Interactive Technology Corporation Ltd v Ferster & Ors

On 15 November 2016, I handed down a reserved judgment in this case. The neutral citation of that judgment is [2016] EWHC 2896 (Ch). For the purposes of the present judgment, I will assume that the reader is familiar with the earlier judgment and I will not attempt a detailed summary of the history of the matter nor the result of that earlier judgment. As in the earlier judgment, I will continue to refer to Jonathan Ferster simply as “Jonathan”.

Following the hand down of the earlier judgment, a hearing was then fixed for 19 December 2016 with the intention that I would deal with consequential matters following the judgment. In the usual way, it was expected that those consequential matters would involve any disputes as to the form of the order to be made, costs and permission to appeal. By the 19 December 2016, however, the parties had become involved in other disputes as to whether there should be a post-judgment freezing order and whether there should be an interim injunction in relation to a dispute about the employment of Jonathan by ITC. That last dispute arose out of facts which occurred following the judgment on 15 November 2016. These other disputes also came before the court on 19 December 2016 with the result that I was not then able to deal with all of the usual matters consequential on the judgment. The result was that the outstanding consequential matters were adjourned to a further hearing which took place on 7 February 2017.

At the hearing on 19 December 2016, the parties and the court were able to make progress in relation to a number of matters. One of these related to the form of the order to be made to give effect to the judgment in respect of ITC’s successful claim that Jonathan had committed a breach of fiduciary duty by paying to himself sums of money, ostensibly as remuneration, which ITC had not authorised. Mr Gourgey QC, leading counsel for ITC at the trial and again on 19 December 2016, asked the court to make a specific form of order in relation to that claim and Mr Thompson QC, leading counsel for Jonathan Ferster at the trial and again on 19 December 2016, agreed that the court should make the order in the terms sought by Mr Gourgey for ITC, providing that it was understood that an order in that form did not prevent Jonathan putting forward certain arguments. Mr Gourgey appeared to accept that Jonathan could put forward such arguments although he made it clear that ITC would submit that the arguments were unsound.

At the hearing on 19 December 2016, in view of the agreement between counsel as to the form of the order dealing with the unauthorised remuneration claim, I indicated that I would make the order sought and there was then a consideration of the next steps which were to be taken pursuant to and in accordance with such an order. I will refer to the agreed form of order on this point as “the remuneration order” and I will set out the relevant wording later in this judgment.

After the hearing on 19 December 2016, the parties remained in agreement as to the form of the remuneration order. Indeed, the solicitors for ITC pressed the court to seal the remuneration order but as a result of the High Court vacation it was not sealed. Then, on 20 January 2017, the solicitors for ITC wrote to the court stating that the court should not seal the remuneration order and on 23 January 2017, the solicitors for ITC wrote again to the court to the effect that the court should not make the remuneration order but should make a different order, in a form which they provided, to deal with ITC’s claim in relation to unauthorised remuneration. I will refer to this draft order as “the new draft”. As a result, the court did not seal the remuneration order in advance of the adjourned hearing on 7 February 2017.

The result of ITC’s change of position in this respect was that I heard substantial submissions at the adjourned hearing on 7 February 2017 as to what should be done. Ms Stanley QC appeared for ITC in place of Mr Gourgey. ITC asked me to make an order in accordance with the new draft. Jonathan asked me to rule that the remuneration order had already been made on 19 December 2016 and an order in that form should be sealed by the court.

I have been provided with a transcript of the hearing on 19 December 2016. I was taken through the transcript in detail by counsel for both parties. It is clear from the transcript that, on 19 December 2016, the form of the remuneration order was agreed and, further, the court made the remuneration order.

As I have explained, the remuneration order has not yet been sealed. Mr Thompson submitted that the remuneration order had been made on 19 December 2016 and, unless it was subsequently set aside, it should now be sealed. He referred to CPR 40.7 which provides that an order takes effect from the day when it is given or made or such later date as the court may specify. In the present case, the court did not specify any later date as the effective date of the order and therefore, he submitted, it took effect when it was given or made. He also referred me to the notes in White Book at 40.2.1 which stated that a judgment takes effect from the time when the judge “pronounces it”. The same note goes on to consider the jurisdiction of the court to alter its order before it is sealed. He submitted that in the absence of the court exercising its jurisdiction to alter the remuneration order pronounced on 19 December 2016, that order is and remains the binding and effective order of the court.

I accept Mr Thompson’s submissions as to the status of the remuneration order. Indeed, once the transcript of the hearing on 19 December 2016 was considered, there could be no real argument to the contrary. I therefore hold that I pronounced the remuneration order on 19 December 2016 and that that order was given or made and was effective on that date.

On 7 February 2017, there was considerable argument as to what the remuneration order means. I could take the view that since the order was in agreed terms and since it is an order which has been made by the court, it is not necessary for me at this stage to construe it. It could be said that if, in due course, the remuneration order is implemented then any dispute as to its meaning can be determined by the court which is called upon to give effect to it. Neither side asked me to take that course. Indeed, following this judgment I may be asked to hear submissions in support of ITC’s application that Jonathan be ordered to make an interim payment on account of this liability pursuant to CPR 25 and for that purpose it will at least be helpful, and it may be essential, to understand the meaning and effect of the remuneration order.

Accordingly, I will address the submissions as to the meaning of the remuneration order. For that purpose, I need to set out the relevant parts of the remuneration order. I will also, if only by way of contrast, set out the relevant parts of the new draft.

The remuneration order is in these terms:

“6.

In respect of his lawful entitlement to remuneration from ITC, Mr Jonathan Ferster was only entitled to receive the sum of £120,000 per year more than the amount of the payments paid by way of remuneration by ITC to each of Mr Stuart Ferster and Mr Warren Ferster.

…

Compensatory relief

9.

Judgment be entered for ITC for equitable compensation to be assessed in respect [of] the payment to Mr Jonathan Ferster of unauthorised “remuneration” from ITC that was in excess of Mr Jonathan Ferster’s entitlement under Paragraph 6 above (“the Unauthorised Remuneration”).”

The new draft is in these terms:

“6.

In respect of Mr Jonathan Ferster’s remuneration from ITC, (“the Remuneration”):

(1)

he was only entitled to receive the sum of £120,000 per year more than the amount of the payments paid by way of remuneration by ITC to each of Mr Stuart Ferster and Mr Warren Ferster (“Lawful Remuneration”);

(2)

all increases in the Remuneration above the Lawful Remuneration were unauthorised and must be repaid by him to ITC;

(3)

he is liable to account to ITC for all payments made out of the assets of ITC in respect of the Remuneration beyond the Lawful Remuneration.

…

Unauthorised Remuneration

9.

For the purposes of quantifying the liability of Mr Jonathan Ferster in Paragraph 6(2) and (3) hereof, an account (“the Account”) be taken of all monies paid out of ITC’s assets in connection with the Remuneration above the Lawful Remuneration.”

Much of the dispute as to the meaning of the remuneration order arises from the use of the words “equitable compensation”.

In very brief summary, Mr Thompson submits that this phrase refers to compensation for loss caused by a breach of a duty in equity. Mr Thompson then submits that the assessment of such compensation necessitates an investigation into whether the breach of duty caused the loss which is claimed and/or whether ITC would have been any better off if the duty had been performed and not broken.

Also in brief summary, Ms Stanley submits that the phrase “equitable compensation” is not to be equated with, and certainly not confined to, compensation for loss caused by a breach of duty in equity. She submits that it can also refer to monies payable pursuant to an account of profits made by a fiduciary in breach of duty and/or monies ordered to be paid by a trustee to restore to a trust fund monies which the trustee paid away without authority. She submits, by reference to the new draft, that the liability referred to in paragraph 6(3) of the new draft is a liability to pay equitable compensation.

In support of her submission as to the possible meanings of “equitable compensation”, Ms Stanley cited FHR European Ventures LLP v Mankarious [2015] AC 250 per Lord Neuberger PSC at [7] and AIB Group (UK) plc v Mark Redler & Co [2015] AC 1503 per Lord Reed JSC at [120]. In the first case, Lord Neuberger referred to a case of principal and agent where the agent had received a bribe or secret commission and where the principal was entitled to an account of the profit made by the agent. He then stated that the principal’s right to seek an account gave him a right to “equitable compensation” in respect of the bribe or secret commission which was the quantum of the bribe or secret commission (subject to any permissible deduction for expenses incurred by the agent). In the second case, when Lord Reed discussed the right to equitable compensation, by which he meant the right to compensation for loss caused by a breach of duty in equity, he explained that in Mankarious the description of a right to payment of the sum found due on an account of profits as “equitable compensation” was the use of the phrase in a different sense.

At the hearing on 7 February 2017, both counsel referred to the findings in my judgment that Jonathan had committed a breach of fiduciary duty by using his position as a director of ITC to cause ITC to make payments to himself, purportedly as remuneration, but without the authority of ITC. Both counsel then made detailed submissions as to the various remedies which could have been claimed by ITC by reason of this breach of fiduciary duty. There was a measure of agreement between counsel as to the remedies potentially available. I comment that this detailed analysis of the legal position as to remedies had not been put forward at the trial, nor at the hearing on 19 December 2016.

To explain the submissions of counsel as to remedies, it is helpful to refer to some of the alleged consequences of Jonathan causing ITC to pay him unauthorised remuneration. The alleged consequences included the following:

In relation to these four alleged consequences, Mr Thompson submitted that there was a difference between a “gains-based” remedy and a “loss-based” remedy. He said that ITC could, in principle, claim a gains-based remedy for consequence (1) and, arguably, for consequences (2) and (3), in the latter two cases if one could regard Jonathan as having made a gain as a result of the payment of PAYE and NI. However, ITC could not claim a gains-based remedy for consequence (4). However, where ITC could claim a gains-based remedy, it could in the alternative, and at its election, claim a loss-based remedy. In that way, ITC could elect to pursue a loss-based remedy for all four consequences. Mr Thompson then submitted that if ITC did elect to pursue a loss-based remedy for all four consequences, then the loss recoverable would be restricted to any loss caused by the breach of duty. A loss not caused by the breach of duty would not be recoverable.

In relation to these four alleged consequences, Ms Stanley submitted that ITC was entitled to claim an account in relation to consequences (1), (2) and (3). By the taking of such an account, the amount of money paid away by ITC to Jonathan and HMRC would be quantified. ITC was entitled to require Jonathan to restore that money to ITC. Even if it could be argued that there should be a different result for consequences (2) and (3) because these did not involve sums received by Jonathan, he could not avoid a finding that he was liable to restore to ITC the unauthorised payments which he himself received (i.e. consequence (1)). It should be noted that paragraphs 6(2) and (3) of the new draft would cover consequences (1), (2) and (3). Ms Stanley submitted that a claim to an account, and then payment, for consequences (1), (2) and (3) did not involve any consideration of causation apart from the obvious point that ITC had the money before it was paid away and it did not have it after it was paid away. She submitted that there was no need to search for a counter-factual (as with a common law damages claim) to inquire as to what might have happened if there had been no breach of duty. Ms Stanley accepted that any claim to compensation for consequence (4) was a claim for loss allegedly caused by the breach of duty and questions of causation could arise. The new draft did not provide for the alleged consequence (4). Ms Stanley pointed out that consequence (4) had not so far been pleaded by ITC.

Ms Stanley did not appear to disagree with the suggestion that in the alternative to claiming an account and an order for the restoration of the monies paid away without authority, ITC could claim compensation for loss caused by the breach of fiduciary duty. If for example, the removal of money from ITC had caused it to miss out on a profitable investment of that money, the loss of the investment could be compensated by an award of equitable compensation for breach of duty.

Counsel also agreed that where ITC could claim the remedy of requiring the restoration of money paid away by ITC and an alternative remedy of claiming compensation for loss resulting from the fact that money was paid away, ITC could make an election between those remedies and, once made, such an election was irrevocable.

Ms Stanley also submitted that if ITC claimed compensation for loss caused by consequence (1) (as distinct from an order requiring the net salary to be paid back to ITC) and the loss which it identified was the loss to ITC of the net salary, no question of causation arose apart from the obvious fact that before the payment of net salary ITC had the money in question and after the payment of net salary it did not.

Having recorded the submissions as to the remedies which were originally in principle open to ITC, I need to return to the question as to the meaning of the remuneration order. What remedy or remedies did the remuneration order give to ITC?

As Ms Stanley pointed out the phrase “equitable compensation” covers more than one remedy. As Mr Thompson pointed out there are gains-based remedies and loss-based remedies but, as is accepted in the present case, the relevant gains-based remedies are inconsistent with the relevant loss-based remedies. In the present case, a claim to an account and an order for the restoration of the money paid away is inconsistent with a claim to compensation for loss caused by the making of those payments. I do not think that I can hold that the words “equitable compensation” in the remuneration order cover all gains-based and all loss-based remedies which could be claimed as a result of the payment of unauthorised remuneration. I must therefore seek some further way of interpreting the remuneration order.

Both counsel appeared to accept that I could have regard to the background to the remuneration order. For this purpose, Mr Thompson referred to the pleadings, the earlier judgment, the skeleton arguments for the hearing on 19 December 2016 and the transcript of that hearing. Ms Stanley did not object to me having regard to those matters as an aid to the interpretation of the remuneration order.

In ITC’s Claim Form, so far as relevant, ITC claimed “equitable damages and/or compensation for breach of fiduciary duty by the First Defendant arising from his unauthorised receipt of remuneration”. The Claim Form also included a more detailed Prayer for Relief in similar terms to the Prayer for Relief in the Particulars of Claim. Paragraph (12) of that Prayer for Relief claimed a declaration that Jonathan held all sums received as unauthorised remuneration on trust and also claimed an order for the payment of “such monies” to ITC. Ms Stanley submitted that that Prayer was only for a proprietary remedy. I agree that the claim to a declaration of a trust was in the nature of a proprietary remedy. The phrase “such monies” is open to interpretation. It is more natural to read that phrase as referring to the monies paid to Jonathan as unauthorised remuneration and as not being restricted to monies which can be traced as held on trust. Paragraph (13) of the Prayer for Relief stated:

“In the alternative to Paragraph (12), an Order that the First Defendant do pay damages (alternatively equitable compensation) to the Claimant for all sums received by or to his benefit [as unauthorised remuneration].”

On a fair reading of the Prayer for Relief, paragraph (12) was a claim that Jonathan restore monies paid away by ITC which were “received by or to his benefit” and paragraph (13) was an alternative claim to compensation for loss resulting from the payment of unauthorised remuneration “received by or to his benefit”. In paragraph (13), I consider that the pleader is using “equitable compensation” in its most usual sense as compensation for loss resulting from the breach of duty. I also comment that this pleading would extend to consequences (1), (2) and (3) referred to above but not consequence (4) because it refers to sums “received by or to his benefit”.

I was not referred to any other part of the pleadings.

In his written closing submissions, Mr Gourgey, at paragraph 234.3, referred to the election to be made by ITC between an order providing for an account and payment by Jonathan and an order for equitable compensation. He submitted that the amount recoverable by way of equitable compensation would be greater that the amount recoverable pursuant to an order for an account and payment.

In my earlier judgment, I referred at [229] to the fact that ITC claimed an account and repayment in relation to the unauthorised remuneration and that it claimed equitable compensation “alternatively, at its election”. This was my understanding of the Prayer for Relief. The claim to an account and repayment was in the alternative to the claim to equitable compensation. As in the Prayer for Relief, and as in Mr Gourgey’s closing submissions, I was using equitable compensation in its usual sense of compensation for loss resulting from the breach of duty. I stated at [233] that Jonathan was liable to repay to ITC the unauthorised remuneration. At [234] I dealt with ITC’s claim “at its election” to “equitable compensation” for breach of fiduciary duty.

Before the hearing on 19 December 2016, Mr Gourgey provided me with a skeleton argument which included paragraph 13 in these terms:

“ITC is entitled at its option to repayment of the unauthorised remuneration taken by Jonathan or to equitable compensation for breach of fiduciary duty. For the reasons given in the Judgment (Judgment [229]), an assessment of equitable compensation will be greater than an order for the repayment of the unauthorised element. ITC’s current intention is to elect at the hearing for the remedy of equitable compensation. The equitable compensation is likely to be made up of (1) the amount of the unauthorised remuneration and (2) national insurance paid by ITC on the unauthorised remuneration. ITC reserves the right to seek in due course by way of consequential relief an order that Jonathan is liable to indemnify ITC in respect of any tax penalties and interest levied by HMRC following restatement of ITC’s accounts to reflect the amount of remuneration that was properly payable to Jonathan.”

Paragraph 13 of that skeleton argument is important. It makes a clear distinction between a remedy involving an order that Jonathan repay the unauthorised remuneration and the remedy of equitable compensation for breach of fiduciary duty. It states that ITC has the right to elect between the two remedies. It also explains why ITC would wish to elect for equitable compensation rather than an order for repayment of the unauthorised remuneration.

At the hearing on 19 December 2016, Mr Gourgey asked me to make the remuneration order containing in particular paragraph 9 as set out above. I raised the point that Mr Thompson had provided a draft order which was marginally different from the paragraph 9 put forward by Mr Gourgey. Mr Thompson then told me that the differences were immaterial. At that point there was essentially common ground that the court should make an order in accordance with Mr Gourgey’s paragraph 9. Mr Gourgey then made submissions on his application for an interim payment pursuant to the remuneration order.

At the hearing on 19 December 2016, Mr Thompson then addressed me on the application for an interim payment having noted that ITC had elected for equitable compensation. Mr Thompson then submitted that the compensation payable was for loss resulting from the breach of duty. He then submitted that on the evidence given at the trial as to the market value of Jonathan’s services, the remuneration he had received did not exceed that market value so that ITC had suffered no loss.

Having heard these submissions, I remarked that there appeared to be a major point of principle between the parties. I put in my own words the difference as I saw it between an order that Jonathan repay to ITC the unauthorised remuneration and an order that he pay compensation for the loss to ITC resulting from the payment of unauthorised remuneration. Mr Gourgey submitted that the losses which ITC had suffered were that its money had been paid away and there was no need to search for a counter-factual scenario. I raised the possible counterfactual of Jonathan asking his fellow directors for an increase in remuneration and an increase being agreed. I stated that I did not regard Mr Thompson’s submission about the calculation of loss as being hopeless; that was relevant to whether I should order an interim payment. Just before the short adjournment, Mr Gourgey stated that he might need to think about simply claiming repayment of the unauthorised remuneration and not claiming compensation for losses. Mr Thompson reserved his position as to whether it was too late for ITC to go back on its election.

After the short adjournment, Mr Gourgey told the court that ITC maintained its position in relation to the assessment of equitable compensation. I asked Mr Thompson whether he was content with the wording of paragraph 9 of the remuneration order and he stated that he was, subject to it being clear that he would be able to argue his points on causation of loss. Mr Gourgey did not suggest that Mr Thompson could not put forward the argument but, of course, Mr Gourgey had earlier made it clear that he would submit that the argument was unsound.

With this background, it is clear that both parties were proceeding on the basis that ITC had two potentially available remedies. The two remedies were seen as an order for the repayment of unauthorised remuneration and an order for equitable compensation, meaning compensation for loss resulting from the payment by ITC of unauthorised remuneration. The parties proceeded on the basis that those two remedies were inconsistent and that ITC had a right to elect. It is also clear that the parties did not agree on the relevance of arguments as to causation. There was a clear election by Mr Gourgey between the two remedies. He first made a choice on behalf of ITC when he introduced paragraph 9 of the remuneration order and he maintained his stance having heard Mr Thompson’s arguments on causation.

Against this background, it is relatively straightforward to interpret the remuneration order. The remuneration order provides for ITC to recover compensation for losses resulting from the payment of unauthorised remuneration. That is a different remedy from the remedy provided in the new draft. I cannot construe the remuneration order as having the same effect as the new draft.

Ms Stanley submitted that ITC could not have made a binding election prior to the time when the remuneration order pronounced on 19 December 2016 is sealed. She submitted that ITC could therefore reverse its earlier choice and now elect for an order in the terms of the new draft. This submission ignores the fact that, as I have earlier held, the court made the remuneration order on 19 December 2016. It cannot now make a different order unless it is asked to exercise, and it does exercise, its jurisdiction to set aside its earlier order. In any case, I cannot accept Ms Stanley’s points about there having been no election, as I will now explain.

In relation to what acts amount to the making of an effective election between remedies I was referred to the decision of the Privy Council in Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514. The judgment of the Privy Council was given by Lord Nicholls. At page 521D-F Lord Nicholls referred to the actions involved in making an election. He referred to the litigant choosing the remedy before judgment was “given” and before the judge was “asked” to make an order. He also referred to the litigant making up his mind before judgment was “entered”. This passage stresses the significance of there being a judgment to give effect to the election. This passage does not involve a ruling that a judgment which is pronounced or given or made has to be sealed before it can be said that an election is made. I do not see any reason of principle why a choice made by the litigant and given effect in a judgment which is effective and binding is not an effective election.

Ms Stanley also submitted that there could be no effective election unless ITC knew all of the relevant facts at the time of its election. It is correct that a litigant can ask the court to give him time to investigate facts which are relevant to his election so that he is not required to elect in ignorance of those facts: see Tang Man Sit at page 521F-H. However, if a litigant chooses to elect on the basis of the information he has, even if that information is incomplete, the election is effective. In any event, in the present case, there were no relevant facts of which ITC was ignorant when it made its election. Further, when it maintained its election after the short adjournment it had been clearly informed of the legal points that Jonathan would made as to the consequences of an election for compensation for loss resulting from the breach of duty.

Accordingly, I find that ITC elected for equitable compensation, in the sense in which that phrase was used in this case at all times up to and including 19 December 2016, not later than the point in time on 19 December 2016 when I gave effect to the agreed application before me that I should make an order in accordance with paragraph 9 of the remuneration order.

There was no application by ITC to set aside the remuneration order I made on 19 December 2016 pursuant to the court’s power to alter its own order before the order is sealed. That jurisdiction is explained in Re L (Children) (Preliminary Finding: Power to Reverse) [2013] 1 WLR 634. In any event, I do not see any basis on which I should alter an order I made at the request of both parties when ITC knowingly made its election to take the remedy recorded in that order.

As I explained above, there is a separate point on which the parties are not agreed. For present purposes it is sufficient to explain the point by reference to consequence (1) referred to above without discussing consequences (2) and (3). 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. Jonathan 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.

I will not rule on this question of causation at this stage for a number of reasons. First, the point is far from straightforward, as can be seen from the discussion of compensation and causation by Lord Toulson JSC in AIB Group (UK) plc v Mark Redler at [47]-[61]. Further, the analysis may be different in a case of fraud as compared with an honest breach of trust: see Lord Toulson at [62]. Yet further, the analysis may be different where the fiduciary, as distinct from a third party, has received the relevant sum. After the hearing on 7 February 2017, Ms Stanley sent me the decision of the Court of Final Appeal in Hong Kong in Tang Ying Loi v Tang Ying IP FACV No. 9 of 2016, the judgment having been given on 8 February 2017, and both counsel offered to make further submissions on that decision. The arguments which I heard on 7 February 2017 were for the purpose of my considering the order to be made to give effect to my earlier judgment. I am also asked by the parties at a hearing on 10 February 2017 to deal with a number of further applications and it seems likely that there will be inadequate time on 10 February 2017 to deal with a number of pressing matters. In these circumstances, I will content myself with determining the matter which has to be determined at this stage as to the form of the order to be made following my earlier judgment. Secondly, the point being raised is a preliminary point in relation to an issue as to causation. It is not obviously right to decide a preliminary point in relation to causation without knowing rather more about the implications.

The result of the above is that the remuneration order pronounced on 19 December 2016 should be sealed.