Watchstone Group Plc v Quob Park Estate Ltd & Ors

In this petition the Petitioner, Watchstone Group PLC, seeks relief under section 994 of the Companies Act 2006. The Petitioner was formerly known as Quindell plc, and in this judgment I shall refer to the Petitioner as Quindell.

Quindell was originally founded by a Mr Robert Terry, who is the Sixth Respondent. Until November 2014, Mr Terry was the executive chairman of Quindell. He ceased to be a director of Quindell in November 2014, but was retained as a consultant through his company, then called Advanced Data Solutions, but now called Quob Park Estate (“QPE”), until March 2015. QPE is the first Respondent to the Petition.

Quindell had a relationship with the company which is the subject matter of this petition, namely OS3 Distribution Limited. OS3 Distribution Limited has formerly been known by a number of names and I will refer to it as the Company.

The Company was founded by a Mr Philip Brooks, who is the fourth Respondent. At the time of the events complained of, Mr Philip Brooks was a director of the Company, along with Mr Gary Brooks, Mr Philip Brooks’ brother, who is the second Respondent, Mr Kevin Williams who is the third Respondent and Mr Keith Nisbet who is the fifth Respondent. I will call Mr Philip Brooks “Mr Brooks” and Mr Gary Brooks “Mr Gary Brooks”. There is a close social relationship, as well as a longstanding business relationship, between Mr Brooks and Mr Terry.

The Company owned, through a US subsidiary called SMI LLC (“SMI”) certain intellectual property rights to telecommunications software called OS3. The software ran on a platform owned by an American company, BMC Software (“BMC”). There had been various dealings between Mr Terry and Mr Brooks since they had both been involved in an earlier venture of Mr Terry’s called the Innovation Group PLC. Quindell became a publicly listed company in May 2011, and around this time the arrangements relating to the Company and Quindell became such that Quindell was a 19% shareholder in the Company. An exclusive distribution agreement was signed between Quindell and the Company on 30 September 2011. This involved Quindell buying a significant quantity of “stock” (in reality paying an advance on software licences). The exclusive distribution was later varied and I shall call the agreement as varied “the Distribution Agreement”.

Between then and late 2014, the Company seems to have been significantly dependent on Quindell. Quindell collected all the revenue from sales of the Company’s products and services pursuant to the Distribution Agreement, and accounted to the Company for its share. The Company’s cash needs and finances were dealt with by Quindell under the direction of Mr Laurence Moorse, then the Financial Director of Quindell. There were staff working for the Company carrying on tasks for Quindell and vice versa. From about early 2014 disputes began to arise in relation to the charges which were being made to the Company for staff employed by Quindell but who were contracted out to the Company. There were discussions about bringing the two businesses together, but nothing came of those. Quindell also made a number of loans to the Company. Another company owned by Quindell, namely Quintica, also used the OS3 software.

Towards the end of 2014, Mr Terry ceased to be a director of Quindell. New directors were appointed. There was an overlap of directors between November 2014 and May 2015, and a number of the earlier board of directors left Quindell on 29 May 2015, including Mr Moorse.

It quickly became clear that the new management wanted the Company to operate separately from Quindell and also to have some clarity as to the dealings between Quindell and the Company. Mr Terry was engaged by Quindell as a consultant for a while, and in that capacity was charged by Quindell with negotiating an agreement to tidy matters up. There were a number of areas in issue. First, there was a dispute about how much money the Company actually owed Quindell, in part arising from the issues referred to above about charging rates. The second was that some shares in Quindell which belonged to Mr Brooks had been sold and the proceeds apparently paid to Quindell; those shares had been held in what was described as the TMC account at a broker called Daniel Stewart PLC (“Daniel Stewart”), but the share certificates had not been provided to support the sale, causing some difficulty for Quindell.

A settlement agreement between the Company, Quindell, SMI and Mr Brooks was entered into on 22 December 2014 (“the December Agreement”). (I note that in fact the relevant Quindell party seems to have been Quindell Technologies Limited, but the parties have proceeded on the basis that this is not significant). Material provisions included the following:

At this stage, the balance of “unsold stock” stood at £1.4m.

During the period January to March 2015 the new management of Quindell were considering what should be done in relation to the Company, and discussions between Quindell and the Company took place. For this purpose Mr Brooks produced what has been described as the Financial Prospectus which he sent to Mr Moorse on 22 January 2015. I will return to this document later. Mr Brooks attended a meeting with Quindell and its advisers, PwC and Rothschild. Quindell exercised its option to take the additional 14% of shares on 31 January 2015.

At the same time the directors of the Company were thinking about a post-Quindell existence. Mr Nisbet had been working for Quindell, but now returned to the Company and took on responsibility for the finances and accounts of the Company, as none of the other directors were prepared to do this. However, to begin with he concentrated on cash management, and it appears that at this stage none of the directors really had any grasp of the actual financial position or profitability (or otherwise) of the Company. Mr Brooks also opened discussions with Mr Terry in January 2015. Those discussions included a non-executive director fee for Mr Terry of £50,000 pa and also Mr Terry giving strategic advice with a one-time fee of £333,333 invoiced up front (but with Mr Terry loaning money to pay for it), pursuant to which Mr Terry would work with the Company to identify short term funding for April and May to support the Company post its arrangements with Quindell, and would also help the Company seek potential buyers for the Company or the Company’s intellectual property, or an alternative investor structure to replace Quindell and provide new growth capital. Mr Terry was at this time still engaged as a consultant to Quindell.

During the period January to March 2015, disputes developed about the meaning and effect of the December Agreement. On 25 January, Mr Mitchell of Quindell emailed Mr Nisbet with a staff breakdown, setting out which company he thought was paying for which staff. Mr Nisbet chased Mr Mitchell on 30^th January expressing his concern about payroll. It transpired that there was no clarity about which company was paying what, with Mr Mitchell of Quindell calling the December Agreement a “dogs’ breakfast”.

Money was transferred from Quindell to the Company at the end of January, but further disputes arose. Meanwhile, in early February Mr Brooks told Mr Moorse that he had met a number of potential purchasers who might buy out the Quindell 33% shareholding.

On 19 February 2015 a preliminary Quindell board paper identified the Company as a potential candidate for disposal. In mid-February, Mr Stefan Borson, who had joined Quindell in August 2014 as Chief Legal Officer and then Group General Counsel, became involved. It is apparent from the documents that he was most unhappy about the December Agreement. Mr Borson, Mr Mitchell, Mr Sargeant and Andrew Passfield of Quindell met with Mr Brooks in the latter part of February. Mr Brooks came away thinking that the meeting had gone well and that there was some positive indication about funding for the next 2 quarters after 31 March 2015 if needed “so that we are not rushed into exit options”. An email of 24 February from Mr Brooks to the other directors makes it clear that Mr Moorse and Mr Terry were both telling Mr Brooks that Quindell would not in fact fund the Company beyond 31 March 2015, and that Mr Brooks did not know what to believe.

Following that meeting, Mr Borson asked the Company to execute a charge for the money which was to be paid by Quindell at the end of February. Mr Brooks and Mr Borson then engaged in discussion about what Quindell was and was not obliged to pay. By 26 February 2015 Mr Brooks was making reference to being in a dispute position in relation to the December Agreement, and without prejudice correspondence started. On Friday 28 February Mr Brooks emailed Mr Moorse, Mr Mitchell, Mr Borson and Mr Sargeant stating that the due payment from Quindell had not been paid. A payment was eventually made on 12 March 2015.

By the latter part of March, Mr Borson was again sending a proposed charge and facility agreement, together with a draft settlement agreement. Mr Brooks responded on 25 March 2015 asserting that sums of £48,282 were due from Quindell to the Company in respect of sales, £87,098 in respect of services, and £114,341 in respect of a project in which the Company and Quindell were both involved, with a company called Arqiva. Mr Brooks also told Quindell that if Quindell met their contractual commitments under the December Agreement, and made the final payment at the end of March so that the Company could meet its payroll obligations, then with operational restructuring and some additional finance support from other sources, the Company would be able to manage its cashflow without further assistance from Quindell.

On 30 March 2015 Mr Brooks again emailed Mr Borson and Mr Moorse asking for confirmation of the amounts to be paid the following day. The sums were not paid, and further discussions took place on 1 April, with Mr Borson saying that Quindell wanted validation of the March end costs. Mr Brooks explained that the directors were seeking a sale to BMC and had obtained other finance from the directors and associates of the directors. Mr Borson sought confirmation that the 14% of shares had been allotted; Mr Brooks said that he would check at his end. Mr Brooks also asked if Quindell was interested in selling its shares.

The amount of the payment for the March end costs due under the December Agreement was agreed on about 15 April 2015 and paid on 22 April 2015.

On 22 April 2015, but effective from 1 March 2015, the Company entered into an agreement with QPE (“the Consultancy Agreement”) for QPE to provide consultancy services to the Company pursuant to which QPE would host quarterly board meetings and provide an observer at the meetings (who was Mr Terry), and would provide consultancy services in connection with equity and debt fundraising and similar considerations, and general strategic support and advice. The Consultancy Agreement provided for the consultancy services to be obtained in blocks for 10 or 30 days at a cost of £125,000 or £360,000, and there was an initial fee of £360,000. Neither Mr Terry nor QPE became a director of the Company at this time.

On 23 April Mr Terry emailed Mr Borson saying that he was now the exclusive adviser to the Company. By this time two new issues had arisen. The first was whether the exclusive distribution arrangements under the Distribution Agreement came to an end on 31 March 2015, or only when the prepaid stock was repaid. The second was whether maintenance fees provided for under the Distribution Agreement should be paid over to the Company or set off against the prepaid stock. Mr Terry took the position that he agreed with Quindell that the Distribution Agreement did not come to an end until the stock had been repaid, but that the maintenance fees should be paid to the Company, so that c £307,000 plus VAT was due.

By 1 June 2015, settlement discussions in relation to these and other issues were well advanced. The events of 1-3 June 2015 are then at the heart of the issues which have been raised in this case. I will return to them in detail below.

On 2 June 2015, the directors asked the shareholders to pass a special resolution (“the Special Resolution”) in the following terms:

“That, in accordance with section 569 of the Companies Act 2006 (CA 2006), the directors of the Company be generally empowered to allot equity securities (as defined by section 560 of the CA 2006) as if section 561 of the CA 2006 did not apply to any such allotment”.

It is convenient at this stage to set out the terms of section 561. That section provides as follows:

“(1)

A company must not allot equity securities to a person on any terms unless–

(a)

it has made an offer to each person who holds ordinary shares in the company to allot to him on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company, and

(b)

the period during which any such offer may be accepted has expired or the company has received notice of the acceptance or refusal of every offer so made.”

All the shareholders other than Quindell were sent the proposed special resolution by email. There is a dispute about whether Quindell was provided with notice of the proposed special resolution, to which I will return below. The Special Resolution was passed with more than 76% of the shareholders’ votes and is dated 8 June 2015.

On 5 June 2015 a Loan Note Instrument was entered into between the Company and QPE as security trustee. On the same day, loan notes were issued to Mr Brooks, in the separate sums of £1.175m and £495,000, and to Mr Williams in the separate sums of £400,000 and £75,000. Those for Mr Brooks were in respect respectively of the shares in Quindell which he had provided pursuant to the December Agreement which had been set off against £2.7m of funding from Quindell to the Company, and in respect of the initial sums due from the Company to QPE under the Consultancy Agreement (£360,000 plus £50,000 plus VAT), which Mr Brooks had paid, borrowing money from Mr Terry to do so. Those to Mr Williams were in respect of money he had loaned the Company together with interest. Under the terms of the Loan Note Instrument the Company agreed not to have other borrowings other than the Loan Notes, save for borrowings up to £100,000 under finance etc. leases of equipment, computers etc.

On 16 June 2015 the board of the Company resolved to allot 627 shares to Quindell. The share certificate representing these shares is dated 19 June 2015.

On 19 June 2015 a settlement agreement (“the June Agreement”) between Quindell, Mr Brooks and the Company and other associated companies was executed. The June Agreement was intended to settle a range of outstanding issues, including for example a change of name for the Company. It provided among other things for:

The effect of the issue of the Loan Notes to Quindell was that there was a charge over the Company’s intellectual property, which was likely to be enforced if Quindell was not paid its Loan Note. The Loan Note fell due on 30 June 2016.

Following the June Agreement being entered into, QPE loaned money to the Company. The Company continued to trade, but continued to be in a difficult financial situation. The effect of the new borrowing by the Company from QPE, which amounted to £272,730.25 by 30 September 2015, was that the Company was in breach of its obligations under the Loan Notes.

On 16 September 2015 the Company prepared a Private Placing Memorandum (“PPM”) inviting investment at £5,000 per share together with the issue of associated warrants. On 30 September a number of transactions took place.

Some of the above shares in Daniel Stewart had been pre-sold by the Company for cash. However, on 1 October 2015 trading in shares in Daniel Stewart was suspended.

Between 14 and 23 October 2015 QPE loaned the Company a further £85,000, supported by guarantees from the directors. By November 2015 QPE had carried out about 100 days of consultancy for the Company at a cost of some £1.2m.

On 6 November 2015 a number of events occurred:

As a result of these transactions, the breach of the Loan Note Instrument referred to above was cured.

On 18 November 2015 Quindell wrote formally to the Company asking for the information to which it was entitled under Schedule 3 of the June Agreement (it had asked on a couple of occasions previously but the information had not been supplied). Quindell also asked for the appointment of Mr Sargeant as a director of the Company.

Mr Brooks responded on 2 December 2015. He attached various pieces of information including management accounts. In respect of allotments Mr Brooks said there were none yet, but that shares were due to be issued for c £2m raised. Mr Brooks also informed Mr Borson of the issue of shares on the basis of a £20m valuation and of the existence of the warrants, and notified Mr Borson that the warrants would involve the issue of shares of up to 76% of the enlarged shareholding if the future valuation was lower.

Mr Brooks also informed Mr Borson that approximately two weeks previously, BMC had made an offer for the Company, offering $2m up front and $2m on earn out. Mr Brooks’ email states that “If we take up this offer then this not only provides a dilemma for Loan Note holders but it also very disappointing for [the directors] after all the hard work over the last 6 years, and of course even then with final DD and legals to go it may still not happen.” The Points of Defence state that this offer from BMC was for the equity of the Company. In oral evidence Mr Brooks explained that it was for the assets of the Company. I will return to this below.

Mr Brooks’ email also stated that he personally did not think that the BMC offer was viable so that he had been speaking to QPE about possible options for carrying on. Mr Brooks pointed out that if the BMC offer was accepted, he anticipated the Loan Note holders being paid about 69%; he put forward various other options for dealing with the Loan Notes, which included buying out Quindell’s loan notes or equity, significantly extending the duration of the Loan Notes, or carrying out a rights issue or equity raise prior to 1 July when the Loan Notes matured. Mr Brooks pointed out that this would likely dilute Quindell to c 6.5%, and it was unlikely that sufficient money could be raised to pay more than 50p in the pound in respect of the Loan Notes anyway. It appears that by this stage, a valuable deal with Verizon was about to be signed.

Mr Borson responded offering a clean break on the basis of repayment of the Loan Note at par (£1.255m) and a further £1.255m for the 33% shareholding. Mr Borson also stated that Quindell had severe doubts about the viability and solvency of the business, and reminded Mr Brooks of the directors’ obligations given the precarious financial position of the Company. Mr Borson went on to ask a number of questions about the transactions which had been gone into, expressing his shock that a 33% shareholder had not been consulted about the transactions which had resulted in the warrants.

As a result of this exchange, Mr Borson took the view that Quindell should not appoint a director to the board of the Company. A contemporaneous email describes the position as “toxic”, and as he explained in evidence he did not think it fair to the individual to ask him to go on the board of the Company.

Mr Brooks replied to Mr Borson on 3 December offering to pay the loan note at par, and somewhat in advance of its due date, and to buy the 33% shareholding for £200,000 if he had until 17 December 2017 to purchase; otherwise he thought he could get an offer of £100,000 from QPE.

Between 10 November and 7 December 2015 QPE loaned the Company a further £180,000. On 7 December 2015, the directors of the Company at a board meeting approved the issue of 1,723 shares in the Company for £300,026 in cash. Mr Terry’s unchallenged evidence was that the price was chosen as it gave the greatest number of shares to be issued under the warrants. Also on 7 December 2015, QPE was allotted 10,532 shares in the Company pursuant to the Warrant Instrument, and paid £10,532 in cash for those shares.

QPE became a director of the Company on 7 December 2015.

On 15 December 2015, QPE was allotted a further 5,729 shares in the Company in exchange for shares which it owned in Imaginatik PLC, on the basis that the Imaginatik shares were worth £997,500. The board minutes record that this was the average price paid by QPE to Daniel Stewart for Imaginatik shares. Those shares were sold, at substantial losses as against the price paid but raising cash, during 2016.

The Verizon deal referred to above was indeed signed during December 2015.

Quindell then consulted solicitors, and a letter was sent by Herbert Smith Freehills on 21 December 2015.

The petition was issued on 4 May 2016, seeking payment of Quindell’s Loan Note and a buy-out order in respect of Quindell’s shares in the Company. Quindell’s Loan Note was in fact repaid by the Company on 28 June 2016, with QPE waiving its right to be paid at the same time. Mr Brooks was also repaid the outstanding £495,000 Loan Note which he still had, which he used to repay the money he had borrowed from Mr Terry to pay QPE’s initial invoice from April 2015.

On 31 May 2016 the directors sold their shares in the Company to QPE in exchange for shares in QPE.

In November 2016, QPE acquired the intellectual property and the stock and OS3 related contracts of the Company. All the creditors of the Company, including HMRC, have been paid other than QPE itself. The Company therefore now has no assets and no business and its only liabilities are to QPE. There is no suggestion by Quindell that the intellectual property or other assets were transferred at an undervalue.

Section 994 of the Companies Act 2006 provides as follows:

“(1)

A member of a company may apply to the court by petition for an order under this Part on the ground–

(a)

that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b)

that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

Quindell makes two complaints that the Company’s affairs have been conducted in a manner which is unfairly prejudicial to the interests of some part of the members including Quindell, alternatively to the interests of Quindell.

First it complains that the directors of the Company, orchestrated by Mr Terry, made the arrangements whereby Quindell was diluted from a 33% shareholder to a 5.3% shareholder in such a way as to deprive Quindell from voting on, and if it thought fit blocking, a special resolution in respect of the same. It is pleaded in paragraph 6.3 of the Petition, and again in Further Information provided on 24 November 2016, that Quindell would have blocked a special resolution so as to prevent the arrangements if it had been properly informed what was intended, and if it had been in a position to do so as a 33% shareholder. The Further Information complains that Quindell was deliberately prevented from blocking a special resolution for general empowerment by including such general empowerment in the Special Resolution. These complaints therefore go to the Special Resolution, which was passed in June 2015.

Second it complains that the transactions which took place in September and December 2015 whereby the dilution of its interest in the Company took place did not raise any funding but did have the effect of making QPE the Company’s overwhelming majority shareholder. It is alleged that the execution of the Warrant Instrument and the consequent allotment of shares was not in the interests of the Company and/or was for an improper or predominantly improper purpose. It is therefore alleged that the board of the Company acted in breach of fiduciary duty, and/or in breach of sections 171 and 172 of the Companies Act 2006.

Mr Lord QC submitted in opening that Quindell had not pleaded a complaint about the Special Resolution, which was passed in June, but only about the creation of the warrants in September 2015 and their subsequent exercise in December 2015 which led to the substantial dilution of Quindell. Mr Lord referred me to a number of cases on the importance of confining the parties to their pleaded case, particularly in a section 994 petition, and in particular referred me to Patrick McKillen v Misland (Cyprus) Investments Limited and Others [2012] EWHC 521 in which David Richards J said at paragraph 12:

“The importance of statements of case as the means by which the real issues in the case are defined is clear in all cases, but it is of particular importance in proceedings under section 994 of the Companies Act 2006 where the jurisdiction is so widely expressed. This was recognised in In re Tecnion Investments Ltd [1985] BCLC 434 at 441 by Dillon LJ, who, as a first instance judge had early experience of the new unfair prejudice jurisdiction introduced by section 75 of the Companies Act 1980.”

I accept Mr Lord’s submission as to the importance of confining Quindell to its pleaded case. However, Mr Lord’s submission that Quindell had not pleaded a case relating to the Special Resolution was made by reference to paragraphs 6.1 and 6.4 of the Petition. I think that this is too narrow a reading of the Petition, which sets out in paragraph 4.1 the events of which it complains, namely the Special Resolution on 8 June 2015, the issue of the Warrant Instrument and the issue of warrants pursuant thereto on 30 September 2015, and the subsequent allotment of shares which substantially diluted Quindell. Paragraph 4.1 complains that these events took place without Quindell’s knowledge, and paragraph 4.3 complains that the Special Resolution was passed when Quindell should have been a 33% shareholder, that the general authority to raise equity funding was included in contemplation of Quindell becoming a 33% shareholder and that the Special Resolution could not have been passed without Quindell’s consent as a 33% shareholder. In paragraph 6 which is headed “Conclusion”, Paragraph 6.3 specifically pleads that the arrangements were effected in such a way as to deprive Quindell from voting on, and if thought fit blocking, a special resolution in respect of the same, and further pleads that Quindell would have blocked a special resolution so as to prevent the arrangements if it had been properly informed of what was intended. “The arrangements” which are alleged in paragraph 6.4 to have been effected in breach of fiduciary duty, and in breach of sections 171 and 172 of the Companies Act 2006, must include the arrangements for the Special Resolution. The Further Information given by Quindell on 24 November 2016 also sets out complaints in relation to the Special Resolution.

I therefore conclude that Quindell has properly pleaded a case in relation to the Special Resolution in June, and that it is entitled to pursue that case.

Quindell’s complaint in relation to the Special Resolution is twofold: that it was carried out unbeknown to Quindell (paragraph 4.1), and that it was carried out when Quindell should have been a 33% shareholder and in contemplation of Quindell becoming a 33% shareholder, in such a way as to prevent Quindell from voting on and if thought fit blocking the Special Resolution (paragraph 6.3). Mr Collings Q.C. on behalf of Quindell accepts that the Special Resolution is valid, but submits that the directors’ actions in promulgating the Special Resolution were carried out for an improper purpose, namely the purposes already set out in this paragraph, and that the directors did not believe the Special Resolution to be in the interests of the Company for the benefit of the shareholders as a whole but rather intended to disadvantage Quindell.

In relation to the issue of the warrants in September 2015 and the subsequent allotment of shares pursuant thereto, which together were the events which significantly diluted the interest of Quindell, the case pleaded is that:

Mr Collings explained in opening that his case in relation to the Special Resolution was that although entered into in breach of fiduciary duty and for an improper purpose, it did not cause any prejudice, whether fair or unfair, to Quindell until 30 September 2015 when the September arrangements were entered into pursuant to the Special Resolution. As he put it, if the Special Resolution had been put in a drawer and never acted upon, it would all be merely theoretically unfairly prejudicial. Thus, the September arrangements come into play in two ways on Quindell’s pleaded case; first, as being the unfair prejudice which stemmed from the Special Resolution, and secondly on the basis that the directors caused the Company to enter into the September arrangements for an improper purpose and without a bona fide belief that they were in the best interests of the Company.

In relation to this second way in which the September and subsequent arrangements were relied upon, at the end of the evidence Mr Lord asserted that Mr Collings had not put that case to the directors. Mr Collings confirmed that he had not put the case about improper purpose and also confirmed he was not relying on that case in relation to the September and subsequent arrangements; he submitted however that he had fairly put to at least the principal witnesses that the September arrangements were not entered into in good faith in the belief that they were in the best interests of the Company for the benefit of the shareholders as a whole. I will return to this issue later.

The case against Mr Terry and QPE was that Mr Terry had “orchestrated” the arrangements complained of for the benefit of QPE. There was no allegation that Mr Terry or QPE was a shadow director of the Company at the relevant time, or that he owed any fiduciary duty to the Company.

Mr Collings submitted that in order to succeed, Quindell had either to show a breach of fiduciary duty or of section 171 or 172, or he had to show that the directors’ actions were a visible departure from generally accepted standards of fair dealing, or were unconscionable. Mr Collings also submitted that even if the directors were acting for a proper purpose and bona fide in what they considered to be the best interest of the Company, nonetheless the massive dilution of Quindell by the September transactions and the warrants would outweigh any good that was done for the Company by the raising of money, such that the transactions could amount to unfair prejudice. Mr Lord however submitted that unless the company was a quasi-partnership in which equitable considerations arose, there could be no unfair prejudice unless the directors had breached either section 171 or section 172 (or their equitable fiduciary duty).

In this context both parties referred me to O’Neill v Phillips [1999] 1 WLR 1092, to In re Saul D Harrison & Sons Plc [1995] 1 BCLC 14 and to In Re Coroin Ltd (no 2) [2013] 2BCLC 583, where David Richard J at first instance said this at paragraph 632:

“632 On the difficult concept of fairness, the Court has the authoritative guidance given by the House of Lords in O’Neill v Phillips [1999] 1 WLR 1092 and the Court of Appeal in In re Saul D Harrison & Sons Plc [1995] 1 BCLC 14. The passage from the speech of Lord Hoffmann in O'Neill v Phillips is so central to a consideration of these issues that I consider it right to set it out in full:

“5.

“Unfairly prejudicial”

In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 17–20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J. said in In re J. E. Cade & Son Ltd. [1992] B.C.L.C. 213, 227: “The court … has a very wide discretion, but it does not sit under a palm tree.”

Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (“it's not cricket”) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.

In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.

This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in In re Westbourne Galleries Ltd. [1973] A.C. 360, adopted in giving content to the concept of “just and equitable” as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:

“The words [‘just and equitable’] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

I would apply the same reasoning to the concept of unfairness in section 459. The Law Commission, in its report on Shareholder Remedies (Law Com. No. 246) (1997) (Cm. 3769), para. 4.11, p. 43 expresses some concern that defining the content of the unfairness concept in the way I have suggested might unduly limit its scope and that “conduct which would appear to be deserving of a remedy may be left unremedied … ” In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty. Petitions under section 459 are often lengthy and expensive. It is highly desirable that lawyers should be able to advise their clients whether or not a petition is likely to succeed. Lord Wilberforce, after the passage which I have quoted, said that it would be impossible “and wholly undesirable” to define the circumstances in which the application of equitable principles might make it unjust, or inequitable (or unfair) for a party to insist on legal rights or to exercise them in particular way. This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness.”

633 To similar effect is the judgment of Hoffmann LJ in In re Saul D Harrison & Sons Plc where he makes clear that the starting point in any case under section 994 is to ask whether the conduct complained of was in accordance with the basis upon which the petitioner agreed that the affairs of the company would be conducted and that, in most cases, this basis is adequately and exhaustively laid down in the articles of association, the material statutory provisions and sometimes in collateral agreements between the shareholders. It is equally well established that it is not every breach of the articles or shareholders agreement which will constitute unfair prejudice.”

In the Court of Appeal in Re Coroin Ltd (no 2) [2013] 2BCLC 583, Arden LJ said this at paragraph 17:

“In order to show unfairness, Mr McKillen had to demonstrate unfairness stemming from a breach of a legal right conferred by the articles or the shareholders' agreement: see generally O’Neill v Phillips [1999] 2 BCLC 1. In one category of case, that is where the company is formed on the basis of a personal relationship between the shareholders, the court is able to subject legal rights to equitable considerations. However, the judge held that Coroin did not fall into that category of case and there is no appeal on that point.”

Mr Collings also referred me to Graham v Every [2014] EWCA Civ 191 and to Re Tobian Properties Limited [2013] 2 BCLC 567 at paragraphs 21-22 where Arden LJ said:

“21 The key phrase in s.994(1) , “unfairly prejudicial”, comprises two elements, unfairness and prejudice but both of these must be understood in the context of company law. The concept of fairness inherent in this phrase is flexible and open-textured but it is not unbounded. The courts must act on a principled basis even though the concept is to be approached flexibly. They cannot decide whether to grant or refuse relief from unfair prejudice on the basis of palm-tree justice. The impact of the context was explained by Lord Hoffmann in O’Neill v Phillips [1999] 1 W.L.R. 1092; [1999] B.C.C. 600 ………..

22 One of the most important matters to which the courts will have regard is thus the terms on which the parties agreed to do business together. These are commonly found in the company's articles. They also include any applicable rights conferred by statute. In addition, the terms on which the parties agreed to do business together include by implication an agreement that any party who is a director will perform his duties as a director. Primary among these duties are the seven duties now codified in sections 171 to 177 of the Companies Act 2006 . Under these duties, a director must act in the way which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. There is also the well-known duty to avoid conflicts of interest and duty: a director must avoid a situation in which he has an interest which conflicts with that of the company. Six out of seven of these duties are fiduciary duties, that is, duties imposed by law on persons who exercise powers for the benefit of others. Non-compliance by the respondent shareholders with their duties will generally indicate that unfair prejudice has occurred.”

Mr Collings did not seek to argue that this was a case in which the relationship between the parties required that the court subject legal rights to equitable considerations. Accordingly, as in Re Coroin Limited (No 2), Quindell will have to show that there was unfair prejudice stemming from a breach of the “terms on which the parties agreed to do business together”. I have set out above what is actually pleaded as to the conduct complained of, which does not go outside the allegations of improper purpose and breach of fiduciary duty.

Quindell’s case pleaded in paragraph 6 of the Reply is that as a result of the conduct complained of, unfair prejudice has been suffered by Quindell in two respects; firstly because the value of the Company and consequently the value of Quindell’s shareholding therein has been diminished; and secondly that Quindell’s shareholding was diluted from 33% to 5.3%.

The Respondents’ response is that there was no prejudice, and if there was prejudice it was not unfair, for a variety of reasons:

The issues therefore are as follows:

Mr Collings Q.C. referred me to paragraphs 15 to 22 of the judgment of Leggatt J in Gestmin SGPS S.A. v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm). Paragraphs 19, 20 and 22 of that judgment are as follows:

“19 The process of civil litigation itself subjects the memories of witnesses to powerful biases. The nature of litigation is such that witnesses often have a stake in a particular version of events. This is obvious where the witness is a party or has a tie of loyalty (such as an employment relationship) to a party to the proceedings. Other, more subtle influences include allegiances created by the process of preparing a witness statement and of coming to court to give evidence for one side in the dispute. A desire to assist, or at least not to prejudice, the party who has called the witness or that party's lawyers, as well as a natural desire to give a good impression in a public forum, can be significant motivating forces.

20 Considerable interference with memory is also introduced in civil litigation by the procedure of preparing for trial. A witness is asked to make a statement, often (as in the present case) when a long time has already elapsed since the relevant events. The statement is usually drafted for the witness by a lawyer who is inevitably conscious of the significance for the issues in the case of what the witness does nor does not say. The statement is made after the witness's memory has been “refreshed” by reading documents. The documents considered often include statements of case and other argumentative material as well as documents which the witness did not see at the time or which came into existence after the events which he or she is being asked to recall. The statement may go through several iterations before it is finalised. Then, usually months later, the witness will be asked to re-read his or her statement and review documents again before giving evidence in court. The effect of this process is to establish in the mind of the witness the matters recorded in his or her own statement and other written material, whether they be true or false, and to cause the witness's memory of events to be based increasingly on this material and later interpretations of it rather than on the original experience of the events.

Mr Collings invited me to treat the evidence of all the Respondents’ witnesses with caution. He submitted that there was evidence of rehearsal of evidence arising out of the litigation process, and drew attention to the similarity of a number of the Respondents’ witness statements. He also drew attention to the directors’ evidence in cross examination to the effect that emails did not mean what they plainly said.

I bear well in mind the guidance in Gestmin, and the need to carefully consider the contemporaneous documents and the inherent probabilities.

I do find that the oral evidence of the Respondents’ witnesses needs to be treated with some caution.

Quindell elected only to call Mr Borson, and I did not therefore have the advantage of hearing from other directors at Quindell whose correspondence was in issue before the court. Mr Borson was on the whole a careful witness who was willing to concede that emails said what they clearly said, but there were some aspects in which again his evidence cannot be squared with the contemporaneous documents. Again therefore his evidence must be treated with some caution in those respects.

I was taken to sections 171 and 172 of the Companies Act 2006, which relevantly provide as follows:

“171 A director of a company must–

In relation to section 171, both parties referred me to Eclairs Group Ltd v JKX Oil and Gas plc [2016] 1 BCLC 1, but submitted that in view of the lack of agreement between their Lordships as to the test for which purpose was to be considered, I should consider what was the predominant purpose of the directors in promulgating the Special Resolution, following the speech of Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 835F-H:

“… it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.”

In relation to section 172, Mr Lord referred me to Re Smith & Fawcett Ltd [1942] Ch 304 at 306, where Lord Green M.R. said that the directors had a duty to act:

“bona fide in what they consider – not what a court may consider – is the interests of the Company”.

Mr Collings did not really dispute that this was the correct consideration; he accepted that what was important here was the directors’ bona fides. Although he referred me to two cases on irrational directors, I do not think that they assist in this case.

I then turn to the events leading up to the Special Resolution in more detail.

The background as to the dealings between Quindell and the Company in the period January to June 2015 is set out in paragraphs 2-21 above. There are many references in the witness statements to, and ample evidence in the contemporaneous documents of, the financial difficulties which the Company was facing in the first part of 2015. All the directors ceased taking any salary from early 2015 (and that salary was formally waived in 2016). Some of the directors put additional money into the Company during January –June 2015, borrowed money from others to put into the business and ran up bills on their credit cards when travelling on the Company’s business. In oral evidence Mr Brooks described this period as being “five months of sheer hell”. That evidence is supported by the contemporaneous documents and I accept that this was the directors’ experience at that time.

It was also the directors’ belief that Quindell was deliberately seeking to drive the Company into insolvency. Mr Terry mentions this in his witness statement, and Mr Brooks confirms that paragraph of Mr Terry’s statement. Mr Brooks also gave oral evidence of a conversation he had with Mr Sargeant prior to the December Agreement in which Mr Sargeant told him that he owed £12m to Quindell, and because the Company had no money, Quindell was going to run the Company into administration and take the intellectual property.

Mr Brooks’ account is supported by the contemporaneous documents. The documentary record shows that during the period leading up to the events of 1-3 June 2015 Quindell was well aware of the Company’s financial difficulties, suggests that Quindell at least considered a strategy along the lines of Mr Brooks’ evidence, and also suggests that Quindell knew that the Company was likely to turn to Mr Terry and QPE for funding:

It is also apparent that as at 1 June 2015, what was in the directors’ minds was that the best outcome for the Company and its shareholders was a sale to BMC. A possible sale to BMC is first mentioned in an email of 5 February 2015 from Mr Brooks to Mr Moorse, and again in an internal Quindell email of 19 February 2015 in which it is recorded that Mr Brooks had told Mr Borson that the other shareholders were keen to sell, and had again mentioned BMC as a possible purchaser. But as Mr Terry put it in his witness statement “the Company would only achieve a sale to BMC if it stayed solvent, and it was a struggle for the Company to do that with each month that passed”. During the latter part of May, Mr Terry and Mr Brooks were in contact with BMC seeking to pitch the Company’s business to them. On 29 May 2015, Mr Terry (who was then travelling) also told Mr Brook that he had ideas to discuss with the directors when he returned, including the potential to raise some funds at a valuation of £30m while waiting for the BMC deal to complete.

By 1 June, there were in existence various disputes as to the obligations of Quindell under the December Agreement, and the additional shares to bring Quindell to a total of 33% had not been issued. Settlement discussions were taking place. On 1 June the following took place.

At 10:12 on Tuesday 2 June, a notice was sent out by email to all the shareholders in the Company other than Quindell seeking a special resolution in the terms set out in paragraph 23 above. The covering email explained that the Company had been advised that the special resolution needed to be passed by the shareholders “in order for the Company to meet its commitments to Quindell as part of its restructuring to a standalone operational entity and which will also provide us with the flexibility to raise new funds as necessary”. It is common ground that no email was sent to Quindell.

The majority of the other shareholders, in addition to Quindell and the four directors, were friends and family of the directors, many of whom had been given shares by Mr Brooks. On 2 June, one of the shareholders asked Mr Brooks for an explanation. Mr Brooks responded as follows:

“as part of the restructuring of [the Company] to be independent from Quindell Group we had to issue a further 14% shareholding taking them to 33% in exchange for settlement of growth funding……unfortunately when I decided to issue shares to a load of individuals…I hadn’t thought through the pre-emption rights written in the Articles that mean we have to liaise with loads of shareholders to get resolutions passed to support these events. Getting a 75% majority approved to this resolution to remove pre-emption rights will simplify approvals going forward enabling us to move quicker. Your support would be appreciated!”. An explanation in almost identical terms was given to a number of other shareholders who made enquiry.

On 3 June 2015, Mr Brooks forwarded this explanation to the other directors, saying:

“we are already obliged (and already in breach) to issue 14% more shares to Quindell. Unfortunately our combined shareholding (us four) do not have the necessary 75% voting rights to pass the resolution due to pre-emption rights in the Articles. Getting a 75% majority approval to this resolution to remove pre-emption rights will simplify approvals going forward enabling us to conclude the Quindell obligations but also give us “the board” flexibility going forward to make decisions. Quindell are unlikely to like this but currently only hold 19% so we need to get this done now and gather up at least 75% approval on this resolution.”.

In his witness statement, Mr Nisbet stated that the reason for the inclusion of the general empowerment was that the board was in agreement that the Company had to have the ability and flexibility to sell shares and quickly raise funds, and that to achieve this it would be necessary to obtain disapplication of the pre-emption rights, and was also necessary to issue the additional 14% of shares to Quindell. Mr Terry in his witness statement stated that from his and QPE’s perspective, the general empowerment was a key issue as otherwise QPE would have been considerably hindered in its attempts to raise funds for the Company, and in all likelihood QPE would no longer have been willing to assist as an adviser or provide further funds, which would have left the Company in an insolvent position. Mr Terry also explains in his witness statement that he did not trust Mr Borson and Mr Sargeant, and that he feared that once Quindell was a 33% shareholder, Quindell would use their veto rights to bring the Company to the brink and thereby acquire the Company’s intellectual property on very favourable terms as a result.

Mr Brooks’ witness statement confirms that he agrees with these explanations. He explains that he had tried to obtain further funding from Quindell and that had failed; he had exhausted his own contacts, and took the view that assistance from QPE was the only way forward for the Company, to keep it afloat until a sale to BMC could be arranged. I have referred above to his evidence that it had been 5 months of sheer hell for the directors. There is documentary evidence of Mr Brooks seeking short term funding from both Quindell and QPE/Mr Terry around the time of the Special Resolution. Mr Brooks also accepted in his witness statement that he understood, and gave evidence that he and the other directors had discussed, that once Quindell’s shareholding had increased to 33%, the Company would never be able to get 75% shareholder consent again.

In cross examination, Mr Terry said that he had told the directors that unless the issue was sorted, he/QPE would not lend to the Company, and Mr Brooks also gave that as a reason for the Special Resolution. Mr Terry’s oral evidence was more certain than what he said in his witness statement, namely that in all likelihood QPE would not lend, but I accept that the threat that QPE would not lend, and the belief that without QPE’s immediate lending and its future ability to raise funds the Company was going to run out of cash before the BMC offer was received was a material fact in the minds of at least Mr Brooks and Mr Nisbet.

Mr Gary Brooks’ evidence was that on the evening of Monday 1 June 2015 the directors discussed a number of matters, including the product and how they were going to meet the payroll. He said that the meeting came up with some very legal jargon which was explained to him as a need to have a way to raise funds to pay the payroll. The ability to issue the new shares to Quindell and the ability to raise funds to pay the payroll were what was in his mind when deciding to put forward the Special Resolution, and what he was really interested in was the payroll.

Mr Williams’ evidence was that at the meeting on 1 June, he was particularly concerned about the payroll, that he had put £60,000 of his own money into paying the payroll, and that he believed that the Company needed a process whereby it was able to raise money on a quick and simple basis in order to pay the payroll.

The directors’ position taken in their witness statements, and steadfastly stuck to in cross examination, was that they had not issued the shares giving Quindell its additional 14% prior to 1 June 2015 because they thought that Quindell’s right to the shares was conditional upon it honouring its obligations under the December Agreement. I am unable to accept that evidence, which flies in the face of the contemporaneous documents, some of which are set out above. I find that the directors did indeed believe that Quindell were in breach of the December Agreement, and that during April and May 2015 they were stalling the issue of the shares while they negotiated the June Agreement, but that they did not apply their minds to the legal question of whether the obligation to issue shares was conditional. They were trying to best position the Company in the negotiation leading to the June Agreement which settled (as they thought) all the outstanding issues. Quindell, it is clear from the documentary record, was also seeking to best position itself in the same negotiation. However, it is clear to me that the directors’ stalling in April and May 2015 was not for the purpose of getting through the Special Resolution, that problem having not then occurred to them. Instead, the stalling having happened, the directors took advantage of the fact that Quindell was still only a 19% shareholder at the time that it occurred to them to pass the Special Resolution to get the Special Resolution through.

Mr Collings made it clear that he was not alleging that the directors had in mind on 2 June 2015 the arrangements which were eventually entered into in September 2015. I agree. It is clear to me that what all the directors had in mind was having flexibility to raise funding in whatever way they could in the future, and that in addition at least Mr Philip Brooks and Mr Nisbet had in mind a desire to ensure that Quindell could not block such fundraising in the future, so that it was important that the Special Resolution was passed before Quindell was issued the additional shares bringing it to 33%. Mr Williams clearly understood this at latest on 3 June, when he received Mr Brooks’ email referred to above. I do not find that any director had in mind causing any detriment to Quindell, or conferring any benefit on QPE. Indeed, the directors collectively had a greater interest than Quindell’s prospective share at that time, and there was no reason for them to want to confer any benefit on any person other than the shareholders. They envisaged that the BMC offer would be successful, and that Quindell would get its share of that offer.

Mr Collings however says that the directors acted for an improper purpose and in breach of their fiduciary duty to act bona fide in the interests of the company for the benefit of the shareholders as a whole when they caused the Special Resolution to be considered and voted on before Quindell was issued its additional shares. He draws an analogy with fixing the date of a shareholders' meeting at a time when it is known that a hostile shareholder cannot attend, drawing attention to the following passage from paragraph 16 of the judgment of Lord Sumption in the Eclairs case, supra:

“….One of the commonest applications of the principle in company law is to prevent the use of the directors' powers for the purpose of influencing the outcome of a general meeting. This is not only an abuse of a power for a collateral purpose. It also offends the constitutional distribution of powers between the different organs of the company, because it involves the use of the board's powers to control or influence a decision which the company's constitution assigns to the general body of shareholders. Thus in Fraser v Whalley (1864) 2 H & M 10 , the directors of a statutory railway company were restrained from exercising a power to issue shares for the purpose of defeating a shareholders' resolution for their removal. In Cannon v Trask (1875) LR 20 Eq 669 , which concerned the directors' powers to fix a time for the general meeting, Sir James Bacon VC held that it was improper to fix a general meeting at a time when hostile shareholders were known to be unable to attend. In Anglo-Universal Bank v Baragnon (1881) 45 LT 362 , Sir George Jessel MR held that if it had been proved that the power to make calls was being exercised for the purpose of disqualifying hostile shareholders at a general meeting, that would be an improper exercise of the directors' powers. In Hogg v Cramphorn Ltd [1967] 1 Ch 254 , Buckley J held that the directors' powers to issue shares could not properly be exercised for the purpose of defeating an unwelcome takeover bid, even if the board was genuinely convinced, as the current management of a company commonly is, that the continuance of its own stewardship was in the company's interest. The company's interest was an additional and not an alternative test for the propriety of a board resolution.”

Mr Collings also drew my attention to two passages in the judgment of Hart J in CAS (Nominees) Ltd v Nottingham Forest FC [2002] 1 BCLC 613. The first at paragraph 43 is as follows:

“The claimants’ attack on the transaction is therefore best put, not on the basis that there was no genuine and primary purpose to secure capital for the club, but on the basis that the means adopted to secure that end were an improper (and in section 459 terms unfair) evasion of obstacles laid in their path by statue. That thesis requires them to demonstrate wither that the statute impliedly prohibits such an exercise of their powers, or that there was something inherent in the powers which were used which made it improper for them to be exercised in such a manner”.

The second, at paragraph 48, is as follows:

“The claimants’ case is not that they lost the chance to exercise rights of pre-emption under s 89. Their case is that they lost the chance (which they would have taken) to vote their share against a special resolution disapplying those rights of pre-emption. If they are right that the board was bound to proceed, if at all, by the route of such a special resolution, then what they lost was the ability to block the transaction. Whatever view one may take of the merits of their choosing to exercise that power, it is entirely intelligible that they should feel a sense of grievance at being deprived of it.”

The real complaint of Quindell can be gleaned from its Further Information. Quindell said in its Further Information and Mr Collings repeated in opening that the directors should have caused the Company to issue the additional shares before the Special Resolution was promulgated. That is really the nub of this part of the case. I disagree. In relation to the additional shares, Quindell was not a shareholder but a contractual counterparty. I see no obligation on the directors to ensure that Quindell’s contractual interests were preferred to the interests of the Company and the then shareholders as a whole, whose interests the directors considered to be served by the survival of the Company and ability to raise funds in order to get to the position where an offer from BMC could be received. This would be to confer on Quindell a contractual benefit for which it could have, but did not, bargain. I find that the predominant purpose of the directors in promulgating the Special Resolution at that time (ie before Quindell became a 33% shareholder) was twofold, namely to enable the issue of the additional shares to Quindell and to enable the Company to raise finance in the future which the directors genuinely thought it needed. I also find that the directors genuinely considered that the Special Resolution was in the best interests of the Company for the benefit of the shareholders as a whole. Neither is this a case where, as it was put in the Nottingham Forest case, there was an evasion of obstacles laid in the directors’ path by statute. There was no obstacle to the Special Resolution being promulgated at that time because Quindell was not yet a 33% shareholder – unlike the Petitioner in the Nottingham Forest case, it could not block the Special Resolution.

I have referred above to conferring an additional contractual benefit on Quindell. It was suggested to Mr Borson in cross examination that he could have asked for contractual protection against dilution. Mr Borson’s evidence was that he had not thought about this, and that he accepted he had made a mistake. I cannot accept that evidence. The documentary evidence shows that Mr Borson was thinking about the possibility of dilution and also of asking for contractual protection against it. On 27 February 2015 in an internal email about possible strategy, Mr Borson stated that Quindell needed protection against superdilution, and also proposed that one possible course was (among other suggestions) to require an absolute prohibition on the Company granting any security to a third party or issuing any new equity without Quindell’s prior written approval. Quindell could have required this in the December Agreement or in the June Agreement; instead in the June Agreement it asked for information about allotments made. The benefit which Quindell says it should have had (ie protection against a special resolution being passed before its shares were issued) was something for which Quindell could have contracted.

I turn then to Quindell’s second complaint in relation to the Special Resolution, namely that in promulgating the Special Resolution, the directors caused Quindell not to be given notice of the proposed Special Resolution, so that Quindell was deprived of its opportunity to object.

It is clear that all shareholders other than Quindell were sent an email at 10:12 on 2 June 2015. The directors gave various explanations for why no email was sent to Quindell. Mr Brooks says in his statement that it was because the directors were not sure who the best person to email it to would be; in oral evidence he said he wanted to speak to Mr Moorse, while Mr Borson was hostile. Mr Nisbet said that he had a discussion with Mr Brooks in which he expressed that Mr Moorse was the best person to speak to, but that Mr Nisbet did not know which email address Mr Moorse was using (Mr Nisbet suggested in evidence that there was an issue about whether Quindell had changed its name to Watchstone at that time), and that as a result it was decided that it should be delivered by hand to make sure it got there on time.

I cannot accept Mr Nisbet’s evidence. There are many emails to Mr Moorse in the bundle, and Quindell did not start using the Watchstone email addresses until many months later. It is clear that there was a deliberate decision not to tell Mr Borson. Mr Brooks was in direct contact with Mr Borson by email on each of 1, 2 and 3 June. Indeed, on 2 and 3 June, further discussions were taking place between Mr Borson and Mr Brooks in which Mr Borson was pressing Mr Brooks for an interest in the IP and handing over the source code as a pre-condition for any further financial assistance. Discussions had been taking place with Mr Sargeant, Mr Mitchell and Mr Moorse over the previous weeks and months. It is clear that the directors did not want to alert Mr Borson to what happened.

The Company says that Quindell was given a paper copy, which was either handed or left on the desk of Mr Moorse. The evidence from Mr Borson is that a thorough search was made at Quindell and that no paper copy was found. On 8 December 2015, when Mr Borson raised the question of whether Quindell had been given notice, Mr Brooks wrote to Quindell saying “we are currently looking into your query as to whether you were sent a copy of the resolution, or if maybe it was sent to someone else at Quindell such as [Mr Moorse].” Attached to Mr Brooks’ email was a document described as a “contact register” which records that Quindell was given a paper copy of the draft resolution, but there is no evidence as to when the contact register was prepared.

The Further Information provided by the Respondents on 28 October 2016 states that the Company was based in the same building at the time as Quindell and the parties were attending regular meetings with Mr Moorse in particular being present. In oral evidence, Mr Brooks said that Mr Moorse was 10 minute drive away. In fact it came out during the evidence that Mr Moorse had left Quindell on 29 May 2015, so that it is not possible that the document was handed to him, and thus even at best, leaving a notice on Mr Moorse’s former desk would not have brought the notice to the attention of Quindell. During his evidence, Mr Brooks said he left the document on Mr Moorse’s desk, and said “It was a long while ago, and there was a lot of stuff going on, but I have a vision that had been building up over the last two days, since someone told me about 29^th May and his resignation, that seems to crystallise that is probably what does happen”. He then accepted that he could not remember anything about the visit to the offices where Mr Moorse had previously worked. Mr Brooks also said in oral evidence that he recalled that by the time he was going to see Mr Moorse he knew that they were already “over the line” with the 75% needed for the resolution.

Mr Brooks was also adamant that he would not have deliberately failed to give Quindell a notice of the resolution, particularly since he was dealing with Mr Borson. However, clearly in fact Quindell did not receive the notice; when Mr Borson did discover about it in December 2015, he wrote in strong terms. Even if a paper copy was left on Mr Moorse’s desk, that plainly was not sufficient, and at best for the Respondents, that was not even attempted until the time that the resolution had become effective. I do not find that any of Mr Nisbet’s or Mr Brooks’ evidence on this matter is reliable; but given the existence of the document recording that a paper copy was given, I find on the balance of probability that a paper copy was left at Mr Moorse’s office, but after the 75% votes had been received and after Mr Moorse had ceased to be a director of Quindell.

Plainly the directors should have given notice to Quindell at the same time as the other shareholders. I do regard the directors’ conduct here as analogous to the arranging of the shareholders’ meeting at a time when certain shareholders could not attend, and find that here the directors used their powers to make arrangements for the passing of a special resolution for an improper purpose, namely to avoid Quindell from being aware of the proposed special resolution before it was passed.

I therefore find that in this respect the directors breached their duty under section 171 in making the arrangements for promulgating the Special Resolution.

For reasons which will appear below, it is more convenient if I take this issue with issue 3.

As set out above, the complaints about the September and subsequent arrangements were that (a) they did not raise any funding which assisted with either short term working capital or longer term funding, (b) they did not help position the Company to meet its Loan Note obligations in June 2016 and (c) they had the effect that QPE became the overwhelming majority shareholder in the Company.

Paragraph 15(4) of the Points of Defence states that “in view of the fact that the Petitioner had included a nil value for its shareholding in the Company in the Annual Report for the year ended 31 December 2014 filed in August 2015, the board of the Company considered that the only basis on which it would be able to obtain subscriptions pursuant to the Placing was if the Placing involved the issue of an associated warrant on the terms set out in the Warrant Instrument”. Paragraph 22 states that the arrangements did provide working capital and funding going forward, that the company’s balance sheet was also strengthened by the September arrangements, and that the Company’s obligations to Quindell pursuant to the Loan Note were met on 28 June 2016 and that that would not have been possible without the September arrangements and QPE’s subsequent agreement to the postponement of the Company’s obligations to QPE under the Loan Notes. Paragraph 27 pleads that the purpose of the arrangements was to enable the Company to strengthen its balance sheet and to obtain critical funding to secure the future of the business. Mr Lord Q.C. submitted that far from being criticised, the directors should be commended for having kept the company going long enough to pay off all its creditors other than QPE, including Quindell’s Loan Note.

Mr Brooks’ evidence in his witness statement was that as a result of the lack of financial information available and failed attempts to raise funds elsewhere, without the provision of the warrants the Company would not be able to raise money unless it survived long enough to receive an offer from BMC which represented a valuation greater than the Company’s outstanding debt. Mr Brooks’ evidence was that the Company needed funding until the offer from BMC could be received.

As set out above, in closing submissions Mr Collings eschewed reliance on the pleaded allegation of improper purpose. The only remaining issue is whether the directors acted in breach of their duty to act bone fide in the best interests of the Company; and for this, the only pleaded case is that the arrangements raised no funding, whether short term or long term, did not assist in repaying the Loan Notes but had the effect of entrenching QPE as majority shareholder. The way in which Mr Collings put it in closing was that the assets provided for the shares issued in September 2015 were worthless.

In my view it is clear that the September arrangements did raise funding, and the assets were not worthless. I agree that there is an issue about whether they were worth what they were said to be worth in the resolutions, but they were not worthless. The Company received shares in QPE and in Daniel Stewart, which improved its balance sheet. Some of the Daniel Stewart shares had been pre-sold and used to fund cashflow in the sum of c £50,000. The Daniel Stewart shares were listed and should have been available to sell; in the event, since they were suspended, they were used to improve the balance sheet by the transactions set out above, which had the effect that the breach of the terms of the Loan Note Instrument was remedied. As a result of the September and subsequent arrangements, QPE was willing to lend and did lend further funds of £85,000 in October 2015, and a further £190,000 after the breach of the Loan Notes was remedied in November 2015. £300,026 was raised in cash from the allotment of 1,723 shares in December 2015, and the Company obtained shares in Imaginatik PLC which it sold giving it additional cash of £249,156.81. All these contributed to the short term working capital needs and hence the continued survival of the Company until first the BMC offer was received, and following that, until the Company could repay its Loan Note to Quindell. They must also have contributed to the payment of the Quindell Loan Note.

In reality, Mr Collings’ submissions were to the effect that the September arrangements and the subsequent arrangements did not turn out to be a good deal for the Company. He complained in closing submissions that the Daniel Stewart shares were later used to discharge debts due from the Company to the directors, and that in November the directors were relieved of liability under personal guarantees and QPE became a secured creditor in relation to debts the bulk of which arose from the Consultancy Agreement between QPE and the Company which Mr Collings describes as most unusual and onerous. As Mr Collings put it in oral closing submissions, he was submitting that the transactions were of no benefit to the Company, alternatively that they were of questionable benefit, alternatively that the benefit to the Company was massively outweighed by the prejudice to Quindell. The first of these alternatives is the case pleaded and addressed in the evidence. The latter two are not pleaded and were not put to the directors. There is no pleaded complaint about breaches of duties by the directors in relation to the events of November 2015 whereby the directors exchanged their secured debt for QPE and DS shares, or in relation to QPE becoming a secured creditor, or in relation to the directors’ personal guarantees being extinguished, or in relation to entering into the Consultancy Agreement, and it was not put to the directors that they had acted in any way improperly in relation to these events. There was no pleaded case that the value of the shares which were allotted exceeded the value which the Company received for them, or what it was said the respective values were, or that the benefit to the Company was outweighed by the detriment to Quindell, and again these issues were not explored in the evidence with the directors. Mr Terry’s response when some of these matters were explored with him was that he was on the other side of the transaction and was entitled to do whatever bargain he could; it was not suggested to him that he was not so entitled.

I have set out above Mr Lord’s submissions, which I accept, in relation to confining parties to their pleaded cases. This is particularly important where serious allegations of breach of fiduciary duty are being made against the Respondents. They are entitled to know what case they have to meet, and to have an opportunity to meet that case. Accordingly, in relation to the respects in which I have identified, Quindell should not be permitted to go outside the case set out in its statements of case and put to the directors in cross examination. Mr Collings said twice in closing that he was not just throwing everything in the air and saying that as things fell down there was unfair prejudice, but in my judgment that was what Mr Collings was doing in this area of the case.

In relation to the pleaded case, I am satisfied that the arrangements did raise funding and did contribute towards the repayment of Quindell’s Loan Note, and that the directors shareholdings were diluted in just the same way as Quindell’s were. The evidence of the directors was that in relation to the September arrangements and the arrangements which flowed from them, they were doing to best they could to obtain any funding they could in order to survive long enough to receive the long awaited offer from BMC, and after the BMC offer was received, to keep the Company going long enough to repay Quindell’s Loan Note. I accept that evidence which is consistent with the contemporaneous documents. In closing submissions Mr Collings invited me to find that Mr Terry had told Mr Brooks prior to 30 September 2015 that the Daniel Stewart shares were at risk of being suspended, so that the directors knew that they were being “sold a pup”, but not only was that not put to Mr Brooks, Mr Collings expressly told Mr Brooks that he was not suggesting that. Mr Collings did not even raise the September transactions or any of the subsequent transactions with any of the directors other than Mr Brooks. In the circumstances I find that there was no breach of duty by the directors in relation to entering into the September transactions or the transactions which followed from them.

Here Mr Collings relied upon the passage from the Nottingham Forest case which I have set out above, and also on the following passage from Re Coroin Ltd, supra, at paragraph 630:

“Prejudice will certainly encompass damage to the financial position of a member. The prejudice may be damage to the value of his shares but may also extend to other financial damage which in the circumstances of the case is bound up with his position as a member. So, for example, removal from participation in the management of a company and the resulting loss of income or profits from the company in the form of remuneration will constitute prejudice in those cases where the members have rights recognised in equity, if not at law, to participate in that way. Similarly, damage to the financial position of a member in relation to a debt due to him from the company can in the appropriate circumstances amount to prejudice. The prejudice must be to the petitioner in his capacity as a member but this is not to be strictly confined to damage to the value of his shareholding. Moreover, prejudice need not be financial in character. A disregard of the rights of a member as such, without any financial consequences, may amount to prejudice falling within the section.”

The only action of the directors which I have found was a breach of the directors’ duties was the directors’ action in deciding not to give notice of the proposed Special Resolution to Quindell until after the votes had been received, and even then failing to actually give notice to Quindell. But what would have happened if notice had been given to Quindell? Quindell could not block the resolution. It passed with more than 76% of votes. Quindell said that it could have approached other shareholders, but the other shareholders were all friends and family or associates of the directors, and there is no evidence that they would have joined with Quindell; Mr Brooks’ evidence was that he was confident of obtaining 75% and I accept that evidence. In closing submissions when I asked what would have happened if Quindell had been notified of the proposed special resolution, Mr Collings said that Quindell could have applied for an injunction. That was not pleaded, and there is no evidence that Quindell would have applied for an injunction. I cannot see that any prejudice has flowed from the lack of notice; the Special Resolution would have been passed whether or not Quindell through Mr Borson had been given notice of the proposal that it be passed. Accordingly the passing of the Special Resolution was not caused by the breach which I have found, and any actions which flowed from the Special Resolution were similarly not caused by that breach. It is clear that there must be a causal link between the conduct complained of and the prejudice alleged; see Saul D Harrison, supra, at 31c.

Mr Collings also submitted that simply having one’s rights invaded can be prejudice in itself, citing for this proposition paragraph 630 in the judgment of David Richards J, in Re Coroin, supra. Again, no such prejudice was pleaded, and in fact as set out above Mr Collings put his case on the basis that if the Special Resolution had been put in a drawer and not acted upon, there would not have been any prejudice. Further, the judgment of David Richards J continues at paragraph 631 as follows:

“631 Where the acts complained of have no adverse financial consequence, it may be more difficult to establish relevant prejudice. This may particularly be the case where the acts or omissions are breaches of duty owed to the company rather than to shareholders individually. If it is said that the directors or some of them had been in breach of duty to the company but no loss to the company has resulted, the company would not have a claim against those directors. It may therefore be difficult for a shareholder to show that nonetheless as a member he has suffered prejudice. In Rock (Nominees) Limited v RCO Holdings Plc [2004] BCC 466 the respondent directors of the company procured the sale of an asset to a company of which they were also directors. It was alleged to be a sale at an undervalue and procured in breach of the respondent directors' fiduciary duties to the company. The evidence established that the price paid was not an undervalue but was the best price reasonably obtainable, and the Court of Appeal upheld the decision at first instance that no prejudice had been caused to the petitioner. At paragraph 79 of this judgment, with which the other members of the Court agreed, Jonathan Parker LJ said;

“As to the judge's finding of breach of fiduciary duty on the part of the respondent directors, it is plain that, as the judge found, the respondent directors were “in a position of hopeless conflict”. Further, they would undoubtedly have been well advised to obtain an independent valuation. However, no harm was in fact done and no damage or prejudice was caused. Nor is there any question of the respondent directors being personally accountable in any way. That being so, it seems to me to be inappropriate to reach a conclusion that they breached their fiduciary duties, as it were, in the abstract”.

In my judgment that is the position here. Insofar as I have found a breach of duty, the directors breached their fiduciary duty in the abstract and no prejudice was caused by it because the notice which they failed to give would not have permitted Quindell to block the Special Resolution.

That is therefore the end of the matter. However, in case this goes further, I shall set out my conclusions on the other matters which were argued.

Mr Collings’ case, as set out above, was that prejudice was suffered as a result of the Special Resolution when the September transactions were entered into and shares were allotted pursuant to the warrants. Mr Lord’s first response to that was that the Special Resolution was not needed for the issue of the shares and the share warrants in September 2015, or the allotment of shares pursuant to the warrants, and that therefore there was no causal connection between them.

This argument depends on the terms of sections 560, 561 and 565 of the Companies Act 2006.

Section 561 is set out above. Section 560 provides as follows:

“(1)

In this Chapter–

“equity securities” means–

(a)

ordinary shares in the company, or

(b)

rights to subscribe for, or to convert securities into, ordinary shares in the company;

“ordinary shares” means shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in a distribution.

(2)

References in this Chapter to the allotment of equity securities—

(a)

include the grant of a right to subscribe for, or to convert any securities into, ordinary shares in the company, and

(b)

do not include the allotment of shares pursuant to such a right.

Section 565 provides as follows:

“Section 561(1) (existing shareholders' right of pre-emption) does not apply to a particular allotment of equity securities if these are, or are to be, wholly or partly paid up otherwise than in cash.”

Mr Lord says that the issue of both the shares and the warrants in September 2015 pursuant to the PPM was for consideration which was paid up otherwise than in cash. He says that the warrants are equity securities as defined in section 561, being a right to subscribe for ordinary shares in the Company, and that therefore section 565 provides that since those warrants were issued for non-cash consideration, section 561 does not apply. He then says that the issue of the 10,532 ordinary shares pursuant to the warrants in December 2015, which was the event which significantly diluted the other shareholders, including Quindell, was not an allotment of equity securities which would trigger section 561 because of the terms of section 560(2)(b).

I agree with Mr Lord’s analysis. Mr Collings has two responses. First, Mr Collings says that the thing which triggered the issue of the shares pursuant to the warrants was the allotment of 1,723 shares for cash on 7 December 2015, and that that allotment required the Special Resolution. Second he says that the scheme was basically avoidance of the statutory scheme for pre-emption.

As to the first, Mr Lord accepts that the allotment of the 1,723 shares required the Special Resolution. But what would have happened without the Special Resolution? Mr Collings repeatedly said that Quindell would have blocked the September arrangements, but Quindell had no right to block the allotment and issue of shares even if the Special Resolution had not been passed. If a 33% share of the 1,723 shares had been offered to Quindell on 7 December 2015 under the statutory pre-emption rights, Quindell would have either have subscribed for them or refused them. On either basis, the shares would have been allotted, and the warrants would have been triggered, giving rise to the substantial dilution. Thus, the only possible loss is of an opportunity to subscribe for 33% of 1,723 shares at a total cost of just over £100,000. It is clear on the evidence, and was the case put to the Respondents, that Quindell had no intention of putting any more money into the Company except as a secured lender. But in any event it would not have prevented the dilution or a diminution of value, which is the prejudice which is pleaded.

As to the second, shares and warrants were issued in September 2015 for non-cash consideration. That is what the statute permits. I am unable to see what criticism can be made of the directors for issuing shares and warrants for non-cash consideration. Neither was any criticism made of the directors for issuing shares for much needed cash in December 2015. There was no pleaded case, and hence it was not put to the witnesses in cross examination, to the effect that the directors had breached their fiduciary duties in issuing the 1,723 shares for cash, or for the specific amount of cash, in December 2015. Mr Collings referred me to the commentary on section 561 in Buckley on the Companies Acts which states that it is suggested that the requirements of section 561(1) would not be excluded by including a de minimis non-cash element or the use of a cash box company whereby cash is subscribed for shares in a shell company and then shares in that shell company are the consideration for the allotted shares. What Mr Collings suggested was that the only real consideration given for the arrangements taken as a whole was the c £10,000 cash provided for the shares allotted pursuant to the warrants. I do not agree for the reasons set out in paragraph 115 above, and in any event what he is suggesting is that there was de minimis cash consideration, rather than de minimis non-cash consideration.

Finally, Mr Lord submitted that there is nothing to suggest that Quindell’s shares had any value in June 2015 and nothing to suggest that their value diminished as a result of the allotment of shares later in 2015, so that there was no diminution of value as pleaded. On the contrary, Mr Lord submits, Quindell has benefitted from the arrangements of which it complains, in that they permitted the Company to survive long enough to repay, and assisted in providing cash to repay, Quindell’s loan note.

A substantial amount of time at trial was spent on valuation issues, both in cross examination on the expert evidence, but also in that the Respondents’ witnesses were cross examined on matters which went to the data used for the valuation by Quindell’s expert, Mr Hall.

Leaving to one side the expert evidence for the time being, it is apparent from the evidence that as at 8 June 2015 and still in September to December 2015, the Company was in a very precarious state.

On the other hand, in December 2015 Mr Brooks offered to pay £200,000 for Quindell’s shares (on extended credit terms) and told Mr Borson that the Company was in fact paying its debts as they fell due, and the Respondents offered to purchase Quindell’s shares for £208,000 in December 2016. Mr Terry gave evidence that prior to the offer from BMC the directors had been anticipating an offer for something between about £3m and £9m for the Company (Mr Sargeant in an internal Quindell email also suggested in early 2015 that he would be amazed if the offer from BMC was any higher than £6m). Quindell offered to take £1.255m for its shares in December 2015. An email from Mr Brooks to the other directors in June 2015 suggests that Mr Terry had said that he could do a capital raise on the basis of a valuation of £25m. In September 2015 Mr Terry wrote emails to Mr Shea of Daniel Stewart, whom he was seeking to persuade to invest in the Company, and by no means gave the impression that the Company was valueless. On 2 December 2015 Mr Brooks told Mr Borson that Mr Terry thought that there was some future value, but that it required substantial restructuring for Mr Terry to support the Company further. These all suggest that at least some people thought the Company had some value in the middle of 2015.

Nonetheless, it is clear to me from the totality of the evidence that whether or not the Company had some value, the Company would not have survived from June 2015 onwards without the assistance of QPE in lending money and in subscribing for the shares and warrants. Mr Brooks gave evidence that by June 2015 he had exhausted his other resources, and the only two options were either to take what QPE were offering, or to hand the Company and its intellectual property over to Quindell. In my judgment the contemporaneous documentary record is consistent with the evidence of the Respondents, to the effect that, whether or not the shares had any value (for example because there was a special buyer, such as BMC, or because the intellectual property had a value in excess of the Company’s debts), the Company as an entity could not survive from June 2015 onwards without QPE’s assistance and the transactions which were complained of. There was no evidence to suggest, and it was not suggested to the directors, that there were other options open to them.

The valuation evidence was directed at a valuation date of 8 June 2015. It was directed to remedy, rather than to the value of the shares at the date of the September and subsequent arrangements. Nonetheless, since it was evidence given at trial I shall consider whether it assists in deciding the issue of whether Quindell suffered the pleaded prejudice.

The Respondents’ expert, Mr Lawler, was of the opinion that as at 8 June 2015 the Company’s shares had no value. He considered the net asset value basis and the capitalised earnings basis of valuation, and concluded that the value was nominal on either basis. Both experts accepted that a discounted cash flow valuation was not possible. Mr Lawler’s approach was simple. The net asset basis showed a negative position. The Company had made historic losses, and there was no management information as at June 2015 from which one could deduce any future maintainable earnings. Thus one could not do a valuation based on future maintainable earnings.

Quindell’s expert, Mr Hall, accepted that the Company had made historic losses. The Company only produced abbreviated accounts, and the first management accounts in existence appear to date from October 2015. This is as a result of the unusual arrangements between Quindell and the Company prior to December 2015. Mr Hall records that he was unable to prepare a valuation on any of the dates on which he was invited to value the Company, namely 31 January 2015, 8 June 2015, 4 May 2016 and October 2017. Mr Hall instead states that he is able to prepare a valuation of the company as at the end of March 2015 based on 2 year projections which were sent by Mr Brooks to Mr Terry at the end of January 2015 and the abbreviated accounts for the year to 31 March 2015. The projections, which were contained in the Financial Prospectus referred to in paragraph 11 above, contain “ordinary” and “worst case” scenarios for the two years. Mr Hall also took into account values implied by successive allotments in 2015, namely the allotment of the additional 14% to Quindell which implied a value of £7,499.44 per share, suggesting a total value of £27.2m for the total shares, the allotment of shares at a price of £5,000 per share to QPE pursuant to the PPM and the share purchase agreement dated 30 September 2015, the allotment of shares at a price of £174.13 per share in December 2015, and noted also the offer from Mr Borson and the statement from Mr Sargeant noted in paragraph 136 above. Mr Hall decided to proceed on the basis of a weighting of 20% for the year 1 ordinary scenario in the Financial Projections, 5% for the year 2 ordinary scenario, 70% for the year 1 worst case scenario and 5% for the year 2 worst case scenario.

The evidence about the Financial Projections and the Financial Prospectus was as follows. Mr Brooks prepared the Financial Prospectus in December 2014 or January 2015, and sent it to Mr Moorse in the context of seeking to persuade Quindell and its new advisers, PWC and Rothschild, that Quindell should continue to fund the Company. Mr Moorse told Mr Brooks that the figures were unsupportable and not based on Quindell’s or any recognised accounting policy. He suggested that Mr Brooks needed help from an accountant to prepare proper projections. The projections were therefore taken out of the document actually submitted for the consideration of Quindell and its new advisers because they were not supportable. The Company had no experience of selling without the Distribution Agreement and were only able to produce a realistic sales forecast in April 2016. Mr Brooks’ evidence was that to create the Financial Projections he had reverse engineered the figures from the size of the team he wanted to employ, together with showing a sufficient amount of profit to make it attractive. The figures were premised on and were designed to support an investment of £5-10m. Mr Brooks also sent them to Mr Terry, who also advised that they should not be sent to Quindell and its advisers.

Mr Hall seeks to deal with this point in the joint expert report and in his oral evidence by pointing to management accounts for the 10 months to January 2016, which included a significant payment from a company called Verizon (although it appears that these were incorrectly accounted for in those management accounts). Those figures suggested an annualised EBITDA, and also an EBITDA for the 10 month period, which were greater than the worst case figures in the Financial Projections. Mr Hall accepted that it is not permissible in valuing a company at one date to use hindsight from subsequent financial performance. He suggests that when it is unclear what information on the prospective financial performance of the company or the business could have been available to a potential purchaser at the valuation date, the hindsight of its subsequent financial performance could give an indication of what could have been available at the time. On this basis Mr Hall justifies looking at the January 2016 management accounts.

I think that the difficulty with that is that it disguises the real problem with the Company, which was that in March 2015 (and in June 2015) the Company had very limited past accounts which showed substantial losses, and had no proper management information. Contrary to Mr Hall’s hypothesis which is that the January 2016 management accounts show what could have been available in March 2015, a prospective purchaser in March 2015 would not have been told that there was available proper management information which was a rational basis for the projections in the Financial Prospectus, but rather would have been told that the management had not been able to formulate proper management accounts or prepare forecasts which it was prepared to send to Quindell and its advisers. In my view the considerable amount of time and effort which was dedicated to the January 2016 management accounts, and the questions of discounts, multiplier and so on, overlooked this fundamental point. I find Mr Hall’s reliance on the Financial Projections and the weighting he has given the figures in those projections in the face of the information provided as to their provenance to be surprising.

I prefer Mr Lawler’s approach which was that a potential purchaser would have had available to him the abbreviated accounts and, even at best, the results for April/May 2015, all of which would have shown a loss. A potential purchaser might have been shown the Financial Projections but would not place any reliance on such a document without seeing evidence supporting the figures used, and being satisfied (a) that they were realistic and (b) that the contingencies could be satisfied. As I have set out above, as a matter of fact I am satisfied that neither of those two conditions would have been satisfied at the valuation date. I agree with Mr Lawler that the questions of appropriate multiplier, the true effect of the January 2016 management accounts and appropriate discounts simply do not arise, and I do not consider them further.

The expert evidence does not therefore cause me to doubt the conclusion I have reached in paragraph 137 above as to the ability of the Company to survive without the arrangements it came to with QPE.

Mr Collings said that any deficits in the management of the Company, such as a lack of proper management information, should not be visited on Quindell. I disagree. That was the nature of the Company in which Quindell was a shareholder.

Accordingly, I find that Quindell has not persuaded me that Quindell’s shares in the Company had any value as at 8 June 2015 and hence has not persuaded me that any prejudice has been suffered, even if I am wrong in my earlier conclusions. I sense check that against what happened later, as set out in paragraph 135 (iv) and (v) above, and that confirms my view. The sense check also confirms my view that Mr Hall’s valuation cannot be right.

Mr Lord invited me to stand back and look at the position as at the date of the trial. He submits that the reality is that the Company was in a parlous position; that that position was in part caused by the actions of Quindell; that the directors put in their own money, have waived salary, and have ended up with nothing and indeed are in debt. He submits that the very transactions which are complained of are those which allowed the Company to survive long enough to repay the Loan Note to Quindell in June 2016, and that in fact Quindell has benefitted from the transactions complained of by having its Loan Note repaid. He submits that the Company has no value now, since it has no assets and no business. The only creditor is QPE, which has purchased the assets of the Company at a price which is not complained of, and QPE has subsequently had to write down the value of those assets. He submits that there is nothing unfair in what has happened.

I agree. In my view Quindell has failed to show any prejudice, and if there was any prejudice it was not unfair. The directors were doing their best in extremely difficult circumstances.

The question of how I should exercise my discretion as to what remedy to grant does not therefore arise. In case this matter goes further, however, it may be useful for me to indicate that for the same reasons as set out in paragraphs 148-9 above, I would not have made an order for the purchase of Quindell’s shares in the Company. In this context I should note that in relation to the one area where I have found there was a breach of duty by the directors, namely the failure to take proper steps to provide notice to Quindell of the Special Resolution, Mr Terry’s evidence, on which he was not challenged, was that he had no knowledge that Quindell had not been properly given notice.

Accordingly the Petition should be dismissed.