Electrosteel Castings (UK) Ltd v Metalpol Ltd

Judge Behrens:

1. Definitions

1. I shall adopt the following abbreviations

1. Introduction

2. This is an application by Electrosteel to restrain the presentation of a winding up petition by Metalpol. It is not in dispute that in a letter dated 7^th March 2014 Metalpol’s solicitors, BRM threatened to present a petition unless £264,091.05 was paid by 15^th March 2014 and that it has not withdrawn the threat.

3. Electrosteel contends that it has an equitable set off or a cross claim against Metalpol which substantially exceeds the sum owed by it to Metalpol. In those circumstances the presentation of the petition should be restrained.

4. For the purpose of the introduction the cross claims can be summarised though it will be necessary to look at them in a little detail later in the judgment.

1. Electrosteel is a wholly owned subsidiary of Electrosteel India. At all material times the directors of Electrosteel were Mr Lohia, Mr Jalan and Mr Radford. Mr Lohia and Mr Jalan are also on the main board of Electrosteel India and are resident in India. Mr Radford was appointed Managing Director of Electrosteel in 2004. The principal activity of Electrosteel is the distribution of ductile pipe work and accessories to customers which include utility customers in the UK.

2. Metalpol was incorporated on the instructions of Mr Radford on 29 May 2012, with Mr Radford’s wife as its director and holder of 5 shares. The 5 shares were gifted by her to Mr Thornton to hold on trust for Mr Radford, pursuant to a Deed of Trust dated 1 October 2012.

3. It is Electrosteel’s case that Mr Radford deliberately concealed his interest in Metalpol from Electrosteel

4. It is Electrosteel’s case that the conflict of interest that arose gives rise to a number of claims of breach of fiduciary duty against Mr Radford. It also contends that Mr Radford was at all times Metalpol’s de facto director, and Mr Thornton it’s de jure director was also a party to the dishonest concealment of Mr Radford’s shareholding, the Respondent knowingly assisted Mr Radford in his breach of trust to the Applicant and or conspired with him to injure it by unlawful means.

5. In support of the claims made against Metalpol Electrosteel rely on a number of documents

1) A document dated 3^rd July 2012 found on Mr Radford’s computer and referred to throughout the application as “The Process and Principles document”

2) Annex No 1 to a Distribution Agreement between Metalpol and Metalpol Poland dated 13^th September 2012

3) A Memorandum of Understanding between Electrosteel and Metalpol dated 30^th October 2012

4) A Joint Venture Agreement between Mr Thornton, Mr Radford and Metalpol Poland – all trade from Metalpol Poland had to be through Metalpol – enabled margins

6. A summary of the claims/cross claims made by Electrosteel against Metalpol is contained in the following table:

5. Metalpol accepts that Electrosteel may have a cross claim but denies that quantum could possibly exceed the £241,088 due to it. In those circumstances it contends that the Court should not restrain the presentation of the petition.

3. The law on Disputed Debts /Cross Claims

6. There was very little (if any) dispute between Counsel as to the relevant law. In his skeleton argument Mr Lakin summarised the position in this way:

The court has a discretion in the case of a set off or cross claim where the court finds the following: (1) that the cross claim is genuine and serious, (2) that A has been unable to litigate and (3) that the cross claim is in an amount that exceeds the amount of the petitioner’s debt. (see Re Bayoil SA [1998] BCC 988 also Re A Company v Andy Thornton Contracts Ltd [2013] EWHC 4291 (Ch)).

7. Mr Jory QC referred me to three statements from the authorities:

1. As Vice-Chancellor Morritt J said in Re: The Arena Corporation Ltd [2004] EWCA Civ 371

“For my part I think that the traditional test of “bona fide disputed on substantial grounds” is in this case, for all practical purposes, synonymous with “real as opposed to frivolous” (para. 53)

2. As the Chancellor (Sir Andrew Morritt) said in Abbey National Plc v JSF Finance & Currency Exchange Co Ltd [2006] EWCA Civ 328

“….. once it is established that there are substantial grounds for disputing the claim, which may include issues of law, and that they are advanced honestly the court should not go on to consider the prospects of success of either party to the dispute” (para 46)

3. Furthermore, as Peter Gibson LJ said in Alipour v Ary [1997] 1 WLR 534

“It has long been the practice of the Companies Court when faced with a creditor’s petition based on a disputed debt to dismiss the petition…The reason for the practice has been essentially pragmatic. The vast majority of petitions to wind up [companies] are creditors’ petitions. The Companies Court procedure on such petitions is ill-equipped to deal with the resolution of disputes of fact. There are no pleadings, there is no [disclosure] and there is no oral evidence normally tolerated on such petitions”

8. In the light of these authorities Mr Jory QC submitted that the test was whether Electrosteel’s claims were real as opposed to fanciful. If the Court was satisfied that they were real it should not investigate them further. He submitted that the test was not a high one.

4. The allegations of breach of fiduciary duty

4.1 The Documents

The Process and Principles Document

9. It will be recalled that Metalpol was incorporated on 29^th May 2012. There were 5 issued shares all in the name of Mr Radford’s wife.

10. During the course of its investigation Electrosteel discovered on Mr Radford’s computer a document dated 3^rd July 2012 describing the process and principles behind the establishment of “NewCo”. It followed from meetings with Accountants, Solicitors and key employee and partner (Mr Thornton).

11. It referred to Mr Radford holding the equity and that when Metalpol Poland put in matched funding there would be sufficient working capital. It proposed that the shareholding would be divided as 40% for Mr Radford, 35% for Metalpol Poland and 15% for Mr Thornton.

12. However Mr Radford’s interest was to be kept secret:

In order to keep details off the Company Register [Mr Thornton] will be made nominated shareholder on behalf of Mr Radford… To protect the interest of Mr Radford a nominated shareholder agreement would be put in place.

At Companies House the Register would show 2 Directors these being Mr Thornton and a nominated individual from [Metalpol Poland] … In reality Mr Radford would act as MD of the NewCo and would play an active management role in the Company.

13. The Business activities of NewCo included:

NewCo would become the ‘sourcing’ conduit and ‘fountain of knowledge’ for Electrosteel for the items currently supplied via Castings Services Ltd …

All the above range of products when required by Electrosteel would be sourced via NewCo. In doing so NewCo earn the margin currently taken when supplying products previously supplied by Casting Services Ltd. The one proviso is that products manufactured by Metalpol Poland are supplied first and foremost where possible.

Mr Radford will also refer enquiries picked up on his sales activities both in the UK and Export markets to NewCo where appropriate.

The existing orders for fittings being placed on Metalpol Poland by Electrosteel would in the future be placed on NewCo and a small commission is paid to the UK Company being funded by a small price increase.

14. In a section headed projections a number of matters were highlighted:

…Whilst [the commission] may make pricing tight initially for the polish business it is an effective way of getting the business established without injecting major funding. It also means that Mr Radford can influence the level of sales to enable the cash flow of NewCo to be protected in its establishment phase.

Having the business based within the Electrosteel offices also ensures that both Mr Radford and Mr Thornton can influence the level of business secured by NewCo and at the same time take the decision as to which is the best route for the order to be placed based upon margins earned and financial security in respect of payment.

15. In paragraphs 34 to 36 of his first witness statement Mr Lohia makes a number of points about this document. First he states that neither he nor Mr Jalan knew anything of Mr Radford’s interest in Metalpol. Second, he points out that the commission paid to Metalpol was at the expense of a price increase to Electrosteel. Third he points to the fact that when on his travels (at Electrosteel’s expense) Mr Radford was promoting the interest of Metalpol. Fourth he points to the direct reference to Mr Radford influencing the level of sales to be secured by Metalpol.

The Offer to Mr Thornton

16. On 23^rd August 2012 Mr Radford wrote to Mr Thornton offering him the position of Sales Director of Metalpol reporting to the Managing Director. He signed the letter as Managing Director of Metalpol. The offer included a share incentive.

The Distribution Agreement

17. On 13^th September 2012 the commission agreement between Metalpol and Metalpol Poland was signed. It set out the commissions payable to Metalpol. Commissions were only payable in respect of sales to customers other than Electrosteel unless expressly agreed. The agreement was signed by Mr Radford on behalf of Metalpol.

Declaration of Trust

18. On 1^st October 2012 Mr Thornton executed a declaration of trust declaring that he held the whole of the shareholding of Metalpol on trust for Mr Radford. In his witness statement Mr Thornton does not explain why the Declaration of Trust was executed. Mr Jory QC submits that it is obvious that it was executed to keep Mr Radford’s shareholding in Metalpol secret.

The Memorandum of Understanding

19. On 30^th October 2012 Electrosteel and Metalpol signed a Memorandum of Understanding relating to the basis of their relationship. It is not necessary to refer to it in detail save to note that it was signed by Mr Radford as a Director of Electrosteel and Mr Thornton as a Director of Metalpol. In fact Mr Thornton had not been appointed a Director at that time. He was not so appointed until the end of December 2012.

The Joint Venture Agreement

20. On 12^th December 2012 Mr Radford, Mr Thornton and Metalpol Poland signed a Joint Venture Agreement relating to Metalpol. Under the Agreement Mr Radford would be a 55% shareholder but his shares would be held by Mr Thornton on trust.

21. The Board had the responsibility for the supervision and the management of Metalpol. It envisaged 3 directors one nominated by Mr Radford, and one by Metalpol Poland. Any decision on reserved matters required written approval by Mr Radford and Metalpol Poland.

22. Mr Radford’s director held the post of Chairman and a casting vote.

23. In paragraphs 19 and 20 of his witness statement Mr Lohia makes the point that these arrangements were designed to keep Mr Radford’s interest in Metalpol secret. He also draws attention to clause 6 appears to be contrary to the interests of Electrosteel in that it prevented Electrosteel and Metalpol Poland from dealing directly without Mr Radford’s permission.

4.2 Trading

24. On 19^th December 2012 Mr Thornton was appointed a director of Metalpol though he does not seem to have left his previous employment until 31^st December 2012. According to Mr Thornton trading started in January 2013. Mr Thornton ran the business on a day to day basis. Both Mr Radford and Mr Thornton assert that Mr Radford received no salary from Metalpol. [An entry in the bank account suggesting that a payment of £2,765.88 was such a salary payment was, they both say, an error].

25. It is not in dispute that there was substantial intercompany trading between Electrosteel and Metalpol. It is equally not in dispute that Metalpol occupied part of Electrosteel’s premises in Chesterfield. Metalpol was also allowed access to Electrosteel’s server.

26. According to both Mr Radford and Mr Thornton, Mr Radford was not involved in the day to day ordering or sale of goods by Electrosteel. This was carried out by Mr Young.

27. On 27^th February 2013 Mr Radford executed a guarantee on behalf of Electrosteel in respect of goods to be supplied to Metalpol by FWB. When these proceedings were commenced it was believed that there was a contingent liability under that guarantee in the sum of £49,788.83. In his second witness statement Mr Thornton has exhibited documents showing that the maximum liability under the guarantee is £6,875.08. Mr Jory QC accepted that this was the position.

4.3 Departure of Mr Radford from Electrosteel

28. On 10^th September 2013 Mr Radford purported to resign from his post as Managing Director. However following discussions with Mr Lohia and Mr Jalan he agreed to work his notice of 12 months. Investigations into his conduct began in December 2013. It is common ground that he ceased to be employed as Managing Director on 6^th January 2014. He resigned his directorship of Electrosteel at or about that time.

29. On 14^th November 2013 (that is to say whilst he was still acting as Managing Director of Electrosteel) Mr Radford wrote to Barry Price (then an employee of Electrosteel) offering him a job as technical manager of the Metalpol group at a salary of £29,000 p.a. The letter is signed by Mr Radford as Managing Director of Metalpol.

30. On 31^st January 2014 IM on behalf Electrosteel sent a letter before action to Metalpol alleging claims totalling £480,672. On 7^th March 2014 BRM replied in detail to the allegations. In the letter BRM threatened to present a winding up petition unless £264,091.05 was received before 14^th March 2014. This deadline was subsequently extended to 24^th March 2014.

31. These proceedings were commenced on 19^th March 2014. On 21^st March 2014 Judge Raeside QC granted an interim injunction and gave directions. The matter came before me on 29^th May 2014 and 10^th June 2014 when I reserved judgment.

32. The evidence comprised 2 witness statements from Mr Lohia, two witness statements from Mr Thornton and one from Mr Radford.

5. Breach of Fiduciary Duty by Mr Radford

33. It is not necessary to go into this in detail because in paragraph 10 of his skeleton argument Mr Lakin accepts that the court may consider that there is a clear argument that Mr Radford has acted in breach of his duties towards Electrosteel.

The duties of a fiduciary are summarised by Millett LJ (as he then was) in Bristol & West v Mothew [1998] Ch 1 at 18:

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. 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 a 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.

34. It is, to my mind, well and realistically arguable that Mr Radford’s failure to disclose his interest in Metalpol to Mr Lohia and Mr Jalal amounted to a breach of fiduciary duty. It is equally well arguable in the light of the elaborate arrangements disclosed by the documents set out above that Mr Radford deliberately concealed his interest and directorship of Metalpol from Electrosteel.

35. As Mr Jory QC points out it is also well arguable that Mr Radford was in breach of his contractual duty of fidelity to Electrosteel.

36. It is, however, not sufficient for Electrosteel to establish a claim against Mr Radford. In order to justify the restraint of the winding up petition it must establish a claim against Metalpol.

6. Dishonest assistance in breach of fiduciary duty.

37. Mr Jory QC submitted that Metalpol was an accessory to the breach of fiduciary duty. As Mr Lakin pointed out the ingredients of this liability were summarised by Lewison J in paragraph 1480 of the judgment in Ultraframe [2005] EWHC 1638 (Ch)

The ingredients of dishonest assistance were set out by Lord Nicholls of Birkenhead in his authoritative opinion in Royal Brunei Airlines Sdn Bhd v. Tan [1995] AC 378. Although some doubt had existed whether his exposition represented English law, that doubt has been dispelled by the decision of the House of Lords in Twinsectra v. Yardley [2002] 2 AC 164 . In Tan Lord Nicholls summarised the ingredients of liability as follows (p. 392):

"Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. "Knowingly" is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden scale of knowledge is best forgotten."

38. In paragraph 1481 Lewison J set out the combined test for dishonesty in the following way:

i) The conduct complained of must be conduct which is dishonest by the standards of ordinary and reasonable people; and

ii) The Defendant must have realised that he was contravening those standards; and that ordinary and reasonable people would have regarded his conduct as dishonest.

39. Morgan J formulated the test in a slightly different way in Aerostar Maintenance v Wilson [2010] EWHC 2032 (Ch) at paragraph 184. After identifying the relevant authorities in paragraph 183 he summarised his conclusion:

The test as to dishonesty, distilled from the above authorities, is as follows. Dishonesty is synonymous with a lack of probity. It means not acting as an honest person would in the circumstances. The standard is an objective one. The application of the standard requires one to put oneself in the shoes of the defendant to the extent that his conduct is to be assessed in the light of what he knew at the relevant time, as distinct from what a reasonable person would have known or appreciated. For the most part dishonesty is to be equated with conscious impropriety. But a person is not free to set his own standard of honesty. This is what is meant by saying that the standard is objective. If by ordinary objective standards, the defendant’s mental state would be judged to be dishonest, it is irrelevant that the defendant has adopted a different standard or can see nothing wrong in his behaviour.

40. Mr Jory QC submits first that Mr Radford’s conduct was dishonest within that test, and second that, as the de facto managing director of Metalpol Mr Radford’s dishonesty is to be attributed to Metalpol. If necessary he submits that Mr Thornton was also dishonest within the test.

41. Mr Lakin accepted that Mr Radford was the de facto Managing Director of Metalpol until December 2012. He accepted that for that period Mr Radford’s knowledge was to be imputed to Metalpol. When faced with the letter dated 14^th November 2013 written to Mr Price he was inclined to accept that the court might draw the same inference from the date when Mr Radford gave his notice in September 2013. However he contended that the Court could not draw that inference for the period when Mr Thornton was in charge of the day to day running of the business. He also drew my attention to denials by Mr Thornton in for example paragraph 11 of his witness statement that he had any knowledge of the extent of any disclosures by Mr Radford of the extent of his interest in Metalpol.

42. It has to be remembered that there has been no disclosure by Metalpol, Mr Radford or Mr Thornton. There has been no cross-examination of either Mr Radford or Mr Thornton. To my mind, however there is sufficient material in the documents for Electrosteel to have realistic prospects of establishing a claim based on dishonest assistance against Metalpol. The deliberate attempts to conceal Mr Radford’s interests as demonstrated in the Process and Principles Document, the Declaration of Trust and the Joint Venture Agreement may well lead the Court to infer that Mr Radford was not acting as an honest person would. The extent to which Mr Radford was controlling Metalpol for the period between January and September 2013 can only be determined after a trial. He did after all execute the guarantee in favour of FWB in February 2013. In the light of Mr Lakin’s concessions with regard to the period before January 2013 and after September 2013 it cannot be described as fanciful to submit that Mr Radford was also controlling Metalpol for the intervening 9 months. There are a number of questions surrounding Mr Thornton which are at present unanswered. What was the purpose of the Declaration of Trust and the Joint Venture Agreement, both of which he signed, if not to conceal Mr Radford’s majority shareholding and control of Metalpol? Why did he sign the Memorandum of Understanding if not to give the impression that he was in control of Metalpol? It is, to my mind, not fanciful for Mr Jory QC to submit that after disclosure and cross-examination the Court might find him to have been dishonest.

43. In my view claims against Metalpol based on dishonest assistance are in principle realistic. It will, however be necessary to look at the individual claims to determine the extent to which they can realistically be made out.

7. Conspiracy

44. Both Mr Jory QC and Mr Lakin referred me to the judgment of Morgan J in Aerostar for the ingredients of the tort of conspiracy. Three paragraphs from his judgment are relevant.

167. The second tort alleged against Mr Ashfield is that he and Mr Wilson (and indeed Avman) conspired together to injure AMIL by unlawful means. The tort of conspiracy has two branches. One branch of the tort requires a claimant to show that the relevant defendant acted with the predominant purpose of injuring the claimant. That branch of the tort is not relied on in this case. The Claimant relies on the alternative way of establishing the tort of conspiracy, by showing that it has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the relevant defendant and another person or persons to injure it by unlawful means: see Kuwait Oil Tanker –v- Al Bader [2002] All ER (Comm) 271 at 311. Accordingly, there must be a combination, to carry out unlawful acts, which are the means by which injury is intended to be inflicted; there must be an intention to injure AMIL and there must be resulting loss and damage.

172. In view of the fact that it has generally been assumed in a number of cases that breaches of a fiduciary duty and breaches of contract are unlawful means for the tort of conspiracy to injure by unlawful means and because I have, in any event, already found Mr Ashfield liable in tort, I have reached the conclusion that I should follow the general approach and hold that such breaches are indeed unlawful means for the tort of conspiracy to injure by unlawful means. In due course, I will consider the position of Avman who was also alleged to have conspired with Mr Wilson and Mr Ashfield to injure AMIL.

174. That brings me to the requisite intention to injure for the tort of conspiracy to injure by unlawful means. In OBG Ltd –v- Allan [2008] 1 AC 1, the House of Lords considered the requisite intention for the tort of intentionally causing injury by unlawful means. The point is discussed by Lord Hoffmann at [62] and by Lord Nicholls at [164]-[165]. Lord Hoffmann distinguished between ends, means and consequences. He held that a person intends to cause loss even where his conduct is only intended to be the means by which he enriched himself. Conversely, a person is not liable for loss which is neither a desired end, nor a means of attaining a desired end, but merely a foreseeable consequence of one’s actions. Lord Nicholls’ speech is to the same effect.

45. In the light of my conclusion in relation to the dishonest assistance claims it is to my mind realistically arguable that there was a combination between at least Mr Radford and Metalpol and possibly in addition Mr Thornton to injure Electrosteel by unlawful means (breach of contract or breach of fiduciary duty). I note that both Mr Radford and Mr Thornton assert that there was no intention to injure. However in the light of the discussion in paragraph 174 of Aerostar it is, to my mind not fanciful to suggest that it may be established.

46. Accordingly claims against Metalpol based on conspiracy are in principle realistic. It will, however be necessary to look at the individual claims to determine the extent to which they can realistically be made out.

8. Cumulative nature of claims

47. Before considering the individual claims it is important to bear in mind two points that have been drawn to my attention by Mr Lakin in his supplemental skeleton argument.

48. The first relates to the difference between cumulative and alternative remedies. As is pointed out in Snell’s Equity 32^nd Ed paragraph 7-052:

The principal is entitled to elect the remedy which is most advantageous. Where a principal has available to it alternative and inconsistent remedies, he or she must elect between them. Election is unnecessary where the remedies are cumulative rather than alternative. The classic example of inconsistent and alternative remedies is: “(1) an account of the profits made by a defendant in breach of his fiduciary obligations and (2) damages for the loss suffered by reason of the same breach. The former is measured by the wrongdoer’s gain, the latter by the injured party’s loss.” “These remedies are alternative, not cumulative. A plaintiff may have one or other, but not both”.

49. Authority for this proposition is Tang Man Sit v Capacious Investments [1996] 1AC 514 at 520. Electrosteel does not need to elect at the time the proceedings are brought but must make an election when judgment is given in its favour. It is then binding.

50. The second relates to the nature of a claim for loss of profit against an accessory who is found to have dishonestly assisted a fiduciary. This point was considered in some detail by Lewison J in paragraphs 1589 – 1601 of the judgment in Ultraframe. In effect he held that the dishonest assistant could be made to disgorge any profit that he (the dishonest assistant) made but this did not extend to profits made by the fiduciary. At paragraph 1600 Lewison J put it thus:

I can see that it makes sense for a dishonest assistant to be jointly and severally liable for any loss which the beneficiary suffers as a result of a breach of trust. I can see also that it makes sense for a dishonest assistant to be liable to disgorge any profit which he himself has made as a result of assisting in the breach. However, I cannot take the next step to the conclusion that a dishonest assistant is also liable to pay to the beneficiary an amount equal to a profit which he did not make and which has produced no corresponding loss to the beneficiary. As James LJ pointed out in Vyse v. Foster (1872) LR 8 Ch App 309:

"This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the Court finds that he actually made more, constituting moneys in his hands "had and received to the use" of the cestui que trust."

51. This view is repeated without adverse comment in paragraph 30-081 of Snell.

9. The Claims by Electrosteel

52. It is convenient to deal with the claims in a different order from the order set out above.

9.1 Defective Flanges - £14,001.00

53. This is a straightforward claim for breach of contract. It is alleged that some of the flanges supplied are defective and that it will cost £14,001 to replace them. There is some dispute in the evidence (paragraph 67 of Mr Radford’s statement) as to whether the remedial work was caused by a breach of contract by Metalpol. However the claim plainly has realistic prospects of success.

54. I would accordingly allow the £14,001 as a genuine set off/counterclaim.

9.2 Secret Commissions - £27,254

55. Commissions were received by Metalpol pursuant to the Distribution Agreement. This is thus a case of knowing receipt of monies received in breach of fiduciary duty rather than dishonest assistance. For reasons that I have given such a claim has realistic prospects of success. There is a dispute as to whether the total of such commissions amounts £17,672 or £27,254.50 which it is unnecessary for me to go into in detail. In my view the claim for £27,254.50 is not unrealistic.

56. I would accordingly allow the £27,254 as a genuine counterclaim. It is, however, an equitable claim for account of profits rather than a claim for loss.

9.3 The Guarantee - £6,875

57. The sum is now relatively small and is unlikely to make a real difference to the result of the case. In his supplementary skeleton Mr Lakin has reminded me that the surety does have rights against the principal debtor even before he has paid the debt. Those rights include a right in equity to compel the principal to relieve him of his obligation. The surety can sue in a quia timet action for an order that the principal debtor pay whatever is due to the creditor.

58. There is no authority as to whether such a claim is a cross claim for the purpose of the law relating the restraint of the presentation of winding up petitions. The existence of the potential liability under the guarantee is a cloud hanging over Electrosteel under which it might be liable. Metalpol has not discharged the liability under the guarantee. In those circumstances it seems to me as a matter of discretion right to take the contingent liability under the guarantee into account when assessing the value of the cross claim.

59. I would accordingly allow the £6,875 as a genuine counterclaim.

9.4 The Salary (£161,026) and Travel Costs (£48,252)

60. In paragraph 22 of his supplementary skeleton argument Mr Lakin drew my attention to paragraph 7-062 of Snell’s equity which includes:

If a fiduciary acts dishonestly he will forfeit his right to fees paid or payable by the principal. ⁵⁹² He will also forfeit his right to such fees if he takes a secret profit from a third party which is directly related to performance of the duties in respect of which the fees were payable, ⁵⁹³ even if the principal has benefited from the fiduciary’s performance of those duties. ⁵⁹⁴ A fiduciary will also lose his or her right to fees if the fiduciary’s breach of duty is so grave that there has effectively been no performance at all, ⁵⁹⁵ on the basis of total failure of consideration.

61. Most of the authorities cited relate to claims for commission by agents who have acted in breach of fiduciary duty. There is a full review of the authorities in the Court of Appeal decision in Imageview Management v Kelvin Jack [2009] EWCA Civ 63. In the course of his judgment Jacob LJ set out a number of strong statements of law from the authorities including:

…an agent must not take remuneration from the other side without both disclosure to and consent from his principal. If he does take such remuneration he acts so adversely to this employer that he forfeits all remunerations from the employer, although the employer takes the benefit and has not suffered loss by it.

62. An attempt was made to apply this doctrine to the salary of a Bank employee who had acted in breach of fiduciary duty in Bank of Ireland v Jaffery [2012] EWHC 1377. The attempt failed on the facts of the case. In paragraphs 371 – 373 of his judgment Vos J (as he then was) said:

371. This is not a case such as Imageview supra, where an agent has betrayed the trust of his principal in relation to the sole subject matter of the agency. As I have already said, Mr Jaffery was employed by the Bank in a senior position and betrayed the Bank’s trust in respect only of the transactions involving the RGC Customers. In other respects, he seems to have been a valuable and diligent employee promoting the Bank’s interests successfully. Of course, the Bank must be compensated on normal principles for the breaches of duty that I have found. The law applies the rules as to breach of fiduciary duty strictly for the reasons given by Jacob LJ in his judgment in Imageview, but it does not do so unfairly.

372. Mr Kitchener argued that the equitable solution would be to require Mr Jaffery to forfeit his bonuses, since they would not have been paid had his breaches been uncovered. That was the clear benefit that Mr Kitchener said he obtained from his failure to disclose his wrongdoing. Whilst it might be true, as I have said, that, had he given a true certificate of compliance (or rather non-compliance) with Code of Conduct in 2010, he would have been dismissed and lost a large part of his bonuses, that does not mean that it is equitable for him now to have to repay them. The bonuses were paid for the good job he was doing to improve and promote the Bank’s business generally. The Bank can be fully and properly compensated by requiring Mr Jaffery to disgorge his profits or paying equitable compensation.

373. It would be unfair in my judgment, even taking into account the nature of Mr Jaffery’s breaches, to require him to repay his salary and bonuses, or indeed any part of them. The breaches must, as I have already said, be looked at in the context of his employment as a whole. Mr Jaffery worked long hours over several years for the Bank. It would be both disproportionate and inequitable in the circumstances of this case to require Mr Jaffery to repay some 5 years of salaries and bonuses in addition to disgorging his profits or paying equitable compensation.

63. Mr Jory QC argues that this passage shows that such claims are maintainable even though they failed on the facts of that case. It will only be after a trial that the Court will be able to make necessary findings in relation to Mr Radford’s behaviour in relation to the period after June 2012. He relies in particular on the “Process and Principles’ Document” He accordingly submits that there are realistic prospects of establishing a Counterclaim for the full sum of the salary and expenses paid to Mr Radford after June 2012.

64. To my mind there are considerable difficulties facing Electrosteel’s claim. It will be difficult for Electrosteel to establish that Mr Radford’s breach of trust related to the sole subject matter of his employment; there is no authority where this principle has been applied to expenses paid out in respect of the employee’s employment. I do not however need to decide whether these difficulties are so great as to make the claim unrealistic.

65. In my judgment this claim is answered by paragraph 1600 of Lewison J’s judgment in Ultraframe. Whilst it is possible (and I put it no higher) that there is a claim against Mr Radford for the return of the salary and expenses there is no such claim against Metalpol. It is not a profit that Metalpol has made as a result of assisting in the breach. It is not a loss that Electrosteel has suffered.

66. It follows that the claim has no realistic prospect of success and I reject it.

9.5 Management Time (£36,539)

67. In the letter before action IM described the claim thus:

This relates to time spent and associated expenses dealing with the investigation and consequences of Mr Radford’s/Metalpol’s wrongdoing.

68. In paragraph 69 of his first witness statement Mr Lohia describes differently:

The Directors and employees of the Company have spent a considerable time repairing damage caused to its workforce and its customers as a result of Mr Radford’s actions …

69. In paragraph 106 of his witness statement Mr Radford draws attention to the lack of detail in the claim and invites the court to be sceptical about the claim.

70. In paragraph 64 of his second witness statement Mr Lohia attaches a breakdown which may be summarised:

71. Apart from this breakdown no detail has been provided of the nature of the claim. Thus it is not clear what investigations have taken place, what damage it is alleged has been caused to the workforce, why it was necessary to carry out work in India, why the travel expenses were necessary, why employees of the parent company were used.

72. I was referred to two authorities on this claim – paragraphs 294 – 299 of the judgment of Newey J in Avrahami v Biran [2013] EWHC 1776 (Ch) and paragraphs 84 – 87 of the judgment of Wilson LJ in Aerospace v Thames Water [2007] EWCA Civ 3

73. In paragraphs 294 and 296 of Avrahami Newey J said:

294. As a general rule, expense incurred in connection with litigation will be recoverable, if at all, pursuant to a costs order rather than by way of damages. The principle can be seen in Cockburn v Edwards (1881) 18 Ch. D. 449. In that case, the damages awarded to a plaintiff included “the difference between the amount of his costs of the action as between party and party and the amount of his costs as between solicitor and client”. An appeal on this point was successful. Brett LJ said (at 462):

“[T]he damages in an action of tort must have been incurred when the action is brought, except in some cases where they include everything up to the time of trial, and they cannot include any expenses incurred in the action itself. The law considers the extra costs which are disallowed on taxation between party and party as a luxury for which the other party ought in no case to be liable, and they cannot be allowed by way of damages”.

296. Wilson LJ’s observations were applied in Al-Rawas v Pegasus Energy Ltd [2008] EWHC 617 (QB). In paragraph 24 of his judgment, Jack J said:

“I accept that management time spent on preparing a claim for damages for breach of contract is not recoverable as damages. I also accept that it is not recoverable as costs, and so is irrecoverable. That is the law”.

74. In Aerospace Wilson LJ summarised the law in relation to claims based on staff time. In paragraph 85 he approved the approach of Gloster J in this passage of a judgment.

In my judgment, as a matter of principle, such head of loss (i.e. the cost of wasted staff time spent on the investigation and/or mitigation of the tort) is recoverable, notwithstanding that no additional expenditure “loss”, or loss of revenue or profit can be shown. However, this is subject to the proviso that it has to be demonstrated with sufficient certainty that the wasted time was indeed spent on investigating and/or mitigating the relevant tort; i.e. that the expenditure was directly attributable to the tort … This is perhaps simply another way of putting what Potter L.J. said in Standard Chartered, namely that to be able to recover one has to show some significant disruption to the business; in other words that staff have been significantly diverted from their usual activities. Otherwise the alleged wasted expenditure on wages cannot be said to be “directly attributable” to the tort.”

75. In paragraph 86 he summarised his conclusions;

86. I consider that the authorities establish the following propositions:

(a) The fact and, if so, the extent of the diversion of staff time have to be properly established and, if in that regard evidence which it would have been reasonable for the claimant to adduce is not adduced, he is at risk of a finding that they have not been established.

(b) The claimant also has to establish that the diversion caused significant disruption to its business.

(c) Even though it may well be that strictly the claim should be cast in terms of a loss of revenue attributable to the diversion of staff time, nevertheless in the ordinary case, and unless the defendant can establish the contrary, it is reasonable for the court to infer from the disruption that, had their time not been thus diverted, staff would have applied it to activities which would, directly or indirectly, have generated revenue for the claimant in an amount at least equal to the costs of employing them during that time.

76. In my view the details provided by Mr Lohia do not come within a measurable distance of satisfying the above tests. It is not clear how the time was spent, whether it was spent investigating the claim. Furthermore in so far as employees of the parent company were used it is not clear why this gives a claim to Electrosteel.

77. In the absence of such details I regard the claim as unrealistic and would not allow it as a genuine set off/cross claim.

9.6 Overcharge on Flanges sold by Metalpol - £79,276.18

78. In paragraphs 50 – 52 of his first witness statement Mr Lohia alleges that Mr Radford deliberately placed orders for flanges with Metalpol rather than sourcing supplies in the best interests of Electrosteel. He suggests that if the orders had been placed with Electrosteel India the cost would have been significantly less. He submits that the only reason that the orders were not placed through Electrosteel India was because of Mr Radford’s influence over the ordering/purchasing process of Electrosteel.

79. Mr Lohia exhibited a one page schedule which purports to show that 4,250 flanges which were purchased from Metalpol at a total price of £143,751.28 could have been purchased from Electrosteel India for £79,276.18. The Schedule does not attempt to identify the individual contracts or the dates of the contracts. It simply identifies the total number of flanges of each type bought and compares what it alleges are the unit rate against the unit rate of Electrosteel India.

80. Mr Radford answers these allegations in paragraphs 68 to 72 of his witness statement. In summary:

1. He chased Electrosteel India to manufacture flanges on behalf of Electrosteel. Electrosteel India refused to do this as it did not suit the production facilities in India. One batch was produced in 2007 but there were quality issues resulting in Electrosteel being advised to go back to the original source. Mr Radford continued to ask Electrosteel India to produce flanges but they refused to do so.

2. The orders were made by Mr Young after discussions between Mr Wheldon and Mr Thornton. Mr Radford gave no instructions to Mr Young in relation to the flanges. [One of the points made by Mr Lakin was that there was no witness statement by either Mr Young or Mr Wheldon who are employees of Electrosteel. Either of them might have been expected to provide a witness statement if there was the influence suggested by Mr Lohia.].

3. Although he uses somewhat strong language Mr Radford is critical of the price comparison produced by Mr Lohia:

1) He makes the point that he had been requesting this price comparison for years. If the figures are correct it would mean that the flanges could be manufactured, machined and shipped for less than £1 per kg.

2) If Electrosteel had been able to get such prices over the last 10 years it could have saved over £1 million in the cost of flanges.

81. Mr Lohia deals with these allegations in paragraph 47 of his second witness statement. He repeats that he cannot understand why Electrosteel purchased invoices from Metalpol at, what he asserts is, “such a high price”. He does not deal with Mr Radford’s assertions at all. He produced a second schedule giving more details of the price comparison schedule originally produced. The new schedule seeks to justify the figures and purports to show that the prices quoted by Electrosteel India would not have involved sale at a loss. A number of invoices are produced which are said to show the prices at which Electrosteel India purchased flanges and at which it could have supplied Electrosteel.

9.7 Overcharge on bespoke items – £52,503

82. In paragraphs 53 to 57 of his first witness statement Mr Lohia asserts that Metalpol has supplied some £217,253.95 of bespoke items to Electrosteel since May 2012. Bespoke items are items which do not appear on supplier’s regular lists and it is thus not easy to compare prices.

83. He produced a Schedule of some 321 bespoke items. This shows that the cost to Electrosteel of these 321 items was £118,083.48. He asserts that an alternative supplier would only have charged £84,312. The difference amounts to £33,771.25 (or 29%). When this is scaled up over all the bespoke items the overcharge amounts to £52,503.04.

84. He also exhibits two separate invoices dated 15 and 16 October 2013. These are said to show that in respect of one order there was a mark up of £8,870 of approximately 100% by Metalpol from the price it had paid Rivitswade the previous day.

85. Mr Radford answers these allegations in paragraphs 73 to 82 of his witness statement:

1. In 2013 Electrosteel did not have the capability to produce quotations for bespoke items. Mr Young took the decision to refer enquiries to Mr Thornton. He exhibits an email from Mr Young dated April 2013 to this effect. Mr Thornton then submitted a quotation which Electrosteel either accepted or refused. Mr Radford did not influence the decision to buy or not.

2. He points out that there is a massive amount of work in preparing the quotations for bespoke items. He draws attention to the fact that the suppliers in Mr Lohia’s schedule are unnamed and describes the allegation of profiteering against Metalpol as being selective.

3. He points to a whole range of factors involved in making a quotation. He submits that it is not fair simply for Mr Lohia to seek artificial prices at a later time. He draws attention to the need to respond to customers timeously.

4. He has carried out an analysis showing that if Mr Lohia’s analysis was correct and a further £52,503 should have been achieved on bespoke items it would mean that the margin would have been near 30% which is far higher than was achieved in previous years.

86. In Mr Lohia’s second witness statement he denies the allegation of selectivity. He points out that Electrosteel got Metalpol’s invoice by mistake. He points out that the margin on bespoke items was 34% in 2011.

9.8 Discount on products supplied to Metalpol - £35,802

87. In paragraphs 59 and 60 of Mr Lohia’s first witness statement he asserts that Mr Radford supplied Metalpol with goods at discounted prices. He asserts Electrosteel’s margin was reduced. He exhibits a table showing loss of margin:

88. It is worth commenting that within each heading that there are wide variations within individual items. Thus in the pipe section (where the loss is alleged to be £7,860) the margins vary from -5% to 26%.

89. Mr Radford answers these allegations in detail in paragraphs 84 to 97 of his witness statement. I do not intend to set out his evidence in detail. In paragraph 89 he points out that as Metalpol did not commence trading until January 2013 its impact on sales up to December 2012 would be nil. There was no change in the margin at the end of the 2012/2013 financial year.

90. In paragraph 94 he summarises the position:

1. There may have been a fall in margin but this was not as a result of Metalpol

2. Metalpol provided £14,846 purchasing benefit with better prices in 2013

3. Electrosteel has failed to recover a rebate of £8,000 due from Viking Johnson not recovered.

4. Electrosteel sold £31,069 of property at a loss

5. Rebate of £15,574 has been provided by Metalpol during the investigation

6. If this is factored in the true margin is 19%

91. Mr Radford stresses that at no time was he involved in individual product procurement. All was done by Mr Young and his team.

92. In his reply Mr Lohia exhibits further invoices showing that in respect of some products the prices charged to Metalpol was lower than that charged to third parties. The obvious reason for the discrepancy is said to be that Mr Radford exerted his influence.

9.9 Discussion and conclusion on the trading claims

93. Mr Jory QC accepts that I cannot decide the trading claims on the limited information before me. He accepts that in any trial there would need to be disclosure and expert forensic evidence. He however submits that there is sufficient material in Mr Lohia’s evidence and the supporting schedules for me to hold that the claims are realistic. He draws to my attention the questionable conduct of both Mr Radford and Mr Thornton and invites me to view their evidence with scepticism. He relies on the experience of Mr Lohia in the field. He reminds that the test is not a high one.

94. Despite the force of these submissions I cannot accept them. To my mind these claims are largely speculative. My reasons for this view may be summarised.

1. There is no direct evidence that Mr Radford influenced any of the prices which are now criticised. It is true that there is a reference to such influence in the “Process and Principles” document in July 2012 but there is no actual evidence that he did. To my mind there is considerable force in Mr Lakin’s point that there should have been a witness statement from Mr Young or someone else from the sales team if there was such influence. This is not a case where Electrosteel has not been able to investigate its claim. According to its own schedule some 108 days have been spent in investigation.

2. It is to my mind of significance that Mr Lohia has not chosen to answer the allegation that Electrosteel India refused to supply the products said to have been overcharged by Metalpol. As the whole basis of the claim is that Electrosteel India would have supplied them cheaper it would have been easy enough for Mr Lohia to have challenged Mr Radford’s evidence on this point.

3. I did not find the schedule relating to the bespoke items satisfactory. As Mr Lakin pointed out these are bespoke items not on a supplier’s ordinary price list. There is no evidence as to who provided the alternative price, what information it was given or what other terms applied. Whilst I accept that there may be a possibility of a claim in respect of the margin charged by Metalpol in respect of the October 2013 invoice this amounts to a mere £4,000 odd. I am not prepared to infer that there is a realistic claim for £52,503 from those two invoices.

4. The claims for undercharging are based wholly on margins. The wide variations in the margins for individual items coupled with Mr Radford’s explanation lead me to regard a claim for £35,802 as speculative.

9.10 Other claims

95. There are two claims that I have not dealt with – the claim for Mitchell’s Investigation (£8,250) and for Development Work (£8,500). These claims total only £16,750 and thus will not affect the overall result. As a result I heard no argument on them and say no more about them.

10. Conclusion

96. In the light of my conclusion on the individual claims it is plain that the set offs or cross claims do not approach the sum of £241,088 which is due to Metalpol. In those circumstances I decline to continue the injunction granted by Judge Raeside QC.

97. I cannot leave this case without expressing my gratitude to both Counsel for the clear and helpful way the numerous issues in the application have been presented and dealt with. Their assistance has made a complex application manageable.

Addendum

11. Handing Down

98. Following the conclusion of the argument on 10^th June 2014 I prepared a draft judgment which was circulated to the parties on 19^th June 2014. On 24^th June 2014 I received a number of uncontroversial proposed corrections from Mr Lakin on behalf of Metalpol and Mr Payne, the solicitor at IM with conduct of the matter, on behalf of Electrosteel. Mr Jory QC was at that time involved in a different trial and did not have an opportunity to consider the judgment. In the result I prepared the “Approved Judgment” (as set out in paragraphs 1 to 97 above) which substantially incorporated the corrections. Arrangements were made for the judgment to be handed down on 2^nd July 2014.

99. At some time between 24^th and 30^th June 2014 Mr Payne had the opportunity to discuss the draft judgment with Mr Jory QC. In the result on 30^th June 2014 Mr Payne emailed a letter to the Court in which he invited me to reconsider my judgment on 2 grounds. First, he submitted that I had failed to deal with Electrosteel’s submission that the salary and travel costs, which I dealt with in section 9.4 of the judgment, could be recovered as damages for conspiracy and/or inducing breach of contract. Second, he submitted that there was a factual error in paragraph 94.2 of the judgment. He drew my attention to paragraph 46 of Mr Lohia’s second witness statement.

100. Fortunately the case that I had been due to try this week compromised and I was thus able to hear full argument on these submissions on 2^nd July 2014. After hearing submissions from Mr Jory QC and Mr Lakin I indicated that I would prepare an addendum dealing with the two matters raised by Mr Jory QC.

12. The Factual Error

101. In Section 9.9 of the judgment I discussed and came to a conclusion on the trading claims. In paragraph 94 I expressed the view that the claims were largely speculative. I summarised my reasons in paragraphs 94.1 – 94.4. In paragraph 94.2 I said it was significant that :

Mr Lohia has not chosen to answer the allegation that Electrosteel India refused to supply the products said to have been overcharged by Metalpol.

102. Mr Jory QC submitted that he had in fact dealt with it in paragraph 46 of his second witness statement where he said:

After some initial quality issues with flanges from India were resolved in or about 2010, Mr Radford failed to follow the direction of myself and Mr Jalan, as the majority of the board that the Company should purchase flanges from Electrosteel India. Mr Radford never so much as asked for a price comparison from Electrosteel India compared with what he was paying to Metalpol Limited or Rivitswade.

103. I agree with Mr Jory QC that there is a factual issue between Mr Lohia and Mr Radford as to the instructions which were given in relation to the purchase of flanges. I also agree that paragraphs 94.2 and the third sentence in paragraph 81 are inaccurate. However this does not affect my overall conclusion that the trading claims are speculative. It is to be noted that Metalpol was not incorporated until 2012. Thus, there were two years after the resolution of the quality issues that Electrosteel could have purchased from Electrosteel India. It is, to my mind remarkable that if the sort of savings suggested by Mr Lohia could have been made that more forceful steps were not taken by Mr Lohia and/or Mr Jalan. It is not clear what motive it is suggested that Mr Radford might have had for not making these savings in the period before the incorporation of Metalpol.

13. The Loss of Salary

104. Although Mr Jory QC’s skeleton argument made it clear that Electrosteel had a claim for conspiracy and/or inducing breach of contract it was by no means clear that the claim for loss of salary was alleged to be damages resulting from those claims. In setting out the individual claims he did not distinguish between claims for damages as a result of tort and claims for breach of fiduciary duty.

105. In those circumstances I accept that I assumed that the claim was a claim for breach of fiduciary duty and that I did not deal separately with the claim as a head of damages for tort. It was for that reason that in section 9.4 of the judgment I dealt with the claim as a claim for breach of fiduciary duty.

106. Mr Jory QC referred me to paragraph 63 of Mr Lohia’s first witness statement in which Mr Lohia asserts that if Mr Radford had disclosed his wrongdoing he would have been dismissed. To my mind it does not begin to follow from that assertion that any salary paid to and expenses paid in respect of Mr Radford after June 2012 is a “loss” to Electrosteel. There is no evidence as to what would have happened if he had been dismissed. The appointment of a replacement Director would have incurred costs. Equally there is no evidence that suggests that no benefit at all was obtained from Mr Radford’s appointment. More fundamentally I do not see that the continued employment of Mr Radford is a recoverable loss in tort. I note that Mr Jory QC has not drawn to my attention any authority in which they were so recovered. In my view the salary is recoverable, if at all, as a claim for breach of fiduciary duty. For the reasons set out in paragraph 65 of the judgment that claim is not maintainable against Metalpol. Furthermore it is, in any event an alternative to the claim for damages.

14. Conclusion

107. In the result my views remain unaltered and the application to continue the injunction is refused.