Case No:2LS40452
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
LEEDS DISTRICT REGISTRY
MERCANTILE LIST
The Court House
Oxford Row
Leeds LS1 3BG
Before :
His Honour Judge Saffman sitting as a Judge of the High Court
Between :
MONTPELIER BUSINESS REORGANISATION LTD | Claimant |
- and - | |
(1) AJP ONE LLP (FORMERLY ARMITAGE JONES LLP) (2) AJP TWO LLP (FORMERLY LPA DIRECT LLP (3) CHRISTOPHER JONES (4) ANTHONY ARMITAGE (5)SIMON PADGETT | Defendants |
Mr S Myerson QC for the Claimant
Mr H Jory QC for the 4th Defendant
The First and Second Defendants being not represented nor present
The Third and Fifth Defendants being in person
Hearing date: 14, 15, 18, 19, 20 and 21 April 2016
Date draft circulated to the Parties 9 May 2016
Date handed down 5 July 2016
JUDGMENT
Introduction
On 28 September 2010 the parties in this action entered into various agreements including an Asset Purchase Agreement and a Management Services Agreement. This case requires determination of a claim and counterclaim arising out of alleged breaches of those agreements.
Mr Simon Myerson QC appears for the Claimant. Mr Hugh Jory QC appears for the Fourth Defendant, Mr Anthony Armitage. The first and second Defendants, both Limited Liability Partnerships, ceased to trade on 31 December 2012 and are now in voluntary liquidation. Their liquidator has not taken an active part in this litigation and they are not represented at the trial. The Third Defendant, Mr Christopher Jones is a litigant in person, as is the Fifth defendant, Mr Simon Padgett. It is agreed however that the positions of the Individual Defendants, both as to their defence of the claim and their prosecution of their counterclaim, is identical and that they stand or fall together.
Dramatis Personae
It is wise to provide some brief detail of the people and companies involved in this case, both those who were parties to the agreements and, where the parties are not individuals, those involved in them or with them.
The Claimant, Montpelier Business Reorganisation Ltd (MBR) was incorporated in September 2010. It is now dormant.
Mr Philip Nuttall, a chartered accountant, was, at the material time, a director of MBR. Until their resignation on 4 May 2012 Messrs Jones, Armitage and Padgett (collectively called the Individual Defendants) were fellow directors.
The shareholders in MBR are the Third to the Fifth Defendant who between them own 50% of the issued shares and Montpelier Professional Ltd (MPL) which owns the remaining 50 %. A Shareholders Agreement was entered into simultaneously with the Asset Purchase Agreement and the Management Services Agreement and was intended to regulate the relationship between the shareholders and their obligations to MBR. No issues arise for determination in this case with regard to that agreement.
MPL is a holding company of which a Mr Edward Watkin Gittins is a director and, I believe, major shareholder. Mr Gittins resides in the Isle of Man and that is also his business address. Until his resignation on 31 December 2011 Mr Nuttall was also a director of MPL. The subsidiary companies of which MPL is the holding company are collectively known as the “Montpelier Group”. All group companies practice as chartered accountants.
Mr Nuttall is a director of Montpelier Professional (Leeds) Ltd which is one of MPL’s subsidiaries.
The Individual Defendants are all professional men and are highly experienced in the field of “turnaround” work arising out of insolvency. That is, they are experienced in assisting businesses in financial distress or their creditors and in insolvency work generally. All three have an enviable reputation in this work. Mr Armitage is a certified accountant and Insolvency Practitioner, Mr Jones is a solicitor and Mr Padgett a property consultant.
The First Defendant, AJP One LLP was incorporated in January 2009 under the name Armitage Jones LLP. The individual defendants were the partners. It was set up to offer corporate turnaround advice. I refer to it hereafter as Armitage Jones because this is the name by which it is described in the agreements.
The Second Defendant, AJP Two LLP was set up on the same date and with the same partners. Its remit was to provide advice to lenders in the property market and administrative services to Mr Armitage and Mr Jones acting as LPA Receivers. I shall refer to it hereafter as LPA Direct because this was the name by which it is described in the agreements.
Background leading to the execution of the agreements
It is not in dispute that in about May 2010 Mr Nuttall approached Mr Jones with a view to initiating discussions as to whether both LLPs might wish to become part of the Montpelier Group. It seems clear that he made this approach with the blessing of Mr Gittins on behalf of MPL. Mr Gittins’s evidence was that Mr Nuttall put the idea to him and vouched very highly for Mr Jones in particular whom he had known for many years.
Mr Nuttall and no doubt Mr Gittins felt that the Group and the LLPs could mutually benefit by such an arrangement. It would give the Defendants (who were after all a start up business) access to a wider market and the Defendants’ expertise in the field of insolvency would complement the services offered by the businesses operating within the Montpelier Group.
Initially Mr Nuttall envisaged that the opportunity to work within the Montpelier Group umbrella would be sufficiently attractive to entice the Individual Directors to agree a deal without seeking any capital payment. Suffice to say that was not how Messrs Jones, Armitage and Padgett saw it.
Initially Mr Gittins was happy to leave it to Mr Nuttall to progress the talks but ultimately he became more directly involved. Mr Armitage and Mr Jones spoke of a meeting in June at the offices of Mr Nuttall at which all three Individual Defendants and Mr Nuttall and Mr Gittins were present at which essentially a deal was agreed. It was that the Defendants would associate themselves with the Montpelier Group (Footnote: 1) on the basis that a company would be incorporated in which the Individual Defendants would between them own 50% of the shares and MPL would own the balance of the shares and which would purchase the goodwill and certain defined assets of the LLPs for £500,000. The company actually incorporated for this purpose in September 2010 was MBR.
The agreement did not envisage the creation of an employer/employee relationship between MBR and any of the Defendants. The Defendants would continue to remain partners in the LLPs. It was to be what Mr Jones referred to as a “lateral hire” whereby Armitage Jones and LPA Direct, through the Individual Defendants, would supply services (as defined in the Management Services Agreement) to MBR on the terms set out in the Management Services Agreement.
It is the evidence of Mr Armitage that at that meeting he and his individual co defendants were assured amongst other things that there would be direct access to the group’s extensive client network including their international clients, that they would be supported by the group’s administrative and marketing structure and that two substantial funds would be established, one for corporate rescue purposes and the other to facilitate distressed purchases. I acknowledge that it was the evidence of the Individual Defendants that this latter point was of great interest to them because the funds had the potential to generate significant profits both in connection with their administration and out of the purposes to which the money in the funds was put. They complain that the funds were not put in place. The Claimant argues that it was not contractually obliged to do so. I do not feel that it is necessary to address any issues with regard to the funds because the Defendants do not make any claim arising out of the fact that no funds were set up. They merely make the point that the prospect of such funds materialising was one of the matters which made an association with the Claimant attractive.
The Individual Defendants, and particularly Mr Armitage, were also very much attracted to the idea that if the deal was wrapped up in this new company in which they had equity than ultimately they may well have a lucrative exit route at the time that they wanted to retire.
The only issue of principle about which the parties were not in fairly early agreement was how the £500,000 consideration was to be paid. Unsurprisingly the Defendants wanted it up front; equally unsurprisingly Mr Gittins wanted a deferred payment plan since it was always expected that he or MPL would be the source of that money (or part of it). By 5 July however that particular wrinkle had been resolved. It was agreed that the consideration would be paid in three tranches namely £150,000 on completion, £100,000 payable 6 months after completion and the balance of £250,000 payable 12 months after completion. The obligation to make these payments was recorded in the Asset Purchase Agreement. The latter 2 payments were described in the Asset Purchase Agreement as the First Deferred Payment and the Second Deferred Payment respectively.
Mr Gittins’s evidence was that he was not overly concerned about this payment. The LLPs were billing well and that was clearly expected to continue. The deal involved the new company (MBR) retaining a significant proportion of the costs generated by the LLPs and it was felt therefore that the deferred payment would to all intents and purposes be self funding, albeit he was ready to meet any shortfall through MPL if necessary.
Agreement having been reached in principle, solicitors were instructed. That culminated in the incorporation of MBR as the vehicle through which the agreement was to operate and a number of documents executed by the parties to reflect the perfected agreement. I have already referred to the Asset Purchase Agreement, the Management Services Agreement and the Shareholders Agreement but in addition MBR executed a debenture over its assets and undertaking in favour of the Defendants for the purpose of securing the deferred payments. I should also mention that MPL were a party to the Asset Purchase Agreement for the purpose of guaranteeing the deferred payments.
The Claim
The initial payments of £150,000 and the first deferred payment of £100,000 were paid, albeit not in accordance with the agreement. The payment of £150,000 due on completion was actually paid on the day following completion. Mr Gittins contends that the failure to make this payment on time was simply because of practical difficulties arising out of the fact that the money was to be transferred from an Isle of Man bank. The Defendants believe that the problem stemmed form the fact that, unbeknown to them at the time, Mr Gittins was arrested on 27 September for alleged false accounting and cheating HMRC.
The payment of £100,000 which was due for payment on 28 March 2011 was not paid until 8 June 2011. Mr Gittins’s evidence is that this payment was not made when due because, contrary to the terms of the Management Services Agreement, the Defendants were consistently failing to provide the financial information concerning MBR to which MBR was entitled and, furthermore, the Defendants were not making the efforts to integrate within the Montpelier Group that the Management Services Agreement required.
These were issues about which the Individual Defendants took exception. Matters were referred by them to their solicitors and, on 21 April 2011, a formal demand for the money was made to MBR and MPL, as guarantor pursuant to the Asset Purchase Agreement, was also called upon to honour its guarantee. There was then a flurry of email exchanges but in fact on 2 June there was a meeting between Mr Gittins and the Individual Defendants at a restaurant in Manchester when matters were resolved.
There is dispute as to exactly what was agreed at that meeting in the sense that Mr Gittins’s evidence is that he was assured by the Defendants that henceforward they would comply with the agreement. The Defendants say that at that meeting the only matter which exercised Mr Gittins was the extent to which the Defendants were demonstrating a commitment to the project and that at that meeting the Defendants were able to allay Mr Gittins fears that their commitment was not total.
Both Mr Gittins and the Defendants agree however that at that meeting Mr Gittins agreed to arrange for the immediate payment of the £100,000 and the Defendants agreed that the final payment of £250,000 could be deferred until 31 December 2011. The rationale of that deferral was, according to the Defendants that if there was not consensus that in the period up to 31 December the appropriate level of integration was achieved then the Defendants could walk away with their trading names and the intellectual property therein but that the £250,000 would not be payable. There is at supplemental bundle 6/288/1178 an email from Mr Jones to Mr Gittins to that effect in which Mr Jones borrows the phrase used by Mr Gittins at that dinner to describe the scenario that would then unfold as an “amicable divorce”.
Mr Gittins argues that it was agreed that the £250,000 would be paid provided that by 31 December
“there was a consensus that the Defendants had complied with what they had agreed to and had achieved appropriate integration in the intervening period into the Montpelier Group”.
If there was no such consensus the parties would “walk away with their original trading names and intellectual property” (Footnote: 2)
It is of course axiomatic that there was no “amicable divorce”. A pivotal issue in this case arises out the fact that the payment of £250,000 had not been paid by MBR. In the light of the alleged breaches by the Defendants of their contractual obligations, MBR seeks a declaration that it is not liable to make this payment and further it seeks an account of the monies to which it argues it is entitled from the Defendant pursuant to the Management Services Agreement (which it asserts is ongoing because the Defendant have never terminated it) and which have not been paid and further it seeks damages equal to the loss in value that it has suffered by virtue of the Defendants’ conduct.
The Defendants deny breach of contract and argue that, even if there has been breach, no loss has been suffered by the Claimant. They counterclaim for the £250,000 that has not been paid by MBR subject to deductions to reflect the monies that they acknowledge are due to MBR pursuant to the Management Services Agreement and which represent its share of bills rendered by Armitage Jones and/or LPA Direct and which have been paid to them. Their contention is that the amount due to the Claimant pursuant to the Management Services Agreement is £198,906.72. If that is deducted from the £250,000 then the amount due from the Claimant is £51,093.28.
The Relevant Agreements
The Asset Purchase Agreement
Leaving aside the question of whether the Defendant are in breach of contract the question arises as to whether, on a proper construction of clause 3.3 of the Asset Purchase Agreement, they are entitled to the Second Deferred Payment of £250,000 in any event.
It is as well to set out the clauses that may touch on this issue in full:
Subject to adjustment in accordance with clause 3.3 the Purchase Price for the Business and Assets to be paid by the Buyer to the sellers pursuant to this agreement shall be £500,000 in cash as follows
The sum of £150,000 on Completion (the Initial Payment)
The sum of £100,000 on or before the date is 6 months after the Completion Date (the First Deferred Payment); and
The sum of £250,000 on or before the final day of the Deferred Payment Period (the Second Deferred Payment)
The First Deferred Payments and the Second Deferred Payment hereafter referred to together as the "Deferred Payments"
The Purchase Price shall be apportioned as follows:
£499,500 for the Goodwill;
£1 for the client engagements; and
£499 for the assets described in clause 2.1.3
The Deferred Payments shall not be payable if at any time during the Deferred Payment Period Armitage Jones materially fails to perform its services in accordance with the operational provisions of the Management Services Agreement in the reasonable opinion or the Buyer and the failure (if capable of being remedied) remains unremedied for 30 days after being called to Armitage Jones’ or the individuals’ attention by written notice from the Buyer. If such failure is attributable to an act or omission of one of the Individuals a pro rata reduction shall be made.
The Initial Payment shall be reimbursed by Armitage Jones or the individuals if Armitage Jones is in material breach of its obligations under the Management Services Agreement to perform its services within 3 months of completion in the reasonable opinion of the Buyer and the failure (if capable of being remedied) remains unremedied for 30 days after being called to Armitage Jones’ or the individuals attention by written notice from the buyer
In these clauses “the Buyer” is MBR, and in clause 3.3 The “Deferred Payment Period” is defined as “
“The period commencing on the Completion Date and ending on the first anniversary of the Completion Date”
On the basis of the contract that would be 28 September 2011 but, as I have remarked, it appears not to be in dispute that it was extended to 31 December 2011 (Footnote: 3).
It will be noted from clause 3.3 that broadly the Claimant is relieved of the obligation to pay the £250,000 if Armitage Jones does not remedy a material breach of the Management Services Agreement within 30 days of written notice. The notice upon which the Claimant relies was dated 9 March 2012 and took the form of a letter from MBR’s solicitors, Lupton Fawcett to Armitage Jones. It is indisputable that this notice was given well after the Deferred Payment Period had expired, even on the basis that that was 31 December 2011 rather than the 28 September 2011 as the agreement stipulated. Mr Myerson argues however that a true construction of clause 3.3 does not require that it be served within that period.
Mr Jory contends, on the other hand, that any notice which is intended to relieve MBR of the obligation to pay a deferred payment must be served within the Deferred Payment Period. If it is not served in that period, then payment must be made notwithstanding any breach. The remedy is then for MBR, having made the payment, to sue for its losses arising from the alleged breaches.
It is not argued by Mr Myerson that the alleged breaches of contract have the automatic effect of relieving the Claimant of its obligation to pay the Second Deferred Payment of £250,000. He accepts that the Claimant is only absolved from the obligation to do so if it has served a notice in accordance with clause 3.3.
It is therefore necessary to embark on the exercise of construing and interpreting clause 3.3 of the Asset Purchase Agreement. I shall refer to this as “the First Construction Point”
There is however a further issue that it is necessary to resolve based upon the proposition that it is necessary to draw a distinction between the reasonable opinion of MBR as a company and the reasonable opinion of one of its directors.
This issue revolves around that fact that clause 3.3 stipulates that the second deferred payment of £250,000 only ceases to be payable if Armitage Jones
“fails to perform its services in accordance with the operational provisions of the Management Services Agreement in the reasonable opinion of the Buyer (MBR) …”
It is not disputed that the letter of 9 March was written because Mr Nuttall had formed the opinion that the Defendants were in breach but he was only one of 4 directors, the other three being the Individual Defendants. Mr Jory questions whether Mr Nuttall’s opinion in such circumstances, even assuming it to be a reasonable opinion, can be seen to be the opinion of MBR. I shall refer to this as the “Authority Point”
Before I deal with the First Construction Point and the Authority Point I set out the relevant provisions in the Management Services Agreement in respect of which it is argued by the Claimant that the Defendants are in breach
The Management Services Agreement
The relevant clauses are:
The Company (MBR) engages the Service Providers to provide the Services to the Company and the Service Providers agree to provide the Services upon the terms and conditions set out in this Agreement.
("Service Providers" is defined as Armitage Jones and LPA Direct together)
("Services" are defined as;
"the supply by the Service Providers of the Individuals (Footnote: 4) to:
Develop and enhance the Business
Develop the Montpelier brand
Act as directors of the Company and
Be responsible for the day-to-day operations of the (claimant's) business”)
The Service Providers covenant with the Company to provide the Services and to ensure the performance and observance by the Individuals of all of their obligations under this agreement……
This Agreement will commence on the date of completion of the Asset Purchase Agreement and will continue (subject to earlier termination as provided in this Agreement) for a fixed term of 12 months and thereafter until terminated by the Company or the Service Providers giving to the other not less than 6 months written notice.
The Individuals shall during the term of this Agreement
Perform the Services diligently and efficiently and to the best of their skill and ability
Give to the Company and its auditors for the time being all such information, explanations, data and assistance as they may require in connection with the provision of Services.
3.1.3………………..
…………………
The Service Providers shall use all reasonable endeavours to ensure that the Individuals:
increase the amount of business undertaken by the Company; and
assist the development of the Montpelier brand
The Company shall pay to the Service Providers fees at the rate set out in Schedule 1 exclusive of VAT for the provision of the services (the Fee). The Service Providers shall deliver an invoice in respect of the Fee in the first 7 working days of each month in respect of any days or part days work during the course of the previous month. The company shall pay the Fee within 14 days of delivery of such invoice.
The Service Providers may include in the invoice referred to in clause 6.1 such travelling and accommodation expenses and disbursements as have been reasonably incurred in provision of the Services. The Service Providers shall provide to the Company such vouchers or other evidence of actual payment of such expenses as the Company may reasonably require.
The Individuals shall at all times give to the Company and its auditors for the time being all such information, explanations, data and assistance as they may require in connection with the provision of Services
Except as required in the provision of the Services or as may be required by law, neither the Service Providers nor the Individuals shall, either during or at any time after the termination of this agreement, use for its or their own purposes directly or indirectly for the purposes of any of any other person, or disclose to any person, company, business entity or other organisation or cause any unauthorised disclosure of, any Confidential Information.
Nothing contained in this Agreement prevents the Service Providers or Individuals from being engaged or concerned in any other consultancy work or activity provided that
Such work does not preclude or conflict with the proper performance of the Services
Such work is not in competition with nor is it provided to any third party whose business affairs may reasonably be regarded as being in competition with the Montpelier Group
…………
In the event that the Service Providers or the Individuals become aware of a conflict of interest which would prevent the Service Providers or the Individuals acting in the best interests of the company, then the Service Providers shall immediately inform the company and Montpelier in writing of such conflict of interest
Notwithstanding any other provision in this agreement, the Service Providers (acting jointly) may by written notice terminate this Agreement or suspend its performance of all or any of their obligations under it immediately and without liability for compensation or damages if:
The Company fails to comply with any of its obligations under this Agreement and the failure (if capable of being remedied) remains unremedied for 30 days after being called to the attention by written notice from the Service Providers.
The Company convenes a meeting of its creditors or suffers a petition to be presented or a meeting to be convened or other action to be taken with a view to its liquidation except (with the approval of the individuals) or the purposes of and followed by amalgamation or reconstruction; or
A receiver or administrative receiver is appointed of any of the company’s property
Schedule
Fees
The Service Providers will be remunerated for Services as follows:
50% of time recorded by the Individuals; and
20% of fees billed by the Company net of expenses in respect of work introduced by the Service Providers/the Individuals (less any invoices submitted by the Company but still over 90 days until paid); and
50% of any excess in the event of over recovery (less any shortfall in the event of under recovery) against time recorded ….
It will be noted that the Management Services Agreement does not specify in terms that invoices in respect of Services supplied have to be raised by MBR. In fact invoices were raised by the LLPs. The Claimant argues that, by reference to clause 6.1, it is clear that that was not what was intended. What was intended was that MBR invoice for work done by the Defendants and then pay the Fees due to Armitage Jones and LPA Direct to them on receipt of an invoice from Armitage Jones or LPA Direct depending on which LLP provided the Service. In fact the LLPs raised invoices in respect of services supplied with the intention of then accounting to the Claimant for its share. It is important to record that the Defendants accept that they are liable to the Claimant for the proportion of the fees that the Management Services Agreement granted to it.
A second construction point arises as to whether it was permissible under the agreement for the LLPs to act in the way that they did with regard to invoicing although the position of the Defendants is that even if they were not, it was actually subsequently agreed that invoicing should take place in that way. I shall refer to this construction point as the Second Construction Point.
The allegations of breach of this Agreement are broadly;
That contrary to the Management Services Agreement, the Defendants failed to procure that client engagements (Footnote: 5) were made with the Claimant and not with Armitage Jones and/or LPA Direct. It is in this connection that the Claimant contends that for example invoicing by the LLPs in their name was a breach.
That the Defendant failed to provide information or accounts to the Claimant as to the amount of revenue generated and that no money so generated has actually been paid to the Claimant despite requests by the Claimant for accounts, ledgers and other financial information. It is alleged that in the circumstances the Defendant traded not for the benefit of the Claimant but for their own benefit.
That the Defendants failed to promote the Montpelier brand
The individual Defendants failed in their general duty to act in the best interests of MBR
The Defendants argue that the Management Services Agreement was terminated with immediate effect by notice served by Armitage Jones on 18 May 2012. That notice was served pursuant to clause 12.1 (rather than clause 2.3).
It will be recalled that clause 12.1 stipulated that a notice having immediate effect could only be served on one of the grounds stipulated in clauses 12.1.2. or 12. 1. 3. There is no suggestion that grounds for termination arose under 12.1 2. As regards 12.1.3, in fact receivers had been appointed by Armitage Jones on 24 January 2012 because of the failure to pay the second deferred payment of £250,000. On the same date the Defendant suspended performance of the agreement by written notice to that effect.
The receivers withdrew however in June 2012 because Armitage Jones was not prepared to indemnify them in respect of their costs of legal action threatened by MBR.
The Claimant argues that the purported termination of the Management Services Agreement was ineffective to achieve termination because it contained no reason for termination and had been overtaken by the Defendants own failure to deal with the Claimant’s notice of 9 March 2012. That is the basis for their contention that, by virtue of the fact that the Management Services Agreement remains extant, the obligation to account for the Claimant’s share of fees continued up until Armitage Jones and LPA Direct ceased to trade.
The Authority Point
It will be recalled from paragraphs 36 to 38 above that this refers to the question of whether MBR had, as it was required to do pursuant to clause 3.3 of the Asset Purchase Agreement, formed an opinion that the Defendant had failed to perform the services required to be performed under the Management Services Agreement.
Mr Jory refers to the Articles of Association of MBR. Article 3 makes the directors (plural) responsible for the management of the company’s business. Article 7 (1) specifies that the general rule about decision making by directors is that any decision has to be either a majority decision or is to be taken in accordance with Article 8. Article 8 specifies that a decision of the directors is taken when
“all eligible directors indicate to each other by any means that they share a common view of the matter”
Article 8(3) provides that a reference to eligible directors is a reference to
“directors who would have been entitled to vote on the matter had it been proposed as a resolution at a directors’ meeting”.
Article 8(4) provides that a decision may not be taken in accordance with (Article 8) if
“the eligible directors would not have formed a quorum at such a meeting”.
A quorum is defined by Article 11(2) as 2 directors but the standard provision was actually altered by resolution of MBR to provide that a quorum is two directors provided that at least one director appointed by MPL is present and at least one of the Individual Defendants are present in their capacity as directors.
The point made by Mr Jory is that the constitution of this company has been deliberately constructed to provide that neither Mr Nuttall as the representative on the board of MPL by whom he was appointed on the one hand nor the individual directors on the other hand have the ascendancy in terms of decisions of the board. Thus a decision by Mr Nuttall in such circumstances cannot be a decision of the company. In short, it is not accepted that MBR itself formed the requisite opinion which is a prerequisite to a notice under clause 3.3 of the Asset Purchase Agreement.
Mr Myerson argued that this was a point raised by Mr Jory in his opening on Thursday that had not been pleaded and it was unjust to expect him to deal with it. Mr Jory asserted that it had never been accepted that the company had formed this opinion. It was an assertion made in paragraph 34 of the Particulars of Claim but had not been conceded in paragraph 92 of the Amended Defence (which addressed the assertion in paragraph 34). Accordingly it remained in issue and further that he had presaged it in his skeleton argument.
For reasons given on the first day of this trial I concluded that it was a point that the Defendant should be entitled to pursue, not least because essentially it was a point of law which could be resolved on the basis of the evidence already filed and in so far as it could not, additional evidence was minimal and Mr Nuttall could deal with it in the course of his oral evidence and furthermore Mr Myerson would have time to marshal his thoughts on the issue overnight and if necessary over the weekend.
In fact Mr Nuttall was able to deal with this issue during his evidence in chief which commenced on the following day. He was clear that a director who is conflicted is not eligible to vote. He was of the view that a director not able to vote is not an eligible director for the purpose of Article 8. In the circumstances the only eligible director was Mr Nuttall himself. In this context therefore his opinion was indeed the opinion of the Company.
He points out that at the relevant time none of the Defendants took the point that MBR had not formed the requisite opinion. Even though they were represented their solicitors did not take issue with the notice of 9 March on that basis and no director required the convening of a board meeting to ventilate that issue.
It is right to say that in his closing submissions Mr Jory relegated his Authority Point to something of a merely supporting role to which he attached far less weight than he did to his point that in any event the Claimant was out of time with its notice of 9 March because, in order to relieve the Claimant of the obligation to pay the remaining £250,000, it had to be served before that payment became due.
It has to be said that it seems clear to me that the individual defendant directors were indisputably conflicted on the issue as to whether Armitage Jones was in breach of the Management Services Agreement and that accordingly that was a matter upon which it was inappropriate for them to vote and they were thus ineligible to vote. That would, without more, mean that in this case the opinion of Mr Nuttall is indeed the opinion of the Company.
I do not overlook the provisions of Article 8(4) that I refer to in paragraph 50 above but if the defendant directors were going to argue the point that the opinion was not formed by a quorate board in my view it was incumbent upon them to raise it at the time. Had they done so then they may have had a point. MBR would then probably have been deadlocked and MPL and/or Mr Nuttall may have had to consider other ways to advance their position. They did not however, notwithstanding that they are all sophisticated and professional businessmen and Mr Jones is a solicitor learned in the field of corporate law. Neither did their solicitors. Indeed the contention that MBR did not form the requisite opinion has only been fully articulated recently, more than 4 years after the letter of 9 March 2012.
In my view it would be wrong to permit the Defendants to say now that the decision to serve notice was reached by an inquorate board and is therefore invalid. In my view any irregularity in the decision making process has been waived in light of the fact that it was not raised at the time or within a reasonable period thereafter and I accordingly reject Mr Jory’s Authority Point.
The Construction Points
Before I deal with each such point it is appropriate to set out the law applicable to the issue.
The Law
The law is now conveniently summarised in the speech of Lord Neuberger in Arnold v Britton 2015 AC 1619 from paragraph 14 at page 1627.
"When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd (2009) AC 1101 para 14. And it does so by focusing on the meaning of the relevant words………… in their documentary, factual and commercial context. That merely has to be assessed in the light of (i) the natural and ordinary meaning of clause, (ii) any other provisions of the (document) (iii) the overall purpose of the clause and the (document), (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions”
The learned judge then went on to emphasise six specific factors of general application in this exercise of construction (Footnote: 6). I do not intend to set them out at length. The purport is that
Commercial common sense should not be invoked to undervalue the importance of the language of the provision which is to be construed
The clearer the natural meaning the more difficult it is to justify a departure from that meaning.
Commercial common sense must not be invoked retrospectively. Common sense is only relevant to the extent of how matters would or could have been perceived by reasonable people in the position of the parties at the date the contract was made. The mere fact that a contractual arrangement if interpreted in accordance with its natural language has worked out badly, or even disastrously, for one of the parties is not a reason to depart from the natural meaning.
A court should be slow to reject the natural meaning of a contractual provision simply because it appears to be a very imprudent term for one of the parties to have agreed even ignoring the benefit of hindsight. Interpretation is to identify what the parties have agreed, not what the court thinks they should have agreed.
Only facts known to both parties or reasonably available to them both at the date of the contract can be taken into account as an aid to construction. It cannot be right to take into account a fact or circumstance known only to one of the parties
In situations where an event occurs which the parties clearly did not intend or contemplate judging from the language of the contract then the court should give effect to the intention that the parties would have intended if that is clear.
It is against that background that the construction points must be considered
The First Construction Point
This is the issue concerning the construction of clause 3.3 of the Asset Purchase Agreement that I point up in paragraphs 32 to 35 above.
Mr Myerson argues that grammatically there is no basis for restricting to the Deferred Payment Period the time during which a notice may be served. That, he argues, can only be achieved by implying into the clause the phrase “served within that period” so that the clause reads
“The Deferred Payments shall not be payable if at any time during the Deferred Payment Period Armitage Jones materially fails to perform its services in accordance with the operational provisions of the Management Services Agreement in the reasonable opinion or the Buyer and the failure (if capable of being remedied) remains unremedied for 30 days after being called to Armitage Jones’ or the individuals’ attention by written notice from the Buyer served within that period. If such failure is attributable to an act or omission of one of the Individuals a pro rata reduction shall be made”.
He argues that the underlined addition is impermissible when the clause makes sense without it. He argues that a reasonable person with the relevant background knowledge would understand the clause to mean that notice may be served either inside or outside the Deferred Payment Period limited only by the fact that it must clearly be served before the payment is made.
He points out that it would have been the work of seconds to add the phrase which limits to the point that payment is due the period during which the notice could be served if that was what the parties had intended and he points out that there are other points in the Asset Purchase Agreement where such a phrase could have been inserted but was not. He has in mind here for example clause 16. That is the clause dealing with the service of notices. A provision making it clear that in the context of clause 3.3 the notice must be served before the payment is due could, he argues, easily have been inserted there.
In the context of other provisions of the document (Footnote: 7) he draws my attention to clause 3.4. That deals with the initial payment due on completion and provides that it shall be reimbursed to MBR if within 3 months of completion MBR opines that Armitage Jones is in material breach and that has not been remedied within 30 days. That clause does not require such notice to be served within that 3 month period and a reasonable person would not think that it would, not least because the 3 month period is not referable to an obligation assumed by MBR such as an obligation to pay money to the Defendants. He argues that, armed with that knowledge, a reasonable person would not read clause 3.3 as being limited in the way that Mr Jory suggests.
He also points out that a limitation on the period for service of such a notice to the period prior to which the payment was due would not make commercial sense (Footnote: 8) because it would mean that MBR could not withhold payment if a material breach was actually identified for the first time after the Deferred Payment Period had expired but before payment.
He also points out that for as long as the £250,000 remains outstanding MPL’s guarantee remains in place, as does the debenture over the assets of MBR. The result is that a construction that concludes that notice can be served at any time before payment of the money does not offend commercial common sense.
Mr Jory deals with the issue of construction in some detail in his Opening Note from paragraph 48 and he enlarged upon this further in his closing submissions. He makes a number of points to counter those of Mr Myerson.
First, the reference in the first sentence of clause 3.3 to “at any time in the Deferred Payment Period” applies as a matter of syntax to the whole of the sentence. There must, by the words of the clause 3.3, be three conditions that must be satisfied within the Deferred Payment period if MBR are to be relieved of the obligation to pay the £250,000
There must be a failure to perform in the reasonable opinion of MBR and
Notice is served by MBR and
The breach identified must remain unremedied for at least 30 days.
By use of the word “and” in the clause all these are conjunctive, not disjunctive. He points out that there is no disjunctive preposition in that clause at all. The effect is that each of the conditions has to be satisfied within the Deferred Payment Period.
He argues that not even one of the conditions was met within that period. It was not until February 2012 that Mr Nuttall formed his opinion that Armitage Jones had materially failed to provide the Services, the notice was served on 9 March and by that time performance of the Management Services Agreement had been suspended by the Defendants (Footnote: 9).
Mr Jory further argues that an interpretation which permits notice to be served after the expiry of the Deferred Payment Period cannot make commercial sense. It would permit the Claimant to serve a notice long after its obligation to pay the Defendants had crystallised and even after the Defendants had appointed a receiver for non payment (as they were entitled to do under the debenture executed at the same time (Footnote: 10)). He points out that in fact the Defendants did appoint a receiver because of non payment of the £250,000. It would be absurd and hence totally lacking in commercial sense, it is argued, for that appointment to be rendered invalid by the service of a notice months after the receiver had been appointed. He argues that a reasonable person would be obliged to come to the view that that is not what the parties would have intended.
Furthermore Mr Jory asks rhetorically how it can be said that a reasonable person with the knowledge of the parties at the time of the contract would have perceived that the contract should be taken to mean that MBR is to be rewarded for failing to make a payment that they are contractually committed to make? He argues that the interpretation advocated by Mr Myerson would permit MBR essentially to extend the time for serving a notice simply by not making a payment it has contracted to make. It would thus be rewarded for its breach.
Mr Jory also makes reference to the overall purpose of the clause and the documents (Footnote: 11). He argues that the clause is clearly to record an obligation to make the balancing payment by a certain date provided that no material breach has been notified. He argues that the reasonable person reading this cause would understand the clause to mean that the payment becomes due unless within the Deferred Payment Period the notice is served but the breach remains unremedied.
He argues that that is far from an absurd outcome. It does not mean that the Claimant is precluded from seeking damages for a breach that may have occurred within the Deferred Payment Period. That option is not negated by the clause. It simply means that the money cannot be withheld just because the Claimant intends to take action for a breach.
Mr Jory makes a further point to the effect that the clause is actually quite draconian from the Defendants’ point of view. If there is a material breach which, as a fact, is simply incapable of remedy within 30 days but which has caused the Claimant a loss significantly less than £250,000 nevertheless the Claimant need not pay the £250,000 or even that part of it that is over and above their loss. He argues that that in itself calls for a restrictive interpretation of the clause and a strict adherence to what the words actually mean. He prays in aid Nohabar-Cookson v Hunt (2016) EWCA Civ 128 paragraph 18 in support of that contention.
That is a case dealing with exclusion clauses but the point is made that ambiguity in such a clause may have to be resolved by a narrow construction because
“an exclusion clause cuts down or detracts from the ambit of some important obligation in a contract……… The parties are not lightly to be taken to have intended to cut down the remedies for which the law provides for breach of important contractual obligations without using clear words to that effect”
In this case the important obligation in the contract that the clause addresses is whether £250,000 (which is half the purchase price) remains payable.
Finally, he makes the point that no words need to be added to the clause such as those suggested by Mr Myerson to which I refer in paragraph 66 above. On the contrary, in order that the clause should mean as Mr Myerson contends further words would have to be added along the lines of
“The Deferred Payments shall not be payable if at any time during the Deferred Payment Period or at any time thereafter but before payment has been made………”
I have no hesitation in concluding that I find the arguments of Mr Jory the more convincing. I am satisfied that a reasonable person having all the background knowledge available to both parties at the time that the contract was entered into would have understood that the intention of the parties was that the Claimant would have until the end of the Deferred Payment Period but no longer to relieve itself of the obligation to pay this Second Deferred Payment.
I reach that conclusion for the reasons that are set out from paragraphs 73 above. I should say that in my view it is the clear meaning of the language in the clause and that is a conclusion which, in my view, can be reached even without recourse to questions of questions of commercial common sense such as those that I refer to in paragraph 63 above. If recourse has to be had to commercial common sense to construe this contract then, even though that must not be invoked retrospectively, I am satisfied that that too supports the Defendants’ interpretation of this clause.
I also observe that if the clause favours the Defendant in the sense that they become entitled to the money even if any breach of contract was not known and could not be known by the Claimants until after the Deferred Payment Period then that is not a basis for favouring the Claimant’s interpretation. The term may be imprudently drafted but one need look no further than paragraph 63.4 above to appreciate that that is not a basis for rejecting the natural meaning of the clause.
In the circumstances I am satisfied that the £250,000 is due to the Defendants. The question therefore is whether in fact the claimant has established that the Defendants are in breach of the Management Services Agreement and whether, if they are, the Claimant has suffered loss.
This brings me to the Second Construction Point because one of the allegations of breach is that Armitage Jones and LPA Direct invoiced clients directly, contrary to the terms of the Management Services Agreement which in fact required that MBR invoice the clients.
The Second Construction Point
This is the point I identify in paragraphs 42 above. In common with counsel who I think did not address this at all in their final submissions, I need not dwell on this in the same detail that was devoted to the First Construction Point although of course this issue must be considered in accordance with the same legal principles.
Suffice it to say that I do not see how the reasonable person to whom I have already repeatedly referred could conclude from a reading of clause 6.1 of the Management Services Agreement that Armitage Jones and/or LPA Direct were permitted to invoice clients direct. The language of clause 6.1 is clear; the Service Providers shall deliver an invoice in respect of the Fee. It is as plain as a pike staff that that means deliver an invoice to MBR because the clause states that MBR have to pay it.
I mention in paragraph 63 above that the jurisprudence is that the clearer the meaning, the harder it is to depart from it. It is therefore clear that the language actually used in the agreement to be construed is magnetically important and other considerations such as for example commercial common sense should not be invoked to undervalue the importance of the language that is used.
Not only am I driven to the conclusion that the Management Services Agreement provides no scope for Armitage Jones and LPA Direct to invoice directly but it was clear to me that Mr Armitage was of the same view. The whole tenet of his evidence in this connection was that it was agreed between the parties after the Management Services Agreement had been signed that Armitage Jones and LPA Direct could invoice notwithstanding the terms of the Management Services Agreement, for reasons that I shall come to.
Have the Defendants breached their contractual obligations?
Invoicing and Letters of engagement.
It is not disputed by the Defendant that in fact invoicing and letters of engagement were sent out by Armitage Jones and LPA Direct in their names rather than in the name of MBR. I have already concluded that that did not accord with the obligations imposed upon the LLPs by the Management Services Agreement.
The point made, particularly by Mr Armitage, is that agreement was reached with Mr Graeham Sampson, the financial director of MPL, that letters of engagement and invoicing would come from the LLPs. This was because on completion MBR had neither a bank account nor a VAT registration. VAT registration was only achieved in mid November 2010 and a bank account was only set up in late January 2011 and even then it was an Isle of Man bank account with RBS International (RBSI) which, Mr Armitage says, Mr Sampson told him was not to be used. He draws attention to his endorsement on a letter of confirmation that the account was open received from RBSI and dated 24 January. His endorsement was a manuscript note “IOM DO NOT USE”. It is not accepted by the Claimant that Mr Armitage was told that the I.o.M bank account should not be used and Mr Myerson points out that that is not even a contention pleaded in the defence and counterclaim.
Mr Armitage pointed out that as early as 1 October 2010 he had emailed Mr Sampson chasing up a VAT number and a bank account because he had an invoice to issue. In his witness statement at paragraph 80 he says that he subsequently spoke to Mr Sampson and was told that neither were yet available and it was at that point that Mr Armitage suggested that was
“not a problem because we could put the invoices through Armitage Jones and LPA Direct.”
I presume that at that time it was envisaged that that would occur until the VAT registration and the bank account were in place. Indeed my attention was drawn to an email of 27 January 2011 timed at 13.50 from Mr Armitage to Mr Nuttall copied to Mr Sampson (amongst others) in which Mr Armitage specifically says that
“because there was no MBR bank account no sales invoices have been raised by me on MBR and it was agreed that we would continue to invoice on Armitage Jones and LPA Direct”.
It seems that at that time however Mr Armitage was mistakenly under the impression that Mr Sampson was no longer employed by MPL because in an email timed at 13.28 to Mr Jones and Mr Padgett he is complaining that nothing has happened since Graeham left. He goes on to say that “
“no one told me that he has gone but he resigned as a director in January and I have not heard anything from him since November”
I should add, since it was a point picked up by Mr Armitage, that when Mr Gittins was asked by Mr Jory about the position with regard to billing before the bank account was opened he said that “he had no difficulty in invoicing as Armitage Jones and LPA until then”.
Mr Armitage argues that he did what he could to accelerate the provision of a VAT registration and a bank account by providing information necessary for each to Mr Nuttall and indeed to RBSI. I was referred to emails in supplemental bundle 5 that evidence this.
Mr Armitage was cross examined at some length regarding this aspect of his evidence and his assertion that even when the I.o.M account was opened he was told not to use it. It was queried why for example Mr Sampson was copied in on emails relating to the setting up of the account when apparently it was not to be used in any event.
It was also queried why, on 16 November, Mr Sampson was not copied into an email sent by Mr Armitage to Mr John Noble, the financial controller of MPL in which Mr Armitage pointed out that
“it was agreed that all transactions go through Armitage Jones and LPA Direct until the bank account is open and then we can make the necessary transfers”
It was suggested that one might have expected an agreement that actually varied the terms of the Management Services Agreement to be confirmed in writing somewhere with the person with whom the agreement had been reached (Footnote: 12). After all Mr Myerson pointed out, Mr Armitage had taken the trouble to copy Mr Jones and Mr Padgett into that email.
In fact Mr Noble’s email in reply at bundle 5 tab 203c does not seem to acquiesce in an arrangement where the LLPs do the billing. The email states
“Presumably Armitage Jones need to invoice Montpelier for costs incurred on their behalf and then Montpelier pay those invoice (sic)”
That would of course have complied with the Management Services Agreement as I have construed it.
It is right to record that Mr Armitage’s response to that at tab 204a does not address that but merely says that Armitage Jones and LPA Direct will do the invoicing again at the end of the month and then
“look at putting all future sales through MBR and settling inter company balances”
It is difficult to see that as a response from which it was possible to gain confidence that the Defendant intended to necessarily comply with the Management Services Agreement.
In any event RBSI advised Mr Armitage by email of 26 January 2011 that the bank account was now open. Therefore there was no longer any basis for billing direct by Armitage Jones and LPA Direct because in practical terms there was no alternative.
The Defendants’ position however is that within a day of the account being opened Mr Armitage was told by Mr Sampson not to use it. Mr Myerson points out that Mr Armitage sent an email to Mr Jones and Mr Padgett at 13.28 on 27 January. He told them that the account had been opened but did not mention an embargo on using it. Mr Armitage suggests that he may have been told after 13.28.
An email was sent by Mr Sampson at 15.26 on 27 January in which he asks Mr Armitage whether he has still not received confirmation that the RBSI account was open. The question arises as to why Mr Samson should be addressing such a query to Mr Armitage if it was not to be used by MBR in any event? There is a troubling email of 28 January from Mr Armitage to Mr Jones and Mr Padgett. It informs them that Mr Sampson said he would open a UK bank account “rather than wait for the I.o.M account”. That in itself is not consistent with the idea that an IoM account should not be used. Indeed it seems to demonstrate frustration that the IoM account is delayed. Also troubling is that fact that this email makes it clear that Mr Armitage knew the IoM account was open but it specifically confirms that he did not mention that to Mr Sampson. Mr Armitage’s somewhat lame response as to why he did not mention it was because he was “listening and not talking”.
Mr Armitage refers to an email to him from Mr Sampson of 4 February. By this time Mr Sampson appears to have learnt through other sources that the I.o.M. account is open but mentions that that is “possibly irrelevant now”. Mr Armitage offers that as evidence that it was agreed that it would not be used. He had to admit however that it is equally possible to conclude that Mr Sampson might feel it was irrelevant, not because he had specifically told the Defendants not to use it, but because he thought that, because of the delay and difficulties in opening an account in the IoM, a UK account was being opened instead. Mr Armitage conceded therefore that this email did not demonstrate that the IoM bank account was irrelevant simply because Mr Armitage had been told in terms that MBR should not use it. It is clear that, by February Mr Sampson was expecting a UK account to be opened because he refers to it in an email to Mr Armitage of 1 February. He appears to be under the impression that Mr Armitage is organising it. That is a misunderstanding that was apparently not corrected by Mr Armitage.
So what was the reason that the Defendant felt that it was appropriate for there to have been agreement with Mr Sampson for Armitage Jones and LPA Direct to render invoices and letters of engagement to clients even after the bank account and VAT registration had been set up? The evidence of the Defendants is that there were a number of reasons for this. First there were concerns as to the reputation of Montpelier as a brand arising out of Mr Gittins arrest to which I refer in paragraph 22 above. It was felt that it would benefit MBR if essentially Armitage Jones and LPA Direct, whose reputations were positive, were client facing at least as regards letters of engagement and invoices. Mr Jones and Mr Armitage were however at pains to point out that this did not mean that Montpelier as a brand was sidelined, even in terms of letterheads. Day to day correspondence with clients was on Montpelier headed paper and even bills rendered were accompanied by Montpelier headed timesheets.
The Defendants were also concerned about the knock on effect of this arrest because it occurred as part of an investigation by HMRC into the Montpelier group. Mr Jones mentioned that it became clear to him as a result of his liaison with personnel in the Montpelier group that this situation was sapping morale. This was another reason, as I understand it, for seeking to put some distance between MBR and the Montpelier brand -- for the sake of MBR.
Another reason was that in July 2011 MBR received a letter from HMRC threatening to petition to wind the company up for non payment of VAT of £179,004.62. This was the VAT owed by the Montpelier Group. It was of great concern to the Defendants not least since as far as they were concerned MBR was not part of the Montpelier Group of companies. Mr Jones and Mr Armitage do not dispute that they were told that they need have no concerns about this demand. It was misconceived because MBR was not a group company but they wanted that assurance from HMRC. It is right to say that eventually that came in the form of an unqualified apology from HMRC for ever having threatened MBR with winding up.
A further reason was concern about the stability of the Montpelier Group. The receipt of the letter of threat from HMRC had prompted Mr Armitage to undertake a search of companies sharing the Montpelier name. It transpired that a number had gone into insolvent liquidation.
In the end it was Mr Armitage’s evidence that he had operational responsibility for the manner in which the revenue to be shared by Armitage Jones and LPA Direct on the one hand and MBR on the other was to be earned and he exercised it in the interests of MBR.
Mr Gittins evidence was that while he understood that it might have been appropriate for Armitage Jones and LPA Direct to invoice pending the opening of a bank account none of these reasons would have persuaded him to agree to that situation continuing after the bank account and VAT registration was in place. His evidence was that he and MPL would not have sanctioned running away from the Montpelier brand which is a successful brand or hiding behind Armitage Jones and/or LPA Direct. He did not accept that Mr Sampson sanctioned it either. I was referred to a very full email written by Mr Armitage to Mr Gittins on 19 April. It sets out a detailed chronology of events. There is no reference to an instruction from Mr Sampson not to use the I.o.M account, even though the email makes reference to that account.
It seems to me that it is perhaps not surprising that, when one considers the effect of billing by Armitage Jones and LPA Direct, Mr Gittins and MPL would not have sanctioned the course of action in respect of billing and letters of engagement that Armitage Jones and LPA Direct actually adopted. All revenues came into their bank accounts to which Mr Nuttall was not a signatory. The result was that only three of the four directors of MBR had access to the money to which MBR was entitled and those three were all directors that the Articles of Association distinguished from Mr Nuttall, as the appointee of MPL. (Footnote: 13) What was Mr Armitage’s reaction when that was pointed out to him by Mr Myerson? Surprisingly it was that if somebody had suggested that MBR’s share of the money be transferred to an MBR account he “would have considered the request and discussed it with the other directors and considered their view”
Mr Sampson has not been called to give evidence. The case of Wisniewski v Central Manchester Health Authority (1998) EWCA 596 is authority for the proposition that adverse inferences can be drawn from the absence of a witness who one might expect to hear from but does not attend without good reason. One might have expected Mr Sampson to appear to dispute Mr Armitage’s assertion that billing in a manner contrary to the Management Services Agreement was agreed both before and after the bank account was in place. I do not know whether there is good reason or not for there to be no evidence from him. I am unaware of the circumstances in which Mr Samson left the Montpelier Group albeit I am told that he was the subject of criticism from some regulatory authorities.
Notwithstanding his absence and whether or not there is good reason for it, I have to say that the contemporaneous evidence does not support the view that Mr Armitage was told that the I.o.M account should not be used. I am satisfied that the decision to continue billing in the name of the LLPs after that bank account was opened not only continued a complete reversal of the contractual terms but was a unilateral one reached essentially by Mr Armitage as part of what he described as his “operational function”. In my view it did not accord with the contract or any agreed variation of it and, certainly after the account was opened in I.o.M, the Defendants were therefore in breach of their obligations under the Management Services Agreement.
Having said that I believe it important to make clear that I simply did not get the impression that Mr Armitage was trying to knowingly mislead the court in his evidence about this. Indeed I got the impression that he did genuinely believe what he was telling me. He was giving evidence about matters 4 or 5 years ago. In my view it is much more likely that he has misremembered than that he has sought to deliberately mislead.
I should say that in reaching my conclusion that it was not agreed that after the bank account was opened Armitage Jones and LPA Direct could continue billing clients directly I have not overlooked Mr Jory’s contention made in his final submissions that the evidence points to the fact that it was clear that Mr Nuttall knew that billing was taking place through the LLPs. He referred me to various emails at the end of bundle 5 and the beginning of bundle 6 that make this clear and it is also true that one of the complaints by MBR is that the Defendant failed to supply information about their billing that would enable management accounts to be prepared. Those in my view may support an agreement that the LLPs should bill pending the opening of a bank account but they do not support the contention that it was agreed that that arrangement should continue once an IoM bank account was in place. I note that as late as 14 August 2011 in one of the emails to which Mr Jory referred me Mr Armitage remarks that
“Due to the delays in getting a bank account and the lack of Vat registration in the early days it was agreed that all transactions should continue through Armitage Jones and LPA Direct”.
This specifically records the arrangement as being referable to the absence of a bank account. I also note that even on 17 August Mr Armitage argues that the system in place should continue not because of the instruction not to use an IoM account but because MBR were under threat of a winding up petition.
Accounting information
It is alleged that, contrary to clause 3.1.2 and 8.1 of the Management Services Agreement, accounting information was not supplied and that, contrary to clause 6.1, no monies have been paid to the Claimant representing its share of the monies billed by the Defendants.
This last complaint is not disputed by the Defendant. They have always accepted that they are bound to account to the Claimant for its share of the revenue arising from the LLP’s billing. Indeed the Defendant are prepared to account for billing up to the point when the LLPs ceased to trade rather than just to the point when they say they terminated the Management Services Agreement.
The Defendants dispute however that they have not provided financial information. Once again it is necessary to focus on the evidence of Mr Armitage in this connection since it is he who was expected to provide it.
Before I do so however I observe that Mr Jory argues at paragraph 24 of his opening note that the Claimant’s allegation cannot get off the ground because no request for information has been made by the Company. Any request for information merely emanated from Mr Nuttall, Mr Gittins and Mr Noble none of whom can individually or collectively constitute “the Company” within the meaning of the Management Services Agreement. He concludes, at paragraph 26 of his opening, that “accordingly there was no request from “the Company” at all which could invoke clauses 3.1.1 or 8.1 let alone a breach of those clauses”.
With respect to Mr Jory, it is not an attractive argument for two reasons. First, because the Shareholders Agreement provides at clause 4.1.12 that the individual Defendants will provide MPL with unaudited management accounts every month whether requested or not. Further, clause 4.1.13 provides that the individuals will furnish MPL with such further financial information as MPL shall require. It is difficult to see how a request from Mr Nuttall, Mr Gittins or Mr Noble could not be seen to be a request from MPL. Whilst it is true that they are not MBR, the fact is that there is therefore an obligation to provide information to those who have requested it in any event (Footnote: 14). Secondly, it has consistently been the Defendants’ case, expressed particularly by Mr Armitage, that it was agreed that Mr Noble or one of his colleagues would provide the management accounts because Mr Armitage was too busy and did not have access to the relevant computer systems. Even on the Defendants’ own case therefore it was incumbent on them to supply the necessary information to enable management accounts to be prepared.
Mr Noble gave evidence about financial information sought and received from Mr Armitage. He recounted that on 15 November 2010 he asked Mr Armitage whether there had been any financial transactions that needed to be entered on the ledgers. On 17 November he received an email saying that Armitage Jones and LPA Direct owed £6,545 and £1,700 respectively to MBR but offered no explanation about how that was made up. A request for some detail of how the figure was calculated did produce some documents from which Mr Noble was able to produce some management accounts, a trial balance, a balance sheet and a profit and loss account in the format used by all the Montpelier companies. It is difficult to see therefore that at that stage the Defendants were not complying with their obligations, whether they arose under the Management Services Agreement or the Shareholders Agreement.
On 6 December Mr Armitage sent further financial information in the form of billing details for November. In fact, as I understand it, it comprised of nothing more than time sheets. It is Mr Noble’s evidence that thereafter he received nothing further from Mr Armitage.
In fact, on 18 April 2011 Mr Armitage sent various ledger accounts direct to Mr Gittins. They are in Bundle 6 tab 273. It has to be said that it is not easy to interpret what they mean but Mr Armitage argues that it was information in the same form that was sent to Mr Noble in 2010 and that had been sufficient for him to produce the management accounts that at least MPL needed. Even Mr Armitage does not suggest that any financial information was sent thereafter until 14 August when 2 sheets in bundle 1 tab 43 and 44 were sent.
On 14 December 2011 Mr Sampson asked Mr Armitage to ensure that financial details were supplied for year end accounts by 10 January. Mr Armitage ignored that request. He suggested that was because he did not think it applied to MBR (even though he was an addressee of the email) and in any event he was busy and further, little or nothing had been done with the information that he had already supplied. He said in evidence that he was frustrated and this was why he omitted to bother to send in information on a regular basis.
As I have recorded in paragraph 23 above, it is Mr Gittins evidence that at the meeting which took place on 2 June his dissatisfaction about the lack of financial information was communicated to the Individual Defendants. Indeed it was the lack of that information that he said had prompted him not to make the First Deferred Payment of £100,000 when that had become due.
In the course of his cross examination of Mr Armitage, Mr Myerson took him to many emails touching upon the issue of accounting information and the need for it. I do not intend to refer to them all. An email of 15 April 2011 sent by Mr Gittins in response to a demand dated 14 April from the Defendants for the First Deferred Payment (which was then overdue) makes clear that lack of management accounts was a concern for Mr Gittins. It is interesting to note that at that time Mr Gittins seemed to think that MBR were owed £25,000 by Armitage Jones and LPA Direct. In his reply to that email Mr Armitage does not deny that management accounts are lacking. He simply says that it was not his obligation to provide them and, so far as he is concerned, there are none (although he does not say specifically whose obligation it was to prepare them or how they could be prepared without information from MBR).
On any view the absence of management accounts puts the directors of MBR, including the individual Defendants, in breach of the Shareholders Agreement albeit that the Claimant does not plead a complaint about that. In any event it seems, by reference to an email from Mr Armitage to Mr Gittins dated 18 April 2011 that as at that date what is owing to MBR from the LLPs is closer to £61,000 (Footnote: 15) (rather than the £25,000 referred to in paragraph 126 above). That email does not suggest that that money will be paid (even if the First Deferred Payment is made). Mr Armitage suggests that Armitage Jones will hold the money “effectively as working capital of MBR”.
It is also right to record that perhaps more fundamentally, the Claimant’s position is that actually the obligation to produce accounts rested on the Defendant – that, after all, is what is stipulated in clause 4.1.2 of the Shareholders Agreement. Mr Armitage says that it was agreed that Mr Noble and subsequently a Mrs DeDominicis would deal with the preparation of these management accounts. He demonstrates that by reference for example to an email from Mr Sampson of 1 February 2011 wherein Mr Sampson tells Mr Armitage that Marlene DeDominicis is “going to pick up the admin/finances for MBR. On the other hand, even as late as 26 October 2001 Mr Nuttall is emailing Mr Armitage for “up to date management accounts from the date the transaction was first done, showing all billing, cash received, work in progress and up to date balance sheet”
It has to be said that the evidence generally highlighted does not portray a picture of cooperation and amenability on the part of Mr Armitage. Even if it was agreed that the accounting function would be undertaken other than by MBR, in my judgment it was incumbent on him to supply that information whether requested or not. No information was provided from January 2011 to August 2011 save for some details sent to Mr Gittins in April.
Because it was Mr Armitage’s own evidence I am satisfied that he did not send information because he felt it was pointless and he was frustrated. That would not be a justification for departing from what, even on his evidence, he says was agreed. In my view in this context there has been a failure by Mr Armitage and thus the Defendants to comply with the contractual obligations assumed by them either to supply information when requested or, if the agreement under the Management Services Agreement was varied, by a failure simply to supply the information necessary to enable the management accounts to be prepared on a regular basis.
Failure to promote the Montpelier Brand
It has to be said that not a great deal of the oral evidence was devoted to this issue and I do not intend to do so in this judgment (Footnote: 16). The complaint is that the Defendants were continuing to trade under the style or auspices of Armitage Jones and/or LPA Direct in breach of the Management Services Agreement and the Asset Purchase Agreement. The complaint is pleaded at paragraphs 27 and 37 of the Particulars of Claim and countered in at paragraphs 84 and 95 of the Amended Defence and Counterclaim. Mr Nuttall deals with it from paragraph 51 of his witness statement. The essence of the complaint is that the Defendants had not done what they should to ensure that MBR was “client facing” rather than Armitage Jones and/or LPA Direct, they had not liaised sufficiently with other personnel in the Montpelier Group nor taken sufficient steps to raise the Montpelier profile.
Both Mr Jones and Mr Armitage gave evidence of the steps that they had actually taken to enhance the visibility of both the Brand and MBR in terms of client relations, networking, publicity events, a brochure, a newsletter and PR generally and that evidence was not the subject of extended challenge. Essentially the essence of the complaint was that it was not enough and the Defendants could and should have done more.
I have difficulty in concluding that this complaint is made out at least to the extent of any material breach in so far as it relates to matters other than those concerning letters of engagement and invoices. Even as regards those I remind myself that the unchallenged evidence appeared to be that correspondence with clients was, other than the initial letter of engagement and the invoice, on Montpelier stationery and the invoices at least were accompanied by Montpelier time sheets.
The Individual Defendants’ evidence was that at the outset their commitment was total. It is reasonable to ask why would it not have been? The unchallenged evidence of Mr Armitage and Mr Jones was that they were excited by the prospects for MBR which they saw as being greater than for Armitage Jones and LPA Direct alone and of course the individuals, and perhaps Mr Armitage in particular, were exercised by the fact that a successful MBR may well provide a lucrative exit route on retirement. Mr Gittins had an answer to that question. He felt that the individuals were holding back fully on their commitment until they had the whole of the £500,000 purchase price. That however would have been a particularly high risk philosophy bearing in mind the wording of clause 3.3 of the Asset Purchase Agreement and the possible effect of that wording as set out in paragraph 79 above.
I have not been presented with much in the way of evidence as to what the Individual Defendants could have done but did not do other than visit more Montpelier offices, not use Armitage Jones or LPA Direct email addresses and change a LinkedIn profile (Footnote: 17) and a website forum so that they referred to MBR (Footnote: 18).
I remind myself that the evidence of the Individual Defendants is that in terms of promotion of the brand they had to contend with the fact that the brand had suffered reputational damage by Mr Gittins’ arrest and the issuance of various winding up petitions against Montpelier companies and that this was not only a problem with regard to the recruitment and retention of clients but it was affecting morale in the Montpelier group companies and therefore the motivation of personnel to wholeheartedly buy into the project.
Subject to the matter of invoices and letters of engagement I am not satisfied that the Claimant has established that the Defendant were in breach of their obligation to promote the brand during the relevant time. Having regard to the totality of the evidence on this issue I have concluded that it is simply insufficient to justify the opposite conclusion.
I also note that in any event from 31 December the Claimant was in breach of its obligation to pay the remaining £250,000 and from 24 January the Defendants suspended their obligations under the Management Services Agreement pursuant to clause 12.
Breach of general duty as directors.
Mr Jory in his opening note from paragraph 41 points out that the Particulars of Claim do not specify precisely which actionable breach of duty is referred to. It is merely asserted that the matters that the Claimant pleads as giving rise to a breach of contract are equally a basis for contending a failure by the Individual Defendants to act in accordance with their statutory duties under ss171 to 177, Companies Act 2006.
It is the case that the Individual Defendants did much that cannot be seen to have been in the best interests of MBR. For example;
On 14 April 2011 they demanded payment from MBR of the First Deferred Payment threatening to take “appropriate action to protect our position” if payment was not made.
On 21 April 2011 the Defendants’ solicitors formally demanded that payment (and served a further notice on MPL in their capacity as guarantor).
On 24 January 2012 because the Second Deferred Payment had not been made Armitage Jones appointed receivers over the goodwill of MBR pursuant to the debenture already referred to (Footnote: 19).
On 24 January 2012 Armitage Jones and LPA Direct suspended their obligations pursuant to clause 12 of the Management Services Agreement.
In February 2012 Armitage Jones offered the receivers £5,000 for the goodwill of MBR which essentially it and the other Defendants had sold to MBR 18 months previously for £500,000.
On 18 May 2012 Armitage Jones and LPA Direct give notice to terminate the Management Services Agreement.
On 14 June 2012, the receiver having withdrawn, Armitage Jones, as security trustee take possession of the goodwill of MBR charged by the debenture and assume ownership of that goodwill with liberty, as Mr Armitage sees it, to deal with it as he and Mr Jones see fit.
In addition, on their own admission, the Defendants did not account to the Claimant for the money to which the Claimant was entitled – even though there were concerns as to the solvency of MBR.
Mr Myerson argues that in a position like this where the Individual Defendants, as directors, are in conflict with the Company they should resign because remaining in place is inconsistent with their duties as directors. As a general rule that must be so but by s175(3) of the 2006 Act the duty to avoid a conflict of interest does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company. Each of the steps referred to in 140.1 to 140.7 above would in my judgment fall into that category. On that basis the Individual Defendants were not obliged to resign and were not precluded from seeking to protect their conflicting interests.
I note that the minutes of the board meeting held on 24 September 2010 when the deal was completed record that each director made the declarations of interest required by s177 of the 2006 Act although it is axiomatic that these would have been known in any event since the incorporation of MBR and the consequent board meeting were a natural consequence of the arrangement made by the Defendants with MBR.
However, the failure to account for monies belonging to MBR cannot be justified by any “transaction or arrangement”. I have already found that in fact from the point that the bank account was opened, albeit in the IoM, there should have been no need to account because all monies in payment of invoices should have gone direct to MBR because it should have raised them. Where those contractual terms were in practice reversed then there inevitably arose a need to account, even so far as that reversal was a consensual arrangement.
It is indeed arguable that there was requirement to account for 100% of monies received on the basis that the agreement envisaged that the amount due to Armitage Jones and/or LPA Direct would be paid against an invoice raised by them. Whether that is so or not it is clear in my judgment that Armitage Jones and LPA Direct should at least have accounted for that part of the invoiced amount to which MBR were entitled under the Management Services Agreement. Failing to do so cannot in my view be seen as acting in the best interests of MBR, even if the threat of winding up petitions from HMRC could be said to cast doubt on its solvency, as I think Mr Armitage suggested. In such a case it is trite law that the interests of the company also include the interests of its creditors (Footnote: 20). Certainly the Management Services Agreement did not allow Armitage Jones and/or LPA Direct to retain money just because payment of the purchase price of the goodwill had been partially deferred.
What loss has been suffered by reason of the breaches?
There is a Claimant’s schedule of loss in the Core Bundle at tab 21. It has been prepared by reference to the conclusions of a jointly appointed expert, Mr Chris Clements. He has produced 2 reports respectively dated 12 September 2013 and 30 January 2014 and a Response to Part 35 questions dated 30 June 2015.
The Schedule of Loss calculates loss on the basis of what is due to the Claimant out of the invoices wrongly rendered by Armitage Jones and LPA Direct. It makes the calculation based on 2 separate methods namely Method 1 and 2. Method 1 is based on a split of fees between the Claimant on the one hand and Armitage Jones and LPA Direct on the other in the ratio 30%/70% in the Defendants favour on the basis that, although this was not strictly how fees were meant to be divided pursuant to Schedule 1 of the Management Services Agreement, it was actually, in practical terms, the method of apportionment that the parties worked to. Method 2 apportions fees strictly in accordance with Schedule 1 of the Management Services Agreement.
In addition the Schedule of Loss assumes that the Management Services Agreement is still effective and that thus losses are continuing. It quantifies that loss by generating an extrapolation to 2 November 2015 based on the Fees Claim. The significance of this date is that it was presumably assumed to be the date when the trial of this matter would have concluded. (Footnote: 21). Various deductions are made from the resultant figure to reflect commissions and expenditure to which the Defendants may have been entitled. The resultant claim is in the sum of £744,693.34 plus interest on the basis of Method 1 and £763,807.94 plus interest under Method 2. The parties have however agreed that the Method 2 figures should be regarded as the relevant figures for a calculation of damage.
In addition the Claimant claims for loss of value of the Claimant Company on the basis that the breaches by the Defendants have entirely stripped it of its value which, but for the breaches, would have been £1million as at 31 December 2012 and, based on the assumption that the Claimant would have traded as planned under the Management Services Agreement and would have continued to do so until trial, that value would have been £1million at the date of trial but is now nil.
Mr Jory takes issue with this schedule (which he describes as extraordinary) for a number of reasons;
He suggests that the Management Services Agreement was terminated on 18 May 2012 by notice of that date (Mr Myerson contends that that notice was ineffective).
In any event Armitage Jones and LPA Direct ceased trading in 31 December 2012 and further both went into liquidation on 25 February 2015.
A claim by the Company against its shareholders for loss of shareholder value is not sustainable (Footnote: 22).
The claim for loss of value of MBR ignores the principle upon which damages for contractual breach are based namely that damages must be no more than is necessary to put the wronged party in the position it would have been in had the defaulting party performed the contract.
The valuation of MBR at £1million whether as at 31 December 2012 or at trial is simply not sustainable and is not supported by the single joint expert who in his second report at paragraph 7.55 assesses the market value of MBR at nil even on the basis that the deal had proceeded as planned. In paragraphs 7.23 to 7.26 of his second report he refers to the fact that the value of MBR is related to the continuing preparedness of the Individual Defendants to work for MBR.
At paragraph 7.26 he says
“it is my opinion that the earnings of the Claimant as derived from the acquired goodwill would only have an open market value if the Individual Defendants agreed to work for the buyer of the Claimant. If the Individual Defendants were not prepared to join the new buyer then it is my opinion that the Claimant would have no value”
Mr Jory points out that even if the Management Services Agreement was not terminated on 18 May then, pursuant to clause 2.3, it was in any event terminable on 6 months notice after the first year and there are no post termination restrictive covenants that would bind the Individual Defendants.
The claim for loss of value of MBR and the extrapolated claim for ongoing fees are inextricably linked therefore with the status of the Management Services Agreement and whether it was terminated.
Was the Management Services Agreement terminated on 18 May 2012?
The purported letter of termination was sent on 18 May 2012 and is in bundle 8 tab 514. It makes reference to clause 12.1 of the Management Services Agreement and so it is not purporting to be a termination under clause 2.3, albeit that such a notice could have been served since the Management Services Agreement had by then been in effect for longer than the 12 month period mentioned in that clause.
The notice indicates that termination is with immediate effect; that would not have been possible under clause 2.3. A notice served under 12.1 could only be served in the event that one of the matters set out in sub clauses 12.1.1 to 12.1.3 had occurred. By implication therefore the notice can only have been served pursuant to 12.1.3 following the appointment of the receivers in the preceding January.
Mr Myerson argues that the notice is ineffective. He contends that for a number of reasons. First, because it contains no reason for the termination other than that it is pursuant to clause 12.1. However the Management Services Agreement does not specify that the notice has to say which particular sub clause in clause 12.1 is invoked to justify termination without notice and in any event by a process of deduction that could have been deduced by MBR and indeed it was so deduced. On 21 May Mr Nuttall emailed the Individual Defendants and said
“which part of 12.1 do you think gives you the ability to terminate?
There are 3 reasons given. The first 2 are clearly not applicable. And the third was an appointment by you which is and will be the subject of litigation as you had no right to appoint.
Please try harder
Notice is rejected as inadequate and I remind you once again that you are still under contract”
In fact, on the basis that MBR could only avoid liability to pay the Second Deferred Payment of £250,000 if it had served notice under clause 3.3 before the end of December 2011 (as I have found to be the case) Armitage Jones was entitled to appoint a receiver under the debenture in January 2012. Whether it was expedient or justifiable in the broad sense is not the issue. It was entitled to do it and no declaration has been sought by MBR that the appointment was invalid. (Footnote: 23)
Equally there is nothing in clause 12.1 that requires any notice served consequent upon the appointment of a receiver to be served within a specific period after such appointment. Mr Jory suggests that that makes sense. It may well be appropriate to appoint a receiver and then wait and see whether that appointment resolves matters before taking the step of bringing the Management Services Agreement to an irredeemable termination.
Secondly, Mr Myerson contends that the notice of 18 May is ineffective because it has been overtaken by MBR’s own notice of 9 March 2012. It is not clear to me why the service of that notice should invalidate the Defendants’ notice of May terminating the Management Services Agreement. The notice of March related to the Asset Purchase Agreement and was sent pursuant to clause 3.3 of that agreement. True it is that it complained of breaches of the Management Services Agreement but that was because the opinion had to have been formed that the Management Services Agreement had been breached before MBR could send the notice under the Asset Purchase Agreement. I do not read the letter of 9 March as affecting the Management Services Agreement directly and so I am not persuaded that that notice rendered invalid a subsequent notice that related to the Management Services Agreement.
Accordingly I am satisfied that the Management Services Agreement was terminated by no later than May 2012.
In any event, and while this is not in any sense determinative, I add that I notice that, pursuant to clause 12.1 of the Management Services Agreement, that agreement was suspended by Armitage Jones and LPA Direct by notice to take effect on 24 January 2012. That had the effect of suspending the obligations of Armitage Jones and LPA Direct under the Management Services Agreement. I was not referred to any evidence, documentary or otherwise, that that suspension was ever lifted. If that is the case then it was as good as terminated in January. I would add that it is also difficult to imagine that MBR would have had any open market value, bearing in mind the importance to it of the Individual Defendants where their requirement to provide services under the Management Services Agreement had been suspended.
Further, I would add that there is much force in my view in Mr Jory’s argument that by May the Defendants had, by their conduct, terminated the MSA because it was not complied with thereafter. The failure to give 6 months notice does not render the termination ineffective; it merely gives rise to a claim for damages for losses arising out of the failure to give such notice. However it is argued that in any event the Defendants are prepared to credit MBR with what would have been its share of fees earned by Armitage Jones and or LPA Direct up to the point they ceased trading which almost coincides in fact with 6 months from service of their notice of termination.
In the circumstances I am not satisfied that there is any claim for loss of value of the company even if it is sustainable in law. I am persuaded that the market value of the company was nil, for the reasons set out by the expert namely that any value was dependent on the preparedness of the Individual Defendants to continue to work in MBR pursuant to the Management Services Agreement. In fact I am satisfied that the Management Services Agreement was terminated in May but even if it was not, the fact that it could have been terminated on 6 months notice served with or without reason and that in any event the Management Services Agreement had been suspended by notice in January, in effect depleted the company of any real value despite the fact that the company had paid £500,000 for the goodwill of Armitage Jones and LPA Direct.
In reaching this conclusion I am guided by the following 2 cases;
The Mihalls Angelos (1971) 1QB 164 at 202. This was a case on anticipatory breach but the general principle enunciated must have a wider application. Edmund Davies LJ had this to say;
“What would the position of the parties have been if the defendant had not wrongly announced his refusal to fulfil his part of the contract when the time for performance arrived? One must look at the contract as a whole and if it is clear that the innocent party has lost nothing, he should recover no more than nominal damages for the loss of his right to have the whole contract completed. The assumption has to be made that, had there been no anticipatory breach, the defendant would have performed his legal obligation and no more. A defendant is not liable in damages for not doing that which he is not bound to do”.
In Comau UK Ltd v Lotus Lightweight Structures Ltd (214 EWHC 2122 (Comm) reference was made with approval to Chitty On Contracts 31 ed at 26-074
“if a defendant fails to perform when he had the option of performing the contract in one of several ways, damages are assessed on the basis that he would have performed in the way that benefitted him most. E.g. at least cost to himself… A similar situation arises where a contract breaker had an option to terminate a contract: if the claimant accepts the anticipatory breach of the defendant as a ground for terminating the contract, but the defendant could have exercised an option to terminate the contract so as to extinguish or reduce the loss cased by the anticipatory beach the court will assess the damages for breach on the assumption that the defendant would have exercised the option”
I do not overlook that the expert values MBR not just on an open market basis but also on the basis of its value to the parties. At paragraph 7.17 of his second report he states that that value would be £1m but it is based upon the assumption that the Claimant was trading as anticipated. In the light of the suspension of the Management Services Agreement and the subsequent termination that assumption cannot be sustained with the result that even on this basis the value is nil.
For identical reasons the extrapolated claim for fees on an ongoing basis after December 2012 cannot be supported. Any entitlement to fees terminated when the agreement was terminated. (Footnote: 24)
I appreciate that these findings will be a disappointment to the Claimant but it has to be said I think that it is open to question whether MBR entered into a sensible bargain when it agreed to pay the Defendants so much money essentially for their goodwill without tying in the Individual Defendants either by a requirement to give considerably more than 6 months notice after year 1 or imposing restrictive covenants on them to protect the legitimate interests of MBR. That however is not, and cannot be, the issue.
Losses arising from established breaches
First, while it is true that it was suggested in the Claimant’s solicitor’s letter of 9 March that the Defendants had been making a secret profit at the expense of the Claimant that does not appear to have been pursued at trial. No suggestion was made that fees other than those for which the Defendant are prepared to account have been earned.
Secondly, I have rejected the allegation that the Defendant failed to promote MBR in a manner that breached the Management Services Agreement other than in so far as Armitage Jones and LPA Direct sent out their own invoices and engagement letters (as to which see paragraph 167 below). In fact however it was not challenged that the services they offered to clients between those two points in time was done by the Individual Defendants as MBR and of course the invoices were accompanied by Montpelier time sheets.
As regards the fact that billing in the name of Armitage Jones and LPA Direct itself contravened the Management Services Agreement the fact is that the Defendants constant position is that they have always been willing to account for the monies received as a result of that billing. They have never concealed the billing and it is not suggested that fees have been earned other than through the disclosed billing.
In the circumstances I am not persuaded that substantive losses have arisen in so far as there has been breach. I should say for completeness that I realise that on the facts of this case MBR has been kept out of its money. Often being deprived of cash flow can cause loss but in this case there has been no evidence that that was so. Perhaps this is not surprising, I take account of the fact that MBR did look to MPL and Mr Gittins for financial support. Mr Gittins was candid enough to agree that if MBR had been unable to pay either the first or Second Deferred Payment then that money would have been made available to MBR, as indeed was the money to make the initial payment of £150,000.
Finally I am not persuaded that MBR has sustained a substantive loss by virtue of the one example of breach of directors’ duty of which I have concluded they were guilty (Footnote: 25). For the same reasons as I set out in paragraph 168 above.
I remind myself of the provisions of s178(2) Companies Act 2006 which provides that the duties of a directors are enforceable in the same way as any other fiduciary duty. I have therefore considered whether damages for the breach of directors’ duty which I have found would be different if considered on the restitutionary basis often applied to claims for breach of a fiduciary obligation. I have concluded that there is no evidence that the breach gave rise to a gain to the Defendants. In short, in my view the breach caused no loss to the Claimant and no gain to the Defendants.
Deductions from the £250,000 due that are permissible pursuant to the Schedule to the Management Services Agreement
Under Method 2 the gross amount of fees to which the Claimant is entitled to 31 December 2012 when Armitage Jones and LPA Direct ceased trading is £365,625.29 from which the Claimant agrees that the Management Services Agreement supports deductions totalling £102,227. The net claim therefore on the Claimant’s case in respect of accounting fees is that it is owed £263,398. On that basis even with a set off of the £250,000 that I have found it owes to the Defendants the Defendants would be liable to the Claimant for £13,398.
The Defendants however assert that from the gross fees outstanding by it of £263,398 further deductions totalling £64,490 (The Disputed Deductions) are permissible with the effect that the Claimant owes the Defendants £51,093. (Footnote: 26)
The Disputed Deductions
Mr Armitage deals with these in a third witness statement at core bundle 2 page 343a and they are also dealt with in Mr Myerson’s opening from paragraph 39 and Mr Jory’s from paragraph 62.
I should make clear that, as I understand it, I am to approach the question of these deductions on the basis that all that is in issue are those specifically identified by Mr Jory as the issues namely two invoices numbered 965 and 940 and the issue of recorded but unbilled time.
I acknowledge that Mr Myerson’s in his submissions has referred to other issues; in particular surrounding a receivership at Soil Hill and indeed that was alluded to in the evidence. However, in the end it seemed to me that counsel appeared to be agreed that for the purpose of determining what deductions from the £250,000 were permissible (if I found that £250,000 was indeed owed) the matters for determination were the Disputed Deductions. I note for example that in paragraph 40 of his opening the only potential adjustments that Mr Myerson refers to are invoices 940 and 965 and 2 others that I believe would only be relevant if Method 1 was the appropriate methodology to be used. As I have said, it has been agreed that the expert’s Method 2 is the one to be adopted in this case.
Invoice 965 Improvement Foundation and Invoice 940 Profile Park
Under the Asset Purchase Agreement there is excluded from sale all book debts owed to Armitage Jones and LPA Direct at the time of completion. The Asset Purchase Agreement defines book debts as
“all book and other debts arising out of or attributable to the operation of (Armitage Jones and LPA Direct) owed to (the Defendants) on completion”.
Clause 4 of the Asset Purchase Agreement deals with work in progress. It requires the level of work in progress to be agreed and on payment of an invoice raised after completion the monies will be apportioned on the basis that that apportioned to pre completion work in progress will accrue to Armitage Jones and/or LPA Direct.
It is contended that Invoice 965 and 940 are debts arising out of the operation of Armitage Jones and LPA Direct before completion and are book debts or are otherwise due to the Defendants as pre agreement work in progress.
Invoice 965
Invoice 965 refers to the appointment by Improvement Foundation UK Ltd of Armitage Jones and LPA Direct to advise on the closure of a business. The appointment was well before completion. During the course of his work, Mr Armitage realised that the client could make a claim for repayment of £1.2million of corporation tax. A claim was submitted to HMRC on a contingency basis in the sense that if it was successful Armitage Jones and/or LPA Direct would be entitled to 12.5% of the rebate payable when the rebate was made.
A success fee appointment letter was signed by Improvement Foundation on 23 April 2010. Mr Armitage makes clear in his witness statement at paragraph 12 that the arrangement was not concealed from the Claimant. Heads of Terms discussed in July 2010 make it clear that Armitage Jones and LPA Direct will retain all accrued value up to the date of completion in respect of matters ongoing at completion and an attendance note dated 20 September 2010 prepared by Lupton Fawcett who acted for MBR states that Armitage Jones and LPA Direct are expecting to receive 100% of that fee in respect of Improvement Foundation who are referred to by name in the note. In addition, Improvement Foundation is listed in Schedule 1 of the Asset Purchase Agreement as a “Client Engagement” (Footnote: 27).
All work in connection with the rebate was done before completion and was actually invoiced in respect of recorded time on 29 September 2010 (with the result that there was no WIP per the time records after 29 September as it had all been invoiced (Footnote: 28)). However, the rebate itself as made by HMRC to the Foundation on 28 February 2011, after completion and accordingly the invoice in respect of the rebate was invoiced on 4 March 2011.
The Defendants’ contention is that as a matter of construction it falls within the definition of a book debt even though not owed as at completion, alternatively, it was work in progress.The Claimant argues that there was no book debt at completion because nothing was owed to Armitage Jones or LPA Direct at completion. Nor does it accrue to the Defendant as work in progress because the level of WIP was not agreed as clause 4 envisages.
In my view if it were not a book debt because strictly it was not owed at the time of completion then it was work in progress. It is as well to set out clause 4.2 of the Asset Purchase Agreement
“at completion the buyer and the seller shall agree in writing the level of work in progress accrued as at Completion Date on each of the Client Engagements Upon payment of an invoice relating to a Client Engagement the fees received by the buyer……. shall be apportioned on the basis that work in progress accrues prior to the completion date shall be due to the Sellers and all other fees shall be due to the Buyer”
I do not see that this clause stipulates that work in progress shall only be dealt with in this way so long as it is agreed. In other words I do not accept that the meaning of work in progress is defined by the necessity to agree it at completion. The clause is simply intended to clarify how work in progress is to be apportioned. It would be unnecessarily restrictive to conclude that if the level is not agreed at completion then it is not work in progress.
If I am wrong in that then in any event the fact that the issue was raised with the Claimant’s solicitors and recorded in the note of 20 September would in my view meet the requirement for the level of work in progress as at completion to be agreed. Since there is no evidence that the Claimant demurred from the contention by the Defendant that they wanted and expected 100% it seems to me to be reasonable to conclude that that level was agreed.
In my view the claimant is not entitled to 30% of that invoice namely £47,330.49. That conclusion, it has to be said, also seems to me to accord with the justice of the situation where it was specifically made clear to the Claimant’s solicitors on 20 September that the Defendant expected all money in respect of the arrangement with Improvement Foundation.
Invoice 940
This is considered by the expert most particularly from paragraph 2.25 of what I believe to be Appendix 3 of his first report (Footnote: 29). This is an invoice from LPA Direct dated 23 February 2011 for £12,990 but the issue is whether the amount due to the Claimant in fees includes £1,647 being 30% of work in progress that was included in the bill.
The narrative on the invoice is “remuneration on account per month. From 11/06/11 (sic) to 28/02/11”. It is clear that the narrative should refer to 11 June 2010. On that basis, as the expert calculates, £5,490 of the invoice relates to the period prior to completion (Footnote: 30).
Mr Armitage deal with this in his third witness statement from paragraph 24. The invoice bills for work undertaken by Mr Armitage and Mr Jones as joint receivers appointed by the Bank of Ireland in June 2010in respect of a trading estate named Profile Park.
Fees in respect of their appointment were agreed with the Bank from time to time. Invoice 940 was agreed retrospectively as a fixed monthly fee. It was billed only after it had been agreed, which happened to be after completion.
The expert points out that it appears from a response that he received from the defendants to a question that he posed to them that there was no work in progress for LPA Direct as at completion because it had all been invoiced up to that date.
The point is made by Mr Jory at paragraph 74 of his opening that that response merely reflected the fact that, since at completion, the Bank had not agreed a rate at which the work could be charged then as at completion no figure could be proposed or agreed as to the value to be attributed to that work. As I have remarked above, I do not see this as a wholly convincing explanation. One might have thought that the mere fact that the rate at which LPA Direct could charge had not been formally agreed would not mean that the work done was not work in progress; it was simply work in progress whose value had not then been quantified.
It was work done which at completion had not been billed. In those circumstances it clearly was work in progress and the defendants’ response to the expert’s query does not change that reality.
The claimants argue that the level of work in progress was not agreed as clause 4.2 of the Asset Purchase Agreement required but in my view in this regard there is no basis for my adopting a line of reasoning that differs to that set out in paragraph 184 above.
Accordingly, since this clearly was work in progress because in reality it was work done before completion which had not been billed as at completion, in my judgment the Claimant is not entitled to 30% of that work in progress even though the value of it was only established after completion when the Bank and LPA Direct agreed the monthly fee. I note that paragraph 3.26 at page 61 of the expert’s bundle seems to suggest that the expert would have shared that view had matters not been complicated in his mind by the response he received to his request to the defendants for further information.
The Time recorded but no invoice issue
Mr Jory deal with this from paragraph 76 of his opening. I have been unable to find a specific reference to this issue in either Mr Myerson’s opening or in his oral opening remarks or final submissions. The issue however is identified by the expert from paragraph 3.54 of his first report and it revolves around the interpretation of clause 1 of Schedule 1 of the MSA which I set out in paragraph 40 above. The expert articulates the issue as follows;
“It is not clear from Schedule 1 of the MSA how the Fee should be calculated where there is time recorded by the Third, Fourth or Fifth Defendants which was not then invoiced. For example, the Third Defendant may incur time costs of £1000 in attending initial meetings, but which ultimately does not result in any chargeable work.
Under one interpretation of Schedule 1 of the MSA, the fee due to the Defendants under the above example would be nil ……………..
Under this interpretation the defendants would bear all the risk and cost of trying to win new work.
Another interpretation may be that the Defendants receive 50% of the time costs ie £500……... in accordance with clause 1.1.1 of Schedule 1 of the MSA but, as no fee note is raised, there is no under recovery, such that the fee would be £500.
Under this second interpretation the risk and cost of trying to win new work would be borne equally between the parties”.
In terms of quantifying this dispute it would entitle the defendants to a credit of either £23,890.67 or £15,513.42 depending on which charge out rate is used for the purpose of making the calculation. It would be a credit of £23,890 if this recorded but uninvoiced time is calculated at Armitage Jones or LPA Direct’s charge out rates but only £15,513.42 if calculated at the lower charge out rate that MBR applied to its clients. The parties appear to be agreed that in this case I should adopt the lower figure which is the alternative which favours the Claimant.
The issue must of course be decided on the basis of the meaning of the Management Services Agreement. In interpreting that once again it is necessary to have regard to the matters set out from paragraphs 62 and 63 above and the principles enunciated in Arnold v Britton. The question I must ask myself is “what a reasonable person, having the background knowledge which would have been available to the parties, using the language in the contract, have understood them to mean”
I have to say that there appears to be no real ambiguity in what the MSA says. Clause 6 imposes on MBR an obligation to pay (Armitage Jones and LPA Direct) fees “at the rate set out in Schedule 1 excusive of VAT for the provision of Services.
Schedule 1 clause 1.1.1 provides that the fees payable under clause 6 include 50% of time recorded by the Individual Defendants. On that basis it seems unambiguous that the Management Services Agreement entitles them to 50% of their time recorded after completion even though unbilled. That conclusion seems even clearer when regard is had to paragraph 1.1.2 of the Schedule which talks about remuneration referable to fees billed (as opposed to “recorded”). In addition, clause 1.1.3 switches back to time recorded, emphasising the fact that there appears to be a clear and deliberate distinction between billed time and recorded time.
In my view recourse need not be had to commercial common sense because to do so would undervalue the importance of the words used (Footnote: 31). But if commercial common sense were to be invoked it would in my view lead to the same conclusion, for the reason identified by the expert namely that under this interpretation
“the risk and cost of trying to win new work would be borne equally between the parties”.
I remind myself of the fact that the expert (who is after all a single joint expert) says in paragraph 3.56 of his first report that if no fee note is raised, there is no under recovery to which clause 1.1.3 applies. That view does not appear to have been challenged and accordingly it seems to me to be unnecessary to proceed on a different basis.
Conclusion
The conclusion is that the deductions that the Claimant is entitled to make from the £250,000 that I have concluded it owes do not exceed £198,906.72 (Footnote: 32) plus a nominal amount in respect of damages for breach of contract bearing in mind that I am not satisfied that the Claimants have established a substantive loss arising from any of the breaches that I have identified.
Leaving aside nominal damages the amount due from the Claimant to the Defendants therefore would be £51,093.28 (Footnote: 33). If nominal damages are fixed at £93.28 this would entitle the Defendants to judgement in the sum of £51,000. That is the order that I propose to make.
Final Remarks
I am grateful to both counsel for their very able assistance in this matter.
HHJ Saffman