Hellard & Anor (Liquidators of HLC Environmental Projects Ltd) v Carvalho

In these proceedings, which are brought by means of the so-called ‘misfeasance’ procedure provided by s.212, Insolvency Act 1986 (“IA86”), the liquidators of HLC Environmental Projects Ltd (respectively “the Applicants” and “the Company”) seek financial relief against its principal director, Mr Horacio Luis De Brito Carvahlo (“the Respondent”) in respect of a number of payments which he caused the Company to make between 30 November 2005 and 27 October 2008. The Respondent is by origin Portuguese, but married an English lady and lives here.

The only causes of action relied on are breaches of the Respondent’s duties owed to the Company as a director. Insofar as the payments were made before 1 October 2007 (“pre-codification”), the general duties in question arose at common law. In respect of the 8 payments made thereafter (“post-codification”), which represent the majority in value (though not number), the general duties owed were those laid down by the codifying provisions of the Companies Act 2006 (“CA06”), Part 10 Chapter 2 (being ss.170-181).

At the outset of the trial, I refused the Applicants permission to amend their pleadings to add an alternative claim alleging a preference under ss.239-241, IA86, for the reasons I gave at the time.

Mr Kevin Hellard, a licensed insolvency practitioner and one of the Applicants, made 2 witness statements, and was not required to be cross-examined on them. Some of the events of which the other witnesses spoke took place some time ago, and I have borne that in mind in evaluating their evidence.

Ms Iris Pinhão Capucho, a portfolio manager at Caixa Capital – Sociedade de Capital de Risco SA of Lisbon (“Caixa”) was called by the Applicants. She was a straightforward and direct witness, whose evidence I found to be entirely credible.

The Respondent is an experienced businessman, with an assertive manner, who gave substantial parts of his evidence quite forcefully. He demonstrated a tendency to say – with great apparent conviction – whatever he thought at that moment was most likely to assist his cause. One example of this during his evidence was when he launched into a detailed explanation of his supposed understanding of the Call and Put Option Agreement, which I shall find below was simply embroidery, in attempted support of what he must have realised was an unconvincing denial of a basic understanding of this agreement. An example of this during his dealings with the Applicant liquidators is provided in a letter he wrote to them on 21 April 2011, where in the final paragraph he volunteered an explanation of why Mr Ferro was paid (in total) £55,000 by the Company, which was at odds not only with the truth but also with his own attempted explanations of the same given on other occasions of which I know, beforehand and afterwards. Some of the several occasions on which he became (apparently) confused in his oral evidence appeared to me to be the result of his having given some unsupportable and ill thought through answer a few minutes earlier. On a number of occasions his answers were demonstrably inaccurate for very simple reasons, such as when he denied having been directly aware that Norddeutsche Landesbank Girozentrale (“NordLB”) were complaining that they had not been provided with enough information to support the application for renewal, when in fact (which he appeared not to have noticed) he had been copied into the very e-mail (21 August 2006, 10:09) which made that quite clear. The Respondent’s evidence on matters in dispute must, therefore, be approached with considerable caution if uncorroborated by other independent testimony or contemporaneous documents.

Mr Armando Ferro is a Portuguese mechanical engineer, who has worked as a project manager and project director for over 20 years. He had been employed by HLC Engenharia e Gestão de Projectos SA (“Engenharia”) before moving to work in the UK from (initially) August 1999, and remained in its employment for some time thereafter. He moved to the UK on a permanent or indefinite basis with his family in or about December 2000, and worked as project manager on Engenharia’s ‘turn-key’ contract for the provision of the Neath Port Talbot MREC. In 2003 or 2004 he became an employee of HLC Henley Burrowes Limited, and then in 2006 an employee of Biodiesel Energy Trading Limited (“Biodiesel”), another company within the overall HLC Group. He was never employed by the Company, but served as a director of it between 18 October 2002 and 4 September 2006. He gave his evidence in a straightforward way, and appeared unperturbed by the fact that his evidence differed from that of the Respondent on some points. He was a reliable witness, whose evidence I generally accept, and prefer to that of the Respondent where they differ.

Mr Ramesh Radia is a chartered accountant, who (or whose firm) has worked for the Respondent for almost twenty years. Although he was called as a witness of fact, Mr Radia’s witness statement contained a number of wide-ranging endorsements of the Respondent and his relevant conduct, roundly acquitting him of more or less all the Applicants’ allegations against him (see e.g. paragraphs 6, 50 & 71 thereof). This may be attributable in part to ill judgment or an excess of zeal on the part of the solicitor who assisted in its preparation, but Mr Radia as a chartered accountant of long-standing should have known better than to go along with it, and their presence and content in any event demonstrate a significant lack of independence. Mr Radia displayed a rather mild manner in the witness box, and I think it likely that he can be somewhat overawed by the far more forceful Respondent. Mr Radia appeared to pick his words carefully while giving evidence, and I detected two aspects to this: one a proper concern not to say anything he believed to be inaccurate, but alongside that a desire to word his answers in such a way as to help the Respondent’s cause as much as possible, and avoid giving any evidence which appeared likely to harm it (e.g. his answers with regard to the absence of any reference to the liability to FRIE Grupo in the Company’s accounts). Thus, Mr Radia was ― whether or not sub-consciously ― a somewhat partisan witness, and his evidence on any matter in dispute should therefore be approached with some caution reflecting that.

Mr Stephen Evans, another chartered accountant, is a founder partner in the firm of William Evans & Partners of London W1. He undertook work for the Respondent or his companies from late 2000 onwards (although he had first met him a decade or so earlier), and acted as a non-executive director of HLC (Neath Port Talbot) Limited (“HLC NPT”) from then until its entry into Administration in September 2005. Although he gave his evidence in an impressive manner, and was I believe trying to assist the court with his answers, his recollections were not always reliable. For example, when invited to agree that by 2004 or thereabouts Wrexham Council had come to prefer WRG to the HLC Group he responded “I wouldn’t say that”, a response which he then developed, whereas that was what he himself had (accurately, as I find) said in paragraph 34 of his first witness statement. His attempt to reconcile his earlier answer when that paragraph was put to him was not impressive. And on no objective view of the terms set out in the (pre-amendment) letter of 17 August 2005 and in the agreement of 11 December 2007 could they be said to bear no relationship to one another, as Mr Evans suggested in his oral evidence. I have not found evaluating Mr Evans’ evidence overall easy, but I conclude that some aspects of it have been shown to be unreliable, and, bearing in mind that the more significant inaccuracies would all have tended (had they been correct) to support the Respondent’s position, that he – probably sub-consciously – presented his evidence in the manner which most assisted his client.

Dealing with some of Mr Evans’ more significant inaccuracies now, the interim arrangements introduced by the agreement of 21 July 2006 (to which I will come) were just that, and did not materially alter the substantive terms provided for in August 2005 and implemented in December 2007. Mr Evans’ recollection that payment of the Company’s net entitlement from the Waste Recycling Group (“WRG”) direct to NordLB formed part of the agreement of 21 July 2006 or the negotiations for it was mistaken. That agreement expressly provided for payment to the client account of the Company’s solicitors (clause 8.1.5(d)). The direct payment provision which Mr Evans must have had in mind formed part of the agreement of 11 December 2007, and was not (as I shall discuss more fully below) something to which NordLB had any legal entitlement. The most Mr Evans can have been remembering with any accuracy from 2006 is one or other of the possibilities (which I shall find below) that at some stage the Respondent decided in his own mind that some of the receipts from the completion of the agreement with WRG would be used towards discharging the NordLB loan, and that the Respondent may even have given some such indication informally to an officer of NordLB at some stage during their dealings.

As to the documentary evidence, and more particularly the considerable gaps in it (to take but one example, I was told that only two board minutes have been produced to the liquidators from the entire period 1998-2009), which are the more important in a case where the relevant events occurred some years ago, Miss Leahy submits that I should not allow the Respondent, as the person primarily responsible for keeping and preserving the Company’s documents, to benefit from his failure to do so. She cites from the judgment of Arden LJ in Re Mumtaz Properties Ltd [2011] EWCA Civ 610, [2012] 2 BCLC 109 at [16]-[17]:

“16.

The approach of the judge in this case was to seek to test the evidence by reference to both the contemporary documentary evidence and its absence. In my judgment, this was an approach that he was entitled to take. The evidence of the liquidator established a prima facie case and, given that the books and papers had been in the custody and control of the respondents to the proceedings, it was open to the judge to infer that the liquidator's case would have been borne out by those books and papers.

17.

Put another way, it was not open to the respondents to the proceedings in the circumstances of this case to escape liability by asserting that, if the books and papers or other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator. Moreover, persons who have conducted the affairs of limited companies with a high degree of informality, as in this case, cannot seek to avoid liability or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available.”

Whilst I accept Mr Roe’s submission that this passage does not go so far as to establish some separate principle of policy in respect of claims against directors, I shall bear Arden LJ’s approach in mind when resolving various issues where the documentary evidence available to me is not what it should have been, and shall not judge the actions of the Respondent by some lower standard because the documentation that I would have wished to have available to me is not.

The Respondent’s principal company was a Portuguese company, Engenharia. The shares were split between various entities representing (directly or indirectly) the Respondent, his immediate family, and his associates. Some 2 years after all the payments in question in this case were made, and just over 18 months after the Company went into liquidation, Engenharia itself was placed in liquidation in Portugal on 3 November 2010.

The Company was in effect the holding company for Engenharia’s interests in the United Kingdom. The Respondent also had a personal English holding company, HLC Environmental Holdings Limited, which held a 20% interest in the Company between 26 January 1998 and 28 April 2006. Apart from that, Anglo Portuguese Properties Investments Ltd (a Guernsey trust company, the beneficiaries behind which included members of the Respondent’s immediate family, but not the Respondent himself, and which also held a 48.9% interest in Engenharia) held all the shares in the Company throughout.

Much of the Company’s business was conducted through four direct subsidiaries, HLC (Neath Port Talbot) Holdings Limited (“HLC NPT Holdings”), of which the Neath Port Talbot project company HLC NPT was a 100% owned subsidiary, HLC Waste Management Services Limited (“HLC WMS”), a subsidiary of the Company from 8 January 2004 until its sale on 14 November 2005, HLC Wrexham Limited (“HLC Wrexham”), the original Wrexham project company, and HLC Henley Burrowes Limited (“HLC Henley Burrowes”), an engineering and supply company which the Company took over.

Where convenient, I shall refer to Engenharia, the Company and its various English subsidiaries together as the “HLC Group”, and the Company and its various English subsidiaries together as “HLC UK”. The Respondent was at all material times the dominant figure throughout the HLC Group.

In or about June 1998, following a public procurement process, the HLC Group were chosen by Neath Port Talbot County Borough Council (“NPT Council”) as the preferred bidder for a Private Finance Initiative (“PFI”) project to build a Materials Recycling and Energy Centre (“MREC”) on a specified site at Neath Port Talbot to be leased from the NPT Council, and to provide waste management services therefrom over 25 years (“the NPT Project”). The initially expected total project cost was of the order of £31 million.

In the same year, and again following a public procurement process, HLC Wrexham (formerly ERI Wrexham Limited, a member of the Henley Burrowes group which was taken over by the Company) was chosen by the Wrexham County Borough Council (“Wrexham Council”) as the preferred bidder for a PFI project to build an MREC on an as yet unidentified site in or around Wrexham, to be leased for the purpose by HLC Wrexham (or perhaps an associated company), and provide waste management services therefrom for a considerable number of years (20 or so) (“the Wrexham Project”). The initially expected total project cost was materially higher than that for the NPT Project, and of the order of £50 million to reach operational status.

In and around 1998 to 1999, the Respondent sought investors for the NPT project. Amongst those approached were Fundo De Reestruturação e Internacionalização Empresarial Grupo CGD - Caixa Investimentos (later renamed Fundo de Capital de Risco para Investidores Qualificados Grupo CGD) (“FRIE Grupo”), and Banco Chemical Finance SA of Lisbon (“Chemical”). FRIE Grupo turned down the proposal, but in May and June 1999 Chemical made written offers to Engenharia, both addressed to the Respondent personally as its Chairman, to purchase a significant equity stake in a company then intended to be incorporated to serve as the project company for the NPT Project. Each of these offer letters, which were only 2 pages in length, included clear provision for a Call and Put Option arrangement, whereby from 6 years after the commencement of the investment, Engenharia was to become entitled to require Chemical to sell Engenharia its shareholding in the project company at a prescribed price, and from 6 months later Chemical was to become entitled to require Engenharia to purchase its shares at a (different) prescribed price. The second offer represented the outcome of a renegotiation of the first, whereby the Respondent had succeeded in obtaining an offer in terms somewhat more favourable to Engenharia (including as to the interest rate linked to the exercise of the put option by Chemical). Given his leading role in these negotiations, and in HLC Group generally, and having heard him give evidence, I am satisfied that the Respondent would have understood those offers at the time they were made, including the nature of the Call and Put Options which formed a significant part of them, and that, if he had had any initial difficulty in doing so (which I am inclined to doubt), he would have obtained an explanation of them so that he did. That is only reinforced by the fact of his conduct of subsequent negotiations with FRIE Grupo in early 2003, involving a proposed additional call option (exercisable earlier), mentioned below.

In the event, Caixa, the managing society of FRIE Grupo, acquired Chemical in early 2000, and despite having itself earlier turned down the proposal, it honoured Chemical’s commitment to invest in the NPT Project, and in due course allocated this investment to FRIE Grupo. Caixa, on its behalf, continued the negotiations concerning the terms of (in particular) the Call and Put Option arrangement. FRIE Grupo/Caixa was represented in those negotiations by an established Lisbon law firm, known for short as PLMJ, and the Company by a firm of solicitors with experience in construction and project finance, Winward Fearon.

I am also satisfied that the Respondent would have understood the commercial importance of such put options to (as it became) FRIE Grupo. Although the Respondent asserted that he believed FRIE Grupo’s involvement was like that of a venture capitalist, under Portuguese law FRIE Grupo was not allowed to maintain an equity stake for a period of longer than 10 years, in accordance with the Forbidden Operations article (n. 1c of art. 7) of Law 375/2007 of Nov 8th. Caixa therefore tries to limit FRIE Grupo’s holding of equity stakes to 7 years, and generally negotiates some kind of exit mechanism to this effect. The Respondent, through his experience in attracting investment for his companies in Portugal, was aware of the existence of such restrictions on FRIE Grupo and other similar Portuguese organisations, and of their consequent requirements for exit mechanisms. By 2000, he was aware that FRIE Grupo was subject to such restrictions because, in addition to the NPT project negotiations, he was already involved in another project with Caixa/ FRIE Grupo in Brazil, in respect of which the same restrictions applied. In this regard I accept (as I have already indicated) Ms Capucho’s evidence, and prefer it to that of the Respondent.

‘Financial close’ in respect of the NPT Project occurred on or about 7 September 2000. By various agreements comprised in the same, the project company, HLC NPT, agreed to provide waste management services to NPT Council, including the provision of the MREC, for a period of 25 years, and under the so-called ‘turn-key’ contract Engenharia agreed to design, manufacture, deliver, test and complete the MREC by 4 September 2002 (i.e. in 2 years), albeit with a mechanism by which that date might be extended (and if so, carrying with it a matching extension for HLC NPT) – see the judgment of HHJ Coulson QC (as he then was) in Engenharia v ABN Ambro Bank NV and ors [2005] EWHC 2074 (QB) at [3] and [4].

A sum in respect of development costs incurred prior to this date (audited or approved by NPT Council) was drawn down by HLC NPT under its financing agreement, and reimbursed to the Company, which had incurred them (funded in turn by loans from Engenharia). However this sum was not sufficient to discharge the Company’s overall indebtedness to Engenharia, which was a continuing creditor of the Company, and in the event remained so throughout the period with which I am concerned. The Respondent acknowledged that such reimbursements did not generally cover all the development costs incurred before ‘financial close’ on a project. Although he was reluctant to acknowledge that any particular figure could be used as a working estimate for such irrecoverable costs, the Company’s own documents show that it budgeted £250,000 in respect of the same for 2 different projects, and I see no reason not to take that figure as the Company’s own best estimate for the same.

Another aspect of ‘financial close’ was the conclusion of the investment transaction, and the Company (using funds lent to it by Engenharia), FRIE Grupo, and Neath Port Talbot Waste Management Ltd (“NPT WM” - a company wholly owned by NPT Council) subscribed for and acquired shareholdings (respectively 51.1%, 29%, and 19.9%) in HLC NPT Holdings. This company, as its name suggests, was to be the holding company for the project company, HLC NPT. All three entered into a Shareholders’ Agreement and an Equity Subscription Agreement that day; the Company and FRIE Grupo also entered into a Call and Put Option Agreement (“CPOA”) in respect of FRIE Grupo’s shares in HLC NPT Holdings. The CPOA gave the Company a call option exercisable over the 12 month period commencing 6 years later (i.e. on 5 September 2006), and gave FRIE Grupo a put option exercisable “on, and at any time after” 5 March 2007 (i.e. commencing 6 months into the 12 month call option period), with no restriction, whether linked to the continuing solvency or trading of HLC NPT or at all. It was signed by the Respondent on behalf of the Company. I am again satisfied that the Respondent would have understood the essence of the CPOA at the time it was made, including specifically the nature of the put and call options which lay at its heart.

I reject the Respondent’s evidence that he had a completely different understanding of the same, featuring option prices to be determined at the time of exercise by an expert, and some restriction on the exercise by FRIE Grupo of its put option in the event that the NPT Project had foundered. I find that this was simply embroidery, in attempted support of what he must have realised was an unconvincing denial of a basic understanding of that which he had first negotiated over with FRIE Grupo, and in due course signed. I am also unable to accept the Respondent’s evidence to the effect that he had entirely overlooked FRIE Grupo’s interest under the put option provisions of the CPOA at any material time prior to its exercise. I am not persuaded that his conduct at the time of, and in particular in making, the payments suggests this; rather, in the overall context it suggests to me that he took the opportunity to pay those creditors whom he wished to pay as and when the money to enable him to do so came to hand. Although Messrs Roe and Halban have identified some documents concerning HLC UK’s finances emanating from advisers during 2005 and 2006 which might have mentioned the contingent liability to FRIE Grupo but did not, firstly this is a matter where the primary source of the relevant knowledge was the Respondent himself rather than the Company’s professional advisers, and secondly I find it hard to read the words “the agreement with Caixa” in Mr Radia’s e-mail to the Respondent of 11 August 2005 as referring to anything else, or to believe that the Respondent would have so understood them. Insofar as there were other contemporaneous documents in point which have not survived, as it is the Respondent who failed to preserve them, I am not prepared to make any assumptions about them in his favour.

At about this time, the Respondent persuaded Mr Ferro (who had by then already been working in the UK for a year or so) to move to the UK with his family on a permanent or indefinite basis, by offering him a bonus equivalent to about 1 year’s salary (around £100,000). I find that he did so without making any express agreement as to which company in the HLC Group would make that payment (preferring Mr Ferro’s evidence in that regard to the Respondent’s), and that absent any such express agreement the clear and necessary implication was that it would be paid by Mr Ferro’s then and for the time being continuing employer, Engenharia.

Although the Neath Port Talbot MREC entered some sort of use by January 2003, from some time earlier (Mr Radia thought by about March 2001) operational issues and disputes had arisen as to the design and performance of the plant. In essence, the Company and HLC NPT took the view that the problems being encountered, and in due course the perceived need for modifications to resolve them, were attributable to the composition of the waste being delivered by NPT Council to the MREC for processing not according with the composition which had been specified and/or provided by way of sample. In due course they took legal advice about this, but were advised that the true position under the contract was a matter of some difficulty, and that they would be better to endeavour to reach a commercial settlement with the NPT Council than to seek to litigate it.

In a confidential business memorandum of April 2001, the Company had noted that significant levels of investment were required to “trigger” projects such as those with which it was involved in the UK, and stated that it was “open to negotiate its equity and offer partnership to organisations willing to participate in [their] success”. In practical terms, given that ‘financial close’ on the NPT Project had occurred over 6 months earlier (with FRIE Grupo and NPT WM both having taken significant minority shareholdings in HLC NPT Holdings), and that the only other project in which HLC Group had obtained preferred bidder status was the Wrexham Project, I find that this statement of an interest in taking on project partners must have had in mind the Wrexham project.

Although it is recorded that a draft Waste Management Services Contract in respect of the Wrexham Project was in existence by 11 February 2002, progress on that project proved difficult due to problems with both planning control and the technology, and that same month Wrexham Council suspended negotiations in relation to the PFI agreement for it. They set a number of preconditions for reopening those negotiations, being or including the finding/acquisition of a suitable site, a commercial bank committed to the project, a financial model, a project team being established by HLC Wrexham and a project timetable. When interviewed on behalf of the liquidators in January 2011, the Respondent said that HLC Wrexham spent “millions” on trying to get a suitable site and bring it to planning permission (as he put it).

Thus the Company was having to deal with significant difficulties in respect of both of its two projects at the same time.

By early 2003 the Company was actively looking for a partner for the Wrexham Project, and engaged the firm of Robson Rhodes to assist it in doing so. In March 2003, HLC NPT Holdings and HLC NPT were seeking to raise additional funding to assist with the NPT Project, and in particular the modifications which were going to have to be made to the plant. FRIE Grupo were approached about putting in additional funds proportionately with the other shareholders in HLC NPT Holdings.

In February and March 2003, Winward Fearon were sufficiently concerned about the ability of the Company, HLC (NPT) and Engenharia to discharge their liability to pay their fees in relation to their work on the NPT Project that they obtained personal guarantees in respect of the same from the Respondent before they were willing to continue with such work.

In or around February 2003, as is evidenced by a passage on the second page of a fax of 4 March 2003 from Mr Luto of Winward Fearon to Dr Aguiar of FRIE Grupo, copied to the Respondent, the Company had been negotiating with FRIE Grupo for the grant of another call option, exercisable during the (remainder of the) calendar year 2003 – so some 3 years earlier than that contained in the CPOA. It is clear from the text of the fax that these negotiations had not been conducted on behalf of the Company by Winward Fearon, and I infer that they had been conducted on its behalf by the Respondent; in any event he was present at meetings at which this was discussed, copied into and referred to in a number of related documents, and clearly expected personally to review drafts of the proposed new Put and Call Option Agreement (see the e-mail from Ms Collins at Winward Fearon to Ms Capucho at Caixa dated 11 April 2003). This further supports my earlier findings that the Respondent understood the nature of such options perfectly well.

Negotiations with the NPT Council as to modifications to the MREC had been underway for some months but had not been concluded by July 2003, when the Bank of Scotland, who were funding HLC NPT, stepped in and took over those negotiations.

Unhappily, on 11 August 2003 a serious fire occurred at the Neath Port Talbot MREC, which brought about a cessation of its operations for 18 months or so. Later that month, or thereabouts, the Bank of Scotland appointed a Mr John Evans, an engineer, to the board of HLC NPT. In or about February 2004, it appointed a Mr Robert Ellis, a corporate reconstruction partner with Deloitte LLP, to the board of HLC NPT.

The Company’s balance sheet as at 31 December 2003 (signed off the following October) showed net current liabilities of £277,377, and net overall liabilities of £121,766. Its liabilities included trade creditors of c.£200,000 and amounts owed to related undertakings of c.£5,200,000 (note 10), the latter including indebtedness to Engenharia of c.£4,200,000 (note 13).

In February 2004 the Company/HLC Wrexham, together with recently appointed professional advisers from the accountants BDO and the solicitors DLA, met with Mr Walton of Wrexham Council with a view to restarting negotiations in relation to the Wrexham PFI Agreement. Mr Walton was obviously aware that difficulties were being encountered with the NPT Project, and had concerns about this, because the position in respect of it is recorded as having been discussed under Any Other Business.

HLC NPT’s financial position was very difficult by February 2004, understandably so since it had not been in a position to take any deliveries or to earn any revenue (which, in a fully functioning MREC, would comprise ‘gate fees’ charged per tonne for waste delivered to it; monies charged on the sale of recyclables; and monies charged on sales of surplus energy to the National Grid) since August 2003, and it did not have consequential loss/business interruption insurance in respect of trading revenue lost by reason of the fire. It had c.£798,000 of unpaid creditors (a figure which I infer excludes indebtedness to other members of the HLC Group, because that was already considerably greater than that figure, and rose slightly during 2004), all but one of whom appear to have been party to some sort of standstill agreement. At its meeting on 26 February 2004, the Board considered that its existing Bank facilities were adequate to meet its current commitments to the end of March 2004, but not thereafter.

At the next meeting, on 18 March 2004 it was reported that management accounts showed a substantial operating loss for the month of February, and that “until the Bank had concluded its discussions with various of the parties” no payments should be made to the “Standstill” creditors.

In late March 2004 the Respondent was seeking to negotiate a possible sale of all HLC Group’s UK interests, although he realistically accepted during cross-examination that by reason of the problems being encountered with the NPT Project it was unlikely that the Company would find a purchaser for all those interests; in the event, it did not. In a June 2004 Strategy Plan “for brainstorming”, the funding requirement to the end of 2004 to achieve construction, commissioning and handover of the NPT plant, and site acquisition and ‘financial close’ in respect of the Wrexham project, was estimated at £6.7 million, absent finding a partner.

In July 2004, the Bank of Scotland appointed Mr Derek Pattle, an engineer, to the board of HLC NPT.

In August 2004 Wrexham Council was pressing the Company to progress the Wrexham Project to, or near to, ‘financial close’ by the end of October.

By December 2004, negotiations were underway between the Company (generally represented by Mr Stephen Evans, who took his instructions as to the commercial parameters for the deal from the Respondent) and WRG (a large waste contractor, which had apparently come second in the competition for preferred bidder status for the Wrexham Project) for the acquisition by WRG of a 65% stake in the project (as then envisaged, in HLC Wrexham Ltd). These negotiations proved difficult, not least because the Wrexham Project had already attracted significant public criticism and opposition. Whoever had made the first suggestion that WRG would make a suitable partner in the Wrexham Project (the evidence as to this differed), at least one purpose for putting them forward to Wrexham Council was to enable the Company to be seen to be bringing in another, financially stronger partner. Furthermore, at some point in 2004 Wrexham Council made plain that, whilst mindful that HLC Wrexham had achieved preferred bidder status under its public procurement process, its preference was to go forward to ‘financial close’ and beyond with WRG at least involved as a partner with, if not having taken over the Wrexham Project from, HLC Wrexham. It is noteworthy that WRG also had some involvement in the NPT Project, and had become a significant creditor of the Company as a result (which it remained until December 2007).

The Company’s abbreviated balance sheet as at 31 December 2004 (not signed off until December the following year) showed assets of c.£5.5 million, net current liabilities of c.£1.6 million, and overall net liabilities of something over £500,000. However the auditors’ opinion thereon was qualified, in particular with regard to current assets of some £3,398,098 owed by related undertakings, whose recoverability they considered could not be ascertained with any certainty and which they considered should be written off. Had the directors taken that advice, the Company’s overall net liabilities would have been almost £4 million. Although I do not have more detailed accounts for this year end, taking the 2004 comparables from the 2005 detailed accounts, the amount owed to trade creditors had risen to £342,470 (note 9), the indebtedness to related undertakings had risen slightly during the year to £5,455,384 (note 9), and the indebtedness to Engenharia included therein had slightly increased to £4,530,233 (note 15).The comparables column in the detailed profit and loss account for 2005 showed no turnover (trading income) in 2004, and recorded an operating loss before tax and interest of £432,773.

Negotiations for the involvement of WRG in the Wrexham project were continuing, and by April 2005 WRG’s position had become that it would prefer to control the process both before and after ‘financial close’, and not thereafter to have a minority participator involved. For its part, the Company had come to the view that it would be quite content entirely to dispose of its interest in the Wrexham Project at ‘financial close’, and accordingly by his letter to WRG dated 4 April 2005, Mr Stephen Evans on its behalf proposed a form of option agreement to that end, for a non-refundable fee of £200,000. The other terms suggested in that letter included a 50:50 split of all remaining costs up to ‘financial close’.

The MREC in Neath Port Talbot would have reopened after its 18 month closure at some point in or about early February 2005, but the problem discussed in paragraph 27 above was a continuing one and the nature and funding of modifications remained under discussion. In the 12 April 2005 revision of its Reinstatement Plan (marked both “without prejudice” and “subject to contract”), HLC NPT described the NPT project as it stood as “loss making”, “unstable” and “unsustainable in its current form”, and stated that it would “continue to be loss-making if a number of key issues are not addressed at this point”. It proposed a particular package of modifications (as formulated by Mr Ferro, and to be entirely funded by Engenharia) and an associated financial model (including an increased ‘gate fee’, minimum quantities of waste to be processed, and the Bank writing off £4 million of its existing investment and making a fresh facility of £1 million available to HLC NPT, being the amount of its working capital requirement), and asserted that the “absolute back stop date for unanimous agreement to [it] being documented is 5.00pm on Wednesday 1 June 2005”.

However even the proposed modifications to the MREC were not agreed between the various parties involved. At a site meeting later that month Mr Pattle and Mr Ferro discussed differences between their respective suggestions for those modifications, and although they did not reach agreement, they agreed to keep working towards one. According to HLC NPT board minutes of a meeting on 17 May 2005, they had by then reached agreement on proposed modifications. These, however, were only one aspect of the “integrated package” comprised in the Reinstatement Plan.

That board meeting was attended by the Respondent and Mr Stephen Evans, as well as Messrs Ellis and Pattle. Those present recognised that without the settlement between the Bank and the NPT Council for which the terms of the Reinstatement Plan provided, HLC NPT “will fail”. Then current cash flow information showed “sufficient cash facility to deal with its creditors as they fall due, until the end of June”. The Board considered that the position after 30^th June would be “untenable”, unless an agreement had been reached on the Reinstatement Plan by then. They recognised the seriousness of HLC NPT’s financial position by their recorded belief that in such event they would “have no alternative but to request that the Bank appoint an administrator.” They also agreed that “[w]hilst the [Reinstatement] Plan was being negotiated the Board should continue to ensure, as far as possible, creditors were dealt with properly and no preferences were to be allowed…”

In the event no comprehensive Reinstatement Plan was agreed between the various stakeholders in the NPT Project by 19 August 2005, when the NPT Council served termination notices on HLC NPT under the provisions both of their Principal Agreement of 5 September 2000 and of the ground lease in respect of the site of the MREC, each taking effect on 21 September 2005. This precipitated the resignations of Messrs Ellis and Pattle (the bank appointed directors) from the board of HLC NPT on 24 August. HLC Group’s negotiations (being headed by the Respondent) for a refinancing of the NPT Project were unsuccessful, and on 19 September 2005 the directors agreed that the Bank of Scotland should appoint Administrators to HLC NPT, which it did. On 21 September 2005 NPT Council, believing its interpretation of the legal position to be “unchallengeable”, ceased delivering waste to the MREC, and within a week thereafter had taken control of the site, excluding the Company and its Administrators therefrom. So far as the Company was concerned, this marked the end of the NPT Project, save for its interest in HLC WMS (which the NPT Council involved in the resumed operation of the MREC on the site, under its control).

While the NPT Project had been in its death throes, difficulties continued to be encountered with the Wrexham Project. Although a possible site had been identified on the Wrexham Industrial Estate, this attracted fierce local opposition, and an Open Letter to the Wrexham Council, signed by 17 companies, claiming to include 12 of the top 16 employers on that estate, between them employing over 50% of those working there, was delivered in or about early May 2005. It included references to difficulties which had been encountered with the MREC at Neath Port Talbot, and threatened that planned investment in the estate by several of the signatories in excess of £22 million would be placed elsewhere if the Wrexham Project were to proceed on that site.

Negotiations with WRG were still continuing in June 2005, by which time heads of terms under discussion included provisions for the immediate acquisition by WRG of a 65% share in the project company; for WRG to purchase the remaining 35% interest on ‘financial close’ (the Company preferred the price to be determined on sale; WRG would have preferred it to be agreed in advance); that WRG would pay the Company £200,000 (non-refundable) and further payments (refundable at ‘financial close’) of £100,000 every four months; and for a 65:35 split of remaining costs up to ‘financial close’. On ‘financial close’ the Company was to be paid £1.8 million in respect of development costs already incurred. The heads of terms also included a specific provision that all outstanding invoices up to the date of payment of the sum of £200,000 (which were estimated at £300,000) should be cleared, reflecting a concern on WRG’s part about the non-payment of trade creditors.

In the event, WRG agreed to and did take over responsibility for meeting 100% of the remaining costs from 1 July 2005 up to ‘financial close’. This was part of an offer WRG made by its letter to the Company dated 17 August 2005 (as it stood prior to amendments being ‘tracked’ in to the same by someone on behalf of the Company), and was clearly HLC UK’s working assumption by 12 October 2005 at the latest (see Mr Radia’s e-mail to the Respondent of that date). Other terms of the same offer were that WRG would pay the Company £300,000 for an immediate 65% interest in the project company, but with an obligation that it be used “exclusively … to repay the existing creditors of the project”; that the Company could elect to retain a 35% interest in the project company, but that if it did not do so then WRG should have the right (but not an obligation) to purchase that interest for £300,000; that WRG was to have “complete control over the development of the project and the project company without recourse to [the Company] …”; and that on ‘financial close’ the Company was to be paid £1.7 million by way of a “project fee” (effectively, in respect of development costs already incurred, being conditional upon the Company providing confirmation and evidence that it had incurred costs in, and made inputs into, the project justifying that sum). As will be seen, the terms ultimately implemented in December 2007 were strikingly similar to those provided for by this letter.

Although the amendments ‘tracked’ in to the only copy of the offer now available included an amendment of the price at which WRG was to be entitled to buy the remaining 35% interest, should the Company not elect to retain it, from £300,000 to £2 million, the latter (although put forward, on the Respondent’s behalf, by Mr Stephen Evans and a Mr Michael Ware of BDO) was a wildly optimistic figure in the circumstances, which never had any prospect of being agreed. I suspect that it was a tongue in cheek proposal influenced by the fact that WRG wanted a pre-agreed price for any purchase of the Company’s remaining 35% interest, whereas the Company wished to leave the price open for negotiation or determination later. The Company’s principal negotiating card was its preferred bidder status, but that was ultimately of limited value, both because Wrexham Council’s confidence in the Company had reduced considerably since that had been awarded, and if judged necessary it was always open to it (albeit at some cost which would have to be incurred in the requisite process) to conduct a new tender process, and because, even were it otherwise able to do so, the Company’s financial ability to carry through the Wrexham Project to ‘financial close’ was very questionable. By August 2005 the Company’s negotiating position with WRG regarding the Wrexham Project was (at its kindest to the Company, which is how Mr Evans put it in his evidence) not strong. It was under pressure from Wrexham Council to deliver the solution, did not have the financial resources to take this project to ‘financial close’ on its own, and had no other prospective partner. Although in their evidence the Respondent and Mr Evans referred to what I would characterise as the hope, or theoretical possibility, that the value of the remaining 35% interest might yet increase markedly by or in the years following ‘financial close’, the reality is that no substantial increase on the figure of £300,000 was ever made by WRG. From August 2005 onwards both the Respondent and his advisers, including Mr Evans, realised that any such increase was unlikely and that the Company was unlikely to be able to realise anything significantly more than £300,000 for it without treating it as a very long-term investment, and taking their chances on worthwhile returns thereon accruing (and its value thereby increasing) in the long term. Further it is clear that, by November 2005 at the latest, the Respondent had little enthusiasm for any such long-term investment in the UK waste management sector. Insofar as Mr Stephen Evans was saying anything different in the last sentence of his second witness statement, I do not accept it.

A complete set of the documents from this period has not been preserved or produced, and in the absence of any additional documentation indicating to the contrary, and given the parties’ conduct in implementing some of the terms (including WRG paying all the costs from 1 July 2005 onwards, and putting together a revised proposal for the project with which the Company and its subsidiaries had nothing to do) I infer that at least informal agreement on the terms of Mr Cox’s letter of 17 August 2005 was reached between the Company and WRG by 31 August, and that this enabled those involved to feel sufficiently confident to ‘go public’ on WRG’s role as a partner in the Wrexham Project on 31 August 2005.

During this same difficult period, on 5 August 2005 the Company obtained a £2 million revolving credit facility for 1 year from the London branch of NordLB. NordLB obtained security in the form of a guarantee by Engenharia. It neither sought nor obtained any charge over the Company’s receivables (whether arising from the Wrexham Project or otherwise) either then or when the facility was renewed in or about late 2006, and I do not accept the suggestion that the Respondent genuinely believed that NordLB had any such security interest. Once again the documentation is not complete, but such documentation as there is gives no grounds whatever for the reasonable formation of such a belief, either from the outset of the facility or from some later date such as when the amended facility dated 4 August 2006 was eventually entered into (as the Respondent’s Amended Defence suggests). It may well be that the Respondent had at some stage decided in his own mind that some of the receipts from the completion of the agreement with WRG would be used towards discharging the NordLB loan; it may even be that he gave some such indication informally to an officer of NordLB at some stage during their dealings (see for example the second paragraph of the Respondent’s letter to NordLB dated 4 August 2006). However NordLB had no legal entitlement to be paid out of such receipts, and I am wholly unpersuaded that the Respondent had a genuine belief to the contrary in the absence of any contemporaneous documents which might have given grounds for the formation of such a belief; this view is reinforced by the course of the negotiations for renewal of the facility a year later, to which I will come.

The first draw-down on this facility was taken only 4 days later (i.e. on 9 August 2005) in the sum of £500,000, and £465,000 of it was paid to companies in the HLC Group (£460,000) or to the Respondent and his wife (£5,000). A second draw-down in the same sum was taken 21 days after the grant of the facility (i.e. on 26 August), and £212,250 of that was paid to companies in the HLC Group (£172,250) or to the Respondent and his wife (£40,000). A third draw-down was taken on 12 October, and of this almost £170,000 was paid to companies in the HLC Group. Although no claims in these proceedings are founded on the making of such payments, they cast doubt on the suggestion made by both the Respondent and Mr Radia in their written evidence that the Company’s borrowing from NordLB was needed to enable the Company to take the Wrexham Project to ‘financial close’, and in their oral evidence that it was required to reimburse costs that had already been incurred with creditors thereon, before WRG took over funding the development costs. As I have just held, WRG did so from 1July 2005. In the factual context, I find this use of almost £850,000 out of these first 3 draw-downs by the Respondent to be inconsistent with the Respondent’s own explanations of why the borrowing facility was needed, and to indicate that the Respondent was well aware that the Company’s perilous financial position could have adverse financial consequences for him, his wife and connected entities to the extent that the Company had outstanding indebtedness to them.

In evidence, the Respondent was keen to assert that he believed throughout the material period that the Company might yet obtain new and profitable contracts. Although it is true that in the past the Company had harboured hopes that it might secure other such projects ― in 2001 it had been negotiating with Swansea City Council in respect of one such possibility, and in June 2004 it had reviewed a number of opportunities to tender ― in the event no others were secured, and there is no documentary evidence showing even the identification of any serious leads, let alone the active pursuit of such, from (relevantly) 2005 onwards. Indeed, the Respondent wrote to Mr Ferro in an e-mail dated 28 November 2005, no doubt influenced by the bitter experience of both the NPT and the Wrexham Projects, that “Waste Management in UK is definitely not for HLC …” I do not accept that by the date of this e-mail, or at any time after it, the Company had any serious proposals for further contracts in the UK, nor that the Respondent had any serious or genuine belief that such could be obtained.

By October 2005, HLC Henley Burrowes was being closed down, with the last payments of salary being made in that month, and statutory redundancy payments being made in November and December. Thereafter, a cash flow forecast for the last 3 months of 2005 prepared by Mr Radia for the Respondent in October 2005 showed the Company as the only remaining company in HLC UK which was to be incurring any payroll costs.

On 14 November 2005 the Company succeeded in selling its interest in HLC WMS to NPT Council for £1.2 million. It appears that the main value in that company lay in an IPPC licence which it held in respect of the Neath Port Talbot MREC. In any event, this sale marked the end of any prospect of further recoveries or realisations from the NPT Project for HLC UK.

Between 30 November and 19 December 2005 the Company made payments totalling just under £700,000 to Engenharia, and a payment of £400,000 to the Respondent personally. These are the earliest of the payments giving rise to claims in these proceedings, and I shall return to them below.

The Company’s balance sheet as at 31 December 2005 (approved and signed by the Respondent on 28 September 2006 – he was its only director after Mr Ferro resigned earlier that month) showed assets of just under £3.2 million, net current liabilities of c.£2.4 million, and net liabilities of only c.£50,000 less. Again the auditors’ opinion thereon was qualified with regard to current assets owed by related undertakings, now in the lesser sum of £1,752,102, whose recoverability they considered could not be ascertained with any certainty and which they considered should be written off. Had the directors taken that advice, the Company’s net liabilities would have been over £4 million. The amount owed to trade creditors was slightly down on the previous year at £324,391 (note 9), the indebtedness to related undertakings had fallen by almost £2 million to £3,517,029 (also note 9), and the indebtedness to Engenharia included therein had fallen by slightly over £1.5 million to £2,985,973 (note 15). The detailed profit and loss account again showed no turnover (trading income), and recorded an operating loss before tax and interest of £521,957, and a net loss on exceptional items of £1,336,794.

On 22 May 2006 an additional 500,000 ordinary shares of £1 in the Company were issued for cash at par (2006 detailed accounts, note 10).

It was not until 21 July 2006 that a formal agreement was entered into between the company and WRG concerning the Wrexham Project. A new project company, to take the place of HLC Wrexham, was incorporated named WRG Wrexham PFI Limited (“Wrexham PFI”), together with an immediate holding company WRG Wrexham PFI Holdings Limited (“Wrexham PFI Holdings”). WRG was to have a 65% (voting) shareholding in Wrexham PFI Holdings, and the Company a 35% (non-voting) share. WRG was to make a £300,000 loan to the Company, repayable on a ‘financial close’ up to 31 December 2007. Upon ‘financial close’, Wrexham PFI was to pay the Company a sum agreed by Wrexham Council as constituting development costs incurred by HLC UK in relation to the Wrexham Project up to 30 June 2005. This sum was to be applied (i) in repaying the £300,000 loan from WRG, (ii) in repaying WRG the sum of £500,000 in respect of monies owed arising out of the NPT Project, (iii) in paying a 35% contribution towards any initial (i.e. upon ‘financial close’) investment agreed to be made in Wrexham PFI by WRG and the Company, and (iv) any remaining balance to the Company. It may be noted that, subject to any further deduction under (iii), the net sum which it was anticipated would be paid to the Company was therefore £900,000. If either of the principal parties became subject to an Insolvency Event (as defined) before ‘financial close’, then it was required upon ‘financial close’ to transfer its shares in Wrexham PFI Holdings to the other at their nominal value, but it should be noted that even if the Company were to become so subject, it was not (even purportedly) stripped of its entitlement to recover an agreed sum in respect of pre 30 June 2005 Development Costs as aforesaid. The £300,000 loan monies were (the Respondent said in a letter to NordLB dated 4 August 2006) used to clear “the outstanding creditors”, and the fact that nothing was shown remaining due to trade creditors in the Company’s 31 December 2006 Balance Sheet is consistent with this being correct. Mr Evans described this agreement as “an intermediate document to reflect the commercial terms that had been agreed by that date. It was a road map for going forward too”, which I accept in the sense that it was a document to cover the position between the Company and WRG pending reaching ‘financial close’ on the Wrexham Project (which would include completion of the relevant share issues and sales). Hence the sum of £300,000 payable by WRG to the Company at this stage was by way of loan, although it was clearly contemplated that on ‘financial close’ that sum would become payable as (in substance) the consideration for a 65% stake in, and control over, the company which was to become the project company (hence, indirectly, realising value for HLC Wrexham’s preferred bidder status).

By August 2006, Wrexham Council had agreed the sum of £1.7 million as constituting development costs incurred by HLC UK in relation to the Wrexham Project up to 30 June 2005. The Respondent, writing on behalf of the Company, used this (or more strictly the figure of £1.2 million, which – though not spelt out in his letter – was arrived at by netting off £500,000 which the Company agreed that WRG could set off, in settlement of sums owed to it arising out of the NPT Project) as part of his case to NordLB to extend their facility for a further year. Writing on the assumption that HLC UK would have no ongoing role in the project, and hence that no monies would be required under (iii) in paragraph 63 above, he offered both to apply the £900,000 which would be receivable by the Company on ‘financial close’ (hoped to take place around September/October 2006) under (iv) above to reducing the indebtedness on this facility to c.£1 million, and to make further repayments of £500,000 by the ends of March and July 2007 respectively. Where those two sums were to come from is unclear. Although negotiations proceeded well beyond the expiration date of the facility, in due course NordLB agreed a 15 month extension and amendment, with a reduced facility amount of £1.8 million, again guaranteed by Engenharia. Other forms of possible security were discussed (in particular security over shares in Biodiesel – which was not in the event granted), but NordLB had at no stage expressed interest in being given security over the Company’s receivables. The Respondent was very much involved in these negotiations, and I do not accept that at their conclusion he was left with a fundamentally inaccurate belief as to what security had been given to NordLB.

Within a large bundle of documents (as I understand it un-indexed and in a somewhat disordered state) which accompanied the Respondent’s witness statement when served in March 2013, was a document which on the face of it appears to be a personal guarantee by the Respondent of the extended and amended NordLB facility. This document was not referred or alluded to anywhere in the body of the witness statement. Its presence there and potential significance escaped the attention of the Applicants and their advisers for 4 months or so, until some point in the week before trial. It bears the back-sheet of a firm who were advisers to the Company and/or the Respondent. It is expressed on its face to be by way of Deed (and no other consideration for it is included in its recitals), but the Respondent’s signature is not witnessed, contrary to the requirement of s.1(3)(a), Law of Property (Miscellaneous Provisions) Act 1989. Its date is left blank, and how if at all it was delivered as a deed (as required by s.1(3)(b) of the 1989 Act) is shrouded in mystery. Much of the documentation which must have surrounded its production and signature is unavailable. Clearly the Respondent should have provided it to the Applicants well before these proceedings were even started. There is room for possible cynicism in evaluating the Respondent’s evidence that, save for identifying his signature, he can remember nothing whatever about it, as that might be viewed as an all too convenient lapse of memory.

In June and September 2006, the Company made 2 payments totalling £87,000 which are agreed to have been for the personal benefit of the Respondent, although remitted directly to a company in which he was investing (ESS Holdings). I will therefore deal with the claims in respect of these below as part of the “Personal Payments”.

The Company’s balance sheet as at 31 December 2006 (the abbreviated version of which was signed by the Respondent and filed at Companies House on 30 October 2007), which was not audited, showed current assets of c.£2.3 million (down by something over £850,000 since the previous year end), net current liabilities of c.£2.4 million, and net liabilities of only c.£50,000 less (both very similar to the previous year end). The current assets included almost £1.2 million of debts owned by related undertakings (note 7). The trade creditors had been paid off in full (note 8), and the amount owed to related undertakings had fallen by a further £850,000 or so (note 8). Bank loans and overdrafts had, on the other hand, risen by c.£300,000 (note 8). The detailed profit and loss account again showed no turnover (trading income), and recorded a pre-tax loss of £477,126 on ordinary activities.

On 2 May 2007 ‘financial close’ occurred in relation to the Wrexham Project for some (but not all) purposes. Wrexham Council entered into a waste management services contract with WRG Wrexham PFI (the replacement project company), and NordLB were the funders.

On 26 October 2007 FRIE Grupo served on the Company notice of exercise of its put option in respect of its shares in HLC NPT under the agreement of 5 September 2000. I am quite satisfied that at all material times from HLC NPT entering Administration on 19 September 2005, the put option was for all practical purposes bound to be exercised, or, as it was put during the trial, that this was a commercial inevitability. At first sight, it was somewhat surprising that it was not exercised sooner, promptly after the right to do so arose on or about 5 March 2007. However on the evidence FRIE Grupo/Caixa decided first to obtain UK legal advice about doing so, and by implication they did not put steps for that in hand until that date had arisen, and when they did so that process did not, for whatever reason, proceed with any great expedition. Nevertheless I am satisfied that FRIE Grupo/Caixa at all material times both believed that the put option was exercisable, and fully intended to exercise it. Up until exercise of the put option, the liability it represented from the Company’s point of view had technically been a contingent one (see per Neuberger J (as he then was) in County Bookshops Ltd v Grove [2002] EWHC 1160 (Ch), [2003] 1 BCLC 479 at [50]); upon exercise it became an immediate or present liability.

Some 6 weeks later, on 11 December 2007, the Respondent wrote to NordLB informing it that the next day the Company was going to receive, under a Sale and Purchase Agreement with WRG PFI Holdings, sums totalling £1.25 million net (£900,000 described as a “project fee payment”, and £350,000 described ― not strictly accurately, as will appear shortly ― as a “first instalment for the sale of the shares”). The terms of that agreement (which must already have existed at least in draft by the time this letter was written) provided that the former sum “may” be paid direct to the Company’s account with NordLB (clause 5.3; see also clause 4.4). There was no obligation undertaken by the Company to WRG (the only other party) to apply it in any particular way, in contrast to the provisions of that nature in the 21 July 2006 agreement. The latter sum (defined as the “Initial Consideration”) was payable “in cash on Completion” (clause 3.1). Nevertheless, the letter to NordLB dealt with both sums identically, and expressly authorised NordLB (which was not itself a party to the agreement, and importantly, in the context of the issues in this case, did not hold any security interest over the sums payable thereunder, or any other contractual right, entitling it to such a ‘direct payment’ arrangement) to apply the same in reduction of the Company’s indebtedness to NordLB.

On or about 11 or 12 December 2007, the balance of the agreements normally comprised in a ‘financial close’, which had not been entered into on 2 May, were entered into in relation to the Wrexham Project. These included a further written agreement between the Company and Wrexham PFI Holdings dated 11 December 2007. In addition to final implementation of the terms originally agreed in August 2005 for a payment of £300,000 in return for WRG’s acquisition of a 65% (voting) stake in the new project company, in the weeks leading up to this agreement Mr Stephen Evans had (initially of his own initiative, he said, but in any event, I am satisfied, doing so in the entirely correct belief that the Respondent would be keen to get out of the project, and had no remaining enthusiasm for any long-term investment in the hope that it would ultimately produce a greater return) reached a further agreement with WRG, the effect of which was that the Company would waive its right to retain the Company’s 35% remaining (non-voting) stake therein, and WRG would exercise its right to acquire the same for a further £300,000 (the price provided for in the August 2005 terms), payable one day after certified commissioning of the Wrexham MREC. In addition, it was agreed that the aggregate sums payable to the Company be increased by a further £57,000, probably to cover increased consultants’ fees otherwise payable by the Company which had been incurred, or the need for which had come to be recognised, since the July 2006 agreement was entered into. For whatever reason, £50,000 of that addition was included in the Initial Consideration (which became £350,000) payable on completion, and £7,000 in the “Additional Consideration” (which became £307,000), payable as aforesaid. Payment of the net sum of £900,000 to the Company in respect of development costs ― the calculation of which was not this time made apparent on the face of the document, but appears likely (consistently with the agreement of 21 July 2006) to have represented £1.7 million gross development costs as approved by Wrexham Council, less £300,000 to repay the July 2006 “loan”, and £500,000 to discharge indebtedness to WRG arising from the NPT Project ― was to be procured, and the agreement expressly authorised its payment direct into the Company’s account with NordLB, despite NordLB having no security interest or contractual right entitling it to such an arrangement, as mentioned in the previous paragraph. Why (given the terms of the letter to NordLB also dated 11 December 2007) such express authorisation for direct payment to NordLB was included in respect of this payment, but not the payment of the Initial Consideration, is obscure.

On 24 December 2007, the Respondent paid Mr Ferro the sum of £5,000 out of the Company’s money. As I shall explain in more detail below, this was by way of a Christmas bonus.

The Company’s balance sheet as at 31 December 2007 (the abbreviated version of which was signed by the Respondent and filed at Companies House on 18 November 2008), which was again not audited, showed current assets of only £353,823 (down by almost £2 million since the previous year end), net current liabilities of c.£2.75 million, and net liabilities of only c.£35,000 less. Bank loans and overdrafts were down to c.£560,000, a reduction of nearly 75% since the previous year end (note 9). The detailed profit and loss account again showed no turnover (trading income), and recorded a pre-tax loss of £334,859 on ordinary activities.

During 2008 the Company made a further 2 payments to NordLB in April and May, and a further 2 payments to Mr Ferro during October. I shall deal with these below.

Although a number of quite wide ranging submissions of law were made to me, not all were ultimately pursued, and I shall endeavour to limit myself to those points which were ultimately in dispute, and which relate to issues I find it necessary or appropriate to resolve in reaching my decision on the claims made.

The Company’s only business comprised the two projects I have discussed. It provided substantial funding for each project, neither of which was ultimately a success. Typically, such projects absorb initial expenditure above and beyond the development costs which can be recouped at ‘financial close’ of very roughly £250,000, although each of the NPT Project and the Wrexham Project had, for different reasons, proved particularly intractable and, even after allowing for a likely element of hyperbole in the Respondent’s statement to the liquidators in January 2011 that the Company had spent “millions” on the Wrexham Project, it is very likely that both projects absorbed considerably more such costs than average. In these circumstances, absent sufficiently substantial capital investment in the Company to enable it to ride out such circumstances at its shareholders’ expense, it would not be surprising if it were found to have been in serious financial difficulty by November 2005.

I have dealt with aspects of the Company’s accounts during my broadly chronological findings as to the underlying facts. From its balance sheets as at 31 December 2004 onwards and associated profit and loss accounts, even without making the adjustments which the auditors considered necessary in the qualifications to the last two sets of accounts which bore auditors’ certificates (those to 31 December 2004 and 2005), the Company throughout had substantial net current liabilities and overall liabilities, and trade creditors of £300,000 odd, payment of whom was by inference substantially overdue up to at least July 2006. It made substantial operating losses annually, its retained loss grew accordingly, and its balance sheet deficit for shareholders was over £2 million by the end of 2005. The following table gives a summary of some of the more important figures:

So far as trade creditors are concerned, it should be remembered that the NPT Project had come to an end (so far as concerned the Company and its subsidiaries) in 2005. WRG took over responsibility for discharging all liabilities incurred on the Wrexham Project, and complete control over its development, with effect from 1 July 2005. It is to be noted that as at August 2005 there were “existing creditors of the [Wrexham] project” of over £300,000, and that WRG was sufficiently concerned about this as a potential new participant in the project that it imposed a term in its letter of 17 August 2005 that the £300,000 payment there provided for be used by the Company “exclusively” towards their payment (see letter dated 17 August 2005, first bullet point). It seems clear that these trade creditors, or at least a majority of them in value (an e-mail from Mr Radia to the Respondent dated 27 October 2005 appears to suggest that the Wrexham creditors may have been just below £200,000 in total at that time), remained unpaid until after the £300,000 loan made to the Company by WRG in July of the next year (some 11 months later), because the detailed balance sheet at 31 December 2005 showed trade creditors of well over £300,000 despite expenditure on both projects having ceased some months before then, and because the Company confirmed to NordLB in its said letter of 4 August 2006 that the loan of 21 July 2006 was “used to clear the outstanding creditors”.

So far as liabilities are concerned, it is to be noted that no evidence has been adduced which suggests that either Engenharia or the Respondent personally were willing to extend indefinite credit to the Company in respect of its indebtedness to them. Indeed the Respondent’s evidence seeking to justify the substantial payments he caused the Company to make to them in late 2005 following its receipt of £1.2 million for the sale of HLC WMS indicated to the contrary, and that Engenharia “were in desperate need of the return of the funds". This is not a case where the evidence justifies any such inference merely from some delay in the active pursuit of payment by an associated creditor of the company in question. Having heard the Respondent’s evidence, I consider the true explanation for the making of the payments in late 2005 to Engenharia and to the Respondent personally to be that the Respondent took steps to reduce the Company’s indebtedness to associated creditors as and when cash became available to enable that to be done.

No accounts to 31 December 2008 were produced, but it may be noted that when FRIE Grupo presented a winding-up petition on 10 March 2009, the Company’s reaction was not to oppose it, but to procure the passage of resolutions on 20 April 2009, two days before the return day for the petition, placing it in Creditors’ Voluntary Liquidation. The Statement of Affairs sworn by the Respondent the same day suggested a deficiency as regards creditors of a little over £4.5 million, including a liability of c.£1.59 million in respect of FRIE Grupo. Further, Mr Hellard’s unchallenged evidence is that on the information available to him he can see no reason for FRIE Grupo’s claim in the liquidation in the sum of £1,592,086.52 not to be admitted as valid.

The Company’s accounts themselves provide strong prima facie evidence of insolvency under both ss.123(1)(e) and 123(2), IA86. The former, incorporating the words “as they fall due”, is a “flexible and fact sensitive requirement”, to which balance sheet insolvency is not irrelevant (see per Lord Walker of Gestingthorpe in BNY Corporate Trustee Services Ltd v Eurosail-UK plc [2013] UKSC 28, [2013] 1 WLR 1408 at [34], citing with approval Briggs J (as he then was) in Re Cheyne Finance plc (No 2) [2007] EWHC 2402 (Ch), [2008] 2 All ER 987 at [56] and [35]). This has been reinforced by a number of further, practical indicators, apparent from the evidence, of the Company’s inability to pay its debts as they fell due over a number of years, including the following:

Furthermore, none of the Company’s annual accounts up to and including those to 31 December 2006 included any provision in respect of, or note in relation to, its contingent liability to FRIE Grupo under the CPOA. Nor did the (unaudited) balance sheet as at 31 December 2007 contain any entry or provision in respect of the Company’s by then actual and immediate liability to FRIE Grupo, which had crystallised in October of that year upon their service of notice exercising the put option.

When it comes to the court’s evaluation of the significance of a contingent liability in the context of determining whether a company is insolvent (see s.123(2), IA86), the question of whether, under published accountancy standards, good or best practice would have required its inclusion in company accounts is not a central consideration. That said, I find Mr Hellard’s unchallenged evidence that both Financial Reporting Standards and UK Generally Accepted Accounting Practice require the inclusion of a contingent liability which is material (as I am satisfied this one was, in particular as at 31 December 2005 and 2006) to be wholly unsurprising, and the omission of the immediate liability to FRIE Grupo from the 31 December 2007 balance sheet to be most surprising and unsatisfactory.

What s.123(2), IA86 does require of the court is that it make a judgment (per Toulson LJ in Eurosail in the Court of Appeal [2011] EWCA Civ 227, [2011] 1 WLR 2524 at [119], approved by Lord Walker (with whom all other judges agreed) in the Supreme Court supraat [42]). That is not a simple requirement to aggregate all contingent and present liabilities at their face value with debts presently due (cf per Sir Andrew Morritt C in Eurosail at first instance, [2010] EWHC 2005 (Ch), [2011] 1 WLR 1200 at [31]), but rather a judgment as to “whether it has been established that, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities …” (per Toulson LJ loc cit), a judgment which will be dependent “on the available evidence as to the circumstances of the particular case” (per Lord Walker at [38]).

The case of Eurosail has excited some interest as to how on any given facts the court may set about making that judgment, and indeed as to how the inter-action between ss.123(1)(e) and 123(2) is properly to be understood. However the facts of this case do not require any exploration of the more difficult outer reaches of such issues. On the facts as I have found them, with the Company having no remaining trading business or income stream (nor any realistic prospect of acquiring new ones), no prospect whatever of any further realisations from the NPT Project after the sale of HLC WMS in November 2005, and no realistic prospect of any realisations from the Wrexham Project materially in excess of £2.3 million after the end of August 2005, the commercial inevitability at all times between 19 September 2005 and actual exercise on or about 26 October 2007 that the put option would be exercised, giving rise to an immediate liability within the reasonably near future, would in my judgment require the contingent liability to FRIE Grupo to be ‘covered’ or provided for in more or less the full sum to avoid the court being satisfied that throughout that period the value of the Company’s assets was less than the amount of its liabilities within the meaning of s.123(2). At the beginning of the relevant period the put option was exercisable in a little under 18 months’ time, which period then reduced day by day until 5 March 2007. The factual circumstances of this case are far removed from those of Eurosail, and much closer (so far as concerns the liability under the CPOA) to the example postulated by Nicholls LJ (as he then was) in Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232 at 247e-g (cited with approval by Lord Walker in Eurosail at 1422B-C):

“Take the simple, if extreme, case of a company whose liabilities consist of an obligation to repay a loan of £100,000 one year hence, and whose only assets are worth £10,000. It is obvious that, taking into account its future liabilities, such a company does not have the present capacity to pay its debts and as such it ‘is’ unable to pay its debts.”

I am satisfied by the evidence both that the Company was unable to pay its debts as they fell due (s.123(1)(e) IA86), and that the value of its assets was less than the amount of its liabilities, taking into account its contingent and prospective liabilities (s.123(2) ibid), throughout the period during which the payments complained of in these proceedings were made (i.e. November 2005 to October 2008 inclusive).

The Applicants have ultimately relied on alleged breaches of the following directors’ duties:

So far as duties (I)(a) and (II)(a) are concerned, it is accepted that s.172 effectively codifies the pre-existing common law position, and that s.172(3) simply preserves the common law position with regard to considering or acting in the interests of creditors, whatever that was and is. As to the test for when these duties extend to the interests of creditors, this has been expressed in different ways in the cases:

For my part, I do not detect any difference in principle behind these varying verbal formulations. It is clear that established, definite insolvency before the transaction or dealing in question is not a pre-requisite for a duty to consider the interests of creditors to arise. The underlying principle is that directors are not free to take action which puts at real (as opposed to remote) risk the creditors’ prospects of being paid, without first having considered their interests rather than those of the company and its shareholders. If, on the other hand, a company is going to be able to pay its creditors in any event, ex hypothesi there need be no such constraint on the directors. Exactly when the risk to creditors’ interests becomes real for these purposes will ultimately have to be judged on a case by case basis. Different verbal formulations may fit more comfortably with different factual circumstances.

Messrs Roe and Halban did not ultimately pursue their initial submission, founded on a passage from Gore-Browne and an Australian dictum, that this duty does not extend to considering the interests of contingent creditors. They fall back on submissions, to which I shall come, that the duty only applies where directors subjectively know that the company is insolvent or of doubtful solvency, and only extends to creditors (immediate, contingent or prospective) whose existence as such is subjectively known to the directors.

It is common ground that duties (I)(a) and (II)(a) are subjective ones, in the sense explained by Jonathan Parker J (as he then was) in Re Regentcrest plc v Cohen [2001] 2 BCLC 80 at [120]:

“The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmer’s Company Law para. 8.508). The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”

However, this general principle of subjectivity is subject to three qualifications of potential relevance in this case:

Therefore, whilst I accept the Respondent’s submission that the general principle of subjectivity applies to directors’ consideration of the interests of creditors as well as to their consideration of the interests of the company, that has no application to a situation such as the Respondent suggested arose here, namely that (as his counsel submitted) it simply did not occur to him at the time of the Engenharia Payments or the Personal Payments that FRIE Grupo was a creditor at all. In any event, I have found to the contrary on the facts.

In these circumstances I shall deal but briefly with the Respondent’s further submissions that:

As to the former, Messrs Roe and Halban cited Re Horsley & Weight Ltd [1982] Ch 442 at 455 per Templeman LJ, the West Mercia case supra at 252f per Dillon LJ, and Bell Group v Westpacsupra at [4444] (citing Kalls Enterprisessupra). I see nothing in these cases to displace the law’s general approach to such questions, which is that the requisite knowledge is of the facts which give rise to the relevant legal consequence (here, actual or potential insolvency). Obviously, in most cases the significance of those facts (actual or potential insolvency) will not be wasted on the directors of the company.

As to the latter, if a particular debt (immediate, contingent or prospective) is of sufficient materiality that any reasonable director would have taken it into account, then the principle mentioned at paragraph 92(c) above would apply, and the law would then apply the objective test of whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company’s creditors. If he could not, then the decision cannot be saved on the basis that the directors made the decision they did in good faith, albeit entirely overlooking a material factor which they ought to have appreciated and taken into account.

So far as duties (I)(b) and (II)(b) are concerned, it is again accepted that s.171(b) CA06 effectively codifies the pre-existing common law position. Miss Leahy took, and Mr Roe accepts, the relevant tests for whether these duties have been breached from the judgment of Mr Jonathon Crow in Extrasure Travel supra at [92]:

“92.

The law relating to proper purposes is clear, and was not in issue. It is unnecessary for a claimant to prove that a director was dishonest, or that he knew he was pursuing a collateral purpose. In that sense, the test is an objective one. It was suggested by the parties that the court must apply a three-part test, but it may be more convenient to add a fourth stage. The court must:

92.1.

identify the power whose exercise is in question;

92.2.

identify the proper purpose for which that power was delegated to the directors;

92.3.

identify the substantial purpose for which the power was in fact exercised; and

92.4.

decide whether that purpose was proper.

93.

Finally, it is worth noting that the third stage involves a question of fact. It turns on the actual motives of the directors at the time: Re a Company, ex parte Glossop [1988] BCLC 570 at 577f–g.”

The point made by Mr Crow in the second sentence of his paragraph [92] echoes a passage from the judgment of Jonathan Parker J in Regentcrestsupra at [123]:

“… where a power conferred on a director is used for a collateral purpose … it matters not whether the director honestly believed that in exercising the power as he did he was acting in the interests of the company; the power having been exercised for an improper purpose, its exercise will be liable to be set aside (see, e.g., Hogg v. Cramphorn Ltd [1967] Ch 254.”

On facts such as the present, the application of the first two tests is not complicated. The power in question is to deal with the Company’s assets in the course of trading. The proper purpose for which that power was delegated to its director(s) is to advance the Company’s business and commercial interests. As to both, compare Extrasure Travelsupra at [140]. Furthermore, and notwithstanding Mr Roe’s contrary submission, it seems to me necessarily to follow from the common law principle (preserved post-codification by s.172(3) CA06) concerning directors taking into account the interests of a company’s creditors, that the proper purposes for which the said power may be exercised must, where that duty is triggered, necessarily then include advancing the interests of that company’s creditors.

In the event, it has not proved necessary for me to go into the other duties relied on by the Applicants.

The payments in question may conveniently be considered in 4 categories:

The Engenharia Payments The Respondent caused a total of 8 payments to be made to Engenharia, on 5 different days between 30 November and 19 December 2005, totalling just over £697,000 as follows:

In cash terms, the Company was able to make such payments out of the £1.2 million it received in mid-November 2005 for HLC WMS. The Applicants accepted, for the purposes of the argument of this claim, that the Company should be taken as having genuine unsecured liabilities to Engenharia in excess of these sums, which these 8 payments went to reduce.

The Applicants allege breaches by the Respondent of 2 common law directors’ duties in the making of these payments, all of which were pre-codification:

In his oral evidence, the Respondent accepted responsibility for the making of these payments (contemporaneous e-mails from Mr Radia to the Respondent also confirmed that the latter had arranged for the 3 largest payments to be made), and sought to explain his purpose in making them on the basis that Engenharia “was the biggest creditor. I had a duty as a director to make sure that I would not probably bring a catastrophe to [Engenharia] at that time if I did not repay them the money. They were out of pocket tremendous amounts of money, so it is not like I am making a preference. I had to pay the creditors of the company which had the biggest credit. I was not making a preference.” The Respondent made it clear that Engenharia was anxious to be paid, and gave no evidence suggesting that Engenharia had agreed, formally or informally, any waiver or postponement of its right to repayment by the Company at any stage (had he done so, he would have had to deal with how this came about, given his own dominant role in each of those companies). As I have held, the Respondent was the dominant director of the Company throughout, and he made no suggestion, and there is no other evidence to suggest, that Mr Ferro played any part in the decision to make these (or any of the other) payments while he remained a director of the Company (i.e. until 4 September 2006).

I find that the substantial purpose for which the Respondent caused these payments to be made was to assist Engenharia, and that the decision to make them was made without giving any consideration to the best interests of the Company’s creditors as a whole, nor specifically those of its contingent creditor FRIE Grupo, despite the Company having (and the Respondent knowing it to have) substantial creditors, substantial net current liabilities and overall net liabilities, no live projects or revenue stream, and no realistic prospect of gaining any. The Respondent was in effect choosing which creditors to pay, and which to leave exposed to a real risk of being left unpaid. An intelligent and honest man in the Respondent’s position could not, in the circumstances, have reasonably believed that making the Engenharia Payments was for the benefit of the Company, nor of its creditors as a whole. I am not persuaded on the evidence that making the Engenharia Payments was a necessary step to enable the Company to collect its expected aggregate realisations from the Wrexham Project of around £2.3 million (and note that the preferred bidder status was held by HLC Wrexham, not the Company), or that the same would in some way have been forfeit had the Engenharia Payments not been made (as to which see paragraph 63 above). Breach of both the common law duties relied on by the Applicants is therefore made out.

I then have to consider whether to grant the Respondent’s claim to relief under s.1157(1) CA06, which replaced s.727 of the 1985 Act (“statutory relief”). This provides that:

“If in proceedings for negligence, default, breach of duty or breach of trust against–

(a)

an officer of a company, or

(b)

a person employed by a company as auditor (whether he is or is not an officer of the company),

it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit”.

As Miss Leahy submitted in her opening skeleton argument, and is not as I understand it controversial:

Suffice it to say that the Respondent has not satisfied me that he acted reasonably in making the Engenharia Payments, and that in these circumstances his claim to statutory relief does not get off the ground.

The Personal Payments The Respondent caused a total of 4 payments to be made to himself or (it is accepted) for his personal benefit, between November 2005 and May 2008, totalling just over £500,000 as follows:

In cash terms, the Company was able to make the first and largest such payment out of the £1.2 million it received in mid-November 2005 for HLC WMS (along with the Engenharia Payments).

Although no formal concession was made by the Applicants, the Respondent was cross-examined on the basis that the Personal Payments may have been by way of partial discharge of sums owed to him by the Company. The Applicants allege breaches of all four of the common law directors’ duties mentioned in paragraph 87(I) above in the making of the first three payments, all of which were pre-codification, and of the statutory directors’ duties under ss.172, 171(b) and 175 CA06 in the making of the fourth, which was made post-codification.

In his oral evidence, the Respondent accepted responsibility for the making of these payments. He sought to justify the first on the basis that he, along with Engenharia, “were the biggest creditors”, that he “had to pay to the creditors of the company which had the biggest credit”, and that the repayment of £400,000 to him was (in effect) to enable him to discharge a £600,000 loan which his 83 year old father had made to him, enabling him in turn to lend it to the Company. As should be self-evident, none of these reasons entitled the Respondent to make the first payment to himself out of the Company’s money, however strong the moral obligation to his elderly father to which he had subjected himself by taking such a loan from him in the first place.

With regard to the remaining three payments, they were made on the Respondent’s personal behalf to another company in which he was investing, ESS Holdings (Wellingborough) Limited. As is acknowledged, they are in substance no different to payments remitted directly to the Respondent in person. When Miss Leahy first put it to him in cross-examination that the Company did not need to make the payments to ESS in order to continue with its own business (investments), his answer was that “The Company owed me money, therefore I decided to make that payment on behalf of my credit”. When she put the question again, the Respondent added the suggestion that the payments had the potential “eventually” to be beneficial to the Company, because if his (personal) investment in ESS was successful, he would thereby gain substantial additional personal funds which he could in turn invest in the Company. Clearly none of this entitled the Respondent to make the second, third and fourth Personal Payments for his own benefit out of the Company’s money.

I accept Miss Leahy’s submission that in a misfeasance claim where, as here in respect of the Personal Payments, it is proved that a director is himself the recipient of a benefit from the company, the evidential burden is then on him to prove that the payment was proper: seeIdessa (UK) Ltd v Morrison [2011] EWHC 804 (Ch), [2011] BPIR 957 per Lesley Anderson QC at [28] and GHLM Trading Ltd v Maroo[2012] EWHC 61 (Ch), [2012] 2 BCLC 369 per Newey J at [149].

I find that the substantial purpose for which the Respondent caused all four of the Personal Payments to be made was to assist himself personally, and that the decision to make them was made without giving any consideration to the best interests of the Company’s creditors as a whole, nor specifically those of its contingent (up to October 2007) creditor FRIE Grupo, despite the Company having (and the Respondent knowing it to have) substantial creditors, substantial net current liabilities and overall net liabilities, no live projects or revenue stream, and no realistic prospect of gaining any. The Respondent was in effect choosing which creditors to pay, and which to leave exposed to a real risk of being left unpaid. An intelligent and honest man in the Respondent’s position could not, in the circumstances, have reasonably believed that making the Personal Payments was for the benefit of the company, nor of its creditors as a whole. A fortiori the position with regard to the Engenharia Payments, I am not persuaded on the evidence that making the Personal Payments was a necessary step to enable the Company to collect its expected aggregate realisations from the Wrexham Project of around £2.3 million, or that the same would in some way have been forfeit had the Personal Payments not been made. Breach of the common law duties (I)(a) and (b) (in respect of the first three Personal Payments) and of the statutory duties under ss. 172 and 171(b) CA06 (in respect of the fourth) is made out. It is not, therefore, necessary for me to go into the further questions which were raised in respect of the common law duties (II)(c) and (d), or the statutory duty under s.175 CA06.

Turning to the Respondent’s claim to statutory relief, as with the Engenharia Payments suffice it to say that the Respondent has not satisfied me that he acted reasonably in making the Personal Payments, and that in these circumstances his claim to statutory relief does not get off the ground.

The NordLB Payments On or about 5 August 2005 the Company obtained the £2 million, 12 month revolving credit facility from NordLB, guaranteed by Engenharia, which I have mentioned. £1.9 million of it was drawn down in 6 tranches between 9 August 2005 and 8 May 2006, and almost £850,000 of the monies drawn down in the first 3 tranches (between August and October 2005) was in fact remitted on to the Respondent and other connected parties. The facility expired without agreement for a renewal having been negotiated, though it was later extended for a further 15 months running from 5 August 2006 to 4 November 2007 in the reduced sum of £1.8 million. NordLB held no security over the sums payable to the Company under either of its agreements with WRG dated 21 July 2006 or, most relevantly, 11 December 2007, and I have rejected the Respondent’s case that he genuinely believed to the contrary.

The Respondent caused a total of 4 payments to be made to NordLB on 3 different days between December 2007 and May 2008, totalling something over £1.5 million as follows:

In cash terms, the Company was able to make such payments, and in particular the first two, out of the monies it received from WRG pursuant to their Sale and Purchase Agreement dated 11 December 2007. The £900,000 payment was made direct into the Company’s (overdrawn) account with NordLB by WRG, pursuant to specific provision permitting the same which had been included in that agreement as I have already related; in the event the £350,000 was also paid in the same way, even though for some obscure reason the agreement did not include matching provision for that (see paragraph 71 above). There is no dispute that each of these four payments went to reduce genuine liabilities of the Company in at least the same amount, nor (after an amendment by the Respondent) that they were unsecured. However the Company was not under any legal obligation requiring it to pay NordLB direct without the monies passing through its own account first.

All four payments were made after FRIE Grupo had exercised its put option, and post-codification, and the Applicants allege breaches of directors’ statutory duties in the making of these payments. Before I enumerate those which are relevant, it is convenient that I first address one of the points upon which Miss Leahy sought to rely in closing. She submitted that one of the objectionable features of the NordLB Payments was that they went to reduce a liability of the Company which the Respondent had personally guaranteed. As I have briefly mentioned, at the outset of the trial I refused an application to amend the Applicants’ pleadings so as to allege a preference under ss.239-241. IA86. The factual basis for this amendment was the same allegation of a personal guarantee, and I have already said something about that unsatisfactory and obscure document in paragraph 65 above. In the course of the Applicants’ unsuccessful amendment application, I was told that the officer of NordLB who dealt with this matter, a Mr Mathias Pahlke, was away from the United Kingdom for a period including the trial window, that when the Respondent applied (unsuccessfully) to David Richards J in June for an adjournment of the trial the Applicants responded by offering not to rely on his witness statement at trial, but that when first interviewed by the Applicants’ solicitors he had stated that he had no relevant recollection in any event. The application to amend was argued by Miss Leahy as a single, composite one, and when I refused it she gave no indication that, in the alternative, she would wish at least to amend the relevant paragraph of her Particulars of Claim so as to be able to rely on the (alleged) personal guarantee in support of her misfeasance claim. I should add that, had she done so, that more restricted application would still have faced many of the same difficulties. As the whole of the oral evidence was received at a time when the Applicants had no pleaded case in respect of this (alleged) personal guarantee by the Applicants, I consider that Messrs Roe and Halban’s objection to the introduction of the same during the closing argument is well-founded and should prevail. Accordingly I do not accede to either of Miss Leahy’s alternative requests that I allow her to rely on the (alleged) personal guarantee in support of her case as it stands, or that I now allow a short (she would doubtless say formal) amendment to her Particulars of Claim in order to plead it.

Leaving aside, then, the breach of the statutory duty under s.175 CA85 upon which Miss Leahy had sought to rely by virtue of this supposed personal guarantee, the remaining duties of which she alleges breaches are the statutory duties under ss.172 and 171(b) CA06.

As I have already explained, in his written and oral evidence, the Respondent suggested that he caused the first 2 payments to Nord LB to be made because he genuinely believed that NordLB had a legal right to them, and I have rejected that evidence.

I infer that the substantial purpose for which the Respondent caused all four of these payments to be made was to reduce the exposure of Engenharia on its guarantee to NordLB (whether or not it was also to reduce an exposure the Respondent at least believed he had under a personal guarantee – which I leave aside for the reasons just given). I further find that his decision to make them was made without giving any consideration to the best interests of the Company’s creditors as a whole, including those of FRIE Grupo (which had since October 2007 been an immediate creditor), despite the Company having (and the Respondent knowing it to have) substantial creditors, substantial net current liabilities and overall net liabilities, no live projects or revenue stream, and no realistic prospect of gaining any. So far as the liability to FRIE Grupo is concerned, I reject the Respondent’s suggestion in oral evidence that he had not taken their notice of exercise seriously. Once again, the Respondent was in effect choosing which creditors to pay, and which to leave exposed to a real risk of being left unpaid. An intelligent and honest man in the Respondent’s position could not, in the circumstances, have reasonably believed that making the NordLB Payments was for the benefit of the company, nor of its creditors as a whole. The Company had already collected its aggregate realisations from the Wrexham Project, and was not bound to use them to pay NordLB. Breach of both the statutory duties mentioned above is made out.

Turning to the Respondent’s claim to statutory relief, the facts I have found preclude any possible finding that the Respondent acted reasonably in making the NordLB Payments (the burden of proving which would lie on him in any event), and in these circumstances once again his claim to statutory relief does not get off the ground.

The Ferro Payments The Respondent caused a total of 3 payments to be made to Mr Ferro, totalling £55,000, as follows:

All three of these payments were made after FRIE Grupo had exercised its put option, and post-codification, and the Applicants allege breaches of the directors’ statutory duties under ss.172, 171(b) and 174 in the making of these payments.

An important starting point here is the fact that, as was ultimately accepted by the Respondent, and confirmed by Mr Ferro, Mr Ferro was never employed by the Company.

I find (preferring Mr Ferro’s evidence to the Respondent’s) that the first payment was made by way of a traditional (for employees of at least some Portuguese companies) Christmas bonus, and was unrelated to the agreement the Respondent had made with Mr Ferro several years earlier to pay him a bonus in return for agreeing that he would move to the UK with his family on a permanent or indefinite basis. Mr Ferro’s employer at that time was Biodiesel, and any liability to pay this Christmas bonus was its, not the Company’s. I infer that the Respondent paid it out of the Company’s money simply because in the run up to Christmas 2007 there happened to be some available cash in the Company, following completion of its Sale and Purchase Agreement with WRG dated 11 December 2007. There is simply no rational basis on which the Respondent could, if he had addressed his mind to it, have concluded that this was a liability of the Company’s.

As to the second and third payments, I am satisfied that these were intended to be belated part payments (together, one half) of Mr Ferro’s bonus for agreeing to move to the UK, which sum (£50,000) Mr Ferro had agreed with the Respondent to accept even though the originally agreed bonus had been double (£100,000). As I have already held, this bonus was a liability of Engenharia’s, not of the Company’s. Further, I accept Mr Ferro’s evidence that he was not bothered from whom he received the bonus monies, and reject the pleaded suggestion that Mr Ferro ever contended that the Company should pay him, or that any agreement that it should do so was reached. Here again, there is simply no rational basis on which the Respondent could, if he had addressed his mind to it, have concluded that this bonus was a liability of the Company’s.

I find that the substantial purpose for which the Respondent caused these payments to be made was to discharge liabilities to Mr Ferro, I infer because he could find the money to do so within the Company, and that he was unconcerned as to which companies’ liabilities they were. As I have already mentioned, the Respondent’s own evidence was that by this time “cash flow was like gold dust”, and the Respondent himself then said that he paid Mr Ferro the 2 sums totalling £50,000 “when the monies were available”. The Respondent was thus using the monies of the Company when it was (and had for some time been) insolvent, i.e. unable to pay its own debts as they fell due, to discharge the debts of others. In doing so he gave no consideration to the interests of the Company, nor to those of its creditors as a whole. No intelligent and honest man in the Respondent’s position could, in the circumstances, have reasonably believed that making the Ferro Payments was for the benefit of the company, nor of its creditors as a whole.

Breaches of the statutory duties under both s.172 and s.171(b) CA06 are made out, and it is not, therefore, necessary for me to go on to consider the further alternative ground of claim, namely the alleged breach of the Respondent’s statutory duty under s.174 CA06.

I then have to consider the Respondent’s claim to statutory relief. The sums under this fourth head are smaller than under the first three heads, and causing payments to be made to an individual such as Mr Ferro might in a general, moral sense be thought less unattractive than the payments giving rise to the breaches I have found under those other heads. Nevertheless, these payments were made late on in the period throughout which I have found the Company to be insolvent; the notice of exercise of the put option had already been served; the Company had already received such realisations as it was ever going to receive from both the NPT Project and the Wrexham Project, save only for the Additional Consideration of £307,000 in relation to the latter (which was to be paid one day after certified commissioning of the Wrexham MREC); there was no realistic prospect of the Company gaining any new projects or income stream; and these payments were made without any consideration whatever of the best interests of the Company’s creditors as a whole, and with complete disregard for the fact that they involved monies of the Company (despite its own financial position) being used to discharge liabilities of other companies. In these circumstances, once again the facts I have found preclude any possible finding that the Respondent acted reasonably in making the Ferro Payments (the burden of proving which would lie on him in any event), and once again his claim to statutory relief does not get off the ground.

In respect of each of the four categories of payment the Applicants primarily seek orders that the Respondent pay, or (in the case of the Personal Payments) repay, to the Company the sums which he has wrongfully caused to be paid out. Miss Leahy also indicated alternative claims for damages in the case of the Ferro Payments, and for an account of profit or gain in respect of the Engenharia, Personal and NordLB Payments, were they to be needed.

Miss Leahy accepted that since the NordLB Payments discharged what are accepted to have been genuine liabilities of the Company, and that the Engenharia Payments discharged what may (subject to the liquidators being satisfied as to the same) also have been such liabilities, orders for repayment should in those cases be subject to a form of proviso similar to that applied by the Court of Appeal to the orders made in the West Mercia case supra (“the West Mercia Proviso”), adapted as appropriate to fit the particular factual circumstances here. The proviso considered appropriate in the West Mercia case itself, and the basis for it, was indicated in the judgment of Dillon LJ as follows (report 253c-f and 255b-d):

“Prima facie the relief to be granted where money of the company has been misapplied by a director for his own ends is an order that he repay that money with interest, as in Re Washington Diamond Mining Co. The section in question, however, sec. 333 of the Companies Act 1948 [the predecessor to s.212 IA86], provides that the court may order the delinquent director to repay or restore the money, with interest at such rate as the court thinks fit, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication as the court thinks fit. The court has a discretion over the matter of relief, and it is permissible for the delinquent director to submit that the wind should be tempered because, for instance, full repayment would produce a windfall to third parties, or, alternatively, because it would involve money going round in a circle or passing through the hands of someone else whose position is equally tainted…

In my judgment the appropriate course of administration in the present case is to order Mr. Dodd to repay the £4,000 with interest and to direct that in the distribution of the assets of the West Mercia company to unsecured creditors the debt due from the West Mercia company to the Dodd company is to be taken as notionally increased by £4,000 to what it would have been if there had not been a fraudulent preference, and then any dividend attributable to the extra £4,000 thus added back to the debt of the Dodd company is to be recouped to Mr. Dodd rather than being paid to the Dodd company. That, as I see it, is a rough and ready way of achieving justice on both sides.”

As to the relief primarily sought by the Applicants, Messrs Roe and Halban took from the outset an objection of principle. They submit that in any case where a payment has gone to reduce a genuine liability of a company, that company has ex hypothesi not suffered a loss. In oral argument Mr Roe disavowed raising this as a mere pleading point (wisely, given the presence of paragraph (2) in the Prayer for Relief), but maintained the submission that there is a substantive legal point here. Messrs Roe and Halban submit that the Applicants’ remedies against a defaulting director for breach of duty (reminding me that there are no statutory claims under ss.239-241 IA86 here) are limited to orders providing for the payment of compensation to the company for any loss it has suffered, or for giving an account of profits (also referred to as ‘disgorgement’) where the director has received sums himself (so here, limited to the Personal Payments). They cite Snell’s Equity (32^nd edn), paragraphs 7-051 to -052, -054 to -055 & -058; Bristol & West Building Society v Mothew [1998] Ch 1 (CA) at 16C, 17G-H and 18A per Millett LJ (as he then was); Knight v Frost [1999] BCC 819 at 834C-E per Hart J; Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712, [2001] 2 BCLC 531 (CA) at [49]-[54] per Robert Walker LJ; Re Continental Assurance Co of London plc (No 4) [2007] 2 BCLC 287 at [419] per Park J; and Maroosupra at [169] per Newey J.

They seek to distinguish Re Washington Diamond Mining Co [1893] 3 Ch 95 (CA), a dictum from which was cited by Dillon LJ in the West Mercia case, on the grounds that there the payments in question were made to the directors themselves. That much is correct on the facts – the payments were in respect of unpaid directors fees, and made at a time when the company was (as the headnote puts it) “admittedly in embarrassed circumstances” (see also per Lindley LJ at 109). They then seek to distinguish the outcome of the West Mercia case on the grounds that the circumstances were akin to those in the former case, in that the payment in West Mercia was made into the overdrawn bank account of a company controlled by the director, borrowing on which he had personally guaranteed.

I do not derive assistance on the present point from Washington Diamond Mining, because the claim which there succeeded on appeal was a statutory claim for a fraudulent preference under the terms of the then Companies and Bankrupcty Acts.

I am not persuaded that the judgments of the Court of Appeal in the West Mercia case were intended to be limited to cases where the recipient of the payment was the director in question, or in circumstances akin to such, and consider that this argument requires far too much weight to be borne by the words “for his own ends” in the first sentence of the passage I have already quoted (at 253c-d in the report). Had the Court of Appeal considered it central to their decision to allow the appeal that the facts were akin to personal receipt by the director, and that without that feature the appeal would have been dismissed, this would have been made clear. I do not find any sufficient grounds for distinguishing the decision of the Court of Appeal in the West Mercia case here, and note that it highlighted the breadth of the discretion as to relief conferred on the court by what is now section 212, IA86.

The Respondent further seeks to distinguish Re Palmier plc, Sandhu v Sandu [2009] EWHC 983 (Ch) on the grounds that it proceeded on concessions by counsel. At [18]-[19] Proudman J records the concession that a right of action exists against a director responsible for a preferential payment made at a time when the company was insolvent. However she made clear her approval of it as rightly made (at [19] - “as she must”). Nor did Proudman J give any hint that she disapproved or doubted the parties’ agreement referred to later in her judgment at [185] that:

“the court is not concerned with the assessment of loss or damage to [the company]; [the defendant] is required to restore to [the company] the sums which he has caused to be misapplied…”

Furthermore, as to the underlying principle I prefer the basis of Miss Leahy’s argument in any event. A company is to be treated as in an equivalent position so far as its directors are concerned to that of a trust fund so far as its trustees are concerned (see Re Duckwari plc [1998] Ch 253 at 262A-D per Nourse LJ; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 at [34] per Lord Neuberger of Abbotsbury MR).

The liability of a defaulting fiduciary who has, by his or her default, allowed the trust fund to become denuded is, or includes, a liability to restore the fund to what it should have been. As Lord Browne-Wilkinson put it in Target Holdings v Redferns [1996] 1 AC 421 at 434C-E:

“The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries' rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate: see Nocton v. Lord Ashburton [1914] A.C. 932, 952, 958, per Viscount Haldane L.C. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed: Caffrey v. Darby (1801) 6 Ves. 488; Clough v. Bond (1838) 3 M. & C. 490.”

In Sinclair v Versaillessupra at [40] Lord Neuberger cited this passage with approval in the context of claims arising out of directors’ breaches of fiduciary duty.

In cases concerning a depletion of the monies not of a trust fund but of a limited company, a refinement to this rule ought, however, to be noted. A claim for an order of the type which the Applicants here seek will only be of any practical relevance if an insolvency ensues. If the company in question has not become insolvent, and has continued to discharge all its liabilities, then the making of an order for repayment against a director would be pointless and produce circuity of action, because the director would thereby become entitled to a pro tanto credit from the company for having discharged one of its liabilities.

There is, in my judgment, no legal obstacle to relief being granted here in the form which the Applicants primarily seek, and I consider the grant of such relief to be just and appropriate on the facts (subject to the inclusion of a suitable adaptation of the West Mercia Proviso where that is called for).

Taking the Ferro Payments first, these did not discharge any liability of the Company’s, and accordingly an order against the Respondent for payment to the Company of the £55,000 which he wrongfully caused to be paid out of its funds is just and appropriate, without the need for any proviso. I will hear counsel on the Applicants’ claim for interest in respect of this and all other payment orders to be made.

Since the Respondent himself was the recipient, or the equivalent, in respect of the Personal Payments, an order against him for repayment to the Company of the £507,000 in question is just and appropriate. He is, of course, free to prove in the liquidation of the Company in the normal way in respect of all sums which he claims that it owes him.

Taking the NordLB Payments first, because it is accepted that these discharged genuine liabilities of the Company, the order against the Respondent for payment to the Company of the £1,557,907 which he wrongfully caused to be paid out of its funds, which is otherwise just and appropriate and ought therefore to be made, should be qualified by a suitably adapted version of the West Mercia Proviso.

Making my own adaptations to Miss Leahy’s proposals, the following proviso appears prima facie appropriate, but as agreed at the hearing I will now give counsel for the Respondent the opportunity to make any submissions they wish about it before I determine its exact wording:

As to the Engenharia Payments, the position is similar but not the same. Here although the Applicants accepted, for the purposes of the argument of this claim, that the Company should be taken as having genuine unsecured liabilities to Engenharia in excess of these sums discharged, the Liquidators have not yet been satisfied as to the same. Therefore, while an order against the Respondent for payment to the Company of the £697,063.21 which he wrongfully caused to be paid out of its funds is otherwise just and appropriate and ought therefore to be made, it should be qualified by a slightly different adaptation of the West Mercia Proviso, allowing for this.

Here, again making my own adaptations to Miss Leahy’s proposals, the following proviso appears prima facie appropriate; again I will now give counsel for the Respondent the opportunity to make any submissions they wish about it:

I am grateful to counsel for both parties for the care and diligence with which they have presented this less than straightforward case.