Drouzhba v Wiseman & Anor

In about the middle of 1992, the First Defendant, who was a director of Scott Daniel Limited [‘SD’], began ordering clothes to be manufactured by a state owned Bulgarian clothing factory, known as Drouzhba Style. SD was the contracting company in England. The First Defendant was at all times the active director responsible for SD’s operations.

Much the same method of operation applied throughout this business connection. SD would supply and ship stocks of cloth, to be held at the Drouzhba factory in Varna. Successive orders would be placed for specific quantities, styles and sizes of garments to be manufactured from the cloth and despatched to England. All the dealings were on the basis of ‘cut, make and trim’ [‘CMT’], which means that the Claimants would cut and make the clothes, and fit the labels, buttons and other necessary trimmings, which were almost always supplied by SD. It seems that, all along, transport of the fabric to Bulgaria and the finished articles to England was in the hands of the English company.

In essence, SD did its business in two ways. Mr Wiseman sought bulk orders from retail customers – I infer mostly from retailers with multiple outlets – which would then be transformed into orders for manufacture. It is clear that such orders were normally seasonal and time-critical. He also sold from stock held in London. He gave unchallenged evidence, which was well illustrated from his manuscript sales records, that customers would frequently come and buy stock in very variable quantities. Sometimes purchases from stock would be very modest, sometimes quite large. It is clear also that much of his business from stock was an export trade to retailers as far away as Iceland or sub-Saharan Africa.

Subject to the matters set out below, I have heard no direct evidence of the detailed terms of payment in the early days, but there seems to be common ground that SD were habitually late payers.

By 1995, SD was in premises at 114/118 Commercial Road, London E1. The landlords were Aldgate Warehouse (Wholesale) Ltd [‘Aldgate Warehouse’], of which Mr Tobi Cohen is a director. In addition to Mr Wiseman, there were two other directors of SD, Mr Ivan Metchev and for a brief period Mr Tobi Cohen, in circumstances set out below.

A significant shareholding in SD was in the hands of Maritimus Holdings. Maritimus Holdings was an offshoot of, or connected with, a Bulgarian bank, the Tourist Sport Bank [TSB]. It seems TSB assisted with the payments to Drouzhba. According to Mr Wiseman’s witness statement, adopted in evidence, TSB would pay Drouzhba, and SD then had 90 days to pay TSB. This arrangement was carried out by the issue of bills of exchange.

TSB are not directly involved in this action and the Court has heard little details about their dealings with SD. However what is known is that by 1998, SD were listed in the ‘Complete List of Credit Millionaires in Bulgaria’ as owing TSB approximately Bulgarian Leva 1m. The exchange rate has historically been around 3 Leva to the pound sterling. In fact it is clear this debt had been outstanding for some time. The SD accounts for 1997 list ‘bills of exchange payable’ in the sums of £367,667 for 1996 and £351,688 for 1997. In addition, TSB was no longer providing this facility to SD in the later 1990s, when a similar arrangement was provided by a company called Conance. Mr Wiseman’s evidence was that TSB were never paid off. He was not sure but he believed the bank had ‘become bankrupt or was closed down’ and that the directors had ‘been in prison for a day or two’. The debt continues to appear in the company accounts for as long as they were drawn up.

It follows that, from a period before that central to this action, SD had accumulated very significant debt arising from the finance of its purchases in Bulgaria, and which was never repaid. Had this debt been pursued by the bank, or by those responsible under Bulgarian law for satisfying its debts in the wake of its failure, it seems clear SD would not have been able to pay the debt. It would have gone out of business.

The late Nedialko Dimitrov worked for many years in Drouzhba Style and then as a senior manager in the group which controlled it, up to 1990. In 1991, as the Bulgarian economy was liberalised, he set up a company under the name of Contex, which traded in the fashion and garment sector. He worked in this company with his wife Katya Dimitrova, and their son Kolyo Nedyalkov Kechovski. In February 1996, they founded Rodina Contex Ltd as a vehicle for privatising Drouzhba Style. With the aid of finance they bought a majority shareholding in Drouzhba Style, and operated the business from late 1996. The business was fully privatised on 1 April 1997, as Contex Drouzhba Limited: the Claimants. The factory and business in Varna are on a considerable scale, with 1000 employees, or even more at times.

Father and son dealt with day-to-day work and decisions in the business, whilst Mrs Dimitrova has at all times been the financial director.

In the period leading up to privatisation, Mr Dimitrov and Mr Kechovski looked closely at the company and its clients. SD was a regular client by then. In his witness statement, confirmed in oral evidence, Mr Kechovski stated:

“Scott Daniel and Ronald Wiseman was one of [Drouzhba’s] biggest clients and it was clear to us that he had an established pattern of late payment. As far as I am aware, Scott Daniel never paid Industrial Import or Drouzhba Style within 30 days as required, and in fact, always paid significantly late ……..Even then, Ronald Wiseman tended to pay by instalments rather than payment of any one invoice.”

I accept this evidence as to the pattern of payment.

In 1997, Mr Kechovski was given the formal position of Commercial Director of the Claimants. His English is good, and for that reason, he conducted much of the business of the company with English speaking clients, including SD. His father’s English was poor, and he needed an interpreter for more than basic communication. In his oral evidence, Mr Wiseman stated that most of his dealings were with Mr Dimitrov. Sadly, Mr Dimitrov died in July 2004 and only a short ‘written deposition’ of his evidence is available to the Court.

As the company was privatised as a going concern, it took over outstanding contracts with SD and regular orders were placed by SD through and after the period of the privatisation.

Even in the run-up to privatisation, Mr Kechovski was expressing concern about the pattern of late payment from SD. For example, on 5 March 1997, he wrote to Mr Wiseman pressing for payment, reminding Mr Wiseman that the total amount due was £134,177, representing debt from invoices dated from May 1996. Clearly some payments were made during the year as the privatised company went on working for SD.

By the end of the year, there were still some moneys outstanding against invoices from the pre-privatisation Drouzhba Style, although the debt to the old company had been largely paid off. Jumping ahead a little, by 12 February 1998 the debt to Drouzhba Style was down to £3293.25. However, more debt had now accumulated against invoices on behalf of the Claimant company. In a faxed letter of 12 December 1997, the total sum was said to be £60,374.96. This is consistent with the level of ongoing trading. Mr Kechovski gave unchallenged evidence that during 1997, the Claimants were usually holding 15-16,000 metres of fabric in the warehouse at the factory.

A schedule of the number of garments manufactured by the Claimants shows that during 1997 – which began for the claimant company on 1 April – they manufactured 15,254 garments for SD. This only represents 2.46% of the output of the Claimants for that period, measured by the number of garments. However, I accept that this produces something of an understatement, for the reason given by Mr Kechovski. SD were overwhelmingly ordering menswear, and very often suits. Men’s garments tend to be more elaborate to manufacture and are more complex. A three-piece suit counts as one garment. So does a skirt. Hence the output for SD represented a rather higher proportion of the Claimants output, judged by the work involved and the value than the raw percentage suggests. SD represented a significant business for the Claimants.

By 1997, the financial position and trading record of SD were very poor. This is most clearly seen by setting out in tabular form the profit and loss, and net assets and liabilities, of SD, over the preceding accounting periods, as they appeared in the audited accounts:

As I have noted above, throughout 1997 SD had considerable stocks of fabric placed with the Claimants in their warehouse in Varna. It is common ground that SD had no other significant supplier than the Claimants, and in my judgment there would have been little realistic prospect of SD opening up another significant line of supply, given their financial position. All SD’s eggs were in the Claimants’ basket. These stocks represented a real asset only once they were transformed into saleable garments and were shipped back to England.

It is also true that SD had considerable stock of finished garments in their premises in London. They were in a position, at least for a period, to continue selling from stock on a day to day basis. However, the stock in London would not enable Mr Wiseman to satisfy the larger customers who wanted bulk deliveries. As already set out, such orders were arranged in advance and manufactured to order. Clearly also, unless replenished, the London stock would progressively diminish, cutting off the remainder of SD’s trade.

For all these reasons, it was vital for Mr Wiseman that the Claimants should continue to make and ship garments, if he was to continue in business.

The expert accountants who gave evidence in this case, Mr Hain for the Claimants and Mr Rooney for the Defendants, agree that, as at 9 January 1998, SD was insolvent. They further agree that there is no positive evidence the company returned to solvency. They consider the likelihood that it returned to solvency before it was removed from the register of companies in 2002, as being extremely remote. In my judgment, the evidence clearly supports their conclusions. They also agreed in relation to this time, that ‘..there are no grounds to believe, reasonably or otherwise, that any party would inject capital into [SD]’. The Experts note that on the basis of the disclosure there is no evidence that ‘Mr Wiseman was seeking to, or relying on the expectation he could, raise funds.’ I also accept these conclusions.

Mr Wiseman states in his witness statement, adopted in evidence, that he formed SD in about 1990, because he had met Ivan Metchev. Mr Metchev is a Bulgarian, who was then the London agent for a different Bulgarian suit manufacturer. He was also connected with the Bulgarian Bank, TSB. Mr Wiseman offered to arrange a supply of suits for sale in England. Mr Metchev took a 50% shareholding in SD from the beginning. The first supplier proved unsatisfactory in terms of quality, which was why the business went to Drouzhba Style, from about the middle of 1992.

Mr Metchev became a director of SD on 1 April 1994. It is clear that he took a proper interest in the business, although equally clear that he never had the degree of practical control exercised by Mr Wiseman. In the year to June 1996, for example, Mr Wiseman drew remuneration of £44,590 and Mr Metchev drew remuneration of £10,788. Mr Wiseman also states that Mr Metchev was responsible for the introduction of Maritimus Holding, the subsidiary of the TSB bank, which provided the arrangements for payment in Bulgaria set out above.

The company returns for 1996 show that Aldgate Warehouse had by then acquired 15,000 shares in SD, an equal holding to those of Mr Wiseman and Mr Metchev.

In March and April 1997, SD’s financial problems were becoming acutely pressing. On 5 March, Drouzhba Style wrote to Mr Wiseman stating that the total outstanding was £134,177 and ‘IF YOU DO NOT SETTLE THIS PAYMENT IMMEDIATELY WE WILL NOT EXPORT YOUR READY GARMENTS.’ In January 1997, Mr Wiseman had had to take out a bank loan secured on his house to satisfy personal liabilities to the Inland Revenue in the region of £16,000. On 24 March, SD received a statutory demand for unpaid income tax and National Insurance in the sum of £20,942. On the same day, the company accountants who were working on the 1996 accounts, drafted a note showing that there was a stock shortfall of £125,562.74, a discrepancy which they raised with the company in audit queries. The letter concerning these queries dated 25 April was sent to Mr Metchev at the company offices. It was copied to Mr Wiseman on 2 May, after a prior discussion between him and the accountants.

In my judgment, it is clear that by this time Mr Wiseman knew of the difficulties facing SD. Two steps were taken just at this point, which I find were a response to these difficulties.

On 30 April, Mr Wiseman acquired the shares in a newly formed company called Regency Land Limited. This company subsequently changed its name twice. Firstly, on 24 December 1997 it became Scott Daniel (Menswear) Limited and secondly, on 23 July 1999, a resolution was passed changing the name to Lucci del Marco Limited. For simplicity, I will refer to this company as SDM. It was this company which in due course was used to take over the business of SD.

Mr Wiseman stated in evidence that SDM was formed so that he could operate without the other directors in SD. I do not accept this explanation, at least as a complete explanation. It appears there may well already have been tension with Mr Metchev, particularly over the stock shortfall. However, far from getting away from other directors, Mr Wiseman was about to acquire an additional co-director in SD. In my judgment, Mr Wiseman was determined to go on trading, and realised that SD was in such difficulties he might need another vehicle for his business. That was the principal reason for the acquisition and renaming of Regencyland Ltd.

At one stage, it was suggested that the acquisition and renaming of the new company was carried out in order to transact a large contract with Libya. This explanation was not pressed by Mr Wiseman and wisely so, since it emerged this prospective deal only arose as from September 1998.

On 2 May 1997, Mr Tobi Cohen was appointed a director of SD. His company was, of course, already a significant shareholder. The picture given by Mr Wiseman and Mr Cohen who gave evidence, is that Mr Cohen was never active in the business. Mr Cohen stressed in evidence that he is an extremely busy man with his own concerns, principally his property business Aldgate Warehouse. He is also a director of some other smaller companies.

Mr Cohen gave no comprehensible explanation as to why he became a director of SD, saying in effect he did so because he was asked to do so. He stated that the investment in the company was a minor matter for Aldgate Warehouse, and greatly played down the importance to him and his company of SD and any of its affairs. He stated he was ‘not sure if he was interested’ in the accounts for 1996 even though these were the figures representing trading in the year before he became a director. He was not a director in that year and did not interfere in the business. Later in his evidence he accepted that he did look at the accounts, that he wanted to be assured the company was being run properly and that he had full confidence in Ronnie Wiseman. In this respect, as on some other points, I found his evidence opaque.

In my judgment it is very likely that Mr Cohen became a director at the request of Mr Wiseman. Mr Wiseman’s motives are likely to have been connected with his realisation that SD was facing acute difficulties, with the fact that his landlords were investors, and with the prospect of difficulties with his existing co-director. Mr Cohen’s reasons for accepting the directorship must have included a desire to protect his investment. In the course of his evidence, Mr Cohen appeared to dismiss this entirely. He said his only concern was that the rent was paid properly. The annual rent was £40,000. When subsequently Mr Wiseman came to consider buying out the Aldgate Warehouse shareholding, he suggested a provisional valuation on the shareholding of £70,000. That figure was put to Mr Cohen during his evidence and he still suggested that such a sum was of little or no significance for him. I find the contradiction impossible to accept. In my judgment, Mr Wiseman is likely to have seen Mr Cohen’s appointment as an insurance policy if things went wrong and potentially as leading to assistance in rescuing the business. Mr Cohen may have to some degree yielded to Mr Wiseman’s appeal, but at least part of his motivation must also have been to protect his investment and perhaps also his rental stream.

What is clear is that shortly after he became a director Mr Cohen commissioned a study of the operations of SD, from Messrs Alexander Lawson & Co, accountants and insolvency practitioners. It is clear from the papers that the 1996 accounts were in late or final draft form by late September 1997, and there was a meeting in early October when it would seem highly probable those draft accounts were considered.

I have set out above two of the key indicators on the 1996 accounts. A slightly fuller summary is as follows: there was a loss, after tax, of £256,908.00. Turnover for the twelve month period to 31 December 1996 was £1,515,000.16 compared with £1,603,589 for the previous eighteen month period. This represented a 41% increase in turnover. Despite that increase, the balance sheet revealed that the end of 1996 there were net liabilities of £100,819.00 as against a previous year-end positive balance of £156,089.00. It follows that there had been a loss of value in the company over the previous year of slightly more than £250,000. The net current liabilities were £152,738. Of particular interest is the basis on which the auditors were proposing to state that the company was a going concern. In the Notes to the Accounts the auditors wrote:

“the Accounts have been drawn up on a going concern basis which assumes the continued financial support of a finance company, of the bankers and of the Directors.”

In effect, the auditors were stating that the Company was not able to continue trading legitimately without continued financial support from the sources indicated.

On 10 October 1997, that is to say within days of when I infer Mr Cohen must have seen the draft 1996 accounts, Messrs Alexander Lawson wrote to N. Harris & Co, the auditors, as follows:

“We have been asked by the Directors of the above Company to conduct an investigation into the Company’s affairs in order to establish the viability of the company [emphasis added] and to prepare a report in this respect for consideration by the Directors. We are informed that you are the Company’s auditors and we are therefore writing to you as a matter of courtesy to inform you of these instructions and to let you know that we may be contacting you in due course for information relating to the company’s audited accounts. We also understand that our appointment has been notified to you directly by the Company.”

In my judgment this letter makes it completely clear what were the instructions to Alexander Lawson & Co. There was obvious concern as to whether the company was viable and should continue trading. There is no other inference that can be drawn, as to what motivated Mr Cohen to initiate this investigation. Although the letter recites “directors”, it was Mr Cohen’s own evidence that he instigated this report. His evidence was that he was the one to receive it in oral but not written form. This step was not instigated by Mr Metchev, and Mr Wiseman agrees this was not his initiative. However it is also clear from the letter that “the company” were aware of what was happening. In the context of SD, this cannot mean other than Mr Wiseman. In my judgment it is clear that he knew what was at stake.

In the course of his evidence, Mr Cohen resisted the suggestion that the motive for commissioning the report was because he thought the company might not be viable and might be insolvent. At one point he suggested that the motive might be he was considering making further investment in SD. In my view this was a most unlikely prospect. Mr Cohen’s motive for commissioning the report was the viability of the company. His resistance to accepting that fact is another unsatisfactory aspect of his evidence.

In cross-examination, Mr Cohen suggested that the fee for the work done by Alexander Lawson was in several thousands of pounds. He acknowledged that he had had a report from them. The natural inference from the letter announcing their instruction is that Alexander Lawson were to give a written report. If there ever was a written report, which Mr Cohen doubted, it cannot now be found. Mr Cohen states that his memory is the report was oral. This may well be right, but if it is so, in my judgment it is likely to be because when he heard its substance, Mr Cohen did not wish Alexander Lawson to proceed to commit themselves in writing. It follows that we cannot read what they wrote.

What was the substance of the report? Mr Cohen said in his written statement that the nub was:

“The company was dependent upon continuous efficient sales which was suffering as a result of late deliveries by a supplier but had sufficient orders to trade satisfactory though it had cash flow problems. They never told me that the company was insolvent or ought to cease trading because if that had been said to me, I would have made sure the company ceased trading because I was a director at that time.”

His oral evidence was to the same effect: the company had some cash-flow problems and had some difficulties with a supplier, but was basically in good shape. Mr Cohen said he did not show the written report (if there was one) or give the substance of the report, if it was oral, to Mr Wiseman. He said he would only have done that “if it was detrimental”.

The Defendants argue that the only direct evidence of the content of the Alexander Lawson Report is the account given by Mr Cohen. I accept that is so. I have already expressed my strong reservations about the evidence of Mr Cohen. In reaching a conclusion as to what were the probable contents of this report, it is proper also to look at what Mr Cohen did in response to its receipt.

It is part of the Claimant’s case that Mr Cohen was present at a meeting with Mr Naphtlia Harris when the affairs of the company were discussed. Mr Harris was the company auditor. That is consistent with Mr Harris’s evidence. This must probably have been a meeting to look at the 1996 accounts whether in late draft or at final adoption, the meeting taking place in late 1997. In the course of the opening of the case, the Parties agreed that Mr Cohen had resigned as a director by late 1997, although the formal record might point to a later resignation. I will deal below with what was or was not said by Mr Harris in the course of this discussion. The point of interest is that having joined so recently as a director, Mr Cohen resigned swiftly after the receipt of his independently commissioned report. He did so despite Mr Harris acknowledging the company was a going concern in the terms already set out above. In my judgment this supports the strong probability that the independent report told Mr Cohen that SD was not viable, perhaps with the qualification “without major support from the outside”. It is absolutely clear from his evidence that Mr Cohen would not be interested in providing such significant support, although it is unlikely he said anything about that to Mr Harris.

It is common ground that Mr Metchev was very concerned about the company in late 1997 and he resigned as a director by 31 December 1997.

To complete the picture of SD’s position at the end of 1997 it is necessary to consider what Mr Harris said, or did not say, to Mr Cohen and Mr Wiseman. Mr Wiseman suggested that Mr Harris told him in straightforward terms that SD could go on trading, properly and legally, and if the time came when it could not, he Mr Harris would tell Mr Wiseman that he should stop.

Having heard evidence from Cohen, Wiseman and Harris, I find that Mr Harris did not give to Mr Cohen the kind of open ended guarantee for which Mr Wiseman contends. I found Mr Harris a convincing, responsible and serious witness. I accept Mr Harris’ evidence that he would say and did say no such thing. It is likely that at a meeting following presentation of the draft 1996 accounts there was some discussion of the specific “going concern” basis, which Mr Harris had placed into the text. It is likely that Mr Harris said it was proper for the company to continue to trade whilst it had the active financial support of its creditors the bank and the directors. It is likely that Mr Harris said he could give a view if things changed in a way which affected that “going concern” basis. However, it is inconceivable that Mr Harris would have given carte blanche to a client such as Mr Wiseman, telling him in effect to continue trading until stopped by his auditor. I reject the evidence of Mr Wiseman and of Mr Cohen as to this assurance.

It may be helpful therefore to summarise the position at the very end of 1997. SD was in very poor financial and trading position. The 1996 accounts had been terrible. There was considerable debt to the Claimants and others. The company was heavily dependant on its connection with the Claimants who were vocally concerned about the poor payment record, and were on record as threatening to stop deliveries if payment record was not improved. Mr Wiseman had fallen out with his co-director Mr Metchev, who had resigned. Mr Cohen had both joined the company and left it as a director during 1997. In the course of his brief sojourn on the Board he had received an independent report on the viability of the company from Messrs Alexander Lawson. That report was negative, leading to his rapid resignation from the Board of the Company and disengagement with its affairs. Whilst Mr Wiseman may never have seen a copy of this report, if indeed it was ever reduced to writing, he must have known the gist of it from Mr Cohen. There was no prospect of an injection of capital or any extended line of credit to the company. The “support” of directors, creditors and bankers had no realistic prospect of being substantial. Further, as I have found, Mr Wiseman had received no broad assurance from Mr Harris that he could continue trading. As a strong indicator that he realised the parlous state of SD, Mr Wiseman had acquired and then renamed SDM as a vehicle for his continued business. It is not necessary to find at this stage that he had formulated a precise intention as to how SDM would be used, but the similarity in business names is too striking to be an accident. The renaming of Regency Land as Scott Daniel (Menswear) Limited cannot be an accident. In one way or another, I find that it is plain Mr Wiseman intended this to be a vehicle by which the business of Scott Daniel would be carried on.

In his evidence, Mr Wiseman blames his financial problems on late delivery by the Claimants. He states that:

“Nearly every order was delivered after the date for delivery, in most cases months after that date. This did not start in January 1998 but had occurred regularly well before that date.”

His witness statement also claims, referring to the outstanding debt of £75,000 as at January 1998:

“The debt had built up entirely because of problems caused by the Claimant’s delay in delivering goods as I have explained.”

No detailed analysis of the delay in relation to orders placed earlier than 19 January 1998 was undertaken during the case, almost certainly because disclosure does not provide the precise dates of orders from earlier than that date. However some sense of the degree of delay can be gained by inference from the sequence of order numbers. Order number 291 was dated 19 January 1998; order 341 21 April 1998 and order number 391 was dated 15 September 1998. In other words, orders were running at approximately 50 orders every four months. If the pattern of dealing was reasonably consistent in the period up to January 1998, one would expect order 193 to have been placed at about late May or June 1997 and order 245 to have been placed in about September 1997. Invoice 270 shows both these orders being delivered on 29 October 1997, alongside a spread of orders across the sequence between 193 and 245. Orders 275, 276 and 278 were despatched on 22 November 1997 as recorded in invoice 314. One would have expected these orders to be placed in October 1997. Invoice 416, dated 12 February 1998 records despatch of items against orders 236 and 288, with intervening sequential numbers. One would expect these orders to have been placed between September 1997 and January 1998. Such evidence as there is, therefore, suggests that there was a range of delivery times from order to despatch ranging from 5 or 6 months down to very rapid despatch.

Both sides have given evidence that the industry norm is 6 – 8 weeks from order to despatch.

There is very little, if any, contemporaneous documentary evidence of complaint about delays up to this period. There is a consistent stream of correspondence by fax from the Claimants to the Defendants threatening not to make deliveries if payments are not forthcoming. There is no stream of corresponding replies raising cash flow difficulties based on delay. On 28 January 1998 Mr Wiseman wrote:

“I am a little bit disappointed at lateness of deliveries again, after being told this would not happen. However, I am arranging for transport to be with you to pick these goods up, plus the stock that we have bought from you of your own goods. I would be very much obliged if you could give me an up to date position on our orders, other than the ones above and approximate delivery dates, as we are trying to sell these goods before they come in, which makes our payments a lot easier.”

In that fax is evidence of some level of concern about late deliveries. However, this is the only written reference at this period and the tone is very mild.

I conclude that up to the end of 1997, whilst there were some delays on the part of the Claimants, which may partly be explained by a reluctance to move quickly given the payment situation, this was far from an acute problem. It is plain that some orders were being despatched very swiftly after the order was placed. Any delay problem was not treated as serious where it surfaced in the correspondence at all. I do not accept that late deliveries by the Claimants presented Scott Daniel with a really serious operational problem and I do not accept that it was the sole or even a major cause of SD’s financial difficulties. It follows that, in my Judgment, Mr Wiseman’s attempt to ascribe SD’s financial difficulties up to the end of 1997 to this cause is unreliable.

At the end of 1997, the Claimants sought to enter framework agreements with all their regular clients so as to improve cash flow, plan production and keep their capacity occupied. It is clear that this was in part driven by the Claimants’ bank. The bank had financed the privatisation exercise and also advanced finance for operational capital. Mr Kechovski and his father had met Mr Wiseman on 20 October 1997 in London. It is plain that this meeting improved the relations between the Claimants and Mr Wiseman and his company. At the end of March 1997 the debt outstanding to Drouzhba Style was £134,177. Some further payments were made during the course of the year, reducing the debt. Following the October 1997 meeting Mr Wiseman had arranged for SD to make a further payment of £20,000 in December 1997. The result was that by the end of that year SD’s debt to the Claimants had gone down to £74,682. Mr Kechovski told me, and I accept it, that this reassured him at least to some degree and reinforced the notion that whilst SD might be habitually late in meeting its bills it would be able to pay in the end.

The framework agreement between the Claimants and SD was signed on 9 January 1998. The basis of manufacture was set out as a series of simple obligations, as to supply of fabric, buttons, labels and so forth. Itemised prices were included. The Claimants agreed a capacity to manufacture 3,000 men’s garments per month for each month of 1998 and 1999. There was no express provision for delivery times between order and despatch. This reinforces my conclusion that delay was not an acute issue at that point. The provision for payment was as follows:

“6.

PAYMENTS: BANK TRANSFER MADE TO THE ACCOUNT OF THE PERFORMER [Claimants] MADE NOT LATER THAN 30/THIRTY/DAYS AFTER THE SHIPMENT”.

The agreement was signed by Mr Wiseman as the managing Director of Scott Daniel Limited. The Claimant’s case is that this agreement necessarily involved a representation to the Claimant that Scott Daniel could perform the agreement by paying for the goods ordered thereunder as agreed. It is said that Mr Wiseman procured Scott Daniel to enter into the agreement and that therefore he procured this representation. It is claimed that without this representation, the Claimants would not have gone on manufacturing for SD, at least on credit. The key allegations of falsity against Mr Wiseman are that he knew Scott Daniel was seriously insolvent as at 9 January 1998; that he and his company could not and did not expect either that anyone would inject capital into the company, or that continued trading would bring the company back to a position of solvency. Accordingly, it is said that Mr Wiseman knew SD could not perform the agreement or pay for the orders as agreed.

In my judgment, it is correct that this agreement was intended to formalise relations between the Parties and to set capacities. It is also correct that by entering such an agreement Mr Wiseman must clearly have understood this was intended to regularise relations, and that it was central to the agreement that SD would be able to pay for what it ordered. Because both sides knew that SD had debts outstanding and were habitually late payers, it would not have been thought central to the agreement that every payment was made within thirty days as contained in the letter of paragraph 6. Indeed Mr Kechovski in cross-examination confirmed that his expectation was:

“….that we would be paid 30 days after shipment or within a reasonable period after that.”

What was undoubtedly central was the representation that the Claimants would be paid by Scott Daniel Limited. If it is the case Mr Wiseman knew that SD was insolvent and was likely to go out of business because it was unable to pay its accumulating debt, then inducing the Claimants to go on making supplies by entering a contract for two years further significant supply would be dishonest. That is the heart of the Claimant’s case on this agreement.

The Defendant’s position is that when one is considering an implied representation, one has to look at all the surrounding circumstances to see what is actually being represented. The words and conduct of the buyer of goods on credit, taken as a whole, may make it clear that there is some degree of risk that the buyer will not be able to pay. If the seller proceeds in those circumstances, the seller takes the risk. In this case, it is said that the undisputed evidence of SD’s poor payment record over a considerable period made it clear that SD could not always pay what was due on time. The Defendant says that the assertion the Claimant believed they were sure of getting their money in the end is incredible and is not the inference that any reasonable man would have drawn. The truth is, they say, that the Claimants wanted SD’s business and were prepared to take the risk involved.

I set aside for the moment questions of the relevant roles of the director and the company, in relation to the Statute of Frauds Amendment Act 1828 (“Lord Tenterden’s Act”). I remind myself that in claims of deceit, whilst allegations of fraud need only be proved to the civil standard of probability, the Court should in practice require more convincing evidence to establish fraud rather than other types of allegation: see Hornal –v- Neuberger Products Limited (1957) 1QB 247.

The classic statement of the necessary ingredients for a claim in deceit is to be found in the speech of Lord Herschell in Derry –v- Peek (1889) 14 AC 337 at 376:

“First, in order to sustain an order of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (i)knowingly, (ii)without belief in its truth or (iii)recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must I think, always be an honest belief in its truth.”

Keeping clearly in mind the emphasis on the need for convincing evidence in a case such as this, I find there was deceit in relation to the agreement of 9 January 1998. In some considerable measure this turns upon my assessment of Mr Wiseman in the witness box. I was invited by Counsel to conclude that he was not a dishonest man but rather, in effect, a poor businessman who was over-optimistic about his prospects. He was a man guilty of no more than micawberism. In my view, there is no necessary contradiction between a foolish optimism that something will turn up and dishonesty. Specifically, it is perfectly possible for a businessman to practice deceit in order to keep his business alive, in the unreasonable hope that things will come right in the end. Indeed, a businessman may be encouraged to behave like that if his company has already acquired very large debts which it cannot discharge but which because of external events, the creditor is unable or unwilling to enforce. That was exactly the history of SD in relation to the Bulgarian Bank.

In closing submissions, Mr Bartlett for the Defendants acknowledged that Mr Wiseman was:

“….not a satisfactory witness.”

He conceded that:

“It was almost certainly unwise for him to attempt to run a limited company as the sole executive director. Some of the demands of that position were probably beyond him.”

In my judgment all those observations are true, but do not tell the whole story. Throughout his evidence, I found Mr Wiseman to be evasive when he felt himself under pressure. Mr Wiseman said he did not know there was £350,000 owing to the Bulgarian bank. I do not accept this. As I have already set out above, he exaggerated the delay in deliveries from the Claimants and made the grossly exaggerated claim that all SD’s cash flow and financial difficulties were a consequence of such delays. Later specific examples relate to events beyond January 1998 but bear on my assessment of his evidence generally. Mr Wiseman said he saw no significance in mixing the stock ordered and paid for, or to be paid for, by Scott Daniel, with stock subsequently ordered in the name of Scott Daniel Menswear. I do not doubt the mixing of stock occurred. However, that Mr Wiseman did not see the significance of mixing stock I reject. He told the Court that when SD eventually ceased trading:

“I did not see it as a major event.”

In my judgment this was a disingenuous remark intended deliberately to deflect the cross-examination which might come.

Despite the claim that Mr Wiseman made that he genuinely did not distinguish the stock of SD and SDM, it became clear that in his own manuscript sales records he was allocating sales from the mingled stock evenly between the two companies, sales which took place probably on the same day, going by the date of invoices, but certainly within the same few days written up at the same point retrospectively. The natural inference from these records is that Mr Wiseman himself, having mingled stock principally purchased by SD, was splitting the business in terms of records between SD and SDM in a planned way, so as to facilitate SDM arising like a phoenix from the ashes of SD. When this was put to him, Mr Wiseman resolutely failed to see this point or meet it with answers that could be taken as frank.

No doubt giving evidence over three days is an ordeal for any man of 70 years of age. No doubt it is also true that Mr Wiseman was not a business man of first class ability and was generally over-optimistic. However in my view it is clear that he was also dishonest when he felt he had to be.

In conclusion, as to the framework agreement on 9 January 1998 I find that there was a deceit on the part of Mr Wiseman in signing the agreement. He must have known full well that SD would be unable to make the payments for the stipulated number of garments over the two years of the agreement at all, never mind within 30 days of invoice or a “reasonable period” thereafter. He certainly made this representation knowingly and he can have had no real belief in the truth of the representation. He must have known SD’s days were numbered, since he had SDM waiting in the wings to take over.

I should add that I listened with care to the evidence of Mr Rooney, the expert accountant called on behalf of the Defendants. Whilst his evidence was attractively presented and argued, I did not find it convincing on two key points: firstly, as to the basis for an honest belief by Mr Wiseman in the healthy future of SD after 1997 and secondly, as to the contribution of delay and delivery of goods by the Claimants to the failure of SD.

SD never cleared its debt to the Claimants and nor did the company stick to the arrangements for reasonably prompt payment. Much of the traffic between Mr Wiseman and the Claimants took place by way of telephone calls with no Attendance Notes. However faxes from the Claimants to Mr Wiseman give a reasonable record of what was going on. Only a week after the agreement of 9 January, a payment from Scott Daniel to the Claimants was missed. Orders from SD continued to come to the Claimants and despite continuing problems with payment, a significant volume of further deliveries was made to SD. Fresh orders were placed from 19 January 1998 onwards. Deliveries were made against further orders coming from SD and/or SDM until well into 2001 although, with most of the latest orders in the sequence, delivery was only made against specific payment in advance.

Insofar as these deliveries were made without prior payment, how was this pattern brought about? The answer is by a combination of three factors: firstly, some further payments were made by SD; secondly, there was a series of promises to pay, schedules of payment or agreements for scheduled payments; thirdly, by the shift of business from SD to SDM. The Claimants rely upon the series of orders as containing essentially the same misrepresentation or deceit as to the capacity to pay which is contained in the agreement of 9 January 1998. This is termed the “second claim”. The series of statements as to payment, assurances or agreements, or schedules as to payment are termed the “third claim”. In broad terms, I accept the way the Claimants formulate these claims although it is probably more satisfactory to say that the continuing representation that SD could and would pay for the goods that were ordered and delivered, was made both in the orders and in the various promises to pay.

It seems common ground that at the time of entering the January 1998 agreement, Mr Wiseman had promised to clear all debt by 16 January 1998. That was not done. By 5 February 1998 £53,186.58 was outstanding and the Claimants threatened to withhold delivery of garments unless payment was made. The same sum was outstanding a week later despite Mr Wiseman’s assurances. From a fax of 13 February 1998, it is clear that Mr Wiseman had promised to clear all outstanding payments within ten days from 5 February. No payment had been received by the 13^th. On 15 February, there was a further conversation and a varied agreement was reached whereby £50,000 would be transferred to the Claimants on 16 February. A considerable further quantity of goods had been shipped to the Defendants on 12 February and by 16 February, the total outstanding amount was £110,472,53.

On 16 February Mr Wiseman faxed the Claimants saying that £20,921.70 was being paid that day alongside another cheque of £24,888.10. He further wrote:

“As I have said, we are going to go through all this when I have all my book keeping people here, and sort it out and anything that is definitely owed to you, will definitely be paid to you. Meantime, I hope to make inroads on payments to you for some of the stuff you have delivered on this last lorry within two weeks of receiving the goods, and if things go good, it will be cleared very very quickly.”

On 7 March 1998 £81,361.71 was outstanding and on 16 March £98,506.71. The combination of payment and promises appears to have carried the trade on through the middle of 1998. There is at this period a dearth of documentary evidence in the form of faxes but I infer a similar course of trading continued.

On 1 September 1998 Mr Wiseman faxed the Claimants recording that there had been a meeting in London with Mr Dimitrov and Mr Kechovski. This was on Scott Daniel headed notepaper and read in part;

“As promised, please find enclosed preference list for dockets, [emphasis added] also a list for Nino or Nino type cloth for blazers which I would like as soon as you possibly can.”

And on top of that there is an order for “outfit” – Order No. 0381.

“I am also sending Order No. 0389 for “outfit” and this relates to cloth which was in dockets 0357 Mark 1 and Mark 4 docket 0358 King 3 and 0360 Lotto 2. These are now to be made in SB3 Suits, with “outfit” labels.”

Given the Defendants’ consistent claim that delivery delays were severe and the cause of cash-flow problems, I have singled out this fax. There is no other documentary evidence of any complaint about delay following the single fax of January 1998 set out above. It is clear that this fax gives a re-prioritisation to outstanding orders. It is consistent with there being some delay in delivery by the Claimants. However the tone is friendly and there is no suggestion that the delays have been significant or serious in their implications for the Defendants’ business. Moreover, it is plain from the content that there are adjustments to the labelling of the clothes to fit Mr Wiseman’s customers’ requirements. Mr Wiseman gave evidence to the effect that he did not tend to put things in writing but to make his points orally. He suggested that he had made clear oral complaints about deliveries and about how serious they were for him. I reject this evidence in relation to this later period, as well as the earlier. It may very well be that he dealt more in the spoken word than the written word, but it is plain from those occasions when he did commit himself to writing that he was not treating the scheduling of deliveries as a serious bone of contention between the Parties.

On 11 September 1998 there appears the first series of purchase orders, numbered 701 – 712, containing the names Scott Daniel Menswear Limited. These orders are printed “Scott Daniel Purchase Order Forms” amended in manuscript at the bottom to contain the new name. Mr Kechovski’s evidence is that the question of Scott Daniel Menswear Limited was never raised with him until a meeting he had with Mr Wiseman on 25 June 1999. At that point, Mr Kechovski states that he was told this was simply a change of name, since the Scott Daniel business was mainly in menswear. Mr Kechovski states in his witness statement at paragraph 125:

“Ronald Wiseman told us that Scott Daniel and Scott Daniel Menswear were one and the same company. We always believed that they were the same company and it was simply a change of name as Ronald Wiseman said. We were not concerned at all about the name change and did not consider it to be important. That is the only reason why we sent invoices to Scott Daniel Menswear. It was only mentioned by Ronald Wiseman at the meeting and there was no further discussion about the name.”

On 15 October 1998, a fax was sent to “Kolyo from Ronny” dealing with a number of specific orders. The fax ended:

“Any of these stock items must be invoiced to Scott Daniel (Menswear) Limited which is our new “J.V.” Company.

Best Regards

Ronny”

Mr Kechovski said in evidence that if he had seen this fax he might well have understood that “J.V.” meant joint venture and have understood that this was not merely a name change of the same company. I am not on the evidence able to resolve whether he did see the fax and did not draw that conclusion, or whether he never saw the fax. However, what actually happened was that invoices up to June 1999 were all sent out in the name of Scott Daniel Limited and not Scott Daniel (Menswear) Limited. From June 1999, all the Claimants’ invoices went out in the name of Scott Daniel (Menswear) Limited or Lucci Del Marco Limited, which was the subsequent change of name of Scott Daniel Menswear Limited.

The fax of October 1998 was clearly sent, since it is translated in manuscript into Bulgarian, but it was not acted upon, at least on this point. Nor is there any evidence that Mr Wiseman brought the matter up again before June 1999. In other words, the Claimants behaved in a way which paid no attention to the sentence in the fax of 15 October 1998 and in a way consistent with the memory of Mr Kechovski that he was told in June 1999 of a company name change. I accept Mr Kechovski’s evidence here, as elsewhere, with the effect that I find he believed he was dealing throughout with the same company. This inference is supported by the fact that after June 1999 all invoices were rendered to Scott Daniel (Menswear) Ltd or Lucci Del Marco Ltd even when the original orders had been placed clearly by Scott Daniel Ltd.

This way of working would of course have been impossible, if Mr Wiseman was distinguishing between stock belonging to SD and stock belonging to SDM. However, he was not doing so but was in fact mixing all the stock together in his warehouse, making sales from the combined stock and then dividing those sales between the two companies, without any reference to which company had paid for the stock. Thus, confusion between the property of each company was either immaterial or perhaps helpful to him.

On 18 January 1999 there was a meeting in London between Mr and Mrs Dimitrov and Mr Wiseman. They agreed a revised schedule of payments and the fact of the agreement was confirmed by a fax letter from Mr Wiseman to the Claimants of 21 January 1999. In the course of that letter, Mr Wiseman wrote:

“As I explained to you, business is very tight at the moment and customers are just not coming in to buy goods in any quantity. However, our major customer will be returning from holiday on Monday 25 January and hopefully, will see me the following day with a possibility of buying a lot of stock. If this happens, we will make additional payments to you. As I said to you, our main priority is to clear you as quickly as possible and to keep things running on a healthy basis.”

Mr Kechovski wrote in reply on the following day:

“Dear Ronnie,

Thank you very much for your letter regarding payments. I believe that those payments will be done as the agreed schedule.”

On 26 January 1999 Mr Dimitrov wrote to Mr Wiseman:

“Dear Ronnie,

Thank you for your confirmation letter regarding your outstanding payment schedule. Yesterday we were in Sofia at our bank and we signed an agreement with the bank according to it we have to pay the amounts quoted in your letter as per the exact dates confirmed by you. If we do not do that all our accounts will be blocked and a quaestor will manage with them, which is a sort of bankruptcy for us. As we explained to you we have big duties to our suppliers which had already rose claims to us and their solicitors brought the law against us. Following all the above we need on each payment date quoted in your letter to receive the bank swift document which we have to present at our bank on the same day. Please take in mind that this is clause of the above mention agreement with our bank and we have to keep it, which means that we really need this swift document for the transfer to be received on the same date quoted in your letter. If we do not receive it and give it to our bank our bank accounts will be blocked on the same day. As you can see this is a very critical problem and we believe you will do all your best to help us and to keep your promises and our factory and business. Waiting your transfer of approx. GBP £27,000 on 28.01.99 and the swift document.”

From the end of January 1999 onwards, a series of increasingly desperate messages pass from the Claimants to Mr Wiseman demonstrating that the Claimants were in real cash flow difficulties with their bank. Whilst these problems may not have arisen solely because of the difficulties with the Defendants, it is clear that the failure of the stream of payments from the Defendants made the cash-flow problems acute. By 18 February, Mr Dimitrov was writing:

“As you did not pay, the bank took control of the ready garments in our warehouse and won’t let us load goods.”

Later that month, on 24 February 1999, there is the first clear documentary evidence that Scott Daniel were in difficulty because of delays in delivery. On 24 February 1999, Mr Wiseman wrote:

“We are in real problems because orders 716 – 720 were not loaded. Customers are threatening to take us to Court because I gave them wrong information.”

Here finally is some concrete evidence of failure of delivery causing problems but only after failures to pay by the Defendants had precipitated an acute cash-flow crisis for the Claimants and intervention from the Claimants’ bank.

Through February and into late March there are further complaints by the Claimants about lack of payment. On 21 March 1999 there was a meeting between Mr Dimitrov and Mr Wiseman in London. A schedule of payments was agreed and minuted between the Parties, with the last payment to be on 14 May 1999 with the intention of finally getting the Defendants out of debt to the Claimants.

It is Mr Wiseman’s case that he told Mr Dimitrov at this meeting Scott Daniel would probably be unable to pay the amounts set out in the schedule. Mr Wiseman’s evidence was that he agreed to go along with this schedule with the intention of placating the Claimant’s bank, but that Mr Dimitrov knew all along the schedule did not represent a genuine promise to pay or any representation that SD could pay the amounts set out in the schedule.

The minutes of this meeting record that the outstanding sums on outstanding invoices, ranging from March 1998 to February 1999, total £177,116.62. This schedule was signed by Mr Wiseman.

Mr Kechovski was not present at this meeting, where the Claimants were represented by his father. As I have said above, Mr Dimitrov has died and we only have a very short record of his evidence. In that short statement dated 29 June 2002, Mr Dimitrov makes it clear that he was by this time concerned by the Defendant’s payment record. He records successive visits to Mr Wiseman to obtain payment through 1997 to 1999 but also records further payments being made over this extended period, and in quite substantial sums, even though the level of indebtedness was slowly and inexorably rising. Mr Dimitrov says absolutely nothing in this short account consistent with the suggestion that the schedule of payments was a sham got up to satisfy the Claimant’s bank.

In his witness statement and in oral evidence Mr Kechovski told the Court that his father had given him an account of this meeting. It is agreed that his witness statement miscalculates the total of outstanding sums in the schedule but in my judgment this does not affect the accuracy of his recollection: this figure is merely a miscalculation of the sums within the schedule. Mr Kechovski states:

“At the time of the meeting on 21 March 1999, because Ronald Wiseman signed the agreement and payment schedule for Scott Daniel, and because of the reasons given by him, my father and I did not believe that Scott Daniel had any long term or serious financial problems. We expected Scott Daniel to pay for all of the orders that it had placed and the signing of the payment schedule encouraged us to accept more orders from him.”

Mr Kechovski also rejects this suggestion that this schedule was a sham designed to placate the bank.

I reject the suggestion from Mr Wiseman that he told Mr Dimitrov SD would be unable to meet the payments within the schedule. I find that this was yet another inaccurate and unreliable assertion by Mr Wiseman. In my judgment, Mr Wiseman was energetically trying to preserve his source of supply, as he continued to do after this date.

I have considered with care the short statement coming from Mr Dimitrov and the evidence from Mr Kechovski as to the view then taken by the Claimants as to SD’s continuing capacity to meet its obligations. In my judgment there must by then have been a level of anxiety on the part of the Claimants about whether SD could and would pay in the end. Mr Dimitrov testified to his own anxiety well before this meeting. The Claimants already had difficulties with their own bank, rendered acute by delayed payment from SD. Yet significant payments had continued to be made, at least sporadically, even though the level of indebtedness had continued to rise. Since I have found as a fact that Mr Wiseman was making every effort to reassure the Claimants, it seems to me the right inference is that he succeeded, by setting out and signing the schedule of proposed payments. The fact is the Claimants went on for some further period extending credit to SD. There is no credible evidence that SD’s custom was so important to the Claimants, whether measured by quantity or profitability, that it would have brought Mr Dimitrov and Mr Kechovski to continue manufacturing on credit, unless they were in fact relying upon Mr Wiseman’s assurances that SD would pay in the end.

For all the reasons set out above, I find that this schedule constituted deliberate mis-representation by Mr Wiseman that SD would be able to and would in fact settle these debts. He either knew that the Company would not be able to do so or, at the very least, he was fully aware that he had no real idea how SD could meet such obligations or whether they could at any point in the future meet them.

Following this meeting, there began the final phase of the relationship between the Parties. Further orders were placed and deliveries made. Some further payments were made but not enough ever to clear the debt outstanding in the schedule. The Claimants made successive efforts at pressing SD for payment but the financial position deteriorated overall.

On 25 June 1999 Mr Kechovski and his father saw Ronald Wiseman in London. The Claimants again complained about the payment record. The prices were raised by the Claimants for making each two-piece suit, to reflect the cost of bank interest derived from a loan necessitated by the late payments from SD. It was at that meeting that Mr Wiseman told the Claimants that the Company name was changing from Scott Daniel to Scott Daniel Menswear. I accept Mr Kechovski’s evidence as to how this arose:

“He said that because he received mainly orders for menswear rather than ladies clothing and he was building a reputation in menswear garments, it made sense to change the name. My father and I thought nothing of it. Ronald Wiseman told us that Scott Daniel and Scott Daniel Menswear were one and the same company. We always believed they were the same company…….”

By October 1999 the situation had deteriorated further. There was yet another meeting in London at which the debt was said to stand at £296,749.06. There was an agreement in the course of this meeting that fabric owned by Scott Daniel whether held in Bulgaria or in London, could be used as collateral against which the Defendant’s debt could be enforced (the “security agreement”). It is clear that by this stage, the Claimants were contemplating the risk that the debts would not be discharged.

Between that time and June 2000 the position between the Parties deteriorated further. Some further payments were made, usually in modest round sums. Deliveries were made to England, but during this period invoices were being issued in the name of Scott Daniel Menswear Limited. Finally on 2 and 3 July 2000 Mr Dimitrov and Mr Kechovski travelled to London and met Mr Wiseman again. Mr Dimitrov told Mr Wiseman that unless payments were received orders would not be released for delivery. In fact, it is clear from an agreed schedule of orders and deliveries prepared for the hearing that, with the exception of one order dated June 1999, there was never any delivery of goods against an order placed later than 12 April 1999. For the most part, deliveries against earlier placed orders, made later than April 1999, were against specific advance payments. In other words, credit ceased at about that time.

Some payments were made against the indebtedness between October 1999 and the end of the year 2000. By 31 December 2000 the indebtedness was £239,204.21. Many of these payments were made by SDM rather than SD. During the year 2001 the Claimants delivered further garments worth £28,472.47. Further sums totalling £39,967.07 were paid with the upshot that, by the end of 2001, the balance for items invoiced was £227,709.61. In addition, the Claimants had manufactured goods to an invoice value of £57,554.66 which were not delivered because of the non-payment. Further adjustments and a credit for some monies recouped for unworked fabric leave a claim of £285,464.28.

I have set out above that a term of the agreement on 7 October 1999 was that SD would keep available a substantial amount of stock in London – as well as in Bulgaria – as security against SD’s indebtedness to the Claimants. The Claimants here say that there is only really one issue:

“Did Scott Daniel, as at 7 October 1999, have a substantial amount of stock which the First Defendant caused SD to transfer to SDM?”

Necessary conclusions from the findings set out above are that firstly SD did have significant stock in London as at October 1999 and secondly, that a large quantity of stock purchased by SD on credit was mingled in the warehouse with stock belonging to SDM and was subsequently sold, with the proceeds going to SDM, rather than SD. It is clear that Mr Wiseman acted without any regard to the obligation to maintain stock as security under this agreement.

In MCA Records Inc & Anr v Charly Records Limited [2001] EWCA Civ 1441, the Court of Appeal considered the relative capacity of a director and a limited company to be tortfeasors, jointly or otherwise. In the course of giving the judgment of the Court, Chadwick LJ set out a number of principles which bear on the instant case.

“47.

In Mentmore Manufacturing Co Ltd v National Merchandising Co Inc (1978) 89 DLR (3d) 195 the Federal Court of Appeal of Canada described the question whether, and if so in what circumstances, a director should be liable with the company as a joint tortfeasor as “a very difficult question of policy”. At page 202, Mr Justice Le Dain, delivering the judgment of the court, said this:

“On the one hand, there is the principle that an incorporated company is separate and distinct in law from its shareholders, directors and officers, and it is in the interests of the commercial purposes served by the incorporated enterprise that they should as a general rule enjoy the benefit of limited liability afforded by incorporation. On the other hand, there is the principle that everyone should be answerable for his tortious acts. ”

Plainly, it is necessary, in the individual case, to achieve a balance between those two considerations. Equally plainly, the judge appreciated that. As he put it in paragraph 15 of his judgment: “inquiries into the matter will or may involve an ‘elusive question’ turning on the particular facts of the case, and whose resolution may in turn involve the making of a policy decision as to the side of the line on which the case ought to fall.”

48.

It is because there is a balance to be struck on the facts of each case that it is dangerous for an appellate court to appear to attempt a formulation of the principles which may come to be regarded as prescriptive. But I think it can be said with some confidence that the following propositions are supported by the authorities to which I have referred.

49.

First, a director will not be treated as liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company – that is to say, by voting at board meetings. That, I think, is what policy requires if a proper recognition is to be given to the identity of the company as a separate legal person. Nor, as it seems to me, will it be right to hold a controlling shareholder liable as a joint tortfeasor if he does no more than exercise his power of control through the constitutional organs of the company – for example by voting at general meetings and by exercising the powers to appoint directors. Lord Justice Aldous suggested in Standard Chartered Bank v Pakistan National Shipping Corporation and others (No 2) [2000] 1 Lloyd’s Rep 218, 235 – in a passage to which I have referred – that there are good reasons to conclude that the carrying out of the duties of a director would never be sufficient to make a director liable. For my part, I would hesitate to use the word “never” in this field; but I would accept that, if all that a director is doing is carrying out the duties entrusted to him as such by the company under its constitution, the circumstances in which it would be right to hold him liable as a joint tortfeasor with the company would be rare indeed. That is not to say, of course that he might not be liable for his own separate tort, as Lord Justice Aldous recognised at paragraphs 16 and 17 of his judgment in the Pakistan National Shipping case.

50.

Second, there is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if he is not exercising control through the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder. In other words, if, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability because he could have procured those same acts through the exercise of constitutional control. As I have said, it seems to me that this is the point made by Mr Justice Aldous (as he then was) in PGL Research Ltd v Ardon Internatinal Ltd [1993] FSR 197.

51.

Third, the question whether the individual is liable with the company as a joint tortfeasor – at least in the field of intellectual property – is to be determined under principles identified in CBS Songs Ltd v Amstrad Consumer Electronics Plc [1988] AC 1013 and Unilever Plc v Gillette (UK) Limited [1989] RPC 583. In particular, liability as a joint tortfeasor may arise where, in the words of Lord Templeman in CBS Songs v Amstrad at page 1058E to which I have already referred, the individual “intends and procures and shares a common design that the infringement takes place”.

52.

Fourth, whether or not there is a separate tort of procuring an infringement of a statutory right, actionable at common law, an individual who does “intend, procure and share a common design” that the infringement should take place may be liable as a joint tortfeasor. As Lord Justice Mustill pointed out in Unilever v Gillette, procurement may lead to a common design and so give rise to liability under both heads.”

These principles have been explicitly relied on by Pumfrey J in Koninklijke Philips Electronics NV –v-Princo Digital Disc GmbH & Another (Case No HCO20CO1556.

In fact the potential for joint tortious liability of individuals who have responsibility for the control of a company, alongside the company, is of long standing. The Court in the MCA case pointed out that such liability had been established in Rainham Chemical Works Limited (in liquidation) & Others v Belvedere Fish Guano Company Limited [1921] 2AC 465.

The Court of Appeal in the MCA case also dealt effectively with any argument arising from the speech of Lord Steyn in Williams & Another v Natural Life Health Foods Limited [1998] 1 WLR 830 at 838H – 839A. Lord Steyn’s intention was to limit the proliferation of new tort claims which might arise against directors of companies if they were potentially liable for suit in tort, aside from some “special relationship” between the director and the claimant. His concern was exactly that balance of policy referred to by Chadwick LJ in paragraph 47 of the judgment of the court in the MCA case quoted above. However, it seems to me clear that Lord Steyn cannot have intended his remarks to apply to the factual situation which I have found in the instant case. It cannot ever have been the policy of the law that a director of a company who commits acts amounting to deceit and at the same time procures acts amounting to deceit by the company of which he is a director, should be able to claim exemption from tortious action because of his status as director. On the contrary, the clear policy of the law must be – and must always have been – in favour of a remedy for fraud. It is in my view inconceivable, where fraud is proved, that the status of director could act as an effective shield from personal liability by a director.

Moreover, Chadwick LJ laid emphasis on the judgment of Aldous LJ in Williams v Natural Life as set out in paragraph 45 of the MCA judgment above. In that instance the joint tortious liability of the director is based upon a procurement of the company to carry out the necessary tortious acts without any proof that the director himself personally carried out the tortious acts. In the instant case, as I have found, the activities of Mr Wiseman and of SD were so closely intertwined that one cannot untangle them satisfactorily. Since the essence of the case is representations as to the Company’s credit which were almost all in fact made by Mr Wiseman himself, the analysis must be that Mr Wiseman both made those representations personally and procured the company to make them. No other analysis is possible on the facts. Representations as to the credit of SD made by Mr Wiseman but not by the Company would not have been relied upon. He was thus much more closely concerned than the relevant director in the MCA case, Mr Young, or indeed than Mr Mistlin, the relevant director in Williams v Natural Life. Here, Mr Wiseman controlled everything closely, while most of the representations were made by Mr Wiseman personally, they were necessarily made on behalf of the company. Insofar as the representations as to credit consisted of orders placed pursuant to the various agreements, they were also made on occasion by other company employees under the direction of Mr Wiseman. In my judgment, this is a situation where the individual director and the company may be joint tortfeasors.

Another way of framing the same point is that

“……..there is no reason why a person who happens to be a director …..of a company should not be liable with the company as a joint tortfeasor if he is not exercising control through the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder. In other words, if, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control” and thus “there is no reason why the individual should escape liability because he could have procured those same acts through the exercise of constitutional control”.

See the judgment in the MCA case at paragraph 50.

The relevant provisions of the Statute of Frauds Amendment Act 1828 (“Lord Tenterden’s Act”) are to be found in Section 6:

“Action not maintainable on representations of character etc, unless they be in writing signed by the Party chargeable.

No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade, or dealings of any other person to the intent or purpose that such other person may obtain credit, money, or goods upon, unless such representation or assurance be made in writing, signed by the Party to be charged therewith.”

This section, although antique, has been maintained consistently through successive emendations of the Fraud Acts. Not surprisingly, there has been extensive authority establishing the meaning of the section. The section applies to fraudulent representations only: see Behn v Kemble (1859) 7 CBNS 260; Banbury v Bank of Montreal [1918] AC 626. For an action for false representation to be maintained, a representation as to the credit of another person must be signed by the person making it, and not by an agent: Williams v Mason (1873) 28 LT 232. Representations made in order that the party making the representation may obtain a benefit from the credit allowed the third party, are within the section: see Pearson v Seligman (1883) 48 LT 842. In connection with the phrase “of any other person” the word “person” includes a corporation: see Banbury v Bank of Montreal (Supra). The representation by a partner as to the credit of his firm is one as to the credit of “another person” within the meaning of the Section, see Devaux v Steinkeller (1839) 6 Bing NC 84.

As against the authorities touched on above, which have the effect of broadening the application of the section, the Claimants suggest that the section is inconsistent with Article 1 of the First Protocol of the ECHR because it deprives the Claimant of a chose in action in deceit and under the Misrepresentation Act 1967. The Claimants add that it does so without any compensation and that such an artificial defence is an anachronism, which no longer serves any sensible purpose in the common law. Although eschewing a full blown attack on the section as being incompatible with the Convention, the Claimants do say that the Act should be construed narrowly in the event of any ambiguity, relying on Matadeen v Pointu [1999] 1 AC 98. One might add that, irrespective of any effect of the European Convention on Human Rights, the common law would always have construed such a technical defence to fraud narrowly, given the underlying policy of the law. Yet the section is unambiguously concerned with a limitation on the right of action based on fraud. Where does this leave us in the instant case?

Firstly, it seems to me that in so far as the liability of Mr Wiseman is based on procuring false representation or deceit by the company, that is distinguishable from making a representation as to the “…..credit ….. of any other person”, since what Mr Wiseman has done is to procure that SD should make false representations as to its own credit: an act outside the ambit of the Section.

Secondly, insofar as Defendants are joint tortfeasors in making false representations, they have acted jointly in making representations as to the credit of the company. A narrow construction of the section may well mean that representations made jointly by Mr Wiseman and the company – the company acting through Mr Wiseman – cannot in truth be representations as to the credit of “another person” since they are representations made jointly about one of the two joint representors. If the representations are made as to the credit of the representor – in this instance the company – they are outwith the section. I acknowledge that such an argument is reminiscent of the Scholastics, but it is logically defensible. It is also morally defensible and aligned to what I judge to be the underlying policy of the law where a technical defence to fraud is concerned. The situation of a corporation and a controlling director is distinguishable from that of a partner and a partnership, particularly when the relevant director has the sole practical control over the affairs of the company. This is the situation which I have found to be the fact in the instant case.

The foregoing points are in my view enough to prevent the section acting as an effective shield for Mr Wiseman. There is no relevant representation in the whole history of this case where Mr Wiseman did not procure the representation to be made by the company on its own behalf, at the same time as he made the relevant representation: his representations were always as director of SD. There is no relevant representation where – on the findings of fact I have made – the Defendants were not joint tortfeasors.

It is also helpful to consider the extent to which the representations were signed by Mr Wiseman, so as to set aside any protection which might be otherwise offered by Lord Tenterden’s Act.

The Claimant has argued that:

“D1 placed what can be regarded as a signature on each of the order forms. The fact that it was on a pre-prepared document, or that it is not in D1’s own hand but printed, does not prevent it from being a signature: what matters is whether it was on the order form in order to authenticate it, to show that every part of it emanated from him. It is respectfully submitted that this is its obvious purpose: why else does D1 print his name on the order form at all?”

It is the case that the word “Wiseman” appears on many order forms which were sent by Scott Daniel. The printed name appears at the top of the pre-prepared form and is in cursive script. Yet, in my view, this is not a signature applied to the order forms to authenticate the order, so as to show that the order emanated from Mr Wiseman. These printed cursive names are really a branding exercise, or part of the image or get-up of the Defendant Company. We can test this proposition in the following way: if such an order form had come from the Second Defendant to the Claimants at a period when everyone knew the First Defendant was away on an extended holiday, would it have been thought in the slightest odd? In my judgment, it would not, precisely because no-one would have considered these printed names to be signatures. It follows that in my judgment these printed names do not satisfy the requirement of the section, if it needs to be satisfied.

The Defendant has argued that any signature by the First Defendant on behalf of SD “is not in law a signature by the Party to be charged for the purposes of the 1828 Act”. The reasoning is suggested to be that “a signature by an authorised agent on behalf of a company is the signature of the company for the purposes of the Act”. In my judgment this misses the point which I have made above: the Defendants here were joint tortfeasors. If Mr Wiseman fraudulently signed on behalf of the company, then both he individually and the company, as a legal person, committed the same act of fraud at the same moment with the same signature, whilst representing that the company had good credit.

In any event, there are a series of signatures on key documentations. I have set out above the fact that the First Defendant signed the framework agreement of 9 January 1998, the most important single documentary agreement in the whole sequence. Without this agreement and its direct promise of payment, carrying the clear implied representation of capacity to pay by the company, none of what followed would have taken place. Furthermore, the First Defendant placed signatures, to the letters of 16 February 1998, 21 January 1999, 22 February 1999, 17 March 1999 and 21 March 1999. These were not – or were not all - manuscript signatures, but they were signatures in the full sense: that is to say authentication by the First Defendant that the document came from him. As the history set out above confirms, this means that signatures which I find to be sufficient to satisfy the requirement of Lord Tenterden’s Act were made on many of the key documents representing the credit of the company to the Claimants throughout the period of reliance on such representations. Without these representations, the Claimants would not have continued to extend credit. With these representations, they did.

For all the above reasons, I find that the Claimants should have judgment against the First Defendant. There remains the question of quantum of loss.

I have set out in paragraph 92 the calculation of the claim up to and including monies recouped for unworked fabric. This takes the calculation of loss to £285,464.28.

The Claimants found this quantum of loss on the basis that had the Claimants not given credit to and manufactured for SD, there would have been similarly profitable orders from other customers, for which the Claimants would have been paid. I accept this approach.

The Defendants submit that to be set against this figure are the value of 14000/15000 suits and something in the region of 18000 metres of unworked fabric. The Defendants suggest that the suits should be valued at around £20-£21each and the fabric should be valued at about £2.67 per metre. There is no further evidence as to the exact number of such suits or the exact quantity of unworked fabric which remains. In my view there clearly is some credit to be given in respect of these items against the sum which would otherwise be awarded, although I do not accept the valuations proffered.

Mr Kechovski gave evidence that these suits had not proved to be saleable, but there was little or no detail from him as to what efforts had been made to mitigate this loss. It has long been clear that the Defendants were not going to pay for them. Yet without more, I am not prepared to conclude there has been a failure to mitigate the losses in the case.

After this length of time, the value of suits made up at the latest early 2000, must be greatly diminished. Doing the best I can, I ascribe a value of £5.00 to each suit and I assume a number of units of 14,500. Thus the suits reduce the claim by £72,500. Assuming that the fabric has been properly preserved, something which the Claimants had an obligation to do to mitigate their loss, the value of fabric should have maintained a higher proportion of original value. Doing the best I can, I ascribe a value of £40,000 to this fabric. It follows that the Claimants are entitled to judgement in respect of a principal sum of £172,964.28.

Neither side has raised the question of interest in their submissions to the Court. I will entertain submissions on the question of interest when this Judgment is handed down and the order is perfected.