Back Office Ltd v Percival & Ors

In a judgment handed down on 23^rd May 2013 Mr Percival and Liquidity Group Solutions Limited (‘Liquidity’) were found to be guilty of contempt of court. Contempt of court by the two directors of Liquidity, Mr Tipper and Mr Foulsham, in their personal capacity was not established. At the conclusion of the subsequent hearing to determine the penalties for the contempts the gravity of breach of undertakings given to the court was made clear to Mr Percival and to Mr Foulsham, who was present on behalf of Liquidity. They were informed that a penalty of committal to prison for contempt would not be imposed. At the hearing to determine the penalties for the contempts, as at the previous hearing, the Claimant/Applicant, Back Office Limited (‘Back Office’), was represented by Miss Donnelly and the Defendants/Respondents by Mr Pepperall QC.

The evidence relating to the application for committal for contempt is set out in the judgment of 23^rd May 2013 and will not be repeated here. The circumstances in which Liquidity and Mr Percival gave the undertakings which they were found to have breached are set out in paragraph 2:

“Back Office is a Birmingham based company which provides payroll services. Mr Percival, the First Defendant, and Mr Richardson were salesmen. Mr Tipper, the Fourth Defendant, was its Managing Director and Mr Foulsham, the Fifth Defendant, its Relationship Manager. The individual Defendants and Mr Richardson all tendered their resignations over a short period of time in February and March 2012. They went to work for Liquidity, a newly formed company which also offers payroll services. Back Office commenced proceedings alleging that in breach of their contracts of employment and fiduciary duties, Mr Foulsham and Mr Tipper took steps to set up Liquidity, a competitor company, whilst still working for Back Office, and that Mr Percival participated in those acts. Further it is alleged that all individual Defendants had breached the post-termination provisions of their contracts of employment. Back Office sought injunctive relief against them. At a hearing on 11^th July 2012 before HH Judge Seymour QC sitting as a High Court Judge Mr Percival, Mr Willars (the third Defendant), Mr Tipper, Mr Foulsham and Liquidity gave undertakings (‘the undertakings’):

“…not to solicit or deal with any of the clients listed in the confidential Annex to this Order until 5 March 2013.”

The 279 clients listed in the confidential Annex (‘the prohibited clients’) were those to whom Back Office had provided chargeable services between 24^th February 2011 and 29^th March 2012. The action was stayed on the terms of the Schedule to the Order. The Schedule set out the terms of settlement of the claim and included the payment by Mr Tipper, Mr Foulsham and Liquidity of a sum of money to Back Office and the release of the First, Third, Fourth and Fifth Defendants from the covenants in clauses of their contracts of employment.”

Mr Percival and Liquidity are to be dealt with on the basis of the findings of contempt made against them. Mr Percival was liable for his own acts. The finding of contempt by Liquidity was:

“…established by the acts of its agents Mr Richardson and Mr Percival attempting to solicit the business of prohibited clients on 12^th and 21^st February 2013 respectively.”

Mr Richardson and Mr Percival were working as salesmen for Liquidity. On 12^th February 2013 Mr Richardson contacted Mr Turner of Jobsworth and Mr Wormleighton of Gemdrive to solicit their business for Liquidity. Jobsworth and Gemdrive were prohibited clients on the Annex to the Schedule to the Order of 11^th July 2012.

On 21^st February 2013 Mr Percival contacted Mr Turner in his capacity as a director of Jobsworth. Mr Turner sent an email on 12^th February 2013 to Mr Percival complaining about the “disgusting sales pitch” of Mr Richardson. He complained that Mr Richardson had denigrated Back Office. I found in paragraph 63 of the previous judgment:

“…by an email of 21^st February 2013 Mr Percival contacted Mr Turner in his capacity as a director of Jobsworth, a prohibited client on the Annex. Whilst he also apologised for the approach Mr Richardson made to Mr Turner, on the evidence I am satisfied so that I am sure that by his email of 21^st February 2013 Mr Percival intended to solicit Jobsworth’s business for Liquidity.”

Contempt of court by Mr Tipper and Mr Foulsham was not established. It was not shown to the requisite standard:

“71.

…that either of them authorised the acts of Mr Richardson and of Mr Percival in attempting to solicit prohibited clients. Nor is it established that they could reasonably have foreseen the possibility of such acts and failed to take all reasonable steps to prevent them.”

I have already determined that a custodial sentence is not warranted for the breaches of the undertaking proved in this case.

In deciding the penalties to be imposed on Mr Percival and Liquidity I will also consider the appropriate Order for costs. Mr Pepperall QC made it clear that the costs ordered against the Defendants would be borne by Liquidity. Mr Percival would not be expected to meet any liability for costs.

Counsel agreed that the factors which may be taken into account in determining sanctions were those set out by Lawrence Collins J (as he then was) in Crystal Mews Ltd v Metterick and others [2006] EWHC 3087 (Ch) at paragraph 13:

“The matters which I may take into account include these. First, whether the claimant has been prejudiced by virtue of the contempt and whether the prejudice is capable of remedy. Second, the extent to which the contemnor has acted under pressure. Third, whether the breach of the order was deliberate or unintentional. Fourth, the degree of culpability. Fifth, whether the contemnor has been placed in breach of the order by reason of the conduct of others. Sixth, whether the contemnor appreciates the seriousness of the deliberate breach. Seventh, whether the contemnor has co-operated.”

Miss Donnelly recognised that Back Office had not been prejudiced by the breaches of the undertakings which had been established. Mr Turner and Mr Wormleighton had thought ill of the approaches made to them by Mr Percival and Mr Richardson and no business was won from them by Liquidity. The contemnors had not acted under pressure and the breaches were deliberate acts.

Miss Donnelly submitted that neither Mr Percival nor Mr Tipper for Liquidity showed real appreciation of and apology for the seriousness of their acts. Whilst Mr Percival apologised for his breach in paragraph 17 of his affidavit of 20^th March 2013 he qualified the apology by saying that his contact with Mr Turner was to “set the record straight” and that he contacted him as a director of a company not in the Annex.

Miss Donnelly submitted that the way in which Mr Tipper gave evidence at the hearing in April displayed a degree of arrogance and lack of regard for the court process. In paragraph 61 of the judgment following that hearing I observed that comments made by Miss Donnelly about the way in which Mr Tipper gave his evidence were justified. The first apology he made for Liquidity’s breach of the undertaking was after the company had been found to be in contempt of court.

The financial circumstances of Mr Percival and Liquidity are relied upon in order to mitigate any penalty that may be imposed. Miss Donnelly drew attention to a feature of the second affidavit of Mr Tipper sworn on 30^th May 2013. At paragraph 10 Mr Tipper referred to “Preliminary Accounts” for the period January 2012 to 31^st July 2012. Mr Tipper stated that the accounts were being finalised and he anticipated that they would be submitted to Companies House “in the course of next week”. He referred to the draft accounts as showing “a substantial loss…of over £400,000”.

Mr Mason of Back Office discovered from Companies House that in fact accounts for Liquidity in respect of the period January 2012 to 31^st July 2012 had been filed. They appear to show that they were signed and approved by the directors, Mr Tipper and Mr Foulsham, on 14^th November 2012. These do not show a substantial loss but shareholders’ funds of £10,325. It was only after these accounts were referred to in the Claimant’s submissions on sanction and costs that Mr Tipper sought to explain his failure to refer to them and the variation from profit to loss. In his affidavit of 17^th July 2013, he said at paragraph 7 that statutory accounts were filed in November 2012. At that time Liquidity were uncertain whether the legal fees for the litigation with Back Office could be classified as a business expense and the “advice from our accountants…was to include the legal fees as debtors”. The documents exhibited to the second affidavit were a draft of the revised accounts.

Miss Donnelly submitted that the evidence originally given by Mr Tipper was misleading and designed to show that Liquidity did not have the means to meet a financial penalty.

In submitting that Liquidity should be ordered to pay costs on an indemnity basis, Miss Donnelly invited the court to make findings on and take into account the directors’ attempts to evade service of these proceedings, the failure to disclose the blank RiskDisk search referred to in paragraph 25 of the earlier judgment, the manner in which Mr Tipper gave his evidence to the court and his lack of frankness about the company’s accounts. Miss Donnelly resisted the application that Back Office be ordered to pay the costs of Mr Tipper and Mr Foulsham in successfully defending committal proceedings against them personally. Counsel contended that their defence would have led to no or no appreciable costs being incurred in addition to those relating to Liquidity’s defence.

Miss Donnelly applied for a sum to be paid on account of costs under CPR 44.2(8) on the basis that costs would be subject to detailed assessment.

Mr Pepperall QC advanced arguments against imposing a fine on either Mr Percival or Liquidity. He relied on a passage in Arlidge, Eady and Smith on Contempt of Court 4^th Edition paragraph 14-108 and Phonographic Performance Ltd v Amusement Caterers Ltd [1964] Ch 165 to contend that a fine may be imposed where a civil contempt is committed in “contumacious circumstances” and that the contempts by Mr Percival and Liquidity were not “contumacious”. As for Liquidity, Mr Pepperall QC contended that the company was found to be in contempt on the least serious basis. It was held to be in contempt because of the actions of its servants or agents, Mr Percival and Mr Richardson. Their actions were carried out without the connivance of the company and contrary to instructions.

Mr Pepperall QC submitted that in the case of both Mr Percival and Liquidity as in R (on the application of Bempoa) v Southwark LBC [2002] EWHC 153 (Admin), the public humiliation of a public declaration of contempt was sufficient penalty. Further, both Defendants had entered into voluntary additional restraints considerably extending the period of protection for Back Office from solicitation of their customers. This action speaks louder than words of apology.

Mr Pepperall QC recognised that Mr Percival and Liquidity are liable to pay the costs of Back Office. No additional financial penalty would be warranted.

As for mitigation, Mr Pepperall QC drew attention to Mr Percival’s apologies for his actions both in his affidavit and in court. Mr Tipper apologised to the court in his second affidavit for the acts of Mr Richardson and Mr Percival.

Their financial circumstances were prayed in aid of both Mr Percival and Liquidity. Mr Percival is a man of modest means with few savings. Disclosed documents showed savings of £2,500 which had increased to £3,550 by the time of the hearing. Mr Percival has a partner who is on maternity leave. He and his partner live in rented accommodation and are saving for a deposit to buy a home.

Mr Pepperall QC recognised that there were differences between Liquidity’s draft accounts exhibited to Mr Tipper’s second affidavit which showed a loss and those signed by him on 14^th November 2012 originally lodged at Companies House for the same period exhibited to the affidavit of Liquidity’s accountant, Mr Rudd, which showed a profit. Mr Tipper had stated in his affidavit of 30^th May 2013 that Liquidity could not pay a fine without prejudicing the company’s viability and the continued employment of its staff. Mr Pepperall QC accepted that the court can draw commonsense inferences from the evidence about Liquidity’s financial position.

Mr Pepperall QC contended that Back Office should be ordered to pay the costs incurred by Mr Tipper and Mr Foulsham who were successful in resisting findings of contempt against them in their personal capacity. It was said that they had a personal liability to meet lawyer’s fees. The fees incurred and claimed by them in their personal capacity were calculated by halving the bill of costs for all the Defendants up to the conclusion of the April hearing. To that sum is to be added costs directly attributable to the defence of Mr Tipper and Mr Foulsham in their personal capacities up to and including the penalties hearing.

Whilst a costs order in respect of the successful applications against Mr Percival and Liquidity could not be resisted, Mr Pepperall QC submitted that costs on the indemnity basis should not be ordered. The conduct of Mr Percival and Liquidity was not such as to take the case out of the norm, the basis of an order for indemnity costs as explained in Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson (a Firm) and others [2002] EWCA Civ 879.

Mr Pepperall QC submitted that a costs order against Liquidity would be a sufficient and appropriate sanction to be imposed on Liquidity. He did not oppose an order for a payment on account of costs.

The breach of an undertaking given to the court is a very serious matter. Whilst a breach committed soon after entering into the undertaking is likely to be an aggravating feature, the fact that it occurred towards the end of a period of restraint is not a mitigating feature. Undertakings are to be complied with. A defendant cannot expect to be given credit for complying with an order which he is bound to obey.

In considering the degree of culpability of Mr Percival, I accept that his breach of the undertaking not to solicit or deal with prohibited customers was opportunistic. However he crossed the line from apologising to Mr Turner for Mr Richardson’s behaviour to soliciting the business of Jobsworth. Moreover in doing so he was not honest in writing in his email of 21^st February 2013 that the twelve month restriction on soliciting prohibited clients was up when this was not correct. Mr Percival’s opportunistic action was aggravated by deception.

Liquidity was liable in contempt because of the actions of its salesmen, Mr Richardson and Mr Percival, in soliciting prohibited clients. I accept the submission made by Mr Pepperall QC that this basis of liability is less contumacious than, for example, a company ordering or encouraging its salesmen to act in breach of an undertaking. However, the acts of Mr Richardson and Mr Percival were contumacious to a significant degree and Liquidity was liable for those acts. The breach of a court order is contumacious. The term used by Lawrence Collins J in Crystal Mews is culpable. The degree of contumacy or culpability affects the penalty to be imposed. Accordingly Cross J held in Phonographic Performance Ltd at page 201 that:

“…the measure of contumacy is not sufficiently great to justify me in imposing even a fine on these defendants.”

Decisions on penalty for contempt will turn on the facts of each case. In this case the breaches of the undertaking by both Mr Percival and Liquidity were of such culpability as to warrant the imposition of a fine.

Whilst the voluntary extension of the period of restraint from soliciting or dealing with prohibited customers of Back Office may have been welcome to the Claimant, it has no bearing on compliance with the undertaking or apology for and recognition of the seriousness of its breach. I accept that Mr Percival now appreciates and regrets his breach of the undertaking. He apologised both in his affidavits and in court when giving his evidence. The same cannot be said of Mr Tipper. The apology in his affidavit served after Liquidity had been found in contempt does not excuse the apparent disdain for the court proceedings displayed when giving evidence. Further, his careless at best and misleading at worst depositions in his affidavits regarding Liquidity’s financial position do not demonstrate respect for the court process.

The matters relied upon by Miss Donnelly as indicating a failure to co-operate, the final factor referred to in paragraph 13 of Crystal Mews to be taken into account in deciding on penalty, are not in my judgment relevant to co-operation in mitigating the effects of the breaches of the undertaking. In any event whilst Liquidity may be criticised for not disclosing records of searches of RiskDisk and whilst there may be concern about whether Mr Tipper and Mr Foulsham sought to evade service of the contempt proceedings, the evidence given at the April hearing does not establish culpability in these respects to the sufficient degree of certainty.

However I do regard as seriously reprehensible the way in which Mr Tipper dealt with Liquidity’s financial position in his affidavit of 30^th May 2013.

After Liquidity had been held in contempt of court in a judgment handed down on 23^rd May 2013, on 30^th May 2013 Mr Tipper swore his second affidavit. This was for the purpose of the decision to be taken on penalty. In paragraphs 8 to 10 Mr Tipper stated that Liquidity was incorporated on 26^th January 2012, that their financial year ends in July so a preliminary set of accounts were drawn up for the period from January 2012 to 31^st July 2012. Mr Tipper exhibited the draft of these accounts to his affidavit. He stated in paragraph 11:

“The Preliminary Accounts are currently being finalised and I anticipate they will be submitted to Companies House during the course of next week.”

Mr Tipper did not mention or exhibit accounts which had been signed off by him and lodged at Companies House in November 2012. The November 2012 accounts which were lodged before the start of the contempt proceedings showed shareholder funds in surplus. The draft accounts exhibited to the affidavit of 30^th May 2013 showed a substantial loss.

It was only after Mr Mason of Back Office discovered that the directors had lodged a set of accounts for Liquidity in November 2012 and these were referred to in Back Office’s submissions of 6^th June 2013, that Mr Tipper acknowledged that accounts had been filed in November 2012. In his third affidavit sworn on 17^th July 2013 he said that statutory accounts had been prepared:

“…because we were keen to establish a trading history for Liquidity.”

He sought to explain the considerable difference between the November 2012 accounts and the draft accounts exhibited to his affidavit of 30^th May 2013 by alleging that there were problems with the “accountancy software package” and a revised approach to the sum of £415,000 “legal fees”. In paragraph 31 he referred to:

“…moving legal fees from debtors to the profit and loss.”

Mr Tipper sought to deal in his third affidavit which was sworn on 17^th July 2013 with his failure to state in his affidavit of 30^th May 2013 that accounts had been lodged with Companies House in November 2012. He said:

“9.

…I also wrongly assumed that everyone knew about the November 2012 accounts as they were in the public domain.

10.

As I have said, I fully accept that I neglected to cover the issue regarding the earlier accounts. I have no other explanation to offer the Court other than it was overlooked. For this I apologise and I would like to stress that there was not (and has never been) any intention to mislead the court in any way.”

The other matter of serious concern is the difference between the draft accounts exhibited to Mr Tipper’s affidavit of 30^th May 2013 which show net current liabilities of £417,009 and the November 2012 accounts filed with Companies House which showed debtors of £854,260 and net current liabilities of only £1,293. Mr Rudd, Liquidity’s accountant, stated in his affidavit of 17^th July 2013 at paragraph 44:

“In essence, the main difference between the November 2012 Accounts, the Draft Accounts and the 2013 Accounts is due to the removal of the legal fees from debtors and the placing of this sum instead on the profit and loss account, incorrect information and the wrong accounting period.”

In his affidavit of 30^th May 2013, Mr Tipper relied on the loss shown in the draft accounts to try to establish that Liquidity would not be able to meet any or any significant financial penalty for their contempt. He stated at paragraph 25:

“I would like to stress that at present, the Company has a negative balance sheet. Therefore it is unlikely to be able to meet any or a significant fine. If a fine (and further legal costs) are imposed, not only will it have a significant impact on the Company’s ability to trade normally, but it will also place the livelihoods of our work-force and contractors at risk.”

In my judgment it was seriously misleading for Mr Tipper to rely on draft accounts showing liabilities of over £400,000 in order to plead inability to pay a penalty for contempt whilst withholding the fact that accounts had been lodged at Companies House over six months earlier which showed insignificant liabilities. I do not accept that this obviously material fact was simply “overlooked”. If it was, this shows extreme lack of care on the part of Mr Tipper by swearing an affidavit to be relied on before the court which has a material omission. The accountant Mr Rudd states in his affidavit:

“21.

On 7^th November 2012 I had a meeting with the directors to discuss the accounts and in particular, how, at that point, the Legal Fees should be treated. By this time we had been given copies of the Legal Fees invoices but had not yet reviewed them in enough detail to come to a conclusion as to their treatment from a tax point of view. I therefore agreed with Jonathan Tipper and James Foulsham to look into the treatment of Legal Fees in more detail in due course and to leave the figure of approximately £420,000 showing as an ‘Other Debtor’ on the balance sheet.”

In my judgment it is inexplicable that a figure of £420,000 which included a settlement payment to Back Office and legal fees paid or to be paid by Liquidity (or their directors) should be shown as “debtors” on the 2012 accounts lodged with Companies House. Liquidity was liable to pay those sums to Back Office and to solicitors. They were not to receive them. It appears that Mr Tipper was prepared to treat an amount of over £400,000 as either an amount owed to or an amount owed by Liquidity depending on the picture he wished to present.

The approach by Mr Tipper to the financial information he put before the court for the purpose of determining penalty is not directly relevant to its nature and extent. However it does shed light on the attitude of Mr Tipper to these proceedings and whether I should take his apology in paragraph 5 of his second affidavit seriously. I do not. The way in which Mr Tipper gave his oral evidence at the hearing and his disregard for the need to give a complete and not a partial account in a sworn affidavit leads to inevitable scepticism about the sincerity of his apology to the court. Accordingly I do not take the apology by Mr Tipper into account in determining the penalty to be imposed on Liquidity.