, in the sense that no thought had been given to the actual effect on figures (balances for provisions) at 1.1.05, and (2) that the entire prior year adjustment had been washed through or effectively reversed in 2006. In other words, the effect had been to postpone profit originally taken in 2005, which would have contributed to D1’s bonus entitlement, to 2006. Unsurprisingly, D1’s legal representatives had pressed, without success, for disclosure to assist them in analysing the merit, if any, behind the prior year adjustment. This led to a direction at the PTR that Cs’ should contact KPMG and instruct KPMG to review their files and supply documents which would evidence (1) the reason for the various adjustments, (2) whether KPMG or C1’s directors had initiated the adjustments, and (3) KPMG’s attitude to the adjustments (it being clear that KPMG should only be asked for documents which C1, as audit client, could call for ~ specifically excluding KPMG’s own working papers). The assumption had been that C1’s auditors would be willing to co-operate in the provision of such material. In the event (and quite possibly as a result of a misunderstanding between C1’s representatives and KPMG or its legal advisers), KPMG’s response was to decline to co-operate and to assert that the IoM firm was not subject to the jurisdiction of the English court.

On the morning of 6.12.11, the final day of the trial, and just before commencement of Mr Cullen’s closing speech, I was told by Mr Beever that on the previous day a courier had delivered a substantial but incomplete quantity of documents from KPMG’s records. Missing documents were said to include e-mail exchanges about the prior year adjustment involving a Mr Gardner of KPMG and said to have been deleted.

In closing submissions, Mr Booth QC made clear that no allegation was being made by Cs that D1 had sought to inflate profits by the provision of false material to SW and that D1 could be taken to have had an honest belief at all relevant times that the reported profit over the course of 2005 was accurate subject to audit. Although Mr Booth QC would not concede that the ‘subject to audit’ qualification is meaningless in this context, in my judgment it plainly is because (1) C1’s 2005 accounts were in fact signed off by KPMG on 29.6.06 without any qualification to the audit report; (2) even when the alleged fundamental errors were drawn to their attention, KPMG’s considered position was that no adjustment was necessary; and, (3) the summary and incomplete scrutiny to which Mr Cullen was able to subject the adjustment raises serious questions about the both the accuracy of and C1’s motive for the adjustment.

Restatement of C1’s accounts to correct a fundamental error by prior year adjustment and its effect on free cash is an issue which should either have been properly prepared and presented or have been bypassed. In the event, it came to nothing and certainly does not warrant findings adverse to D1 or the drawing of any adverse inferences in relation to his bonus entitlement.

On the basis of the foregoing facts and matters relating to D1’s contractual entitlement to a bonus, the factual conclusion that I reach is as follows :

In my judgment, the legal effect of the above factual conclusions is as follows :

Had D1 waited until 29.6.06 before taking any bonus payment, any claim by Cs for repayment founded in breach of contract would fail.

However, D1 did not wait. He had no contractual entitlement to the bonus payments that were made to him in 2005.

D1’s conduct in procuring the payment to himself of bonuses calculated on the correct basis by reference to C1’s net free cash but which had not become due for payment were breaches of D1’s contractual duties to serve C1 loyally and faithfully. That is so even if there was no risk that the entitlement might diminish before the due date for payment because the disloyalty is in the timing, not the fact per se, of the taking.

Whether the payments made to D1 and/or the consequential liabilities for and payments of tax and NI caused C1 to suffer any loss or damage is – but should not be – unclear.

Weighing heavily against the prospect that C1 has suffered loss, damage or financial disadvantage by reason of D1’s breaches of contract are the following facts and matters :

Viewed from another perspective, it may be said that any loss sustained by C1, had it funded the bonus payments taken by D1, should be measured by reference to its loss of the use of the amounts taken for periods of 6 months to 1 year.

Cs’ Claim Form seeks “Any other relief, as appropriate” but there is no pleaded prayer seeking an inquiry, either as to damages or of amounts to be found repayable to C1. Having regard to Cs’ approach to disclosure and evidence and to the Court’s objective of dealing with cases justly, this is not a case in which justice obliges the Court to order the making of any such inquiry.

My conclusion is that, C1’s claim for damages or repayment of unauthorised payments founded in breach of contract is not made out, and should be dismissed. I reach this conclusion without having to consider the effect of s.281 and whether or not D1’s breaches of contract were fraudulent. Had it been appropriate so to do, my conclusions on these issues would have been as set out below under consideration of D1’s alleged breaches of fiduciary duties.

There was no contract between C2 and D1. This question does not arise for determination. C2’s claim in contract should be dismissed.

As a director, D1 owed fiduciary duties to C1.

When D1 discussed the calculation of a bonus payment to himself with SW shortly before 20.6.05, D1 did so as a director of C1. When, on 20.6.05, D1 instructed SW to pass Table 3Y to JT, as payroll clerk, for processing the payment of a gross sum of £158,912.04, he did so as a director of C1.

Discussion about or instructing the calculation of a bonus entitlement before it falls due for payment would not, of itself, be a breach of any fiduciary duty owed by a director to the company.

Instructing an employee to initiate the processing of a bonus payment which (1) is not calculated on a basis consistent with the existing contractual entitlement and (2) is not due for payment is not consistent with the fiduciary duties owed by a director to the company. Whether or not such conduct is a breach of duty will depend on the particular circumstances.

In this case, the facts are that (1) negotiations were ongoing about changing the basis of calculation the subject of an existing entitlement, the method used was that being put forward on behalf of the company which would lead to a reduction in the bonus entitlement, but no agreement had been reached; and, (2) alteration of the agreed payment intervals had not been discussed, and the alteration implemented by the director was to his advantage.

Although the fact, amount and timing of the bonus payment on 20.6.05 was known to staff at C1, it had not been disclosed to or approved by the person understood by D1 to represent the mind of C1 on such matters, namely RS.

Whether fiduciary duties are identified by reference to the features of the core duty of loyalty (to act in good faith; not to make a profit out of his trust; not to place himself in a position where his duty and his interest may conflict; and, not to act for his own benefit without the informed consent of his principal) or by reference to the principle as recently formulated in a corporate context by Lord Neuberger MR (exercising powers of management or control otherwise than in good faith and in a way believed to be in the interests of the company), the elements of secrecy and prematurity render the instruction to process a payment a breach of the director’s fiduciary duty.

As to the payments after 20.6.05, an agreement had been reached as to the basis of calculation before any further payments were made. However, no agreement had been reached for any payments to be made on a current year basis at monthly intervals.

Whether D1 gave subsequent instructions to SW and the payroll clerk to calculate and process payment of bonuses or whether they acted on a continuing assumption that they had standing instructions from D1 does not matter. D1 was C1’s a director and executive chairman; he exercised day to day control over C1’s business and affairs; and he used the authority of his office to cause further bonus payments to be calculated and processed by C1 during the course of 2005.

For a person in D1’s position even to stand by in the knowledge that unauthorised payments would be processed and ostensibly authorised by C1’s employees and, in the case of AC, a fellow director would be a breach of the core duty of loyalty. However, on the facts as found in my judgment, D1 did not simply stand by. He instructed the processing of payments which, as from 11.7.05, he honestly believed were accruing due to him, but which he had no reason to believe had become due.

On the face of it, D1’s conduct constitute a breaches of his duties of good faith, not to profit from his trust, not to place himself in a position of conflict of interest, and not to act for his own benefit without the informed consent of his principal (RS as the mind of his employer, C1).

D1 relies in his defence on the authorisation of his bonuses by the Board at the meeting on 26.8.05, and, if need be, the subsequent communication of the Board pack and minutes to RS.

D1’s involvement in the organisation of the 26.8.05 Board meeting is, in my judgment, not out of the ordinary or otherwise such as to raise the question of breach of fiduciary duty. In particular, the raising of bonus payments under AOB does not of itself reveal a want of good faith or a disregard for the company’s best interests.

However, the line was crossed by the presentation that D1 made to the Board, including to AC. D1 could justifiably inform the Board that agreement had been made with RS as to the basis for the calculation of his 10% entitlement, including to a bonus. That agreement was settled on 11.7.05. What D1 could not do was lead the Board to believe that he had a current and ongoing entitlement to be paid at monthly intervals. Nor could he ask the Board to authorise payment on that basis without informing his colleagues that the intervals for payment were still the subject of negotiation with RS; D1 did not so inform the Board.

In my judgment, D1’s failings in that regard also contravened the duties requiring a fiduciary to act in good faith, and prohibiting a fiduciary from profiting from his trust, from placing himself in a position where his duty and his interest may conflict, and from acting for his own benefit without the informed consent of his principal (taking the Board as his principal for this purpose).

Far from saving D1 from any breach of fiduciary duty, D1’s involvement in the purported ratification (of payments already made) and authorisation (of future payments to be taken before the signing off of C1’s 2005 financial statements) constituted further contravention of his fiduciary duties.

In idiomatic English, D1 went beyond being ahead of the game; he jumped the gun. Both idioms envisage anticipation of a future event; the crucial difference is that in the former case anticipatory conduct is acceptable, but in the latter case anticipatory conduct transgresses the rules.

As to the impact of D1’s breaches of fiduciary duties, Cs’ case is that the consequences were all visited on C2.

As an officer of C2, D1 owed fiduciary duties to that company.

All relevant bonus payments are said to have been made from C2’s bank accounts as bank transfers. The procedure for authorisation and effecting transfer payments from C2’s accounts is explained in JT’s unchallenged evidence. JT describes herself as a being employed by C2 as a book keeper. Payment required authorisation by use of 2 (of 3) bank issued security devices. Devices were issued to D1, AC and KC. JT held D1’s device to his order and only ever used it “when [D1] instructed [JT] to do so … On each of the occasions that [JT] used [D1’s] device, [D1] would tell [JT] in advance, who the payment was to be made to, for how much and give [JT] authority use … the device in [D1’s] absence. … [JT] was simply processing the payments. The authority came from [D1]”. That being said, JT did not recall processing any of the payments.

The evidence is that the payments were made on the authority of D1’s and AC’s devices. The inescapable inference to be drawn in respect of each payment is that D1 (1) either used his own device or authorised JT to use it as if she was him, and (2) instructed AC to use his device. Given D1’s assertions as to his bonus entitlement, the involvement (by D1) of SW in the computation of the amount due and preparation of the source document (Table 3Y) for payment, the standing of D1 within KD group, the apparent openness of the arrangements for payment, and the evidence as to only a limited line of reporting between AC and RS, it is unsurprising that AC acted in accordance with D1’s instructions. This would have been all the more so after D1’s presentation to C1’s Board on 26.8.05.

As the payments were to, and did, come from C2’s bank accounts, these acts were done by D1 in his capacity as an officer of C2.

When authorising all transfers of 2005 bonus payments from C2’s bank accounts for his benefit, D1 acted at all times in breach of his fiduciary duties to C2.

In my judgment, D1’s conduct as an director of C2 contravened the duties requiring a fiduciary to act in good faith, and prohibiting a fiduciary from profiting from his trust, from placing himself in a position where his duty and his interest may conflict, and from acting for his own benefit without the informed consent of his principal (taking the Board as his principal for this purpose).

The crucial findings of fact relevant to this issue are that (1) D1 had no grounds for believing that he was entitled to authorise, take or receive a bonus payment during 2005 other than one computed by reference to 10% of C1’s free cash as at 31.12.05 following the signing off of C1’s report and financial statements for the year ended 31.12.05; (2) D1 knew that the only payment interval the subject of an agreement between himself and RS was annual following the signing off of C1’s report and financial statements for any year; (3) D1 had neither told RS, nor taken any steps to ensure that RS was aware, that bonus payments were being made to him; and, (4) having regard to the opportunities D1 had to inform RS of the fact that he was authorising and receiving bonus payments from 20.6.05 onwards, D1’s failure to tell RS or to ensure that he was informed can only have been a deliberate omission on his part.

Set in that context, the authorisation, taking, and receipt of all 2005 bonus payments may fairly be described as clandestine or surreptitious.

Applying the test for dishonesty to these circumstances, D1’s conduct was simply incompatible with the ordinary standards of honest behaviour, and a director in D1’s circumstances could not think otherwise. D1’s breaches of his fiduciary duties were fraudulent.

The effect of my conclusion as to the meaning of the word “fraud” and of the phrase “fraudulent breach of trust” is that liability for a fraudulent breach of fiduciary duty by a person who later becomes and is discharged from bankruptcy does not result in the fiduciary being released from such liability.

Having found D1’s breaches of his fiduciary duties to be fraudulent, his bankruptcy, on 2.4.08, and discharge therefrom, on 10.11.09, is irrelevant to my decision as to D1’s liability in these proceedings.

C1 and C2 have established fraudulent breaches of fiduciary duties by D1. On Cs’ case C2 has been affected, in the sense of suffering financial loss or detriment. Any remedy, whether for compensation, tracing or otherwise, is available to C2 only.

As to what the appropriate remedy should be, Mr Booth QC clearly had in mind a further hearing for the purpose of working out the appropriate order. I agree that such a course is appropriate in the light of my findings and judgment.

Cs have not pleaded a case against D2 on the basis that D1 was her agent and do not seek any relief on that basis. In his closing submissions, Mr Booth QC made clear that agency is raised in the context of knowing receipt and as the primary means by which Cs assert that D2’s ‘knowledge’ is established. Mr Booth QC’s submission is that D2 is fixed with D1’s knowledge by reason of D1 being D2’s agent.

The underlying proposition is that (1) D2 allowed D1 to undertake transactions on her behalf, e.g. the earlier arrangements about the transfer of the family home into her sole name; (2) D1 knew that the 2005 bonus payments were obtained by his misappropriation; (3) these misappropriated monies were transferred into and through joint accounts, then to a specially opened account in D2’s sole name, which activity was the result of D2 allowing D1 to make decisions and operate their joint accounts; (4) at the other end of the time line, D1 “was controlling and operating matters” (presumably a reference to the transfer from D2’s sole account to a solicitor’s client account and then to D3 as a settlement leading to D1’s discharge from bankruptcy) leading to the settlement between D2 and D3; (5) D1’s knowledge (that the 2005 bonus payments were misappropriated) is therefore to be attributed to D2; (6) by D2 entrusting the operation of the joint bank accounts to D1, at the point in time when D1 paid misappropriated monies into joint accounts he was acting as her agent; (7) at that point, the money became joint money “at the instigation and operation of [D2’s] agent”; and, (8) for these purposes, therefore, his knowledge ought to be treated as her knowledge : “… And if he is dishonest at that point in time then, for the purpose of determining what the state of play is with those accounts, his dishonesty ought to be attributed to her” (Footnote: ⁶⁸).

The proposition in essence is that if an agent brings money he knows to be stolen to a principal and deals with that money as the principal’s agent or directs how the principal deals with the money through an account in their joint names, the principal is deemed to know that the money was stolen from the moment that it is received into the joint account.

Mr Booth QC submits that the above is the logical application of the ordinary principles of the law of agency by which the only circumstance in which a principal is not fixed with the knowledge of the agent is where the agent is committing a fraud against the principal.

I do not accept this submission : (1) as I have already observed, the passage and Mr Booth QC’s submissions relating to D2 (as principal) and D1 (as agent) provide a good illustration of why that is so :

Mr Booth QC submitted that the agency point “is, as it were, on top of” the question of unconscionable receipt. Ms Lucas submits that Cs are attempting to bypass the legal test for knowing receipt. I do not accept that D2 should be or is fixed with knowledge as Mr Booth QC submits. I agree with Ms Lucas, and I reject the agency point.

As Cs were not participants in the dealings with the 2005 bonus payments taken by D1, ascertainment of the facts requires consideration of (1) what D2 did, authorised or permitted, (2) what, if any, inferences are to be drawn from the evidence of relevant surrounding circumstances, and (3) what D2 knew or understood about these transactions. In so doing, careful attention has to be given to D2’s evidence tested by cross-examination.

As to surrounding circumstances, the common ground starting point is that D1 and D2 were husband and wife with a family. D1 was the main bread winner, having been C1’s executive chairman since mid 1995 and having additional responsibilities as a senior executive of KD group. D2’s primary role was wife, mother and home-maker, and her part-time occupation was chosen to accommodate the demands of this role. By 2002, D1 and D2 had joint accounts with 2 institutions (current and savings joint accounts with HSBC, and a joint account Bradford & Bingley Building Society (B&B)); and, each of D1 and D2 had sole accounts with one or more institutions (including in D2’s case a savings account with Britannia International Bank (BIB)). The family home was originally jointly owned but, in about 2003, D2 became the sole owner. D1 made the arrangements for that transaction, which was to make D2 feel more secure in a matrimonial context.

As to the original receipt of the 2005 bonus payments, as with D1’s salary, C2 transferred the net of tax sums (£363,244.67 by 6 transfers over the period 20.6.05 to 15.12.05 (Footnote: ⁶⁹)) into D1 and D2’s HSBC joint current account. These transfers had been dishonestly taken by D1, his dishonesty stemming from the timing of the transfers rather than a want of entitlement to receive such total sum, or more, in due course (in the event on 29.6.06). The fact that they were paid into the HSBC joint current account is unremarkable.

As to D2’s knowledge at that time, she knew that for more than 10 years D1 had worked long hours for C1 in particular and KD group more generally, and she understood that most of D1’s time and effort had been concerned with C1. For a decade, D1 had told her, and she reasonably believed, that in addition to his salary, his reward was to come as a share of C1’s growth, specifically a 10% share. D2 said that “as far as [she] was concerned everybody knew that. People outside the company seemed to know that. It seemed to be a fact of life, just like where we live and how many children we have”. D2 was aware that the receipts were substantial; her understanding was that they reflected what D1 had achieved for C1 (which they did); D2 was proud of D1, pleased that his hard work and stress was paying off as they had hoped for many years, and comforted that they would have or add to a “nest egg”. I accept that evidence as a true statement of D2’s knowledge and belief at the time.

Mr Booth QC submitted and opened his cross-examination of D2 on the basis that (1) she, jointly with D1 or solely on her own account, had a large number of bank accounts; and, (2) on each occasion that a bonus payment was taken by D1 it was paid into one joint account and, on the same day, transferred off into another, and then later transferred on another 3 or 4 subsequent occasions. The import being that such transfers are unusual conduct crying out for an explanation, and would bear the hallmark of being unconscionable if not explained.

The reality is that D1 and D2 maintained 2 accounts at HSBC, a current account and a savings account. As monies were received into the current account, credit balances were swept to the savings account and were later returned to the current account as and when needed to make payments or transfers. That is an entirely commonplace arrangement and provides a credible and entirely innocent explanation for the 1^st series of transfers (HSBC joint current account to HSBC joint savings account).

The second HSBC account is simply a savings account, accordingly money is routed back to the HSBC current account as and when required for payment or transfer to 3^rd parties. This provides another commonplace, credible and entirely innocent explanation for the 2^nd series of transfers (HSBC joint savings account back to HSBC joint current account).

The 3^rd series of transfers concerns the transfer, over the period 23.6.05 to 4.1.06 of sums totalling £324k (Footnote: ⁷⁰), from the HSBC joint current account to a joint savings account with the B&B. The transfers to the B&B broadly follow on within a matter of days (and in one case apparently precede) from the initial transfers from C2 to the HSBC joint current account. By 23.6.05, the B&B joint account was a well established joint savings account. It had been opened in 1998 and by the end of 2002 a balance of circa £200k had been built up. Again, a transfer of money from a bank account (even from a savings account with a bank) to add to established savings held at a building society is entirely commonplace and unremarkable.

Pausing at this point, there is nothing unusual about the particular circumstances of any of these transfers that calls for scrutiny of D2’s conscience.

The 4^th transfer occurred on 25.5.06. £500k was transferred from the B&B account to a newly opened high interest account in D2’s sole name at BIB. D2 was an existing customer of BIB (having opened a ‘base rate saver’ account in 2002), so the opening of an account was straightforward. However, and understandably, BIB’s cashier required proof of the source of the monies. Which D1 provided. D2 then returned to the BIB and paid in the B&B cheque for £0.5m.

D2’s evidence under cross-examination setting the background to this transfer is as follows : (1) the prior transfer of their home from joint names to sole names had been effected because D1 wished to provide D2 with a gesture of financial security in case of a breakdown in the marriage; (2) from the latter part of 2005 D2 was aware that D1 had it in mind to leave C1 and set up in business on his own; (3) D1 had promised that he would not use their “nest egg” and had suggested that it be put in a separate account; and, (4) D2 welcomed that suggestion as a means of affording her some security for the family if the new business did not succeed.

D2 was cross-examined on her account by reference to D1’s and her diary of events over the period 16.5.06 (the date of D1’s resignation letter) to 30.6.06 (D1’s last day at C1). There is nothing in the entries or the oral evidence D2 gave to lead to a conclusion that the 4^th transfer was, from her perspective, anything other than a perfectly normal arrangement made by a married couple intending to protect the family’s assets against the possibility of dissipation or loss should a new business venture to be commenced by one of the spouses flounder.

In addition, D2 was cross-examined on the basis that, by 25.5.06, she knew that claims were being made against D1 and that RS was seeking repayment of the bonus payments. D2 said that she was not aware of any claims being made against D1 in the sense of threatened litigation or to blacken D1’s name. D2 acknowledged that D1 had told her that RS had asked for the bonuses back. She said that had caused D2 to seek D1’s reassurance that he had earned that money, to which D1 had responded that there was “no way that [RS] could do that” because he (D1) had earned the money and that his entitlement “had been absolutely properly documented”. D1 had also referred to Board meetings, which D2 knew had taken place periodically, and “to [D2’s] mind that instantly put that one to bed”. Set in context (25.5.06) that explanation would have seemed credible to D2 and there was no reason for her to disbelieve or doubt it.

I also bear in mind that at the time of this transfer (25.5.06), D1 had tendered his resignation to C1, with the result not that he was sent home on gardening leave but that he continued to work during his notice period. This would provide a further sense (albeit limited) of continuity and normality to everyday life, and reassurance in relation to D1’s value to C1 and, indirectly, entitlement to the bonus payments.

Mr Booth QC submits that approval of the Board fell short of an assurance that RS had agreed to the bonus payments. That is so. However, over the previous decade, D2’s knowledge of D1’s 10% entitlement would have stemmed from the original agreement between RS and D1; and, the significance of the Board’s approval to a lay outsider would be that a seal of approval had been given by the independent governing body in addition to the original agreement with the owner.

At approximately the same time, on 31.5.06, D2’s BIB high interest account was fed with a transfer in of £132k from Avalon Trust.

Mr Booth QC submits that when D2 spoke of opening the BIB sole name account and using it to provide ‘security’ she had in mind security from claims, including or such as those of Cs. In my judgment, D2’s notion of ‘security’ was not to seek to evade liability for existing claims but to seek to minimise or avoid the risk of loss from unwise investment in or the future failure of D1’s proposed new business venture.

In my judgment, D2’s evidence was credible and honestly given. If it was for D2 to discharge the burden of proof (which is not the case), I would hold that the 4^th transfer is satisfactorily explained.

The 5^th series of transfers concerns the transfers out of D2’s BIB high interest account. Following the transfer from Avalon Trust and the crediting of interest, by early 2007 the balance on this account exceeded £650k. On 5.3.07, D2 transferred £150k to her base rate saver account at BIB; and, on 21.6.07, she transferred £500k to Gough & Co, an IoM law firm. This transfer was prompted by the commencement of proceedings (QBE Markel litigation) on 8.12.06 to which D1 was 6^th defendant and following which D1 and D2’s joint assets had been frozen.

The transfer from D2’s sole BIB high interest account to Gough & Co’s client account followed advice from that firm and was supported by an undertaking not to touch it. As is commonly the case, the impact of the freezing order included disruption of the ordinary course of paying domestic bills and the HSBC joint current account became difficult to operate. For that reason, D2 then took over management of the household’s finances through an account with the Isle of Man Bank in her sole name. Other funds were added to the balance held in Gough & Co’s client account and became subject to the undertaking.

This transfer was made in accordance with legal advice and provided a sensible and pragmatic solution to the problem of maintaining a household on a day to day basis. The fact that D1 was a defendant in the QBE Markel litigation did not require D2 to revisit the circumstances in which the 2005 bonuses had been received.

The 5^th transfer, is uncommon, but is satisfactorily explained by D2.

The 6^th transfer occurred on 9.10.09, when £600k was transferred from Gough & Co’s client account to D3 (or D3’s solicitors) in respect of a settlement with D1’s trustee in bankruptcy to secure his discharge from bankruptcy. The settlement was made by D2 following legal advice and following an assurance from D3 that the trustee “had not been notified of any claims”.

Mr Booth QC drew attention to e-mails in the lead up to the settlement as demonstrating that D1, rather than D2, gave instructions to her lawyer. That may have been so, but D1 was the person who was bankrupt and the person who had organised a transaction under challenge by the trustee (the transfer of the family home into D2’s sole ownership). Moreover, both D1 and D2 were parties to the e-mail traffic; and, D2 received advice from her lawyers, she was the person on whose behalf the lawyers negotiated, and it was she who made the settlement. It does not follow that the money in Gough & Co’s account was or had become joint money or money under D1’s control.

In relation to D2’s knowledge at the time of the 6^th transfer, i.e. when D2 settled with D3, my conclusion is that D2 believed, and had no reason not to believe, that the only person with a possible claim to any part of those monies was D3. She did not believe and had no reason to believe that Cs, or either of them, had a claim to any part of that money.

It is striking that almost 4 years passed (17.5.06 to 24.2.10) before D2 received notice of any claim by either of Cs, and then it was not a claim letter, or letter before action, but service of proceedings.

The 6^th transfer was made for a legitimate and understandable purpose, to secure the discharge from bankruptcy of the main breadwinner in the family. D2 had no reason to think that Cs or either of them might have any claim to or interest in any part of the money in the Gough & Co client account prior to its transfer. Indeed, D3 had given an assurance to the contrary.

Mr Booth QC submits that the question of D2’s credibility is central to her defence of Cs’ claims.

Cs’ pleaded case and the thrust of Mr Booth QC’s cross-examination and submissions is that D2 “well knew that the money concerned belonged to [Cs] and/or wilfully ignored the obvious fact that the money did not belong to D1 and failed to make such enquiries as a reasonable and honest person would have done either when receiving the money, whilst holding the money, or before disposing of the same” (i.e. through to 9.10.09). This leads to the plea and submission that “on any version of events [D2] was plainly on notice of the alleged misappropriation well before utilising the same as part of a transaction with [D3], but proceeded to dispose of the misappropriated money she had received regardless”.

I have referred to and analysed the evidence by reference to the 6 series of transfers viewed in the context of the surrounding circumstances and D2’s evidence as to her knowledge tested by cross-examination. For completeness, I should also address the particulars of knowledge.

Cs’ particulars of D2’s knowledge were provided as a response to a CPR Part 18 Request and were verified by KW on the basis that he had no knowledge to the contrary and assumed them to be true. On this basis Cs assert, in summary, that:

In my judgment, Cs have failed to establish on the balance of probabilities that, at the material time (between 20.6.05 and 9.10.09), D2 had any reason to think that the 2005 bonus payments to D1 had been or might have been misappropriated by him or were or might be subject to claims by Cs or either of them. Accordingly, there is no evidential basis for a finding that D2’s state of knowledge about the 2005 bonus payments was such as to make it unconscionable for her to retain the benefit of the receipts.

It is unnecessary to repeat the relevant facts. It is clear that D2 had disposed of the 2005 bonus payments more than 4 months before she was notified of any claim by Cs. Ms Lucas rightly submits that D2 “cannot possibly be personally liable nor have [Cs] demonstrated that at [the date of service of proceedings] she still retained any part of the trust property”.

On the facts as I have found them to be, no such liability arises.

In round figures £6k was lost on the 1^st series of transfers (same day sweep between HSBC joint current and savings accounts) and there is no evidence that this sum remained in the current account when the monies were transferred back for payment out to the B&B joint account.

Again in round figures, £35k was lost on the 2^nd series of transfers (a few days later (from HSBC savings account back to HSBC current account). I have not been directed to any evidence about this.

Thus, the relevant period for enquiry here is very proximate in time to the initial receipts and even the latest of the potentially relevant transfers occurred almost 5 months before D1 gave notice of resignation and D2 opened the BIB account into which £324k was transferred.

This issue does not arise for consideration. If it had, I would have been sympathetic to Ms Lucas’ submissions as to the appropriate rate (including compounding intervals) and delay (including Cs’ disregard of any pre-action protocol).

D3 did not attend the trial and made clear at the PTR that his stance would be neutral.

There is no resistance on the part of D3 to Mr Booth QC’s submission that D3 had ample notice of a proprietary claim prior to the settlement agreement with D2. However, any such liability is dependent on the outcome of the order to be worked out in relation to D1, and must await the further disposal hearing between those parties.

I have acknowledged the good sense of Mr Booth QC’s submission that there will have to be some working out of the order to reflect the judgment sought.

Ms Lucas submits that any such working out should not be permitted if it is to involve D2. On my findings, D2 need not be involved.

The sensible course is for Cs’ and D1’s representatives to discuss directions for a hearing to determine the order to be made. In the event that directions cannot be agreed, the alternatives should be submitted with the suggested corrections to this judgment and I shall give such directions as seem to me to be most suitable.

As to costs, I propose to direct that costs be dealt with at a further hearing for which up to 1 day will to be allowed and that the parties should exchange all schedules and calculations not less than 2 working weeks before the costs hearing and should exchange and file (including the schedules and calculations when filing) skeleton arguments not less than 3 working days before the hearing.

As a postscript I add that the case against D1 could and should have been a relatively straightforward and a very much shorter proceeding. Whether or not Cs had time to take and conclude proceedings against D1 before his bankruptcy may be debatable; but, neither argument about s.281 nor the consideration of allegations and evidence relevant to the question whether D1’s breaches of his fiduciary duties were fraudulent need have added materially to the length of the trial.

What is not open to debate is that (1) insufficient attention was paid by Cs to the marshalling of the material relevant to the real issues in this case, (2) far too much attention was paid to the amassing of material intended to cause D1 to be branded generally and thoroughly dishonest, and (3) far too little attention was paid by Cs (that is RS and Cs’ witnesses) to their duties as participants in litigation, including in particular the duty to tell the truth.

An obvious and regrettable consequence of the above is that the trial bundle grossly exceeded that which was pertinent to the real issues between the parties.