Wright v Michael Wright (Supplies) Ltd & Anor

It is unnecessary to describe the tortuous procedural history of this action before and after consolidation save to refer to the directions that I gave at the hearing by way of case and trial management directions. In order to understand these directions, I must first briefly outline the disputes. MWS was set up by MW in 1972. He sold its shares to TWI in 2002 for £1,775,000.00. TWI was set up as the vehicle to buy these shares and its shares are owned half and half by MW and NT but NT controlled both companies since he was the managing director of both. The purchase price was to be paid in instalments over a five-year period and, if TWI defaulted in its payment obligations, MW was entitled to terminate the share sale agreement and call for the return of his shares. MW ceased to be employed by MWS when the share sale agreement was completed but, according to him, he was retained by NT to carry on managing MWS as a consultant and did so over the next five years until NT brought that consultancy to an end in circumstances of much controversy.

The claims brought by CW are of three kinds:

Both defendants disputed these claims. However, neither defendant has any assets. This is because TWI, whose only function was to own MWS’s shares and distribute the dividend payments for those shares, has sold all MWS’s assets for nominal consideration and its goodwill to a third company and is now a dormant company. CW contends that this sale was entered into as a means of taking MWS’s assets out of the company so as to leave it without resources and thereby ensure that CW’s outstanding claim for the unpaid balance of purchase price for MWS’s shares would be stymied. He therefore wants to recover MWS’s shares that he used to own in order to take control of the company and, having done so, arrange for the company to sue NT and the company that has acquired the assets of MWS for the return of its assets or for damages representing the value of the assets that the third party allegedly acquired at a gross undervalue. To do this, CW does not need to identify the precise sum that remains unpaid, he merely needs to show that the unpaid sum is significant since, if he can show that, and can also show that he has successfully terminated the share sale agreement, he is entitled to the return of MWS’s shares.

As for the unpaid consultancy fees, he claims those for three reasons:

It was with these various contentions that the case was called on for a hearing. The court was confronted with two rival sets of hearing bundles prepared, respectively, by CW and NT with TP’s assistance. These bundles had not been prepared in the conventional way with every document placed in chronological order and then each page numbered consecutively. Further, the many payment, or non-payment, items were not identified in a useable schedule cross-referenced to the hearing bundles and supported by detailed and coherently structured witness statements. I therefore adjourned the hearing to allow the parties to produce a schedule of disputed payment items cross-referenced to the relevant supporting documents. I also gave MWS and TWI permission to amend their defences to allege that on the proper construction of the share sale agreement, TWI had in fact over-paid CW. The parties produced a consolidated schedule and a bundle of cross-referenced documents and at the adjourned hearing, at the request of the parties, I agreed to dispense with a trial and to determine the claims and counter-claims on the documents that had been lodged.

As a result of this somewhat tortuous procedure, I must decide these issues:

ISSUE 1: THE CONSIDERATION FOR MWS AND ITS PAYMENT

The only evidence about the sum that CW and NT agreed that TWI would pay for MWS is contained in their respective witness statements. CW stated:

“In 2002, I decided I wanted to sell MWS. NT and myself sought advice on the matter and agreed that we would both set up a new holding company called TWI. We would each hold one share in the new company and TW would then purchase the shares of MWS. NT and I agreed the purchase sum would be £1.775 million and that that sum would be paid to me in equal monthly sums of £21,750.00 with an agreed pre-payment of £470,000. We further agreed in the sale agreement and shareholder agreement that the final sums had to be paid in full by 6^th September 2007. TWI received dividend payments from MWS. I, in turn would be paid the agreed sums from TWI.”

The share sale agreement provided as follows:

“Whereas:

(a)

CW is the holder of £50,000 shares in MWS.

(b)

CW has agreed to sell these shares to TWI for the price and in the manner hereinafter appearing.

1.

CW will sell and TWI will purchase the shares at a price being £35.50 per share (the total price hereinafter called the “share price”)

2.

TWI will pay the share price by way of equal monthly payments (or such other payments as may be agreed between the parties) of £*

…

4.

Payment of the total share price will be over such period as may be agreed between the parties being not more than five years from the date of this agreement.”

* The original did not have any figure filled in after the £ sign.

It is also necessary to take account of this provision in the shareholders’ agreement entered into simultaneously with the share sale agreement. This provides that:

“4(vii) TWI shall not allow or cause TWI to default in the payments due to CW under [the share sale agreement] or any other payments or sums due to CW.

It is noteworthy that 50,000 shares costing £35.50 each represents a total of £1,775 million. However, both TWI and MWS through NT now contend in their defence as follows:

“We say that the agreement is for £1,305,000.00 (being the total amount of 60 x £21,750.00). We say that the agreement reflected this. The share sale agreement is ambiguous and the documents which surround the creation of the share sale agreement show that the intention is for £1,305,000.00. Although it is held by MW that an agreement existed for a pre-payment of £447,000.00, no such agreement exists and no schedule showing how this amount comes about by identifying the amounts that go to make up £447,000.00. TWI would not have paid £1,775,000 for MWI as a going concern. In that £1,305,000.00 should be the price, then MWS has overpaid by £447,000.00. To the extent that the court holds that the agreement does not reflect the intention of the agreement we would ask the court that the agreement be rectified to show this.”

NT contends on behalf of TWI and MWS that the share agreement is ambiguous. This ambiguity arises on his contention because the agreement appears to provide for 60 monthly payments of £21,750 over a period of five years whereas the sum representing the sale of 50,000 shares at £35.50 per share is £1,775,000. He further contends that the background documents and negotiations to the agreement show that the agreed consideration was the smaller of these two sums. In fact, NT has not put before the court these background documents or given any evidence to show that the negotiated price was £1,305,000. However, these documents and the supporting evidence are not admissible to interpret the agreement unless it is ambiguous. There is, however, no ambiguity. The correct way of reading this commercial contract, expressed in the form of a deed, is as follows:

Introduction

Relevant factual background

MW formed NWS in 1972. He had previously worked for Rank Xerox and he formed the new company to supply Xerox supplies to the commercial and business market. In about 1972, he employed NT as a delivery driver and formed a firm relationship with him so that, by 2002, he was ready to sell NWS to NT. At that time, MW estimated that NWS had an annual gross profit in excess of £1 million per annum. He owned NWS’s entire share capital and the value of the company was considered to be nearer £2 million than £1 million. However, NT did not have the resources for an immediate buyout and the two men alighted on a method of selling NWS in a way that enabled the purchase price to be paid to MW over a number of years out of the on-going profits earned by NWS. Although MW was ceasing to own NWS, he would continue to be actively involved in its management acting as a consultant. This would provide valuable continuity for the company, would enable NT to master the necessary management skills and would enable MW to maximise his prospect of being paid in full the outstanding consideration since he would continue to have an active role as a consultant and manager of the business.

MW’s security for the outstanding payments was to be provided by the structure created by the sale agreement of his shares in NWS. A new holding company, TWI, would be set up in which he would own half of the shares and NT the other half. NT would then buy all NWS’s shares from MW for a total consideration of £1,775,000. An initial payment would be made of £447,000 by NWS and the balance of the consideration would be paid in instalments over a future period of no longer than 5 years. As a guide, the share sale agreement entered into between MW and TWI provided for monthly payments of £21,750 over that 5-year period. However, the intention was that the consideration would be paid for entirely out of the profits earned by NWS that would be realised by those profits being used to pay dividends to TWI who, in turn, would pay sufficient of those dividend payments as were needed to pay MW dividends on his shares and additional payments to cover outstanding instalments due from TWI to MW. It was accepted that each payment and the instalment periods would be adjusted by agreement to suit the dividends being received from NWS and that the entire consideration, including the initial payment of £447,000, would be paid by TWI out of the dividends it received from NWS.

MW, initially, would remain a director of NWS with NT but NT would be the sole director of TWI. NT and CW entered into a shareholders’ agreement under which NT undertook to ensure that TWI would paid CW the monies due to him under the share sale agreement out the dividend payments TWI received from NWS.

At the date of the sale, MW had outstanding director’s loans from NWS of £227,654.50. Although no consultancy agreement was entered into, it was envisaged from the start of the new arrangements that he would be paid for the consultancy service he was to provide and, indeed, from September 2002 until 1 July 2009 he worked almost full time as a consultant and only ceased to do so when his services were abruptly terminated by NT and MWS by a solicitor’s letter sent by MWS’s solicitor on NT’s instructions.

Thus, from the outset, there emerged a somewhat tangled accounting picture which involved MW’s on-going director’s loan account which he would have to repay, the payment to him of consultancy fees by MWS, the payment by MWS to TWI of dividends and the payment of dividends and instalments of the share sale consideration by TWI to MW. This accounting structure became even more tangled when, as occurred on several occasions, MW loaned MWS substantial sums to assist it in short-term cash flow difficulties and MWS repaid those loans and also made occasional payments, by way of loans, to MW. On one occasion, MW’s then-wife also made a substantial loan to MWS.

MWS’s accountant for many years from the mid-1990s until 2007 was Mr Stephen Pritchard of Menzies LLP. He also acted for TWI from its formation in 2002 until 2007. For the tax year ending 31 March 2004, he was replaced by a different firm. From 2007 onwards, the accounts of both companies were taken over by Ms Toni Palmer. She was employed as a Financial Consultant from March 2008 for both companies and was responsible for their accounts for the tax year 2007 – 2008 and subsequent years.

Mr Pritchard had to prepare annual accounts for both companies from 2002 onwards in conjunction with preparing their tax returns. He submitted a detailed witness statement which has been invaluable to an understanding of what would otherwise have been an impenetrable series of accounts. The accounts that he prepared have formed the basis of MW’s claim for the alleged unpaid portion of the share sale consideration owed to him by TWI and for alleged unpaid consultancy fees owed to him by MWS and for the rival contentions that the entire consideration has been paid and no consultancy fees were ever due and none in consequence remain outstanding.

The relevant accounts are, in effect, a MW running account which record all payments recorded in the books of MWS and TWI that had been made to MW by both MWS and TWI and all payments received by MWS from MW. Additionally, all loans recorded as having been made to MW and all excesses or loans repaid by MW to MWS were also recorded in these accounts. As evidence of the nature of these accounts, I quote from Mr Pritchard’s evidence:

“Each year, once the draft accounts had been completed, I would have a meeting with [Mr Turner] and Mr Wright to talk them through the draft figures, question them about queries that had arisen, and to do what I could to help them understand the figures that they would be asked to approve. As part of this process each year, the movements of funds to and from Mr Wright were discussed. In some years, Mr Wright had been paid more than the available dividend and he was asked to repay to [MWS] the excess. Accordingly, identifying and agreeing these movements was always of importance in our meetings.”

These accounts were called “C Wright loan account movements” and they were, in reality, accounts that recorded movements of funds to and from CW as recorded in the accounts of MWS and TWI. The accounts did not identify the purpose of any payment so that they cannot be used to identify whether a particular payment was made to CW as a share sale consideration instalment payment, a loan repayment, a dividend payment or a consultancy fee repayment. The true nature of the payment was further masked by the movement of funds to and from CW was shown treating TWI and MWS as a single group. The dispute that has arisen is as to whether 21 of the payments recorded as having been made in the period 2003 to 2008 were paid as a share sale consideration payment or in some other guise.

Much of the dispute arises because NT now contends that no consultancy fees are or ever were due to CW since his consultancy services were given entirely gratuitously. This contention is based almost entirely on the fact that no written contract of engagement was ever entered into although it is accepted that CW worked extensively for and within the offices of MWS. These services were, in the absence of a formal agreement, alleged to have been provided solely to preserve CW’s ability to receive full payment for his outstanding share sale consideration. However, the services provided were far in excess of anything that could be described as the preservation of MWS’s ability to service its indebtedness to CW. Moreover, it was clearly accepted in 2005 that MWS had a liability to pay for CW’s consultancy services. CW had been paid £29,373.14 by MWS for consultancy fees in the tax year ending 31 March 2005. Mr Pritchard, who acted as the accountant for both companies and CW, wrote to CW in a letter dated 17 August 2005:

“Dear Colin

I enclose your 2005 Tax Return, duly completed on the basis of the information provided, for your review and approval.

…

I have entered the consultancy fees from [MWS] as £29,373.14. Please confirm your agreement to this figure and supply details of any expenditure which can be expensed against this income. In particular, if there are reimbursed expenses included in the consultancy fees, I will need a breakdown of these.”

Although there was subsequent discussion as to the “repayment” of some of these fees because the amounts paid for consultancy were greater than the available funds to pay them out of the agreed source of payments, the 2005 Tax Return submitted for CW included this sum for consultancy fees. This is the clearest possible evidence that CW and MWS had not only agreed that CW would be paid for his consultancy work for MWS, he received a substantial payment for it in 2004 – 2005 and returned that payment as income from his consultancy in his tax return and paid income tax on that sum.

In using the documents entitled C Wright Loan Account Movements as an aid to concluding what is the source or purpose of any movement of funds that they record, it is necessary to take account of their purpose and origins and the terms of the share sale and shareholders’ agreements. The documents are deceptively entitled “Loan Account Movements”. This is a title given to them by the account but they are not recording movement into or out of a loan account because, once CW ceased to be a director of MWS, he did not hold a loan account. The document simply records those payments to or from CW in each tax year which are recorded in the annual accounts of MWS and TWI as having been made. They were drawn up as part of the work of preparing the separate accounts of these two companies. Mr Pritchard was very conscious, when preparing these two companies’ accounts that payments to CW by TWI could only be made out of TWI’s dividend income received from MWS since his entitlement to his own dividends and to payment of further tranches of the outstanding share sale debt could only be made from dividend income. Furthermore, any payment by MWS direct to CW by way of repayment of loans to him or of consultancy fees would reduce TWI’s dividend income correspondingly and reduce the sums that TWI could pay him. Therefore, with CW and NT’s agreement, the payments that CW would receive in each tax year for all purposes related to the debt, to his entitlement to half of TWI’s dividend income as dividend income and to consultancy fees, but not to loan repayments, was limited to a total sum equal to the total dividend income paid to and received by TWI from MWS.

In undertaking the exercise of reconciliation of CW’s movement of funds, it showed, in the relevant tax years, that the total paid to CW usually exceeded TWI’s total dividend income. This required an accounting exercise to be undertaken which CW and Mr Pritchard called “whitewashing”. This was a perfectly legal and above board accounting exercise in which the sum in excess of the total TWI dividend income that CW had received in the relevant tax year was “paid back” by CW in the sense that the movement of funds was redirected or, on occasion, a sum of money was actually returned to MWS as a loan.

However, as is confirmed by Mr Pritchard’s evidence, any payment of a portion of the share sale consideration was agreed to be one that would be paid for by TWI and that those payments would come out of TWI’s dividend income. Thus, any sum allegedly paid to CW as a part-payment of the outstanding consideration must be shown, for that contention to be accepted for that particular payment, that TWI was the source of the payment and that the source of the funds for that payment was TWI’s dividend income received from MWS.

Thus, the loan account movements do not identify what any payment recorded as having been made by TWI to CW was for. The source or purpose of the payment, whether it be a partial debt repayment, payment of CW’s dividend income on his shares in TWI or payment by TWI of a sum provided by MWS to discharge CW’s consultancy fees or a loan to MWS made by either CW or his then wife, is not identified in the Movements document. The payment could only have in fact been a debt repayment, rather than a dividend distribution or payment made on MWS’s behalf, if CW and NT under the shareholders’ agreement and CW and TWI under the share sale agreement had separately agreed that that particular payment would be treated as a debt repayment. Such agreements, if they had been reached, could only now be identified by looking at the underlying documents.

If payments totalling £1,775,000 had been paid by TWI to CW for the purpose of discharging its full indebtedness for the purchase of these shares, TWI should have itself made payment of the relevant sums, each payment should have been individually agreed to by TW as its director and CW as the recipient, the date and size of the payment and its purpose as a share purchase payment should have been clearly evidenced in the books and records of TWI and that the total outstanding sum remaining for payment should have been clearly identified in TWI’s annual accounts as the remaining indebtedness due to CW for the share purchase. Preferably, a separate share sale and purchase account should have been opened in TWI’s accounts recording each such payment. For the disputed payments, these documents were not made available to the court and may never have been in existence.

I will determine which payments in excess of £10,000 are ones that it is correct to characterise as being made in order to reduce MWS’s outstanding liability to pay the share sale consideration. Since MW’s claim for the return of his shares in MWS is dependent on showing that he remains unpaid any part of that sum, it is not necessary to determine the remaining items of dispute given their small size and the lack of a need to determine them.

£6,000 paid on 2 February 2003. The defendants contend that out of a payment of £16,180.20 cleared through MWS’s account on 13 March 2003 and made payable to MW, £6,000 represents a payment towards the share sale consideration. The defendants cannot prove that that specific sum was contained within the larger payment and CW contends that he did not receive this payment. Moreover, the payment was made by MWS and there is no evidence that it was sourced from MWS dividend payments. Conclusion: the payment was for consultancy services or was a loan repayment and was not a share sale consideration payment.

£21,750.00 paid on 5 September 2004. Although MW contends that he has no evidence of receiving this payment, he accepts that he received payments of the same sum of £21,750 (which is the sum stipulated as the sum for monthly payment in the share sale agreement) in April – August, October and November 2005. This further payment is therefore proved to have been made as a share sale debt payment. Conclusion: the payment was to reduce the sum due for the share sale agreement.

£18,515 paid in March 2005. The defendants contend that this sum had originally been paid by MWS to CW for consultancy fees and was reallocated as a payment to CW from TWI towards the reduction of the outstanding share sale consideration. This contention is supported by a letter dated 16 September 2009 to NT which states that MW agreed to this reallocation at a meeting he had with him on 4 October 2005. As evidence of that, he referred to a letter dated 7 October 2005 which he wrote to NT saying that at the meeting he had had with CW on 4 October 2005, CW “intends to repay to MWS all of the “loan repayments” that he has been paid since 1 April 2005”. However, there is no evidence that the consultancy fees payment was in fact repaid by NT nor that CW’s tax return was altered so as to omit these payments from his declared income nor that “loan repayments” is a reference to these consultancy payments nor that the appropriate agreements were reached between CW and TWI or CW and NT or CW and MWS to enable this reallocation to have actually taken place. Thus, I conclude that CW changed his mind and did not repay these consultancy payments or he was referring at the meeting to payments he had received as repayment of loans he had previously made to MWS. Conclusion: the relevant payments remained as being payments to discharge invoices rendered for consultancy payments.

£50,000 paid in November 2005. The defendants contend that this payment was made to MW as a share sale consideration payment, MW denies that this payment was made to him at all and instead contends that it was made to his then wife Catherine Wright as a part repayment of the loan she made to MWS pursuant to a loan agreement dated 7 July 2004. A copy of the loan agreement was provided which states that the loan was for £121,359.38. CW has identified that this payment of £50,000 does not appear in any of his bank statements. The defendant’s unsatisfactory response to this evidence is that the loan agreement and the payment it evidences were “just a paper exercise” or, in less polite language, a sham. There is no evidence to justify this assertion of dishonesty and I conclude that the payment was made by MWS to Mrs Catherine Wright as part repayment of her loan.Conclusion: the relevant payments remained as being payments to discharge invoices rendered for consultancy payments.

£13,000 January 2005 – July 2006. This sum represents monthly payments of £700 per month over that period which were paid by MWS to Mrs Natalie d’Amato. The payments were made, what is in dispute is whether these payments were made to compensate her whilst she was working part time for MWS or were made on behalf of CW at his request by way of gifts he was wanting to make to her in this period. Mrs d’Amato was employed by MWS and was on maternity leave in 2004. She returned to part-time flexible working in January 2005 which continued until July 2006. This pattern of working was confirmed by two other employees of MWS at that time. So, the posting of these payments as being made to reduce the share sale consideration debt is an erroneous one. The defendants contend that Mrs d’Amato was employed by MWS until December 2005 as confirmed by her wage slips and was paid with PAYE and National Insurance deducted. There is evidence that CW confirmed that Mrs d’Amato received these payments at a meeting with Mr Pritchard on 18 September 2007 but no evidence that he agreed that these payments should be treated as having been paid by TWI to reduce its liability to pay off the share sale consideration payments. Since there is no apparent reason why MW should be making these payments to his daughter by obtaining a loan from MWS and evidence that these payments were made for employment purposes, I conclude that these payments were not made in partial discharge of the share sale agreement. Conclusion: the relevant payments remained as being payments to discharge invoices rendered for consultancy payments.

I conclude that at least the following payments that the defendants contend were made by TWI to CW in partial discharge of the outstanding share sale consideration debt were not paid by TWI or MWS to CW for that purpose:

In the light of my previous findings, this issue can be dealt with shortly. I will deal with each sub-issue in turn.

Was CW engaged to work for MWS as a consultant between 2004 and 2009?

CW was clearly engaged, albeit without a written contract of engagement, to provide consultancy management services for MWS over a five-year period between 2004 and 2009. The defendants’ sole contention to support their assertion that CW was merely attending MWS’s premises gratuitously in order to monitor its ability to generate sufficient profits to enable it to declare a dividend to TWI sufficiently large to enable TWI to repay the share sale debt is that there was no formal written consultancy agreement entered into. However, an informal but binding contractual obligation to pay a reasonable sum for CW’s services may be, and is, to be inferred from the surrounding circumstances of CW’s five-year virtually full-time working arrangement with MWS.

It is also noteworthy that the high point of the defendants’ case does not begin to establish the proposition that CW was not working as a consultant. They point to the re-allocation of payments made for consultancy services as debt repayments. Even if they had established that such a re-allocation occurred in the real world, it would not provide evidence of the absence of a consultancy agreement, merely that the parties had agreed to defer payment for such services and to treat the payment that had been made as being transferred to another purpose. That transfer, had it occurred, would have left the contractual obligation to pay for consultancy services in place and would merely have deferred the obligation to discharge the appropriate payment for such services.

(5). MW’s Claim for the Return his MWS’s Shares

Pursuant to the share sale agreement, made between MW and TWI, TWI agreed to purchase from CW for a total sum of £1,775,000 the entirety of the shares issued by MWS, all of which were owned and CW and registered in his name. The shares were to be sold forthwith and the sum was to be paid in instalments and the entire sum was to have been paid on or before 6 September 2002. In the event of any of the instalments not being paid, CW could terminate the share sale agreement on giving one month’s notice to TWI and, on the agreement being terminated, was entitled to the return of the shares from TWI who would sign the appropriate stock transfer forms.

Pursuant to the Shareholders’ agreement, NT agreed as the sole director of TWI that TWI would not default in the payments due to CW under the share sale agreement or any other payments or sums due to CW and would arrange for all payments due to CW under or in respect of that agreement to be made promptly by TWI and for all payments received from MWS for that sale to be paid to CW promptly on receipt of them.

An order requiring NT and TWI jointly and severally to take all necessary steps to transfer to CW and all of MWS’s issued shares that are all currently registered in TWI’s name;

An order requiring NT and MWS jointly and severally to take all necessary steps to enable MWS to re-register all of its issued shares in the name of CW;

A declaration that CW is, and is entitled to be, the registered shareholder of all the issued shares in MWS with effect from the date of this judgment.

Judgment against MWS in the sum of £87,515.00.

An order dismissing MWS and TWI’s counterclaims against CW.

The costs of the consolidated action to be the subject of detailed assessment if not agreed.