McTear & Anor v Engelhard & Ors

This trial concerns inter-company transactions between two companies in a group of companies, all of which were owned and controlled by members of the same family. The Claimants contend that the transactions give rise to a debt owed by the holding company to one of the subsidiaries, and to claims against the directors of the subsidiary for breaches of the duties that they owed to the subsidiary (and to its creditors). The Defendants contend the contrary, and that the Claimants are estopped from bringing these claims in any event. These claims form part of what was initially a wider dispute.

A number of applications were dealt with at the beginning of the trial. They are the subject of a separate judgment, which I handed down on 14 March 2014: McTear & Anr v Engelhard & Ors [2014] EWHC 722 (Ch). In sum, I dismissed the Defendants’ applications for extensions of time or for relief from sanctions in respect of the late service of both their trial witness statements and a list of additional documents, I refused to allow them to rely on one of those statements on the additional ground that it contained expert evidence for which they had not sought permission, and I refused them permission to re-amend their Defence. I also granted some of the relief sought by the Claimants in their cross-application, but I refused to strike out the Amended Defence.

In the result, the trial proceeded without any witnesses being called by the Defendants.

However, both sides had previously provided standard disclosure by lists. In addition, both sides had filed witness statements in connection with aspects of the case that were not before me at the trial. Although I was not provided with copies of these materials, it is my understanding that the exhibits to these witness statements are voluminous, and that they include a number of documents that had not been disclosed by either side. My rulings did not have the effect of excluding any documents that had previously been disclosed or these materials, so they were available for purposes of cross-examination.

I set out these matters in my previous judgment. I repeat that part of my previous judgment, with a number of factual and textual modifications, for ease of reference.

The Claimants are the former joint administrators of Broadland Wineries Limited (“BWL”) and the former supervisors of a Company Voluntary Arrangement (“CVA”) that BWL entered into. BWL operated a winery that produced fruit and fortified British-made wines, carried out contract bottling and bag-in-box filling, and produced and bottled semi-sparkling wine. BWL went into administration on 10 March 2006 and came out of administration on 1 February 2007. BWL entered into the CVA on 18 October 2006 and the CVA came to an end on 20 November 2011. By a Deed of Assignment dated 20 September 2011, BWL’s claims in these proceedings were assigned to the Claimants, and they hold them on trust for BWL’s creditors.

Although BWL was sold to a third party on 20 November 2011, at all times material to this claim BWL was one of a number of companies that were owned or controlled by members of the same family. In this regard:

The Claimants were represented by Simon Davenport QC and Richard Samuel. EHL and the Directors were represented by Jonathan Lopian. I am grateful to all counsel for their clear and helpful written and oral submissions.

It is common ground that EHL did not generate any trading income. Whether and to what extent EHL provided management and head office services (“the Services”) to BWL, and, if it did so, the value of the Services are issues in the proceedings.

There is also an issue as to the extent to which the decision to make payments to EHL or to incur charges in respect of the Services placed the Directors in breach of duties that it is accepted that they owed to BWL, in light of BWL’s financial predicament in the period before BWL went into administration. In this regard:

Some of the claims have been settled. The remaining claims revolve around payments in the total sum of £412,739.17 that were made by BWL to EHL between the start of BWL’s financial year on 1 April 2005 and the date when BWL went into administration on 10 March 2006.

The Claimants contend that those payments comprised loans from BWL to EHL, and that those loans fell due upon demand, that was made at latest by service of the claim in the present proceedings. Accordingly, they claim £412,739.17 from EHL as a debt due from EHL to BWL. Among other things, in support of this claim they rely upon:

The Claimants further contend that, if BWL truly owed EHL monies, EHL should and would have proved in BWL’s administration for the sums due from BWL to EHL.

Instead, on 27 April 2006, the then Financial Controller both of BWL and of EHL, Richard Coleridge, sent an email to Mr McKay of the Claimants. According to the Claimants, this gave notice of an intention to make adjustments to BWL’s statement of affairs. The Claimants contend that, on the one hand, the statement of affairs was the responsibility of the Directors, but that, on the other hand, the Directors had no right to change the financial position shown in the books and records of BWL as at the date of the Claimants’ appointment as administrators. One of those adjustments was “Accrue Management Fee £424,109.58 to 10/3/2006 (DR P&L a/c / CR I/Co Engelhard Holdings)”. Mr Coleridge later made that adjustment to the SAGE inter-company account D-D176, and attributed to it the date of 28 February 2006. The effect of this was to enable EHL to recoup £412,739.17, and, as the Claimants contend, to prefer EHL over BWL’s other creditors, instead of treating EHL pari passu with them. The Claimants contend that this was done on the instructions of Michael Engelhard.

As against the Directors, the Claimants contend that the adjustment of £424,109.58 on 27 April 2006 was (1) a sham transaction or accounting entry, (2) a breach of the fiduciary duties that the Directors owed to BWL, (3) a breach of the duties of care that the Directors owed to BWL, and (4) an improper exercise of a management function after administration without the consent of BWL’s administrators contrary to paragraph 64(1) of Schedule B1 to the Insolvency Act 1986. The Claimants further contend that (5) by continuing to incur the charges and make the payments in question the Directors were in breach of the same duties, for the reasons summarised in paragraph 10 above. On these grounds, damages in the sum of £412,739.17 are claimed from the Directors.

These claims are pleaded in paragraphs 21 to 29 of the Particulars of Claim, and are the subject of paragraphs 8 to 13 of the prayer for relief in that statement of case.

Initially, these claims were answered by the pleas contained in paragraphs 33 to 39 of the Defence. On 7 November 2013, the Defendants served “Voluntary Particulars” of that Defence. Following protests from the Claimants’ solicitors, the contents of those “Voluntary Particulars” were inserted into an Amended Defence as a new paragraph 36A. By an Order of Master Bowles made on 24 January 2014, the Defendants were granted permission to serve an Amended Defence in that form.

The substance of the defences with which I am concerned, as originally pleaded, is as follows:

The text that was inserted into the Amended Defence as a new paragraph 36A pursuant to the Order of Master Bowles made on 24 January 2014 gave particulars of the matters summarised at (i)-(iv) above. That text also made reference to two Schedules, that were attached marked “A” and “B”, and that contained breakdowns of the sums of £412,739.17 and £424,109.58.

There is also a plea of estoppel, contained in paragraphs 5 and 6 of the Amended Defence. In paragraph 5 of the Amended Defence it is said that the remainder of that pleading is pleaded “without prejudice” to these assertions. In sum, it is pleaded that, at all material times, the Claimants on the one hand and the Engelhard family, EHL and another Engelhard family company called Engelhard Farms Limited (“EFL”) on the other hand acted on the assumption that the account balances complained of in the Particulars of Claim were correct. Accordingly, it is said that “the Claimants are estopped from asserting that the balances on the SAGE account are other than a correct statement of the true account as between BWL and/or the Claimants on the one hand, and the Defendants on the other, since it would be unjust and/or unconscionable to allow the Claimants to go back on the above assumption”.

The Claimants served witness statements for trial of the First Claimant (“Mr McTear”), the Second Claimant (“Mr Williams”), and Christopher McKay (“Mr McKay”). Mr McKay explained in evidence that, in 2006, he was an associate and the manager in charge of the BWL case, although he has since become a partner in the Claimants’ firm of McTear, Williams & Wood. All three are licensed insolvency practitioners. Mr McTear has specialised in business recovery and turnaround since he qualified in 1988.

Because Mr Lopian wanted to cross-examine all of them, they were each called at the trial. Mr Davenport submitted that each of these witnesses was entirely truthful, and that each did his best to assist the court. I did not understand Mr Lopian to submit the contrary. In any event, I accept Mr Davenport’s submission.

About a year prior to its administration, BWL was struggling with a debt of £800,000 owed to HMRC. By the time of the administration, BWL owed about £3.2m in excise duty. BWL had the benefit of a confidential invoice discounting facility. As a result of this indebtedness, the provider of that facility first reduced it to a point where only essential funds were made available to BWL, and ultimately appointed its own investigating accountant in February 2006.

The Claimants’ involvement began on 28 February 2006, when the Directors consulted Mr Williams. The Claimants took the view that, with some reorganisation, BWL could be returned to profitability, and that might be achieved through a CVA. However, there was insufficient time to put forward a CVA without the benefit of the moratorium that an administration would provide. Accordingly, in their Joint Statement to creditors dated 2 May 2006, the Claimants proposed the following exit route from administration: “It seems likely that there will be a significant dividend to unsecured creditors either by way of [BWL] being saved and entering a CVA; or by the sale of the business and assets and the subsequent liquidation of [BWL] to pay a dividend”.

On 21 September 2006, the Claimants put forward a proposal to creditors for a CVA. Section 11 of that proposal is entitled “Prior transactions” and included the following:

Appendix 2 to that proposal includes a summary of key changes in BWL’s business model. This shows how an estimated loss of £400,000 for the year ended 31 March 2006 could be converted into a forecast profit of £330,000 for the following year. One of the key changes showed a saving of £337,000 in the management charge (although there is also an entry in respect of additional management team costs of £150,000). The narrative explains: “The saving in the management charge is a result of changing the company ownership and board. These have been replaced by a new management team”. I heard no evidence as to whether these forecasts were met, but Mr Davenport argued that they supported the conclusion that EHL’s management charges had been excessive.

These proposals were accepted, and BWL carried on trading, entered into a CVA, and, in due course, was acquired by a third party. Meanwhile, unsecured creditors have received dividends amounting over time to about 42p in the £. As at 9 November 2006, according to a summary of liabilities and a list of creditors each bearing that date and each signed by Michael Engelhard, there were over 300 creditors, with total claims of over £6.8m. HMRC had the largest single claim, of over £3.5m, and the claims of the trade and expense creditors varied in size between two and six figures and amounted in total to just under £2.2m. BWL’s estimated total deficiency was then just over £3.1m.

It emerged in the evidence, and in particular in the cross-examination of Mr McTear, that the Claimants needed the ongoing co-operation of the Directors to put these proposals into effect, and to achieve the best outcome for the creditors of BWL. At the same time, as Mr McTear explained in evidence: “We thought that if we locked horns with Michael Engelhard he might withdraw co-operation and the purposes of the administration might not be achieved”. For that reason, although the Claimants had concerns from an early stage about the charges for the Services made by EHL, and about the adjustment referred to in Mr Coleridge’s email dated 27 April 2006, they did not raise them with the Directors while BWL remained subject to the CVA.

As it transpired, the CVA did not come to an end until 20 November 2011. Thereafter, the Claim Form was issued on 24 February 2012, and it was served, together with the Particulars of Claim, on 18 June 2012. A few days earlier, on 14 June 2012, lengthy letters before action had been sent to each of the Defendants, including details of the bases of claim that are now relied upon before me. The letters stated that the Claimants had no wish to be unreasonable “and will agree sufficiently generous extensions of time for you to consider your position and respond”. The Claimants later consented to a number of extensions for service of the Defence, and in the meantime provided copies of documents sought by the Defendants. The Defence was served on 6 November 2012.

In his witness statement, Mr McTear explains the basis of the Claimants’ claims. In addition to what is summarised in paragraph 12 above, he makes the following points:

I was not shown any documents that contradict any of Mr McTear’s claims that matters are not evidenced by BWL’s papers and records. Further, other points that he makes are supported by various documents to which I was referred. These documents comprise:

After the Claimants were appointed, they continued to employ Mr Coleridge. As Mr McTear explained in evidence, Mr Coleridge’s main job for the Claimants was to bring BWL’s trade creditors’ records up to date. Another function of Mr Coleridge was to assist the Directors to prepare BWL’s statement of affairs. Mr McTear, Mr Williams and Mr McKay were all clear in their evidence that the preparation and contents of the statement of affairs were the responsibility of the Directors, and not of the Claimants.

This accords with the contents of the following contemporary documents:

The issue of EHL’s charge for the Services was raised in correspondence with Mr Williams, initially in an exchange of emails between Mr Williams and Maria Risby on 7 April 2006, and then in Michael Engelhard’s letter to Mr Williams of 20 April 2006: “… we have not yet resolved a number of issues … The management charges to the Holding Company up to and including the date of administration, i.e. 10^th March 2006, should be paid on a pro rata basis”. Thereafter, Mr Williams and Michael Engelhard had meetings.

In light of this history, although Mr McTear, Mr Williams and Mr McKay were called to give evidence in that order, it is convenient to consider first the evidence of Mr Williams.

In his witness statement, Mr Williams accepts that, as set out in Michael Engelhard’s witness statement dated 3 May 2013 served in connection with an application for summary judgment on a different aspect of these proceedings, he met Michael Engelhard on 25 April 2006 and 27 April 2006, and that the issue of the management charges was discussed at the second of those meetings. Mr Williams does not accept, however, that he agreed that the Claimants would pay the management charges on a pro-rata basis, or that these charges would be set off as against the sums owed by EHL, or that he arranged for these offsets to be recorded in BWL’s accounts, or that BWL’s accounts should be amended so as to record that the payments of these charges had been made in full and set off against the debts due from EHL to BWL, or that debts owed to BWL could be credited as against debts due from BWL. Mr Williams makes the points that the issue of the management charges was a matter solely for the Directors, and that at the time he and Mr McTear had not made any decision as to the alleged debt due to EHL. Mr Williams also refers to the contents of his letter of 18 May 2006, quoted above, and says that he would not have written in the terms that he did if he had made any such agreement.

Mr Williams’ account was not shaken in cross-examination. He pointed out that his letter of 18 May 2006 stated (accurately as he contended) that Michael Engelhard’s letter of 20 April 2006 had been “discussed briefly at our brief meeting the other day”. Mr Williams said that he did not recall the specific discussion, but that he was concerned with the administration going forward, and that he did not have much interest in the historic management charges, and did not concern himself with how those charges were made up. He said that the statement of affairs set out matters as the Directors believed them to be, that he made no judgment on that, and that when putting forward a statement of affairs the Claimants could only base it on the information that they had. Mr Williams did not think that he had said to Michael Engelhard “If I’m not happy [with the statement of affairs] I’ll let you know”, and believed that instead he would have said “You do what you like”.

Although he could not recall the details, Mr Williams accepted that he must have known that the management charge had been introduced into the statement of affairs, such that BWL was saying that it was owed a reduced debt by EHL. Although the Claimants knew that there was an issue over that charge, this did not cause him any concern, for two main reasons. First, it was better to be cautious vis-à-vis creditors, and better to understate the assets of BWL than to overstate them. Second, the debt would be collected in the future.

Mr Williams was asked a number of questions to the effect that he had looked into, considered, and evaluated the historic charges made by EHL for the services. He denied that this was so. Mr Williams accepted that neither he nor, to his knowledge, anyone else on behalf of the Claimants had raised any dispute with the Directors concerning the management charge. He said: “It’s EHL’s call as to whether to put in a proof of debt. EHL has taken its advice, and decided whether to put in a proof or not”.

Mr Williams was asked about BWL’s management accounts. He said that he thought that he would have looked at recent management accounts to assess whether continued trading by BWL would be profitable. Mr Williams accepted that the management accounts showed that management charges in the sum of £37,500 had been applied to the trading profit and loss statement in those accounts. For example, the net profit of £13,249 shown in respect of May 2005 had been reached after applying a charge of that amount. Mr Williams also agreed that the purpose of management accounts is to provide as accurate an appraisal as possible to the directors of the financial position of a company on a month by month basis. He said, however, that such accounts are often not very accurate, and thus fail to do this. He explained that he was interested in fact and hindsight.

It was put to Mr Williams that just because the management charge was not shown on BWL’s double-entry book-keeping that did not mean that the charge was not accruing. Mr Williams disagreed with this. He said: “I don’t think it is accruing, if it’s not building up on the balance sheet and the accruals. This is not a full double-entry book-keeping”.

Mr Williams confirmed that, in accordance with the CVA documents, the rules on set-off in relation to a liquidation applied with regard to BWL. However, he disputed that there was any justification for setting off charges for the Services against any indebtedness of EHL to BWL. Mr Williams accepted that the second sentence of paragraph 15 of his witness statement is not entirely clear or helpful. He explained that his position is that there is nothing that he is aware of that shows that any management charge has been raised: he was, and is, not aware either of accruing charges or of any invoice being raised or of any agreement (on the part of BWL) to any form of management charge.

Mr Williams was asked questions about the first part of paragraph 11 of his witness statement, and why he said that the books and records of BWL were not complete. But he was not challenged about the part of that paragraph in which he states that the Claimants had no control over Mr Coleridge’s input into the statement of affairs, and that they did not “give Mr Coleridge instructions to amend the books and records of BWL to take into account hitherto unrecorded payments to [EHL] in respect of management charges”.

Finally, in answer to questions concerning paragraph 20 of his witness statement, Mr Williams explained that this was dealing with the time when the Claimants began making distributions to creditors. He said that it was his position that no management charge had been levied, and that to the extent that he was aware that a management charge had been put in to BWL’s statement of affairs the Claimants had not formed a view on its validity.

I have set out parts of Mr McTear’s evidence above. The cross-examination of Mr McTear covered much of the same ground as was covered with Mr Williams, and Mr McTear’s answers were to the like effect as those of Mr Williams. They included that:

The cross-examination of Mr McKay was largely concerned with the Claimants’ involvement in the preparation of the statement of affairs. Mr McKay was asked, in particular, about email exchanges on and after 27 April 2006 (including Mr Coleridge’s email of 27 April 2006) and about the creation of various BWL balance sheet extracts from trial balances. Quite early in his cross-examination, Mr McKay confirmed the accuracy of the following paragraph in Mr McTear’s witness statement:

“The statement of affairs is produced by reference to the accounts and financial information of BWL, and its purpose is for the directors to set out the true position of the company as they see it. The statement of affairs and its contents are entirely for the directors to produce. [Neither] I nor [Mr Williams] [nor] McTear Williams & Wood’s staff advised on the contents of the statement of affairs”.

Later, Mr McKay explained that matters progressed as follows:

Quite apart from the fact that Mr McKay struck me as a patently honest and helpful witness, this account is supported by the contemporary emails (although they are not as easy to interpret as they might be, partly due to uncertainties as to the extent to which it can be ascertained from the copies included in the trial bundles whether they were sent with attachments, and partly because some of them appear to bear dates at which they were re-printed, presumably for purposes of the present litigation). For example:

I have set out the Claimants’ pleaded case above, as well as a number of their arguments that arise from the evidence.

In addition to making a number of points concerning the facts, which I have incorporated into the narrative above, Mr Davenport’s closing submissions included the following:

I was referred to a number of authorities in support of these and other submissions.

In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd & Ors [2010] EWHC 1614 (Ch) [2010] EWHC 1614 (Ch), [2011] 1 BCLC 202, [2011] WTLR 839, Lewison J said at [25]-[27]:

“25.

Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: In re Lands Allotment Co [1894] 1 Ch 616, 631; Re Duckwari plc [1999] Ch 253, 262.

26.

The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make an unauthorised profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal: Bristol and West BS v Mothew [1998] Ch 1, 18. In accordance with the first facet of the obligation of loyalty it is a breach of fiduciary duty for directors of a company to exercise their powers of management and control otherwise than in good faith and in a way which they believe is in the best interests of the company: Item Software (UK) Ltd v Fassihi [2005] ICR 450. In accordance with the second and third facets, if a director of a company makes an unauthorised profit by the use of his position as a director, he is liable to account for that profit to the company, whether or not he acted in good faith: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144. The precise implications of this proposition are the subject of intense debate; so I will return to it.

27.

If a trustee commits a breach of trust, the beneficiary's remedy against him is a personal one. The basic rule, as stated by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] AC 421, 434 (omitting citation of authority) 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. 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".”

The decision of Lewison J was upheld on appeal (see Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453), and the Court of Appeal did not cast doubt on the accuracy of these passages. Indeed, they are substantially replicated at [34]-[36] and [40] of the judgment of Lord Neuberger, MR.

The passage from Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 to which Lewison J referred is to be found in the speech of Lord Russell of Killowen at 144-145:

“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”

So far as concerns the Directors’ duty of care, Mr Davenport relied on Re D’Jan of London Ltd [1993] BCC 646, in which Hoffmann LJ said at 648 that the duty of care owed by a director at common law is accurately stated in section 214(4) of the Insolvency Act 1986, and is the conduct of: “… a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.”

Mr Davenport also referred me to Re Westlowe Storage and Distribution Ltd [2000] BCC 851, a decision of Hart J, as a robust example of a case in which a director of Company A was held liable for misfeasance (i.e. negligence) although (a) he considered that informal arrangements which in fact were to the advantage of Company B and disadvantaged Company A were of mutual benefit to both companies and (b) he acted in good faith.

So far as concerns paragraph 64 of Schedule B1 to the Insolvency Act 1986, this provides that neither a company in administration nor an officer of such a company may exercise a “management power” without the consent of the administrator. A “management power” is defined as “a power which could be exercised so as to interfere with the exercise of the administrator’s powers”. In short, what is prohibited is the exercise of a power which interferes with the exercise of the administrators’ powers: see Stephen, Petitioner [2012] BCC 537, Lord Glennie at [4].

On the topic of sham transactions, Mr Davenport relied on Snook v London and West Riding Investments Ltd [1967] 2 QB 786, Diplock LJ at 802 (omitting citation of authority):

“if [sham] has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”

With regard to estoppel, Mr Davenport referred to the summary of the law that is contained in Phipson, Law of Evidence, 18^th edn, at 132-141. In particular, he relied upon:

I have discussed the Defendants’ pleaded case above, and I have also referred to a number of the arguments that they advance in answer to the claims against them.

So far as the facts are concerned, Mr Lopian re-iterated in his closing submissions the contents of paragraphs 12-15 and 27-30 of his Skeleton Argument to the effect that, in essence: (a) the Services were provided, (b) if they had not been provided by EHL, they would have had to have been provided by BWL, and billed and booked within BWL rather than within EHL, (c) the way in which the group had operated for years was that central costs were paid out of EHL, every year EHL would make charges to BWL comprising (or, perhaps, including) a re-charge to BWL for monies expended on behalf of BWL, and it is incorrect to view the payments made by BWL to EHL as loans, (d) although the £450,000 was not entered on BWL’s SAGE system until EHL raised an invoice, which was on 31 March each year, BWL never paid EHL a lump sum of £450,000 plus VAT, but instead made payments on account as the year went along, (e) this is reflected in BWL’s management accounts, and (f) EHL’s accounts were audited every year, and contain the statements about arm’s length transactions discussed above.

In answer to the reliance that the Claimants place on the way in which the payments amounting in total to £412,739.17 were recorded in BWL’s inter-company account with EHL, Mr Lopian argued in his Skeleton Argument that there was an agreement pursuant to which BWL agreed to the obligations that the Defendants contend that BWL incurred:

In his closing submissions, Mr Lopian added to these arguments by referring to paragraph 33(a) of the Amended Defence. As to that:

In his closing arguments, Mr Lopian submitted in the further alternative that EHL was entitled to payment on a quantum meruit for the provision of the Services to BWL.

Mr Lopian also submitted that, if the payments in the total sum of £412,739.17 were not paid on account, there was nevertheless an accruing liability on the part of BWL to EHL, such that, by 10 March 2006, BWL owed EHL either £424,109.53 or such sum as was payable on a quantum meruit for the value of the Services provided down to that date, for which BWL and EHL had agreed a value of £450,000 in respect of a full year.

Mr Lopian further submitted, in light of the fact that the CVA incorporates the provisions of the rules relating to liquidation set-off, and because set-off operates by law, and contrary to my rulings referred to in paragraph 2 above, that (a) there was no need for the Defendants to plead set-off, and (b) he was entitled to argue that set-off applies on the existing state of the pleadings and without obtaining permission to re-amend. I have already rejected that argument in giving my earlier rulings, and I say no more about it.

On the question of whether EHL had a right to payment for the Services down to 10 March 2006, in particular because there had been no total failure of consideration, and irrespective of whether the year ending on 31 March 2006 had come to an end, and regardless of whether EHL had raised an invoice, Mr Lopian relied on Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574. Lord Goff said at 588: “In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due … the fact that the contract has been brought to an end [before performance is complete] does not prevent [the promisor] from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground”. Mr Lopian also referred me to Lord Lloyd’s speech at 597 and 599-600, which contains passages that are to the like effect.

On estoppel, Mr Lopian pointed out that, although the Claimants knew how the management charges were being treated by the Defendants in the documents which the Claimants saw between May and September 2006, it had been conceded by the Claimants that they had given no intimation of their concerns to the Defendants prior to 2012. He submitted that it was because nothing was said by the Claimants that EHL had made no claim in the CVA. If EHL had made a claim, it would have had to be considered properly. Either it would have been allowed, or EHL could have challenged its disallowance. In the meantime, dividends have been paid to the creditors of BWL to the extent set out above.

Mr Lopian submitted that this gave rise to an estoppel. He described this as an estoppel by representation, although he formulated the factors that he relied upon by reference to the judgment of Rimer J in Re Millwall Football Club and Athletic Co (1985) plc (in administration) [1998] 2 BCLC 27 at 7, which concerned estoppel by convention:

The material passage from the judgment of Rimer J ends by saying, by reference to other decided cases: “the common assumption need not be of fact, but may be of law; that it must have been acted upon; and that the court will give effect to it only if it would be unconscionable not to do so”. Mr Lopian referred to paragraphs 1065-1081 in Halsbury’s Laws of England, 4^th edn Reissue, volume 16(2), for statements of the law concerning both estoppel by convention and estoppel by representation. In particular, according to paragraph 1076, for the purposes of estoppel by representation, the representation may arise by words or conduct, and “conduct” may include silence or inaction. I have had regard to the contents of all those paragraphs. I do not consider that they state the law in terms which differ materially from the statements relied upon by Mr Davenport.

As to paragraph 64 of Schedule B1 to the Insolvency Act 1986, Mr Lopian submitted that there had been, and could be, no contravention of these provisions in circumstances where the intention behind making the adjustments in issue had been to produce a correct trial balance, from which in turn there could be produced an accurate statement of affairs as Michael Engelhard saw it, which is what Michael Engelhard had been asked to prepare.

Similarly, Mr Lopian submitted that there could be no breach of fiduciary duty arising either from the payments that had been made or from the making of those adjustments. The monies had not been “paid away”, and the entries in the books and records of BWL were entirely proper. There was no evidence to support the suggestion that BWL obtained no, or insufficient, value for the charge of £424,109.53. On the one hand, Mr McTear had accepted that the Claimants had never investigated the value of the Services at any stage, and he did not even know that BWL’s directors had been paid out of the management charge. On the other hand, there were audited accounts for EHL for a number of years (in which the management charges are recorded, and as transactions agreed at arm’s length). There could be no liability if, as Mr Lopian submitted, there had been no loss to BWL.

Finally, Mr Lopian submitted that the Claimants had made no attempt to establish breach by each of the Directors. The Directors are not jointly and severally liable, but, on the contrary, causation has to be shown, and the loss caused by each has to be proved.

In support of these submissions, Mr Lopian cited the decision of the Court of Appeal in Re Simmon Box (Diamonds) Ltd [2002] BCC 82 and the decision of Park J in Re Continental Assurance Co [2001] BPIR 733 at [382]-[391].

In my judgment, the Amended Defence contains no proper pleading of either (a) an express contract, or (b) an implied contract, or (c) a case based on a quantum meruit. I consider that the references to “the agreed annual management charge” and “an agreed management charge” in paragraph 33(a) of the Amended Defence are too slender a foundation to support a conclusion that any of these alternative cases has been pleaded.

I also consider that, read together with the particulars of that paragraph that are given in paragraph 36A of the Amended Defence, these references appear to relate to what was agreed between BWL and HMRC. In my judgment, that does not amount to pleading an agreement between BWL and EHL, but instead sets out an allegation as to what HMRC was willing to treat as legitimate for tax purposes. I observe in passing that, as Mr McTear’s evidence points out, there is also no document that supports that allegation.

In particular, so far as concerns a defence based on a quantum meruit:

Even if any of these cases is taken to be pleaded, there is no document which supports it. In my judgment, this is remarkable. Where an agreement or arrangement is made by the same individuals acting on both sides, and perhaps especially where they are members of the same family acting in their capacities as directors on behalf of two different companies, it may understandably be said that there is a heightened need for there to be some formal, written record, and that this might reasonably be expected. The contrary view, put forward by Mr Lopian, is that it is unrealistic to expect any such formality. Even if the latter view is right, however, I consider that it would be extraordinary for there to be no document of any kind evidencing the agreement or arrangement, especially where it endures for years and it involves sums of the magnitude in issue in this case.

In Warren v Mendy [1989] 1 WLR 853 an individual who was both a boxing manager and a boxing promoter made an agreement on behalf of one of the boxers he managed to fight on one of his own promotions. The agreement was expressed to be between the individual as promoter of the one part and the boxer of the other part. It was signed twice by the individual, once as promoter and once as the boxer’s authorised manager. A standard Clause relating to the boxer’s entitlement to participate in income generated from the exploitation of television rights had been entirely deleted. The Court of Appeal said that the agreement was “to say the least, an unusual document”, and suggested that the British Boxing Board of Control might well wish to consider revising the regulations which permitted a manager to act also as a promoter “in such a way that the relationship can, if it is thought to be desirable, continue to exist, but only with stringent safeguards to protect the boxer”. In the present case, the absence of any written record of agreement not only casts doubts on whether the agreement was made but also means that the terms of what is alleged to have been agreed between BWL and EHL cannot be subjected to scrutiny. In addition, there is no material that establishes or even suggests that stringent, or indeed any, safeguards were put in place by anyone to protect the interests of BWL.

In these circumstances, it is unsurprising that the Claimants rely upon the way in which the payments amounting in total to £412,739.17 were recorded (as an asset of BWL) in the inter-company ledger account marked D176, and contend that the correct way of viewing these payments is in keeping with their accounting treatment by BWL. In my judgment, there is nothing pleaded in the Amended Defence, reflected in the documents which have been disclosed, or contained in Mr Lopian’s submissions to outweigh that.

Viewed prosaically, if the Defendants chose to conduct the financial and corporate affairs of BWL and EHL without creating any record of the rights and liabilities that they now contend to have come into existence as a result of the Directors, in substance, agreeing matters among themselves, and if they instead caused or permitted the creation of books and records which paint a different picture, they cannot readily complain if the Claimants in an administration and the court at a trial take the accounting records at face value.

In Roger Bullivant Ltd v Ellis [1987] ICR 464, [1987] FSR 172 a departing employee took with him documents belonging to his employer or confidential information extracted from such documents, and those materials were used by him (and others) in a rival business to contact customers. Nourse LJ said that “Having made deliberate and unlawful use of the plaintiffs’ property, he cannot complain if he finds that the eye of the law is unable to distinguish between those whom he could, had he chose, have contacted lawfully and those whom he could not”. This does not mean that even where a defendant has stolen documents containing confidential information and has used those documents in soliciting orders, there is an irrebuttable presumption that any business resulting from the orders derives from the wrongful use of the confidential information. On the contrary, whether any particular business has been obtained in this manner is a question of fact in each case: see Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840. The difficulty for the Defendants in the present case, which is in my judgment entirely of their own making, is that due to the way they chose to conduct their business affairs, and in light of (a) their pleaded case, (b) the documents available at trial, and (c) the questions put to the Claimants in cross-examination, it is not possible to distinguish between charges which might have been agreed for BWL’s benefit and payments which may have been made in respect of such charges, and charges and payments which do not satisfy those criteria.

In my judgment, the entries made in BWL’s management accounts do not support the making of a binding agreement, and indeed highlight another difficulty in the Defendants’ case, namely the lack of certainty as to what obligations BWL is alleged to have had:

Other parts of the Amended Defence suggest that the payments were not in fact truly made in respect of any legal obligations (accruing or otherwise) that BWL had to EHL:

If, contrary to the above, either the Defendants’ pleaded case or the documents or both provide a basis on which it would be right to conclude on the balance of probabilities that the entries in the nominal ledger marked D176 amounting to £412,739.17 reflect payments made by BWL in discharge of binding obligations to EHL to which the Directors had committed BWL, in my judgment the Defendants nevertheless face formidable difficulties in justifying those payments in all the circumstances of this case. Some of these difficulties have already been touched on in paragraphs 79 and 82 above.

It is difficult – Mr Davenport submitted impossible – to see how the Directors would have been capable of discharging their admitted duties to BWL by negotiating and agreeing the level of payments to EHL, when (a) they were acting on behalf of both BWL and EHL, and (b) there was a conflict or potential conflict between their duty to BWL and their interests as directors of EHL (who personally received the lion’s share of what was paid).

I am certainly unable to accept that any such agreement could properly be described as being negotiated or agreed on an “arm’s length” basis, and, accordingly, to attach weight to the claims in EHL’s audited accounts that EHL’s provision of the Services to BWL and “all transactions” between (among others) EHL and BWL were conducted on that basis.

Moreover, even if it is assumed that the practice adopted by BWL and EHL (as they contend, with the blessing of HMRC) was not open to objection in previous years, the position was different in the 2005/2006 financial year when BWL’s fortunes declined.

It forms no part of the Defendants’ case, whether pleaded or borne out by the documents, and I certainly do not accept, that the Directors considered at any time in respect of that financial year (a) whether and to what extent it was appropriate and in the best interests of BWL to commit itself to incurring a liability to pay management charges to EHL, (b) whether and to what extent BWL was receiving value for money for such charges, (c) whether they had placed themselves in a position where their duties to BWL and their own interests were or might be in conflict, and, if so, the steps that they should take to resolve that difficulty, and (d) whether EHL might be preferred over other creditors.

Further, three of the Directors were also directors of EHL. Accordingly, not only was EHL not dealing with BWL at arm’s length, but also it cannot be said that the directors of EHL, whose knowledge is to be attributed to EHL, did not know that this was the case.

In all the circumstances, I have come to the clear conclusion that the claim against EHL, and the allegations of breach of fiduciary duty and of the duty of care, are made out.

In sum, although I have not gone over every point that was argued, and although I have placed emphasis in the preceding paragraphs on the points that I regard as having most significance, I prefer the Claimants’ arguments to those of the Defendants.

Moreover, in my judgment this applies in respect of each of the Directors. Although Michael Engelhard was the person who corresponded with the Claimants, there is no suggestion in the Amended Defence, or in any of the documents to which I have been referred, that any of the Directors was more or less involved than the others in the acts or omissions which I have summarised in paragraph 89 above. It is true that, alone among the Directors, Sylvia Engelhard was not also a director of EHL. However, that is not sufficient to relieve her of liability for these breaches. The only difference between her and the other Directors is that they had an actual or potential conflict of interests, whereas while she did not have any such conflict she knew or ought to have known that they did.

In my judgment, the claim based on paragraph 64 of Schedule B1 to the Insolvency Act 1986 is also made out, and against each of the Directors, for the same reasons. The adjustment of £424,109.85 that was made on 27 April 2006, but attributed in the SAGE inter-company account D176 to 28 February 2006, was an improper exercise of a management power without the consent of the Claimants which interfered with the exercise of their powers. It was improper because it sought to achieve or further the outcome that EHL retained the benefit of the £412,739.17 when it had no right to do so.

The Claimants did not at any time consent, or do or say anything which could reasonably have been interpreted as indicating that they consented, to this adjustment in that account. In the correspondence and in the meeting that took place on 27 April 2006 the Claimants were not addressing that adjustment but were instead addressing the subject of the statement of affairs, which they made clear was the responsibility of the Directors.

Further, although Michael Engelhard alone corresponded with the Claimants, all the Directors had responsibility for the statement of affairs. The case that was argued before me was that from their perspective the making of this adjustment and the preparation of the statement of affairs were, in effect, two sides of the same coin. That case was presented on behalf of all the Directors. There is nothing in the Amended Defence or in any of the documents to which I was referred to suggest that only one or some of the Directors knew of and had an involvement in the “tidying up” of the accounts of BWL.

Subject only to the issue of estoppel, those findings are sufficient to dispose of these claims, and it is unnecessary for me to decide whether the adjustment of £424,109.58 that was made on 27 April 2006 was a sham transaction or accounting entry, and I prefer not to do so. In my judgment, it follows from the findings made above that the adjustment that was made was intended, and intended by all the Directors, to give to the Claimants the appearance of creating between BWL and EHL legal rights and obligations which were different from the actual legal rights and obligations of BWL and EHL. However, although this may be reading the words of Diplock LJ too literally, I have some difficulty in concluding that the Directors had a common intention that the adjustment was not to create the legal rights and obligations that it gives the appearance of creating.

Turning finally to the issue of estoppel, it seems to me that what is pleaded in the Amended Defence is estoppel by convention, whereas what Mr Lopian relied on in his Skeleton Argument and, I believe, his closing submissions is estoppel by representation.

At all events, in my judgment the plea of estoppel fails for the following reasons:

For these reasons, there must be judgment for the Claimants on these claims. I invite Counsel to agree a form of Order if they can, but I will hear Counsel on the appropriate form of Order and on issues such as costs and permission to appeal if that is required.