Patley Wood Farm LLP v Brake & Anor

the LLP, which he held was a breach of their fiduciary duty. He also held that there was evidence of misuse of partnership money by the Brakes, but reserved consideration of the detailed allegations and defences to that claim and the amounts involved. I-le also found that the Brakes had refused to provide reasonable financial information.

Mr. Lee ordered that the partnership should be dissolved. He ordered that as part or the winding up there to be an orderly sale or the partnership's assets including the partnership property, and that both the LLP and the Brakes should be entitled to bid. He ordered that the partnership business should be sold as a going concern if reasonably practicable within a reasonable time. He ordered that dissolution accounts should be drawn up.

On 22 ^nd August 2013, Mr. Lee also made an award in the costs of the partial final award. By that costs award he ordered that the Brakes should pay the LLP's costs in respect ofthe arbitration in the sum of 18,539.23. The Brakes have not paid those costs.

On 12 ^th September 2013, Mr. Justice Birss made a freezing order in suppolt of the claim. He did so on the return date from an interim order initially obtained in July 2013 following the failure by the Brakes to pay the costs awarded by the costs award. Paragraph 6 of the freezing order provided that Mr. Lee's partial final award and his costs award could be enforced in the same manner as a judgment or order ofthe court to the same effect. The freezing order restricted the Brakes' right to deal with their personal assets both here and abroad up to a value of subject to certain exceptions. Those exceptions included a right tor the Brakes to spend a reasonable sum on legal advice and representation. Clause 7 of the freezing order restricted the Brakes' right to deal with the assets ofthe partnership otherwise than in the course of its normal day to day business pending the completion of the winding up ofthe partnership or further order.

The precise terms in which clause 7 is drafted is as follows:

no payment will be made by the respondents out of the partnership bank accounts or any use made of the partnership's credit or debit cards that is outside the normal day to day business expenditure of the partnership without the written consent ofthe claimant or the order of Mr. Lee or the court. For the avoidance of doubt,

expense on equestrian matters is not within the definition of normal day 10 day business expenditure of the partnership".

I l Clause 14 ofthe order provided that:

Clause 16 ofthe order provided that:

And then the last clause that I think I need read is clause 25 ofthe order which says:

spending up to E5,500 a month in total between them towards their ordinary living expenses and also a reasonable sum on legal advice and representation provided that no such payment should be made from the partnership bank accounts without the consent of Mr. Lee".

The Brakes subsequently sought to challenge Mr. Lee's partial final award and his costs award. They applied to have him removed as arbitrator. That claim was heard by Mr. Tim Kerr QC between 4 th -7 th March 2014. Mr. Kerr dismissed the claim by a reserved judgment handed down on 25 ^th April 2014. On 27^th June 2014 Mr. Kerr ordered the Brakes to pay costs assessed in the sum of E30,000.

The arbitration accordingly proceeds with the winding up of the partnership pursuant to the terms ofMr. Lee's partial final award. He has appointed a firm

of accountants, Safferey Champness, to draw up dissolution accounts of the partnership and it is envisaged that there will be a sale of the partnership assets including, importantly, the Farm. I am told Ihal draft accounts have been produced but not yet tinalised. There have been applications both to Mr. Lee and to the court in relation to that process, leading to making of a peremptory order on 12^th November 2013. That order was subsequently challenged, and the challenge failed, before Mr. Justice Peter Smith on 1 8 October oflasl year.

On 24^d1 October of this year, the partnership's bank, Adam & Co, Plc, appointed receivers under its fixed charge over the Farm. On 19^th November of this year, Mr. Lee acting on an application by the LLP, made a direction excluding the Brakes from carrying out certain actions in connection with the sale ofthe property. On 26^th November Mr. l,ee gave reasons for that direction. I will return to those directions and the reasons tbr giving them later in the course of this judgment.

Against that background, I come to the various applications. I deal, first, with the application made by the Brakes, that is to say an application which is dated 24^dI June 2014.

The first limb of the Brakes' application was för the court's consent pursuant to the terms of the freezing order to enable them to create a charge over their personal beneficial interests in the assets of the partnership. They wish to create such a charge in favour of their solicitors, Michelmores, in order to provide security for the payment of legal fees. ^El he second limb of that application sought the court's consent under the terms of the freezing order to make certain payments to themselves from the funds of the partnership. One part ofthat was for the Brakes to reimburse themselves from partnership's funds for a payment of I think ES,OOO which they had paid on behalf of the partnership in respect of legal fees, and another element was for them to pay themselves E5,500 per month from partnership funds tar their reasonable living expenses.

However, the Brakes discontinued that application by letters both to the court and to the solicitors, Lester Aldridge, acting for the dated 1 I)ecember, so that is just over a week ago. But that left the costs of that application to be dealt with. The Brakes have proposed that there should be no order as to costs. They submit through Mr. Peters that their application was discontinued as a result of a supervening event, namely the appointment by the bank of the receivers.

Mr. Gavaghan, who appears for the LLP, submitted that that would be quite inappropriate. He submitted that, having made and then abandoned the application, the ordinary costs consequence should flow — namely that the

Brakes should pay the LLP's costs. He submitted that the application never had any prospect ofsuccess. He drew my attention to clause 13. [O) ofthe partnership deed which prohibited any partner charging his rights or interest in the partnership without the written consent of the other partners; thal such consent was not forthcoming, and that the application so thr as it sought an order permitting the Brakes to charge their interest in the partnership was an attempt to go behind that provision. In any event, he submitted, its purpose was to give Michelmores a preference over others with a claim against the Brakes, and that given the Brakes' failure to pay various costs orders and their protestations of lack ormeans, it would have been quite wrong for the solicitors to have been given such a preturence by the court.

As regards the balance ofthe application, again, he submitted, the Brakes were seeking to go behind Mr. Lee's award of June 2013, when he had found that partnership remuneration could only come out of partnership profits, of which there were not any —or none has yet been established. In any event, the evidence suggested that the partnership lacked the requisite free cash to make the payment sought.

Mr. Peters, by contrast, submitted that the application was far from hopeless. He submitted that the court might have been able to sanction the grant of relief under s.14 ofthe Trust ofl.and and Appointment of'l'rustees Act 1996, notwithstanding clause 13.l(j) ofthe partnership deed. He submitted that the case for varying the terms of the freezing order to permit some limited payments to the Brakes out of partnership monies and to reimburse them for past payments ofpartnership expenses was arguable. He submitted that it was really the appointment by the bank, Adam & Co, of receivers over the Farm on 24^ÜI October that rendered pointless the further pursuit of the application.

I am satisfied that the Brakes should pay the LLP its costs ofthe application. The reliefclaimed by that application from what I was told of the matter was, to put it mildly, optimistic, for all of the reasons which Mr. Gavaghan submitted. The plain fact is that the application was abandoned and that I was given no good reason why the usual costs consequence should not follow.

The only remaining question is whether over and above giving the LLP its costs, the LLP is entitled to have those costs assessed on the indemnity basis. Mr. Gavaghan submitted thal they should be. fle submitted that so far from abandoning the application when the receivers were appointed, the Brakes persisted with it for another six weeks during which further costs were incurred. He pointed out that at least two court hearings in the course of November, the Brakes had made it clear that they were pursuing their application. They had spurned an earlier invitation to abandon the application.

Mr. Peters submitted that the claim was brought on behalf of the partnership with the Brakes' authority as the majority partners, and as such with power under the partnership deed 10 authorise the bringing ofproceedings. He therefore submitted that the payments in question they total no more than

I do not agree. In my judgment, expenses incurred by one or more partners in pursuing what, in substance ifnot in form, is a claim against his co-partner to entörce an exceptional funding agreement is not accurately to be described as "business expenditure ofthe partnership". But, even ifl were wrong about that, the payments in question cannot by any reasonable stretch of the imagination be described as "normal day to day business expenditure ofthe partnership", which alone is what clause 7 permits. In short, the payments were in breach of clause 7(a) ofthe freezing order.

So also, in my judgment, were the payments, totalling E27,851 made to Close Brothers Asset Finance between October 2013 and November 2014 in respect ofthe horse box. The short point here is that clause 7(a) in terms states that:

11 is nothing to the point that, prior to the making orthe freezing order, Mr. Lee had sanctioned payments of instalments due under the funding agreement tar August and September Of 2013. On the latter occasion it is to be noted Mr. Lee made it clear that,

Those matters, as it seems to me, go more to the gravity of the breach. They do not amount in my judgment to a refutation of the existence ofthe breach. Belatedly I should add a number ofthe copy invoices have been supplied, but until now none of the lists have been supplied as required by the order.

I am therefore satisfied that all of the breaches particularised in the application to commit are established.

What now must be done? And what, if any, penalty should I impose? I will hear counsel on this, but my current view is that the wrongful payments must be restored to the partnership and the list of payments and ledger entries of the receipts supplied by a date being a date yet to be determined.

What ofthe fact that these are breaches ofthe freezing order to which a penal notice was attached? It is to be noted that these breaches have not occurred covertly or, as it seems to me, in the hope that no-one would notice, much less in conscious defiance of the freezing order. The payments to Michelmores were made on that firm's advice. Having been reassured by them that such payments could properly be made, it is not altogether surprising that the payment to Marriott Harrison was also made. There is some suggestion also that the Safferey Champness the accountants appointed by Mr. Lee, had regarded some or all of these payments as partnership expenses. The payments to Close Brothers Asset Finance were by standing order, and the fact that they were made was plain from the face of the bank statements. As for the failure to supply monthly the list of payments and copies ofthe red sales ledger, the point is made that no-one on the LLP side even noticed that these lists were not being supplied until very recently,

Provided the breaches are made good, I am not inclined to exact any particular penalty to mark the court's disapproval. I certainly do not consider that

But before that happens, I should deal, finally, with 1,1.P's application tor an order pursuant to section 44 of the 1996 Arbitration Act, that the Brakes comply with the directions given by Mr. Lee on 19^ü' November 2014.

The directions which Mr. Lee made were in the following terms.

including the duty not to put themselves in the position or conflict or to take a secret profit".

The particular matters on which the LLP relied in support of its application were as follows:

After making an interim order in the terms sought, Mr. Lee gave the Brakes an opportunity to respond to the directions and advance reasons why they should be amended or withdrawn. All of that is dealt with in the succeeding paragraphs or his reasons.

Mr. Lee then summarises the exchanges that ensued, and at paras. 14-17 he sets out the reasons why following those exchanges, and in particular a telephone contérence during which the matter was argued, he confirmed the directions which he had previously given.

He then dealt with that issue and concluded that he had the necessary jurisdiction. And. as I have mentioned, there is no challenge to that jurisdiction. He then continued:

Brakes' solicitor], contends that the reason for the issue ofthe notice of default and the appointment of the receiver was because ofthe I„LP's conduct. I donot accept that this is the case. In the notice ofdefault dated September 2014, the bank lists three events ofdefault, the first of which is a failure to pay the contracted payments due under the loan agreement. It is true that the bank also lists the arbitration by the 1.1.P and 'the outcome of the arbitration' and the failure to receive signed accounts for the business since the 2010 accounts as events of default, but I have no doubt that the principal reason for the bank giving notice of default is the failure to meet the loan payments".

In reaching my decision I have also considered where the balance Ofconvenience lies in this case. I consider thal it lies firmly in favour of the I-I-P. As I indicated above, my order does not prevent a sale by the receiver to the Brakes. Ifthe Brakes do wish to negotiate with the receivers, they must obtain the consent of either the LLP or myselfto do so. Ifsuch negotiations are genuinely at arm's length and full disclosure is made to the LLP and myself, it is likely that consent will be given. The purpose ofthe order is simply to ensure that the interests of the partnership are fully protected in any sale to the Brakes".

This brings me to section 44 ofthe Arbitration Act 1996 and the basis upon which the court should exercise its powers under that section. So far as material, section 44 reads as follows:

I notice that whereas Mr. Lee's directions gave the LLP permission to apply for interim injunctive relief to support his directions, which would appear to be a reference to section 44(2)(e), the application to the court is grounded on the assertion that the court's assistance under section 44:

The matter was argued on the basis that it was section 44(2)(c)(i) which was in point. I do not, as it happens, think that the difference matters as I take the view that subject to what I shall shortly come to, the Order is capable Of being grounded under either provision

How then is the coun to approach the exercise of its jurisdiction under section 44? Mr. Gavaghan submitted that the coun should by analogy follow the approach adopted to the exercise of the court's jurisdiction under section 42 of the Act. Section 42 empowers the court to make an order requiring a party to an arbitration to comply with a peremptory order made by the arbitral tribunal. The court may not act unless it is satisfied that the applicant has exhausted any available arbitral process in respect ofthe failure to comply with the tribunal 's order, which in some ways is similar to the restriction contained in section 44(5).

In Emmott v Michael Wilson & Partners Limited (NO.2) [2009] EWHC I (Comm) which involved an application to the court for an order under section 42. In the course Of his judgment Mr. Justice "reare said this, and I read from para.59:

"I also accept as submitted on behalf of MWP [MWP was the respondent to the application in that case] that section 42 confers a discretion upon the court and that it would be inconsistent with the exercise of a discretion that the court should act as a rubber stamp on orders made by the tribunal. However, I do not accept that the court must in every case satisfy itself that the case is a proper one for the order which is Sought ifby that is meant that the court must review the decision made by the tribunal and consider whether the tribunal ought to have made the order in question. The reasons that I do not accept that submission are as follows:

It is inconsistent with general principle (c) in the context of sections 33 and 40 ofthe 1996 Act".

Pausing there, principle (c) is that referred to in section I of the 1996 Act.

And that is a reference to the relevant Part of the 1 996 Act, Continuing with his judgment, Mr. Justice Teare said this:

There is then a reference by Mr. Justice Teare to a passage from another textbook which he then comments upon, but I do not think [ need read that.

He then said, in para.62, the following:

occasion for a comprehensive list of such circumstances, even assuming it were possible to compile such a list. One example might be where there has been a material change of circumstances after the peremptory order was made. Another might be where the tribunal has not lillfilled its duty to act fairly and impartially between the parties in breach of its general duty to do so. Another might be where the tribunal has made an order which it had no power to make".

Section 42 is not same as section 44. It is more narrowly drawn. It assumes that the peremptory order made by the tribunal has not been carried out and that the applicant has exhausted any other available arbitral process in respect of that failure. •lhe case for the court's intervention is thereföre all the more compelling. Under section 44 by contrast there is no or no necessary requirement that the respondent to the applicant be in breach ofthe tribunal's order. As the marginal headings to the two sections indicate. section 42 is there to assist in 'the enforcement' ofthe tribunal's order, and then only if it is a peremptory order; whereas section 44 is as the heading indicates to 'support' the arbitral proceedings. It seems to me therefore that the court has a rather wider discretion under section 44 than it has under section 42. To my mind the question is simply whether in all the circumstances the court considers it appropriate to exercise its powers under the section in support of the arbitral proceedings.

That said, I am in entire and respectful agreement with what Mr. Justice Teare said in para.59 ofhis judgment, that whereas the court should not simply act as a rubber stamp on orders made by the tribunal, it is not required to review the tribunal's decision and consider whether the tribunal ought to have made the order in question. Like Mr. Justice Teare, and as Mr. Gavaghan forcefully submitted to me without, so far as I could discern, any particular disagreement on the part ofMr. Peters, the general philosophy of the 1996 Act is to honour and give etiéct to the arbitration agreement which the parties have entered into for the resolution oftheir disputes, so that the court's approach, be where the arbitrator has acted fairly and within the scope Of the arbitral powers conferred upon him, should be to adopt a noninterventionist approach but, where its aid is sought, to act in support of that arbitral process. Relevant to this is that, as Mr. Gavaghan reminded me, an arbitrator has no power to make an order binding on a stranger to the arbitration or to add a penal notice to his order in order to add teeth to it— the expression used by Mr. Gavaghan — so that the order made can be rendered more effective.

Although none of this was a matter of controversy between the parties, there was nevertheless a very deterrnined attempt by Mr. Peters to challenge

Mr. Peters' submissions and to Mr. Gavaghan's responses to them not because I see it as my role to review or second guess Mr. Lee's function, but to satisfy myself that in making his directions Mr. Lee had not proceeded on some wholly mistaken basis, or that the exercise by him of his power to make the directions was not fatally undermined in some fundamental respect. I was so satisfied. That is not to say that Mr. Peters did not advance some powerfül criticisms, but as Mr. Gavaghan reminded me, Mr. Lee has had the advantage which this court has not had of a prolonged and detailed examination through the arbitration ofthe ins and outs of this dispute and a close involvement over very many months in the many factual issues that it has thrown up.

I therefore proceed on the basis that Mr. Lee had good reason to make the directions which the LLP now seeks to have supported, with Mr. Lee's explicit permission and I think encouragement, by an order under section 44. The question, then, is whether I should accede to the application by making the order sought to give teeth to Mr. Lee's directions.

As I made clear to Mr. Gavaghan, [ have felt a difficulty in simply making the Order sought. This is because, although Mr. Lee rejected any intention by his directions to prevent the Brakes from purchasing the Farm when, as it certainly will be, it is put up for sale by the receivers appointed on 24^di October last, the eftéct of the directions as it seems to me is bound to inhibit the Brakes in following that course. Paragraph (a) of the directions in terms prohibits them from purchasing the Farm, and paragraph (b) prohibits them from undertaking any negotiations Of any kind with a view to its purchase. Paragraphs (c)-(e) are directed to any dealings by them including even any negotiations with any purchaser or potential purchase of the Farm.

It is quite true that there is a let out in that they may do any ofthe otherwise prohibited things ifthey have either the LLP's consent or the consent of Mr. Lee as the arbitrator. Ilowever, as the LLP and the Brakes are not only at daggers drawn on just about every issue that has arisen in the course ofthis dispute, which encompasses at least two other sets of proceedings and a separate arbitration; but they are also or may very well be rival purchasers for the Farm. This let out is more apparent that. On the other side, the Brakes have, it is pointed out, a particular interest in purchasing the Farm because it is where, for quite some time now and from well before the partnership was entered into, they have made their home. The power which Mr. Lee reserves to himselfto consent to the Brakes doing any of the otherwise proscribed acts by his directions is of course important, and the directions can always be reviewed by him. "Ihat said, it does seem to me, to put it no higher, that the directions put the Brakes at a disadvantage in their wish to acquire the farm which the LLP or forthat matter a third party bidder, does not face. The question is whether the court should bless and support that position by making the order sought.

In urging that I should Mr. Gavaghan submitted that in a number of respects the Brakes had abused their position by divulging matters to the receivers or those acting for them relevant to the Farm when they should not have done, and by running the Farm down in various respects so that, as he put it, "The well has been poisoned", with the consequence that the Farm has become, in his phrase. "blighted" in the receivers' eyes. I am in no position to reach any conclusion on that. On the other side of the argument Mr. Peters has submitted that the sale of the Farm is in the hands ofthe receivers appointed by the bank and not Mr. Lee — much less the partners of the now dissolved partnership — and that there can be no question concerning either the integrity of the receivers or ofthe bank or their competence; or because it has been pointed out to them their duty to obtain the best price reasonably obtainable for the Farm. Mr. Peters pointed out that the receivers are well aware that the LLP and not just Mr. and Mrs. Brake are interested purchasers or, at the very least, in the case ofthe LLP, is concerned to ensure that the best price is paid. They are also aware, he said, ofthe freezing order and therefore of the restrictions that that order imposes on the freedom of the Brakes to dispose of their assets. All this (and I do no more than summarise his submissions) shows, he said, that the LLP's concerns reflected in Mr. Lee's directions are beside the point. Provided the receivers sell for the best price that the Farm can reasonably obtain, it matters not, he submitted, what negotiations the Brakes may carry out. I seethe force of all ofthat.

In para.14 ofhis written reasons, Mr. Lee stated that his directions were designed to ensure that there is "transparency", and that he and the LLP are kept fully informed ofany negotiations by the Brakes. In a course of email exchanges which followed the making of Mr. Lee's directions and the statement of his reasons for making them, the Brakes through their solicitors took up with Mr. Lee how they were now to proceed, given the restrictions on their freedom of action caused by the directions.

In an email of e December, sent in response to those and other points made to him by Michelmores on behalf of the Brakes and Lester Aldridge on behalf of the LLP, Mr. Lee reiterated that, as he put

I pause there to say that the idea ofa sale without vacant possession was floated by the receivers, but opposed — not surprisingly by the I .1 and ms

So, Mr. Lee was envisaging that his directions would be varied so as - to use his expression — "to ensure transparency ofthe bidding process whilst protecting its confidentiality", he appears to have envisaged a mechanism for achieving this.

I confess that I have had considerable difficulty in understanding quite what is meant by "transparency", where competitive bids for a property are concerned.

9^th December, they emailed Mr. Lee. And I read relevant parts of that email:

And then later: in the same email:

Mr. Lee responded promptly later that same day. He said this:

partnership are protected and to meet the concerns expressed in para. 16 ofmy note that the respondents do not act in breach of their fiduciary duties. It is to meet that concern that I suggested that a mechanism should be found. I think this is a matter which should be capable of being agreed between the parties so that a sale of the property on terms which will be of benefit to the partnership as a whole, as distinct from the respondents alone, is not lost"

I have to say that, given the deep animosities and mutual suspicions which divide the parties, Mr. Lee's hope that the parties can agree a mechanism to give effect to the transparency which Mr. Lee is anxious to achieve seems unrealistic. Failing such a mechanism the directions stand and the Brakes are subject to the prohibitions set out in them. In the meantime, the receivers are preparing for a sale although quite when is unknown.

Michelmores responded at some length to Mr. Lee's email three days later on 12^th December, which is last Friday. And this is what they wrote — and again I do no more than refer to certain passages:

competition in relation to which my clients may not succeed. However, they are being undermined in their ability to participate in that thir [competition I think it means] by the continuation of the restraint order in circumstances where I do not consider that there is now anything that needs to be done or can be done against the backcloth that the receivers are going to sell the property and the partnership's trading will cease as a consequence. I,ester Aldridge on behalf of the LLP have told you that they are applying to the court next week. I therefore invite you to confirm exactly what questions you wish us to address in order that we may meet your requirement for "transparency" or, if you agree that there is nothing now that needs to be addressed in respect of the sale mechanism as put forward by the receivers, the restraint can be lifted to enable my clients to proceed within the very tight constraints set by the receivers. As you have already said that they can bid tor the property, it is their contractual and legal right. With respect, this is at odds with the restraint, given the timetable and lack of clarity in relation to what it is you wish to have addressed and is in effect a barring of my clients in taking pan in the sale mechanism adopted by the receivers which is out of the parties' hands"