Interactive Technology Corporation Ltd v Ferster

This judgment deals with two applications made by the Claimant, Interactive Technology Corporation Limited (“ITC”), against the First Defendant, Jonathan Ferster (“Mr Ferster”). The principal application which needs to be considered is an application for summary judgment under CPR Part 24 against Mr Ferster. The other application is an application for an interim payment under CPR rule 25.6. The application for an interim payment was made on 12 December 2016 which was before the date of the application for summary judgment (which was 21 June 2017). However, it is accepted that the outcome of the application for an interim payment is dependent upon the outcome of the application for summary judgment and that it is appropriate to consider the application for summary judgment first. If I do not award summary judgment, as requested, then it is agreed that I will not be able to award an interim payment. Conversely, it is said that if I do award summary judgment then I should award an interim payment in a sum of approximately £4.5 million.

There is a long procedural history leading up to the present applications. I will give a heavily abbreviated summary of that history with a view to identifying the events which matter for present purposes.

Following a lengthy trial of a claim by ITC against Mr Ferster and other Defendants and the trial of two other connected proceedings, I handed down judgment on 15 November 2016, in relation to the matters which had been tried. In summary, the trial and the judgment dealt with matters of liability with many matters of quantum left to be dealt with at a subsequent hearing.

One of the matters which was determined in the judgment of 15 November 2016 was a claim by ITC that Mr Ferster had taken money from ITC to which he was not entitled. Mr Ferster’s defence was that he had been entitled to those monies as remuneration for his services as the de facto managing director of ITC. I rejected that defence on the grounds that the monies taken exceeded the agreed salary payable to him and although the initial salary was subject to review by the company, Mr Ferster had never applied to the company for an increase in his salary and so neither the directors nor the shareholders (who were the same people) had resolved to increase his salary. In the light of that finding, I stated in the judgment that Mr Ferster would have to repay to ITC the amount by which the monies he had taken exceeded his initial agreed salary: see [233]. I also held that, by taking from ITC monies to which he was not entitled, Mr Ferster had acted in breach of fiduciary duty and that ITC was entitled, at its election, to claim equitable compensation for this breach of fiduciary duty: see [234]. I expressed myself that way in view of the way ITC had pleaded the relief which it sought in relation to that matter. In the judgment, I did not purport to identify the remedy which would ultimately be granted to ITC in this respect. The remedy to be granted would depend on the remedy which ITC asked the court to order, following the hand down of the judgment.

On 19 December 2016, the parties appeared before me and I was invited by the leading counsel who had appeared for ITC at the trial of this claim (not Ms Stanley QC) to enter judgment against Mr Ferster which determined the amount of remuneration to which he was entitled. There was considerable discussion, involving ITC’s then leading counsel and leading counsel then appearing for Mr Ferster, as to the remedy which ITC was seeking as a result of Mr Ferster having paid himself monies to which he was not entitled where he had not asked the company to review the salary initially agreed upon. At the end of that discussion, the court made an order in these terms:

“Judgment be entered for ITC for equitable compensation to be assessed in respect of the payment of Mr Jonathan Ferster of unauthorised “remuneration” from ITC that was in excess of Mr Jonathan Ferster’s entitlement under [the earlier determination].”

Before the order made by the court on 19 December 2016 was sealed, ITC asked the court not to seal an order in those terms but instead asked the court to make an order in different terms in relation to ITC’s remedy for Mr Ferster’s breach of duty in respect of unauthorised remuneration. Mr Ferster did not accept that the court could or should substitute the new order requested by ITC for the order ITC had requested and obtained on 19 December 2016.

On 7 February 2017, I heard considerable argument as to what should be done in relation to the court making an order in relation to the relevant breach of duty. In a judgment handed down on 10 February 2017, I ruled that the court should seal the order in the terms in which the order was expressed on 19 December 2016. That gave rise to the further issue as to what an order in those terms meant in this case. It was clear that the words “equitable compensation” are capable in some circumstances of more than one meaning. The question was: what did ITC ask for on 19 December 2016 when the court acceded to its request and made an order in those terms? At the hearing on 7 February 2017 when this matter was argued, ITC was represented by new leading counsel, Ms Stanley QC, and it was clear that ITC wished to take a different approach to the question of remedy from that taken on 19 December 2016. It was agreed at that hearing that the court needed to construe the order made on 19 December 2016 and for that purpose, the court could take into account the pleadings, the judgment of 15 November 2016, the skeleton arguments for the hearing on 19 December 2016 (and in particular the skeleton argument of ITC which explained the remedy which it then sought) and the transcript of the hearing on 19 December 2016.

In the judgment of 10 February 2017, I held that ITC had directed itself and the court to the effect that ITC had an election to make between (1) an order for an account and an order for payment of monies found due on the taking of such an account and (2) an order for equitable compensation for losses resulting from the breach of fiduciary duty. I held that ITC had informed the court that it was making its election in favour of the second of these alternatives. It did not ask the court to make an order for an account and an order for payment of monies found due on the taking of such an account. Nor did it ask the court to grant it both of these remedies. Accordingly, ITC and the court had used the words “equitable compensation” to grant to ITC a remedy whereby ITC would be entitled to claim compensation for losses resulting from Mr Ferster’s breach of fiduciary duty. Leading counsel for ITC had explained to the court that an order for equitable compensation for losses gave ITC a higher recovery than a claim to an account and an order for repayment of sums found due on the taking of an account. One particular example of such losses was given, namely, tax penalties and interest as a result of ITC needing to restate its accounts to reduce its deductible expenditure and to increase its tax liability resulting in the late payment of tax which would in turn result in a liability to pay tax penalties and interest. Leading counsel for ITC persisted in making an election for the remedy of compensation for losses even after the court had been told by leading counsel for Mr Ferster that his case would be that such an order would involve the court in considering the question whether the breach of fiduciary duty had caused any loss to ITC (and a number of arguments were identified as to how, on the facts of the case, the breach had not caused loss to ITC).

Following the giving of judgment on 10 February 2017, I made an order which declared that the order for equitable compensation made on 19 December 2016 provided “for ITC to recover compensation for losses resulting from the payment to Jonathan Ferster of unauthorised remuneration”.

ITC has obtained permission (from Kitchin LJ) to appeal against my rulings on 10 February 2017 but it is accepted that, in advance of that appeal being determined, and in particular for the purpose of dealing with the applications which are now before me, I ought to proceed on the basis of what I decided on 10 February 2017.

By its application for summary judgment, ITC now seeks summary judgment in its favour:

“in respect of the issue of whether [Mr Ferster] has a defence of causation and/or may seek a just allowance in answer to [ITC’s] claim for equitable compensation in respect of the remuneration which [Mr Ferster] received from [ITC] and which the Court held following a trial of liability was unauthorised.”

I can deal with the suggestion that there is, or will be, an issue as to whether Mr Ferster is entitled to “a fair allowance” when the court comes to assess “compensation for losses resulting from the payment to Jonathan Ferster of unauthorised remuneration”. I do not consider that it has been shown that there is, or is likely to be, any such issue between the parties. The suggestion of a “fair allowance” was made at one point in the history of this litigation. The suggestion was that if the court ordered an account and an order that Mr Ferster do pay to ITC all monies due on the taking of the account, the sum which ought to be paid ought to be reduced by the making of a “fair allowance”. This possibility of a fair allowance was said to be based on the approach in Phipps v Boardman [1967] 2 AC 46 which was further considered in Guinness plc v Saunders [1990] 2 AC 663. However, as ITC did not ask for, and did not obtain, an order for an account and for payment of the sum found due on the taking of an account (being the unauthorised remuneration), the question of a fair allowance does not arise. Accordingly, I find that there is no issue about a fair allowance and it is not necessary or appropriate for me to give any judgment, summary or otherwise, in relation to that subject.

I need to explain what has caused ITC to seek summary judgment in relation to what is said to be an issue of causation which seems likely to arise in relation to the future assessment of equitable compensation for losses resulting from the payment to Mr Ferster of unauthorised remuneration. At earlier hearings in this litigation, leading counsel then appearing for Mr Ferster explained the case which Mr Ferster would wish to run in relation to the assessment of equitable compensation. I summarised the rival cases on this issue in paragraph 46 of the judgment I gave on 10 February 2017, in these terms:

“On the basis that ITC's claim is now for compensation for loss resulting from the breach of duty, ITC says that it is able to establish the relevant loss by showing that before the payment of unauthorised remuneration it had the money in question and after the payment it did not. Its loss is said to be the amount paid away. ITC submits that there is no further need for any inquiry as to causation. [Mr Ferster] submits that ITC will have suffered no loss if all that he received was the market value of his services. Alternatively, he submits that the right counter-factual is that he would have asked for an increase in his remuneration and if that were not agreed he would have resigned and ITC would have had to recruit a new managing director who would receive the market value for his services which would be much the same as the unauthorised remuneration in this case. I am not asked to rule on these factual questions but I am invited to rule on the point which divides the parties as to whether the investigation of causation needs to go any further than that contended for by ITC. I am going to decline the invitation to rule on this point at this stage.”

Ms Stanley submits that the arguments which were previously put forward on Mr Ferster’s behalf are unsound in law and that I ought to rule in favour of ITC on this point on this summary application. Ms Stanley accepts that in so far as the arguments raise matters of disputed fact, I will have to proceed on this application on the assumption that Mr Ferster will be able to establish the facts which he puts forward. In particular, she accepted that I could assume, but for present purposes only, that the market rate for a chief executive officer of ITC at the relevant time or times would have been similar to the sums taken by Mr Ferster from ITC.

ITC not only wants to have summary judgment in its favour on the question of causation but it also wishes to have that judgment at the earliest possible moment. The reason for that is that ITC has petitioned for a bankruptcy order in relation to Mr Ferster. At the hearing of the present applications, which took place before me on an expedited basis on 7 July 2017, I was told that ITC’s petition was due to be heard on 10 July 2017. ITC’s petition is based on Mr Ferster’s failure to pay the sums due to ITC pursuant to other judgments and orders which I made in this litigation. However, the debt due to ITC on which its petition is based would not result in ITC being the largest creditor in any bankruptcy. The largest creditor would be Mr Ferster’s former solicitors. However, if I were persuaded to award summary judgment to ITC and then to award it an interim payment of about £4.5 million, then I understand that ITC would be the largest creditor in the bankruptcy. Accordingly, ITC wishes to establish that position, if it can, as soon as possible.

Following the hearing on 7 July 2017, I was told that on 10 July 2017 a bankruptcy order was made in the County Court at Manchester in relation to Mr Ferster, on ITC’s petition.

ITC’s desire for expedition and the implications in relation to any bankruptcy of Mr Ferster do not directly affect the underlying issues in these applications. However, they do show me that any decision which I make will have a direct bearing on other creditors of Mr Ferster. Mr Ferster chose not to attend the hearing of these applications and did not appear at the hearing of the bankruptcy petition on 10 July 2017. I do not know what other creditors of Mr Ferster knew about the hearing before me on 7 July 2017 but I do know that no creditor applied to intervene in these proceedings. Although I have the benefit of detailed submissions from leading counsel on behalf of ITC I have not heard any argument on the other side.

Ms Stanley made a number of submissions and referred to a large number of authorities in support of them. She stressed the public policy considerations which are expressly acknowledged in many of the authorities dealing with the remedies available where there is a breach of fiduciary duty. She referred to cases where fiduciaries are required to pay over to their principals or beneficiaries the profits they have made even where the principal or beneficiary could not itself have made that profit. She referred to the restricted approach of the court when asked to award a defaulting fiduciary a fair allowance in relation to a profit which he has made which he is ordered to pay to his principal.

Ms Stanley also took me to cases where a fiduciary was obliged to restore to the principal money which had been paid away in breach of fiduciary duty and where the court regarded it as irrelevant to inquire into what would have happened if there had not been a breach of fiduciary duty. In particular, she referred to Bishopsgate Investment Management Ltd v Maxwell (No. 2) [1994] 1 All ER 261, Bairstow v Queens Moat Houses plc [2002] BCC 91, Revenue and Customs Commissioners v Holland [2010] 1 WLR 2793 at [44]-[49] and Libertarian Investments Ltd v Hall [2014] 1 HKC 368. I am prepared to assume for present purposes that those authorities establish that if ITC had sought and obtained an order from the court for an account and an order that Mr Ferster do pay the sums found due on the taking of such an account, then he would have been ordered to repay to ITC the unauthorised remuneration and the court would not have inquired into what might have happened if he had sought the authority of ITC to pay himself increased remuneration before he had taken the monies. However, as I pointed out in my judgment of 15 November 2016, at [235], I have not yet been asked to resolve the question as to whether it remained open to Mr Ferster to apply to ITC for it to review the initial terms as to his remuneration nor the question as to what the result of such a review might be.

Ms Stanley took me in detail to the speeches of Lord Toulson and Lord Reed in AIB Group (UK) plc v Mark Redler [2015] AC 1503 and the consideration given in that case to the earlier decision in Target Holdings Ltd v Redferns [1996] AC 421. In AIB Group, it was held that a defaulting trustee was not liable to repay to the trust fund the sum which had wrongly been paid away in a case where, judged by reference to subsequent events, the beneficiary’s loss was much less than the amount paid away at the earlier time, or even nil. She distinguished that case by submitting that the present case involved a payment to the defaulting fiduciary, rather than to a third party (as in AIB Group), and there was no question in the present case of there being an apparent loss at one point in time and no loss (or a smaller loss) at a different point in time.

I consider that the authorities cited to me do not rule out an inquiry into causation in a case where ITC deliberately sought and successfully obtained, in the alternative to a claim to an account and an order for the payment of the sums found due, an order “for ITC to recover compensation for losses resulting from the payment to Jonathan Ferster of unauthorised remuneration”. The words “compensation” “losses” and “resulting from” the payment of unauthorised remuneration would appear necessarily to involve an inquiry into what losses did “result” from the payment of the unauthorised remuneration.

Ms Stanley also submitted that it was important to focus on the precise breach of duty committed by Mr Ferster. She submitted that the result might be different depending on whether the breach was expressed as: (1) the mere taking from ITC of money to which he was not entitled; or (2) the failure to obtain prior authorisation from ITC for an increase in his remuneration. She submitted that even if a breach expressed in the second way might open the door to an inquiry as to what would have happened if Mr Ferster had asked for prior authorisation, no such inquiry was needed in relation to a breach expressed in the first of these ways. In the case of a breach expressed in the first of these ways, she submitted that Mr Ferster had simply stolen ITC’s money and was liable to return it just like a thief (or other person guilty of conversion) of a chattel was liable in conversion to pay the value of the chattel at the time of the theft or conversion. This approach seems to me to be excessively formalistic and I am not attracted by it. I am not persuaded that there is a radical difference in the approach to be adopted which depends upon the verbal formula which is used to describe a single set of circumstances.

Further, when I was asked to make an order for compensation on 19 December 2016, leading counsel then acting for ITC explained to me that ITC wished to include in its heads of compensation the tax penalties and interest for which it might be liable as a result of the need to restate its accounts to show that Mr Ferster was not entitled to the remuneration which he drew. That claim obviously involves an assessment of causation. Ms Stanley has told me that ITC no longer wishes to put forward that claim. However, ITC’s current wishes cannot remove the fact that ITC previously chose a remedy which, in that respect at least, involved an inquiry into what losses resulted from the breach of duty. Ms Stanley submitted that when one considered the losses resulting from the breach of duty, even if it were appropriate to inquire into causation for some heads of loss claimed, it was not appropriate to conduct the same inquiry into the principal head of loss which is the loss resulting from ITC not having the money taken by Mr Ferster. I am not persuaded that that submission is based on any legal principle.

In the light of the lengthy discussion of the legal principles in AIB Group, Ms Stanley submitted that the relevant legal principles to be applied in this case were in the course of development. She appeared to accept that she could not point to a clear statement of principle in that case which was precisely in point and in her favour. This led her to submit that as the principles were in the course of development, the present case was one in which the court ought to develop them and this application gave me the opportunity to develop the principles in a way which would determine the issue of causation in favour of ITC. It was implicit in that submission that in the absence of that development in the law I should not regard Mr Ferster’s submissions as unsustainable and therefore I should now develop the law to produce a ruling which would defeat those submissions.

Ms Stanley’s submission inviting me to develop the law in ITC’s favour on a summary application is a very bold one. It is generally said that it is undesirable to determine points of law, in advance of the court making findings of fact, in an area of the law which is in transition or is developing: see E.v Dorset CC reported at [1995] 2 AC 633 at 694 per Sir Thomas Bingham MR, X. v Bedfordshire CC [1995] 2 AC 633 at 741 per Lord Browne-Wilkinson; Barrett v Enfield LBC [2001] 2 AC 550 at 557-558 also per Lord Browne-Wilkinson and TFL Management Services Ltd v Lloyds TSB Bank plc [2014] 1 WLR 2006 at [27]. Those statements were made in cases where a contention was put forward which was not entirely covered by previous authority and where the party so contending said that the law might be developed to support his contention and the opposing party applied to strike out the contention. Ms Stanley’s submission is more adventurous than the applications to strike out which failed in those cases. She submits that if Mr Ferster’s contention is arguable, based on previous statements of principle, I should now develop the law so as to make his contention unsustainable. I am not persuaded that I should do any such thing. Apart from the difficulties inherent in her submission, I bear in mind that I have heard argument on one side only and, now that Mr Ferster is bankrupt, his creditors will be affected by any decision I reach in favour of ITC but yet the creditors are not involved in these proceedings.

If I decline to determine the issue of causation on a summary basis, then what will happen, in view of Mr Ferster’s bankruptcy, is that the court may be asked to consider whether to allow these proceedings to continue. If the court does allow that, then it will in due course give directions for the assessment of equitable compensation. It is likely to direct ITC to set out its case in Points of Claim and to direct Mr Ferster’s trustee in bankruptcy to set out his case in Points of Defence. The matter might then proceed, after disclosure and exchange of witness statements, to a hearing at which matters of fact would be determined and any issues of law which arose, such as issues of causation, would be determined in the context of the court’s findings of fact. If it were considered to be a wise course, it is conceivable that the court might be prepared to determine a preliminary issue as to causation on agreed facts or adopt some similar procedure.

In the present case, I am not able to take the view that the arguments as to causation which have been identified on behalf of Mr Ferster have no reasonable prospect of success. I do not consider that it is appropriate for me to develop the law on a summary application, in advance of the court having made findings of fact, having heard argument on one side only, in order that the law as so developed would defeat those arguments.

Ms Stanley had two further arguments which were more of a procedural nature arising in the context of CPR part 24. First, she said that Mr Ferster had not pleaded his case as to causation in any earlier pleading and so I should take the view that such a case was simply not open to him. I am not persuaded to take that view. ITC’s own pleading as to its losses stated that ITC would give particulars of its case at a later time and Mr Ferster’s Defence pleaded that ITC’s claim to have suffered loss was denied. The trial which has taken place did not involve questions of quantum. I have already directed that the remaining issues between the parties should be the subject of directions given at a further hearing which has yet to take place. If these proceedings continue as against Mr Ferster’s trustee in bankruptcy, then I envisage that the court will give directions for pleadings to be served. The time for Mr Ferster (or his trustee in bankruptcy) to plead the defence based on causation lies in the future. Mr Ferster (or his trustee in bankruptcy) is not to be shut out from making his case in response to this application because his defence on causation was not pleaded earlier.

Ms Stanley’s second point is that Mr Ferster has not put in a witness statement in response to this application. Instead he has written to the court referring to the earlier position put forward on his behalf when he was represented by solicitors and counsel. So far as factual matters are concerned, Ms Stanley very fairly accepts that I should proceed on the basis that the market rate for a chief executive officer of ITC at the relevant time would have been similar to the sums taken by Mr Ferster from ITC. As to the counter-factuals relied upon by Mr Ferster, these involve assertions as to what would have happened if he had not broken his fiduciary duty by taking monies without authorisation but had instead sought ITC’s authorisation. They do not involve direct evidence as to historic events and, having conducted the trial in this case, I have heard many days of evidence as to the relationship between the parties which may be relevant when the court comes to consider the likelihood of these counter-factuals occurring.

Having considered the arguments put forward by ITC, I am not persuaded that I should grant summary judgment as requested and instead I conclude that the application for summary judgment should be dismissed. Ms Stanley agreed that if I dismissed the application for summary judgment, I should also dismiss the application for an interim payment.