Before :
MR JUSTICE MORRIS
Between :
BALBIR SINGH CHAGGAR | Claimant |
- and - | |
(1) RAGHBIR SINGH CHAGGAR (2) HI-TECH AUTOPARTS LIMITED | Defendants |
Richard Wilson QC and James Weale (instructed by Shakespeare Martineau LLP)
for the Claimant
Edward Pepperall QC and Marc Brown (instructed by Freeths LLP)
for the First Defendant
The Second Defendant did not appear
Hearing dates: 10, 11, 12, 13, 14, 21 July 2017
Judgment Approved
Mr Justice Morris:
(A)Introduction
The nature of the case
In this action, commenced on 30 October 2014, the claimant, Mr Balbir Singh Chaggar (“Balbir”) claims contractual sums, specific performance, and damages for breach of contract against the first defendant, Raghbir Singh Chaggar (“Raghbir”) and against the second defendant Hi-Tech Autoparts Limited (“the Company”). Balbir and Raghbir are brothers and at all material times they were directors and shareholders in the Company, which carried on business in the manufacture and sale of automobile parts. They were also partners in a property business, Delta Properties Partnership (“Delta”).
Balbir’s claim arises out of a written agreement dated 25 April 2012 (“the Agreement” or “the ISA”), which, effectively, he seeks to enforce. The Agreement was entered into following a dispute between the two brothers concerning the operation and assets of the Company. In broad terms, the Agreement provided that the interests of Balbir and his wife in the Company and in Delta would be bought out for the sum of £1.6 million payable in instalments. In addition Balbir was to receive £60,000 by way of dividends, following which Balbir would give instructions to unfreeze the Company’s bank account. The Agreement further contemplated that a more detailed settlement agreement (referred to as the “SA”) was to be concluded by the parties. Following the Agreement, Balbir was paid the £60,000 and the bank account was unfrozen. However, thereafter the parties did not agree the SA, the interests of Balbir and his wife in the Company were not transferred and they did not receive contractual sums said to be due under the Agreement. Balbir now seeks payment of the substantial part of those contractual sums. Raghbir contends that he is not bound by the Agreement for a number of reasons set out in paragraph 14 below.
The structure of this judgment
In the rest of this section (A), further background is set out, including the parties, the terms of Agreement itself, the parties’ contentions are summarised and the five issues are identified. The section concludes with an outline of the facts. Section (B) sets out the parties’ contentions in more detail. Section (C) addresses the evidence before the Court. Section (D) is a detailed factual chronology, including certain findings on disputed issues of fact. Section (E) then goes on to discuss and analyse each of the five issues. My conclusions are set out at paragraph 276 below.
The parties and their families
Balbir is now aged about 67. Hardev Kaur Chaggar is his wife. He has two sons: Manveer Singh, who had been married to Sumeet, and Sukhdeep.
Raghbir is Balbir’s younger brother. Valvinder Kaur Chaggar is his wife. He has two sons: Kiran Chaggar (also known as Chubby) and Gaggandave (also known as Dave or Sunny). Gaggandave was married to Rakhee Sethi. Her father is Harbinder Sethi.
The Company was incorporated in 1983. Balbir and Raghbir had another brother Jasbir, who was also formerly involved in the Company. He died in 2004 and in 2005 Balbir and Raghbir purchased his shares in the Company for a total consideration of in the region of £1.6 million. From that time on, the Company was effectively owned and run 50/50 by the two brothers and their respective families. Balbir’s 50% share was held as to 33.3% by him (20 shares) and as to 16.7% (10 shares) by Hardev Chaggar. Raghbir’s 50% share was held as to 33.3% (20 shares) by him, as to 6.7% (4 shares) by his wife and as to 10% (6 shares) by Kiran. Kiran started work with the Company in January 2007 and became part of senior management in 2010. The Company entered administrative receivership in June 2014. That receivership was completed on 26 August 2016. The Company has no assets.
As regards Delta, Balbir and Raghbir owned a number of commercial investment properties which were operated through that partnership.
Others
At the material times, the Company and Delta banked with the Yorkshire Bank (“the Bank”), part of the Clydesdale Bank. Until late 2012, Paul Elliott was the manager at the Bank dealing with the Company’s and Delta’s affairs.
Deepak Johar is a solicitor who at the relevant time was carrying on in practice under the name Johar & Co. He was a family friend of the two brothers, and had dealt with their legal affairs for many years. He was particularly close to Raghbir. There is an issue of fact as to the capacity in which he was acting during the course of the relevant events in April and May 2012.
Rishi Chandarana, was a director of BPC Chandarana & Co. Limited, which at material times was the Company’s accountants and advised the brothers, in particular, as to the structure of a possible buy-out previously discussed in 2011 and early 2012.
Clarke Wilmott is a firm of solicitors, who at material times acted for Balbir. In particular, Simon Thomas, managing director of that firm, and Desmond Carr, an associate, were involved in relevant negotiations. Subsequently in the course of events, Balbir instructed other legal representatives, Gateley and a direct-access barrister. Wragge & Co is a firm of solicitors, who at material times acted for Raghbir. In particular Andrew Nugent Smith of that firm was involved in negotiations. Subsequently, the firm of Freeths LLP started acting for Raghbir.
The Agreement
The Agreement provided as follows:
“Initial Settlement Agreement dated 25 April 2012
The signatories to this agreement hereby agree as follows:
1. Hi-Tech Auto Parts Limited (company number 01770948) (Hitech) hereby agrees pay to Balbir Singh Chaggar (BSC) £60,000 on signature of this agreement, by way of dividend payments to the extent it is lawfully able to do so, on condition the bank accounts of Hitech and Delta Properties Partnership (Delta) are unfrozen and BSC and Raghbir Singh Chaggar (RSC) agree to write as directors of Hitech and partners in Delta to the bank in the following terms:
“We hereby authorise you to unfreeze with immediate effect the above accounts and pay Balbir Singh Chaggar by transfer into his account (BS & HK Chaggar, Sort Code 05 05 67, Acc No 45138236) the sum of £60,000 from Delta Properties (Name Account Number & sort code to be completed [then added in manuscript and initialled] RS + BS Chaggar T/A Delta Properties Acc No 49363203 sort code 05-0381
Please also accept this letter as authority to withdraw the internet banking facility for Delta with immediate effect.
We confirm that the dispute between us is settled and, subject to detailed legal documentation being entered in to between us, Balbir Singh Chaggar will not seek to freeze the above accounts at any time in the future.
Please confirm receipt of this letter and that it has been actioned as requested by return.”
2. Hitech and/or RSC will pay to BSC a total aggregate consideration of £1.6m split £800,000 for BSC and Hardev Kaur Chaggar’s (HKC) shares in Hitech and £800,000 for BSC’s interest in the properties held in Delta, payable as follows:
a. £300,000 on or before 31/12/12
b. £425,000 on or before 31/12/13
c. £425,000 on or before 31/12/14
d. £450,000 on or before 30/04/15
In case of any default in such payments BSC and HKC may give to Hitech and RSC parties 3 months notice in writing to pay the amount due at the time and failure by the other parties to do so will render the balance remaining from the aggregate consideration due and payable immediately, and in addition to any other remedies available to BSC but giving due credit for any payments already made under this agreement, if requested by BSC RSC agrees to jointly instruct alongside BSC an agent to sell at the then prevailing market value such of the properties held in Delta in order to satisfy the outstanding consideration, then due. Interest 5% over base rate in case of default only but not otherwise, with the deferred aggregate consideration being interest free.
3. BSC and HKC’s shares in Hitech will transferred to Hitech by them signing the share transfer forms to be held in escrow by Clarke Wilmott LLP which shall be released pro rata as follows:
a. 10 shares in Hitech on payment of the sum at 2a
b. 10 shares in Hitech on payment of the sum at 2b
c. 10 shares in Hitech on payment of the sum at 2d
4. The parties are to seek their own tax advice and have confirmed that they are not relying on any legal or financial due diligence considering this unnecessary but the parties are willing to cooperate in relation to implement any reasonable tax planning that is not to their detriment, if such advice recommends that the properties held in Delta should be transferred to an SPV or any other reasonable tax mitigation solutions, in which case then the release of any shares owned by BSC in such SPV will be on the same basis as in clause 3 above.
5. For the avoidance of any doubt BSC and HKC will transfer any shares in Hitech or the SPV if formed to Hitech subject to the parties obtaining HMRC approval and BSC will transfer the properties owned by Delta to RSC or any nominee of his upon full payment of the aggregate consideration of £1.6m.
6. Pending the payment of £1.6m Hitech and Delta will pay a monthly sum of £4000 to BSC towards the sum of £1.6m from 1 month of the date more detailed settlement agreement referred to at clause 16 below (SA), which will be deducted from the sums payable to BSC and HKC at 2b, c & d. For the avoidance of doubt the total amount payable (excluding the initial dividend payment of £60,000) will be £1.6m.
7. BSC will resign as director of Hitech on the date of the SA but will continue as director of any SPV holding the Delta Properties until payment of the consideration of £800,000.
8. On the date of the SA, the Bank mandates will be changed as follows:
a. BSC to be removed from the mandate for Hitech.
b. BSC to remain on the mandate for Delta or its SPV until payment of £800,000. BSC to operate the mandate only on the basis of two authorised signatories and in the event of any dispute will authorise Rishi Chandarana of BPG (RC) to operate the mandate as RC deems appropriate.
9. RSC hereby agrees to indemnity BSC in respect of any tax payable in respect of his share of land and property in Romania sold by RSC.
10. Each party shall be responsible to pay his/her tax as appropriate, in case of any dispute the decision of BPC will be final.
11. The SA will also incorporate suitable provisions in relation to the following:
a. The settlement terms in the SA are in full and final settlement of all claims each party or its affiliates have against each other whether known or unknown subject only in case of fraud.
b. BSC will cooperate and agree to any sale of the Delta properties to enable RSC to make payments towards the aggregate consideration net of any sale costs and payments required by the bank.
c. From the date of the SA BSC and HKC will not be entitled to any further monies by way of income, interest or capital except the monthly sum at 6 above.
d. BSC will undertake not to freeze the bank accounts of Hitech Delta or any SPV now or at any time in the future.
e. The parties will do all such acts and things necessary to give effect to the SA and in the most tax effective manner.
12. In the event Hitech or Delta does not pay any sum due under this agreement or the SA, or part of it, including for the avoidance of doubt the £60,000 referred to in clause 1 above, RSC hereby guarantees such payment as principle obligor and will upon written demand by BSC, pay the amount outstanding to BSC or as he shall direct.
13. Each party is to bear its own legal costs except:
a. Hitech will pay BSC’s costs to date estimated at £2,400 plus VAT plus his costs of approving the SA subject to an estimate being provided and agreed by RSC and the invoices being addressed to Hitech.
b. Hitech and/or RSC will pay Johar & Company’s legal fees.
14. Subject to the detailed SA being entered in to by the parties within 14 days of the date hereof, the parties will immediately cease all communications directly or through their solicitors and to or from any third parties except to finalise and agree the terms of the SA and BSC undertakes not to freeze the bank accounts of Hitech Delta or any SPV now or at any time in the future.
15. The terms of this agreement and the SA will be kept confidential by the parties and there will be a non disclosure provision and a provision that BSC HKC or any persons authorised or at their direction do return all documents/data and not disclose copy etc any confidential information belonging to any of the other parties.
16. The parties agree and acknowledge that this agreement shall give rise to legally binding obligations on them, notwithstanding that a more detailed SA will be put in place as soon as reasonably practicable (and in any event within 14 days) following the date of this agreement. Once entered in to, the parties agree and acknowledge that the SA will supersede the terms of this agreement and the parties hereby agree to act in good faith in order to put in place the SA as soon as reasonably practical.
This agreement is dated 25 April 2012 and the Parties hereby agree to be bound by its terms with immediate effect.
Signed by Balbir Singh Chaggar:
Date: 25.04.2012
Signed by Raghbir Singh Chaggar:
Date: 25.04.2012
Signed by Raghbir Singh Chaggar on behalf of Hi-Tech Auto Parts Limited (Company number 017709480)
Date: 25.04.2012”.
The parties’ contentions in summary
Balbir’s Case
Balbir contends that the ISA remains valid and binding and that the contractual sum due to him under the ISA remains outstanding. Whilst initially the claim made was one for damages for breach of contract and/or specific performance of the ISA, by the close of the case, the primary relief sought is payment of the contractual sum due, less the sums in fact received upon realisation of the assets of Delta.
Raghbir’s Case
Raghbir denies liability on the following grounds:
The ISA was not a binding agreement. There was no sufficient intention to be bound, alternatively it was an agreement to agree, alternatively there was a failure to agree essential terms such that the agreement was not workable or sufficiently certain.
If the ISA was otherwise binding, it was void as constituting an agreement by the Company to purchase its own shares contrary to the prohibition in s.659 Companies Act 2006 (“CA 2006”).
In any event the ISA was procured by economic duress and was avoided.
If the ISA was otherwise binding, it was discharged as a result of Balbir’s repudiatory breach.
Alternatively, Balbir is estopped now from relying upon the ISA.
Balbir’s Reply
Balbir disputes each of Raghbir’s grounds of defence:
The ISA was a binding agreement; there was an intention to create legal relations, as made clear by Clause 16, and the terms of the ISA are clear, certain and workable.
There was no breach of any provision of the CA 2006. The ISA did not require the Company to purchase its own shares and in any event there was a lawful mechanism by which the Company could have purchased its own shares.
The ISA was not concluded as a result of economic duress and in any event Raghbir affirmed the ISA.
The matters relied upon by Raghbir did not constitute a repudiation of the ISA. In any event, Raghbir proceeded to rely upon and affirm the ISA.
There is no defence based on estoppel. In particular at no point did Balbir make a representation that he did not wish to assert his rights under the ISA and there was no relevant reliance by Raghbir upon any conduct on the part of Balbir.
The Issues
Thus, the issues that fall for determination are as follows:
A binding agreement: Is the ISA a valid and binding agreement (such that Balbir is entitled to enforce its terms)?
Breach of Companies Act 2006: Was the ISA an agreement for the Company to purchase its own shares prohibited by CA 2006 and thereby void?
Economic Duress: Was the ISA procured by economic duress?
Discharge by repudiation: Did Balbir commit a repudiatory breach of the ISA which was accepted by Raghbir as terminating the ISA?
Estoppel: Is Balbir estopped from asserting his rights under the ISA?
The facts in outline
Prior to the Agreement, the brothers had been involved in a successful business engaged in the manufacture of automobile parts. The business was started by Balbir. Until his death in 2004, Jasbir was also involved in the business; following his death in 2004, Balbir and Raghbir raised funds to buy out his interest.
From about 2008 onwards, the two brothers were in dispute over the running of the Company. Raghbir had established a number of other companies – Alpha Products SRL and Delta Product SRL in Romania, Global Car Parts LLP and HiTech Auto-parts (Australia) Pty Ltd. A family trust was established, Chaggar Trust (“the Trust”).
Balbir became suspicious of Raghbir’s dealings, particularly in relation to the Romanian business and believed that Raghbir was excluding him from the business. On the other hand Raghbir took the view that Balbir was becoming increasingly less involved in the Company’s business, whilst he was doing most of the work. This led to discussions, commencing in early 2011, about a buy-out of Balbir’s shares in the Company. These discussions went on until February 2012. However, they ended on 16 February 2012.
At the end of February 2012, Balbir was provided with accounting information for the Company which indicated expenditure of substantial sums in relation to professional fees and travelling and entertainment. This caused Balbir to make further enquiries of the Company’s accounting information. As a result, he had concerns that Raghbir had been misappropriating funds of the Company.
For that reason, Balbir took steps to control the Company’s payments from its bank. On 10 April 2012 he wrote to the Bank giving instructions to ensure that future payments would not be made without his authorisation. Then on 18 April 2012, Balbir instructed the Bank to freeze the Company’s account. On the same date, Andrew Nugent Smith, on behalf of Raghbir and the Company wrote to Balbir demanding that the freeze be lifted, failing which the Company and Raghbir would proceed to apply for an injunction to lift the freeze. There was then a discussion about limits being placed on payments out of the Company’s account, in return for the lifting of the freeze. The Bank had indicated that if the freeze was not lifted, the Company would go into administration. It set a deadline, ultimately extended until 4pm on 25 April.
On 20 April 2012 Raghbir offered to buy out Balbir’s interest in the Company for £300,000. On 23 April 2012 the two brothers met at the Gurdwara Temple (“the Temple”) to negotiate a settlement, aimed at providing a clean break. At that meeting Raghbir offered to buy out Balbir’s interest in the business (i.e. the Company and Delta) for £1.6 million. Immediately after the meeting Raghbir emailed Balbir with the terms of an offer. The parties then instructed lawyers to formalise the agreement. Between then and 25 April 2012 the ISA was drafted with the involvement of Clarke Wilmott, Wragge & Co and Deepak Johar. In the course of that drafting exercise, Balbir insisted upon the ISA being legally binding, resulting in the inclusion of clause 16.
At around 320pm on 25 April 2012 the ISA was concluded and signed by the parties and the instruction to the Bank to unfreeze the Company’s bank account was given. The sum of £60,000 was paid to Balbir.
The parties then set about negotiating the terms of the SA contemplated by the ISA. In early May, Mr Johar, acting for Raghbir, sent a draft settlement agreement for approval. At around the same time Balbir started seeking more information about the Company. In response, on 17 May 2012 Mr Johar sent an email, pointing out that the SA had not been concluded within the 14 days agreed in the ISA and asserting that, as a result of Balbir’s seeking further information and breaching his duties, the ISA was null and void. On 18 May 2012 Mr Thomas responded, emphasising that Balbir’s intention remained to honour the terms of the Agreement and did not accept the assertion that the ISA was null and void. He was concerned that he needed to ascertain the underlying financial position of the Company, Delta and associated entities. That letter enclosed a detailed request for further information. On 22 May 2012, Mr Johar indicated that he was not instructed to respond and was no longer acting. In late May and June, Balbir made further requests for financial information.
On 18 June 2012, Mr Thomas wrote to Mr Johar, headed “without prejudice”, seeking to revive the negotiations, whilst putting forward what appeared to be a revision of the terms agreed in the ISA. That letter is relied upon by Raghbir as a repudiatory breach of the ISA, entitling Raghbir to terminate it (Issue (4)). Further discussions ensued in July and August 2012 in which the parties sought to reach agreement as to the terms of a final settlement agreement. Each of the parties indicated that they were content in principle to implement the ISA, whether in its precise terms or in certain alternative terms.
A few months later, on 26 November 2012, Freeths wrote to Clarke Willmott, asserting that the ISA was not binding and in any event that Balbir had clearly breached the ISA and that the ISA had been “rescinded”.
On 31 December 2012 the first payment under terms of clause 2a of the ISA of £300,000 fell due. Balbir did not at the time seek to enforce the ISA.
On 16 January 2013 Raghbir and Balbir met at the Temple to negotiate a resolution of the dispute. In the event, no resolution was reached and no SA was ever concluded. Balbir now sues upon the terms of the ISA.
On 31 December 2013 the second payment, under terms of clause 2b of the ISA, of £425,000 fell due. Balbir did not at the time seek to enforce the ISA. Between November 2012 and the middle of 2014, neither Balbir nor anyone acting on his behalf asked for payment of sums due under the ISA.
Following a formal demand by the Bank for immediate repayment of all amounts outstanding under the Company’s overdraft facility and other loans, the Company was placed into administrative receivership on 26 June 2014. Subsequently the properties held by Delta were sold pursuant to security over them. The brothers each received a sum by way of their respective share of the surplus in relation to those properties. The administrative receivers completed their task on 26 August 2016.
(B)The Parties’ contentions in more detail
Issue (1): Binding agreement/Agreement to agree
Raghbir’s case
Raghbir submits that the ISA was not a binding agreement. He relies, variously, on a number of principles relating to contract formation.
Agreement to agree: the ISA was an agreement to agree final settlement terms and was not, nor intended to be, binding. It was an “emerging agreement”, meaning no more than an “agreement to agree”.
Absent a further agreement between the parties providing for a lawful mechanism for the purchase by the Company of its own shares, the ISA, in so far as it provided for the purchase of its own shares, was unlawful under CA 2006. As it stood it was incomplete and unworkable and an unlawful agreement, and thus should not be construed as binding, but rather as an agreement to agree.
Further even if the ISA was more than an “agreement to agree” and even if the parties intended to be bound by the ISA, there was no agreement of the essential terms sufficient for the formation of a binding contract and thus the ISA was not an enforceable contract. Clause 16 is not determinative of the issue. Without a binding SA, the agreement as a whole, and the ISA, was unworkable: see Pagnan SA v Feed Products [1987] 2 Lloyds Rep 601, proposition (5) and Barbudev v EuroCom Cable Management Bulgaria Eood [2012] EWCA Civ 54 at §§30, 37, 42, and 55.
In support of these contentions (“agreement to agree” and “lack of essential terms”), Raghbir points to the following matters:
The ISA specifically envisaged a subsequent more detailed settlement agreement.
Hardev Chaggar was not a party to the ISA and was thus not bound by a substantial number of the obligations in the ISA, including the sale of her shares and the payment terms. The parties failed to agree how the ISA was to bind Hardev Chaggar. Unlike the position of Raghbir signing on behalf of the Company, Balbir had not signed the Agreement “for and on behalf of” Hardev. The transfer of her shares contemplated by the ISA could not be completed without an SA. Further “affiliate” in clause 11 must include Hardev. She could not be a party, as well as being an affiliate.
Clause 4 envisaged that the parties would seek tax advice and might restructure their emerging deal in a more tax-efficient manner. That would involve unscrambling the deal and doing it differently through an SPV.
Key obligations in clauses 6, 7, 8, 11 and 14 of the ISA were tied to agreement of the SA.
The ISA failed to identify who was to pay the sum of £1.6 million – the Company or Raghbir.
The ISA failed to specify how or to whom the properties in Delta were to be transferred. Clause 4 envisaged that they might be transferred to an SPV and the release of shares owned by Balbir in such an SPV.
Clause 5 provided for the transfer of shares in the Company or the SPV to be “subject to HMRC approval”. Yet there was no agreement as to the nature and manner of obtaining such approval nor as to what was to happen if it was not forthcoming.
The parties failed to agree when payments should be made under clause 6, nor when Balbir should resign as a director under clause 7, nor when Balbir should be removed from the Company’s bank mandate under clause 8(a), other than by reference to the intended SA that was never concluded.
The parties failed to agree what should be “suitable provision” for the various matters covered by clause 11 a. to e.. In particular, without a final settlement agreement, the ISA could not give effect to the stated intention to achieve full and final settlement.
The parties failed to agree whether (i) they should be able to continue to negotiate or discuss via their solicitors and with third parties, given that such agreement in clause 14 was made expressly “subject to the detailed settlement agreement being entered into within 14 days” or (ii) Balbir was entitled to freeze the bank accounts of the Company again in the event of the SA not being finalised within 14 days, despite his desisting from doing so being a key term of the ISA.
Balbir’s case
The absence of an SA does not render the ISA incomplete. Balbir relies upon the statements of principle in Pagnan SA v Feed Products, supra and in particular upon propositions (4) and (5), first part. Further he relies upon principles that the courts will strive to uphold agreements intended to be binding.
Clause 16 of the ISA determines definitively that the ISA itself was binding, and that the ISA was not merely “an agreement to negotiate”; further, even absent an SA, the ISA is workable and not uncertain. Barbudev turns on the specific terms of the side letter in that case.
As regards Hardev, she did not need to be joined as a party to the
Agreement. Balbir could agree to sell her shares irrespective of her consent. In any event, and as a matter of fact, in concluding the ISA, Balbir was acting as Hardev’s agent; she was an undisclosed principal.
The provisions in clauses 2 and 3 governing the transfer of the shares and the properties are self-standing and operate regardless of the conclusion of the SA. Further matters covered by clauses 6 to 8 and 11 to 14 are self-contained and do not affect the enforceability of the ISA as a whole. Obligations which are framed by reference to the date of the SA do not render the ISA unworkable or void.
As regards clauses 7 and 8(a), even if no SA was concluded, but the parties performed the terms of the ISA, once Balbir and Hardev’s shares were transferred, in practice Raghbir, in his then capacity as majority shareholder, would be in a position to procure Balbir’s resignation as a director and his removal from the bank mandate.
Clause 5 was not a substantive provision, but merely confirmed certain aspects of the parties’ obligations “for the avoidance of doubt”. That HMRC approval can only be in relation to the Company; and, as a matter of construction it applied only if the SPV was formed. Further there is to be a term implied in the ISA that, in the event that HMRC approval is not obtained, Balbir is to transfer the shares, at Raghbir’s direction.
Issue (2): Companies Act 2006
Raghbir’s case
Raghbir submits:
The ISA is an agreement for the Company to acquire its own shares. Clauses 3 and 5 of the ISA requires Balbir’s and Hardev’s shares in the Company to be transferred to the Company. Further clause 2 provides that the £1.6m would be paid by the Company and/or Raghbir. Clause 2 is clearly a contract to acquire its own shares.
The Company’s agreement to purchase its own shares is in breach of the prohibition in s.658(1) CA 2006.
Further since clause 2 of the ISA provides for payment for the shares to be made in tranches, it breaches s.691(2) CA 2006.
The procedure prescribed in ss.694-695 in relation to the relevant resolution was not followed (Amended Defence §15.3).
As to reduction in capital (governed by s.641(1) and s.659(2))
Whilst the parties could have contracted for a reduction in share capital, they did not in fact do so. This was an agreement for purchase of the shares and not an agreement for the reduction in capital.
In any event, the requirements for such a capital reduction have not, and could not have, been complied with. First, the brothers themselves could not have secured a special resolution (requiring 75% of shares). Secondly, there is no evidence that the Company was solvent and that a solvency statement could be signed nor that the court ought properly have confirmed the proposed capital reduction, especially in view of likely objections from creditors to pay £1.6 million and the failure to offer like terms to Kiran.
Accordingly, the ISA was void.
Balbir’s case
Balbir submits:
The fact that one mode of performance of the ISA might have resulted in the transfer of the shares being void, does not render the ISA void. The court should construe the contract in such a way as to ensure that it is performed lawfully.
Under the ISA, the Company was not required to purchase its own shares. Clause 2 provides that payment to Balbir was to be made by “Hitech and/or Raghbir” and conferred upon Raghbir the option to decide what proportion of the contractual sum would be borne by him personally and what proportion by the Company. This option reflected previous discussions which had canvassed the possibility of a buy-out by Raghbir and a buy-out by the Company in the alternative. Further by clause 12, Raghbir personally guaranteed any payment obligation. In any event, the Court should construe the ISA as imposing the obligation upon Raghbir alone. If the Company was unable lawfully to pay for the shares, Raghbir was obliged to do so and the ISA should be construed and/or performed accordingly.
In any event, since payment was to be and/or could properly be made by Raghbir (rather than the Company), the Company would be acquiring its own shares “otherwise than for valuable consideration” falling within the exception to the s.658(1) prohibition found in s.659(1); in that situation it is not the company which is paying for the shares.
The fact that the shares were to be acquired in tranches does not fall foul of s.691(2).
There were, and are, other mechanisms by which the parties could have enabled the shares to be purchased by the Company. This acquisition by purchase could lead, or could have led, to a permitted reduction in share capital. Whether it is a reduction in capital depends upon what the company does with the shares, once acquired. Acquisition by purchase and reduction in capital are not mutually exclusive. Further there was evidence of solvency and a special resolution was and is possible.
Finally, in any event even if the Company and/or Raghbir had chosen to perform the ISA in a way which was unlawful, then the acquisition by the Company of its own shares would be void to that extent. It would not detract from the validity and enforceability of the ISA itself.
Issue (3): Economic Duress
Raghbir’s case
Raghbir submits that the ISA was voidable for economic duress and was in fact avoided. The ISA was procured by Balbir exerting illegitimate pressure upon Raghbir, but for which Raghbir would not have entered into it.
Balbir exerted illegitimate pressure upon Raghbir by the following conduct:
On 18 April 2012, Balbir froze the Company’s bank account, leading the Bank to consider appointing administrators.
Balbir refused to unfreeze the bank account and insisted that he would only lift the freeze (and thereby take action to avoid the appointment of administrators) upon Raghbir signing the ISA.
This conduct was illegitimate: Balbir was acting for his own benefit and for his own interests, rather than in the interests of the Company and thus in breach of his fiduciary duties to promote the success of the Company and to avoid a conflict of interests, contrary to ss. 172 and 175 CA 2006. The pressure was thus “unlawful”. Balbir foresaw the risk that the Company would close down and that was his intention.
But for this illegitimate pressure, Raghbir would not have agreed to buy him out for £1.6 million. The high figure of £1.6m was originally suggested by Balbir. The ISA was entered into shortly before the Bank’s 4pm deadline for the appointment of administrators.
Raghbir had “no real alternative” to entering into the ISA. Absence of a realistic practical alternative goes to the issue of whether pressure is legitimate and not to the issue of causation. The authorisation limits proposed by Balbir were not practical. Further, seeking an injunction to lift the freeze of the bank account, was not an option, because Raghbir had no authority to instruct solicitors on behalf of the Company: see Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102.
Raghbir elected to treat the ISA as void for duress by way of Deepak Johar’s email of 17 May 2012: a bare assertion that the agreement is void is sufficient; there is no need to give the reason for that assertion: see by analogy, Chitty on Contracts (32nd Edn), §24-014. Alternatively, Raghbir so elected by Freeths’ letter of 26 November 2012.
Balbir’s case
Balbir submits that the defence of duress is not made out.
His conduct was not illegitimate. Steps taken to freeze the account were lawful.
He acted in good faith, based on genuine concerns that Raghbir had misappropriated monies and assets from the Company. Those concerns were in fact well founded.
He did not make any threat by reference to the conclusion of the ISA. The freeze was never accompanied by any demand to sign any agreement. The prospective buy-out agreement formed no part of Balbir’s demand; what he asked for was a restriction being placed on the transfer of monies from the Company. Rather, the offer of a buy-out came, in the first place, from Raghbir.
Balbir’s conduct was not causative of the conclusion of the ISA. The freeze on the account was not a significant cause of Raghbir’s offer to buy out Balbir’s interests. Rather Raghbir’s decision to offer to buy him out arose because of Raghbir’s desire to avoid further investigation of his own conduct.
As regards the freeze on the account, Raghbir had the practical alternatives of seeking injunctive relief (which at the time he believed to be an available course) or agreeing to the proposed sensible limits on authorisation of payments.
At all material times, Raghbir had the benefit of legal representation, as provided, in particular, by Deepak Johar.
In any event Raghbir affirmed the ISA by his subsequent conduct and made no attempt to assert that it had been procured by duress. In particular, he sought to remove Balbir from the Company’s BUPA policy, in July 2012 asked Balbir’s lawyers to send a further draft of the SA and on 6 August 2012, stated that he was content to proceed. There was no indication that the ISA was entered into under protest, nor a prompt rejection of the ISA. The 17 May 2012 letter was not a protest on grounds of duress. In fact, despite the terms of the letter of 26 November 2012, no allegation of duress was made until service of the Defence in December 2014.
Issue (4): Repudiatory Breach
Raghbir’s case
Raghbir submits, alternatively, that Balbir committed repudiatory breaches of the ISA, which he accepted as terminating, and thus discharging him from all further liability under, the ISA. By closing argument, Raghbir relied upon two particular matters as constituting repudiatory breach.
In breach of clauses 14 and 16 of the ISA, Balbir failed to agree, or indeed to engage in negotiations, for the SA, whether within 14 days of the ISA or at all.
By his solicitor’s letter of 18 June 2012, Balbir refused to accept instalment payments as provided for by clause 2 of the ISA and instead insisted on a lump sum payment. That was fundamentally inconsistent with the continuation, and amounted to a renunciation, of the ISA. The fact that letter was written “without prejudice” does not make it inadmissible as evidence of repudiation and the statement made was sufficiently clear and unequivocal: see Alan Ramsay Sales & Marketing Limited v Typhoo Tea Limited [2016] EWHC 486 (Comm) [2016] 4 WLR 59.
Raghbir was entitled to, and did, accept Balbir’s repudiation as terminating the ISA. Raghbir’s acts of acceptance of repudiation were:
Johar & Co’s email of 17 May 2012 stating that the “ISA is now null and void”. This was acceptance of the repudiation constituted by the failure to agree the SA.
Freeths’ letter dated 26 November 2012 expressly accepting Balbir’s repudiatory breaches – this was acceptance of both the repudiatory breaches in paragraph 38 above. The letter of 6 August 2012 did not amount to an affirmation of the Agreement. In any event it was properly marked “without prejudice” and the principle in the Alan Ramsay Sales case applied.
Balbir’s case
Balbir submits that he did not commit any repudiatory breach of the ISA and in any event, subsequent to the acts said to amount to repudiation, Raghbir affirmed the ISA.
As regards the letter of 18 June 2012, it was written “without prejudice”, is not admissible and in any event, because it was part of an ongoing negotiation, cannot be construed as an unequivocal renunciation: see Alan Ramsay Sales, supra. Secondly, read in its proper context (effective date and acceleration of shares transfer) the contents of that letter did not state that Balbir was refusing to perform his obligations under the ISA. The proposal in that letter was not inconsistent with the terms of the Agreement. There is nothing to prevent the terms of the SA being different from those in the Agreement which it would replace. Further by his objective conduct, in seeking to have Balbir excluded from the Company in his letter of 4 July 2012, Raghbir was relying upon the continued validity of the ISA. In any event, by the letter of 6 August 2012, Raghbir unequivocally affirmed the ISA.
As regards the alleged failure to agree, or negotiate for, the SA, this was no more than an obligation to agree or negotiate in good faith and as such unenforceable as a matter of law. Thus a failure to comply with an unenforceable obligation cannot amount to a repudiation of a contract, and thus of the ISA. In any event, on the facts, Balbir did not fail to seek to agree the, or an, SA (see eg 18 July 2012 letter from Clarke Willmott).
Issue (5): Estoppel
Raghbir’s case
Raghbir submits that Balbir is estopped from suing under the ISA.
In an ongoing series of events starting almost immediately after the ISA was agreed, Balbir impliedly represented that he would not enforce his strict legal rights under the ISA. Specifically he continued to engage as a director of the Company, to seek due diligence and to investigate the affairs of the Company and sought to renegotiate the terms of the settlement agreement.
Raghbir relied upon such representations by “suffering” or “allowing or permitting” Balbir’s continued involvement in the business right up to the sale of the Delta properties (including the receipt by Balbir of over £500,000 in respect of sale of properties which, if the ISA were binding, should have been transferred to Raghbir under its terms) and the insolvency of the Company.
Only when it was obvious that the Company was in serious financial difficulty did Balbir seek to reverse his position of the two previous years and instead assert his alleged rights under the ISA.
It is inequitable for Balbir to seek, in or after June 2014, to rely upon his strict legal rights under the ISA, given the passage of time and the fact that the Company was on the verge of administrative receivership.
Balbir’s case
Balbir submits as follows.
There was no representation that Balbir would not enforce his rights under the ISA. There must be a clear and unequivocal promise not to enforce rights. Instead Raghbir relies, wrongly, on alleged breach of obligations. Mere delay in enforcing rights cannot give rise to a representation founding an estoppel.
There is no evidence of any reliance on the part of Raghbir. Raghbir’s case is that he permitted or allowed certain things to continue. Raghbir did not alter his position in reliance upon the alleged promise or representation. The things Balbir did were things he was always entitled to do under the ISA and pending the signing of the, or an, SA. Balbir remained a director and was entitled to remain in the business. He would cease to be a director once the SA was signed and concluded.
In any event, Raghbir cannot invoke the Court’s equitable jurisdiction, because his own misconduct and illegality mean that he has not come to the Court “with clean hands”.
Sub-issues of fact
These rival contentions give rise to a number of disputed issues of fact, upon which I am asked by the parties to make findings. Because these issues arise in a variety of different contexts, I make my findings of fact at different junctures, as indicated below. These sub-issues are as follows.
The history of the business relationship between Balbir and Raghbir:
Who created the business? What was the respective involvement of Balbir and Raghbir in the business over time? Did Raghbir exclude Balbir and Manveer from the management of the Company? (limited findings at para 54 below.)
Did Balbir (and Manveer) hack into the Company’s computers? (para. 46 below).
What were the circumstances of the earlier buy-out negotiations? (paras 60 to 66 below).
As at the time of the freeze, had Raghbir in fact misappropriated funds from and/or acted fraudulently in relation to the Company and related businesses? (paras 162 to 174 below).
What was Balbir’s motive or intention when imposing the freeze on the Company’s bank account - to stop misappropriations or to intend that the Company would fail or to obtain a buy out? (paras 134 to 137 below).
Who first raised the possibility of a buy-out in April and who first mentioned the figure of £1.6 million (paras 121 to 124 below).
Did Raghbir have a practical alternative to agreeing to the buy-out? (paras 125 to 128 below).
In concluding the ISA, was Balbir acting as agent for Hardev? (paras 131 to 133 below).
At what points in time was Deepak Johar acting for Raghbir? (paras 129 to 130 below).
Who was to blame for the stalling of the SA process? Did Raghbir affirm the ISA after it was concluded? (paras 254 to 262 below).
(C)The Evidence
Much of the relevant evidence comprises documentary evidence, in the form of correspondence, attendance notes, transcripts of meetings and accounting documents. In addition Balbir, Raghbir, Hardev, and Mr Johar all gave oral evidence, being cross-examined on their witness statements. There was also witness statement evidence from others who were not called to give oral evidence, namely Kiran, Rishi Chandarana and Andrew Blanchard, a former employee of the Company.
Balbir Chaggar
Balbir was the first witness to give evidence and was subject to fairly lengthy cross examination. In general, his oral evidence came across reasonably well. He was prepared to accept matters adverse to his interests, for example he accepted that the bank freeze could have led to the closing down of the Company. His evidence as to his reasons for seeking the bank freeze was consistent. However, on other aspects his evidence was less convincing.
Raghbir alleges that Manveer and Balbir had for some time been hacking into his computer and obtaining access to his personal and confidential emails on Raghbir’s own Hotmail account. I accept this. Kiran’s evidence, which was not challenged, was that their suspicions that the Company’s emails were being hacked were confirmed by an IT specialist they appointed to investigate. He gave further evidence to the effect that Manveer had been reading these emails from his own flat. In my judgment, the concern that Balbir and/or Manveer were continuing to hack into Raghbir’s computer was vindicated by the file of the Hotmail emails which were disclosed. Balbir’s oral evidence in relation to those emails from those dates was evasive and not credible. The suggestion that Manveer had found the hard copy file at the offices did not stand up to scrutiny, not least because those emails ran up to April 2008 in circumstances where Manveer had left the Company in late 2006. These findings are tempered by the fact that this issue was not centrally relevant to the issues in the case, and has to be seen as part of a context where the two brothers had fallen out.
Balbir’s evidence about his reopening enquiries, after the ISA, solely for the purpose of considering his tax position and that he was not interested in investigating the financial dealings of Raghbir and the Company further was not credible, first, because of the wide-ranging nature of the information that was being sought in May 2012 and secondly because, in any event, there was an indemnity against tax liabilities written into the ISA. Nor do I accept his claim that at that time he was not seeking to use a “forensic” accountant. It is plain from the contemporaneous documents that he was. As regards his evidence that he was not seeking to renegotiate the deal by the letter of 18 June 2012 and that the suggestion of “accelerated payment” was merely one option or alternative was not credible and I do not accept it (see paragraph 260 below).
Overall, for these reasons, on issues in dispute, I treat Balbir’s evidence with some caution, in the absence of support from documentary or other evidence.
Hardev Singh Chaggar
Hardev Chagger gave oral evidence briefly in relation to the authority which she had given to her husband to conclude a contract for the sale of shares on her behalf. She gave her evidence calmly, fairly and, in my judgment, honestly. I accept it.
Raghbir Singh Chaggar
Raghbir was not an impressive witness. He was apt not to answer the question asked, to be contentious and to give long rambling explanations which were not relevant. His evidence about his interests in other companies and operations abroad (including operations in Romania, Australia and in relation to Ypsilon in Cyprus), was confusing and evasive. He sought to distinguish between “director’s pay” “remuneration” “salary” and “consultancy fees” in a way which was not readily comprehensible. He denied involvement in Hitech Australia; but that was contradicted by the recording of what he said at the 16 January 2013 meeting. It was plain from documents that he was a director of that company. He sought to escape from agreed transcripts by suggesting there might be an error in translation. He sought to suppress documents including refusing to provide the full underlying Sage files and to provide tax returns. In closing, Mr Pepperall fairly pointed out that questions about misappropriation and breach of fiduciary duty had no bearing on the issues in the case. Nonetheless I did not find Raghbir to be a reliable witness and on contested issues I do not rely upon his evidence, save where it is supported by other evidence.
Deepak Johar
He gave his evidence in a careful and fair manner. He came across as a cautious and respectable professional of many years’ standing. He ultimately candidly accepted, in cross-examination, that he was acting for Raghbir by about 24 or 25 April. I accept his evidence as truthful and his contemporaneous attendance notes as an accurate record.
(D)Detailed factual chronology (including certain findings of fact)
(1)Background
In the 1970s, Balbir, Raghbir and their other brother Jasbir worked together in business producing parts, and in particular mud-flaps, for cars. In 1983 the Company was incorporated. The Company’s articles of association provided that there was a duty upon directors to take decisions collectively. As explained above, in 2005 the two surviving brothers purchased Jasbir’s one-third interest in the Company. Mr Johar acted for both brothers on that transaction.
In 2005 Manveer joined the company. At around the same time Gaggandave came to work in the office. In late 2006, Balbir and Raghbir agreed that none of the children would work in the Company in the future. Manveer left within a week. However, both Kiran and Gaggandave in fact continued working for the Company. Even though Gaggandave had left a few years previously, he was still paid from 1 September 2012 to 30 June 2014 (as the payroll shows). Mr Johar had advised Raghbir to give Gaggandave a backdated contract to help with his application to move back to England. Balbir’s unchallenged evidence was that in 2007, Raghbir informed Balbir that he had become non-resident and was domiciled in India as he resided there for the majority of every year.
After a certain period of time Balbir’s day-to-day involvement with the running of the Company’s business diminished. Balbir says that he was excluded from the business by Raghbir. Raghbir says that Balbir had not been interested for many years. The date from which this diminished role commenced and the reasons for it are disputed, but it is clear, from the evidence, not only of Balbir, but also of Andrew Blanchard and Rishi, that by 2008, at the latest, Balbir was not involved on a daily basis, was involved in building his own family home and that it was Raghbir who was responsible for the active management of the Company. As to who was responsible for this state of affairs, there is no need to make any specific findings.
The overseas operations: Romania and Australia
A number of overseas entities and operations were established. First a business was established Romania. Two companies were set up by Raghbir for the benefit of all three brothers: Alpha Products SRL, a manufacturing company, and Delta Properties SRL to acquire the property for the factory in Romania. Moreover an offshore trust (the Trust) operated through International Trustees Ltd, based in Mauritius was set up in all three brothers’ names. Over time, Balbir came to believe that Raghbir was becoming increasingly secretive about the operation of the business in Romania and would not provide financial information about its operations. Balbir subsequently discovered that Raghbir was the sole owner of Delta Properties SRL with a net worth of in excess of $7.5 million. Balbir had been given the impression that all of the land in Romania had been sold or alternatively that there were other assets in the remaining business of which he was not aware. As regards the Trust in 2008, on Raghbir telling him that the Trust was worthless and had no assets, he signed over his half share in the trust to Raghbir. He believed that ITL Trustees Ltd was linked to International Trustees Ltd and if that were so then Raghbir’s suggestion that the Trust was worthless was false not least because it had held the entirety of the shares in Alpha Products SRL and Delta Properties SRL. Those suspicions were borne out. It appears in fact that the structure was that ITL Trustees held the entirety of the shares in Alpha Products SRL and Delta Properties SRL; that ITL Trustees and International Trustees Ltd were one and the same or connected; that Balbir’s shares in Alpha Products were transferred to Raghbir and Camelia Clem on 3 June 2008; that on 2 June 2008 all of the shares in Delta Properties SRL were transferred to Raghbir.
In 2005 Raghbir mentioned an opportunity for the Company to do business in Australia, supplying to Vauxhall car headlight covers from an Australian company. In 2009, Balbir found out that Raghbir had set up a company in Australia, Hi-Tech Autoparts (Australia) Pty Limited in his own name and that of his son, Gaggandave. Balbir believed that Raghbir set up the Australian company and sold products through websites and kept all of the money generated by that business for himself and his family, whereas he believed that the operation should have been owned 50% by him as its stemmed directly from their joint business.
Raghbir was involved with another company, Ypsilon Holdings (Cyprus) Ltd (“Ypsilon”). This company had no connection with the Company or Delta. Accounting documents indicated substantial payments in 2009 to 2011 to Ypsilon in excess of £1 million in 2011. In cross-examination about Ypsilon, Raghbir said that it was not his company. However when asked what the company was and where the money that was paid to Ypsilon, had gone subsequently, Raghbir invoked the privilege against self incrimination.
In January 2010, Kiran informed the branch manager of the Bank that directors’ pay had been suspended, that Raghbir had not received any “remuneration” for approximately six months and that Balbir’s pay had been held in December and suspended indefinitely.
In his witness statement, Balbir stated that up until 2010/2011, whilst unhappy with the way in which Raghbir was running the business without involving him, Balbir did not have any concerns that Raghbir was taking money from the business for his own benefit. Accordingly he never checked the accounts or books for either the Company or for Delta.
Previous Discussions about a buy-out of Balbir’s shares (including findings of fact)
In the period between early 2011 and February 2012, there were discussions between Balbir and Raghbir in relation to a proposed buy-out of Balbir and Hardev’s shares in the Company. The following is common ground. Those discussions were initiated by Balbir; they involved advice from Rishi as to how to structure such a buy-out in a tax efficient manner and the favoured option was for the Company to buy the shares. By the end of that process - by February 2012 - the price being offered was £300,000; and on 16 February 2012 eventually Balbir decided not to proceed and that negotiations were put on hold. There is a dispute as to the price that was initially discussed and the evidence regarding the structuring of the deal pays more careful attention, as follows.
Balbir’s evidence was that the very next day after he first raised the issue, Raghbir told him that his shares in Hitech had been valued at between £650,000 and £750,000 and that he verbally accepted that offer. By contrast, Raghbir’s witness evidence, notably, made no reference to a figure greater than £300,000. However, in cross-examination he accepted that an initial offer in excess of £600,000 was made – based on an initial valuation which reflected the price paid to buy Jasbir’s interest. Moreover, in his evidence, Kiran said he understood that an initial offer of £600,000 was made to Balbir, but that he and Paul Elliott were not comfortable with that level of offer. At a meeting with Raghbir, they concluded that £300,000 was fairer. That offer was initially accepted by Balbir and they went to Rishi to structure the deal efficiently for everyone.
In April 2011 following a call from Raghbir, Rishi wrote to Raghbir (copy to Balbir) setting out various options for the sale of Balbir’s shares; including a sale of all Balbir and Hardev’s shares to Raghbir and also a purchase by the Company of its own shares. The latter option referred to “clearances being taken from HMRC before completing a deal”. Rishi recommended that they consider the option of the Company being the purchaser.
On 15 June 2011, Rishi wrote to both parties, setting out his belief that they had agreed a valuation of £500,000 for Balbir’s shares, with part of the consideration deferred after transfer. At that point it seemed that the route to be adopted would be a purchase by the Company of its own shares. Rishi pointed out that he would therefore need to apply for HMRC clearance. Balbir in his evidence denied that this was the agreed figure and assumed that Rishi had got that figure from Raghbir.
Eight months later, by email dated 15 February 2012 to both Balbir and Raghbir, Rishi confirmed that the most tax efficient route was for the Company to purchase Balbir’s and Hardev’s shares. By that time the purchase price being discussed was £300,000 with Balbir lending back to the company £150,000 as an interest-free loan over three years. The email referred to a second option, of a phased acquisition with multiple completion dates (as in fact subsequently adopted in the ISA) but Rishi advised that that would incur greater legal fees and more complication in terms of obtaining HMRC clearance. He recommended that corporate solicitors be instructed to deal with Hi-Tech’s purchase of shares. Balbir, in his evidence, stated that that reduced offer was made by Raghbir on or around 15 February 2012 when Raghbir told him that the business was really struggling. In the morning of 16 February Rishi gave instructions to corporate solicitors to cover, inter alia, “Purchase of own shares by company”, stating “the shares are to be purchased by the Company”.
However, later on 16 February 2012, Rishi wrote to the solicitors who had been instructed, with copy to Raghbir and Balbir, recording the fact that Balbir had indicated that he needed more time to think over the proposed heads of terms and suggesting “that all work is put on hold until I get further confirmation that we are good to go”. It was clear that at that point in time the proposed acquisition was put on hold.
In the light of the foregoing evidence – particularly the independent evidence of Rishi and Kiran - I find that, initially a buy-out price in excess of £300,000, and of at least £600,000 was being discussed, and at one point a figure of £500,000 has been agreed between the parties. I further find that the buy-out in contemplation at that time was a purchase of the shares by the Company.
(2)April 2012: up to the signing of the ISA
Balbir seeks financial information
In and around February 2012, Balbir requested accounting information concerning the Company; he requested accounting records from the Company’s accountants, BPC Chandarana & Co (including the company’s Sage accounts). On 29 February 2012, the accounts manager at BPC Chandarana & Co provided Balbir with a profit and loss account and balance sheet for the Company obtained directly from the Sage system. The profit and loss account showed travelling and entertainment expenses in excess of £61,500 and “Professional fees” in the sum of £112,710.02. Balbir’s evidence was that this discovery was of serious concern to him as Raghbir had not paid him any wages and the Company had never historically spent such sums. On 23 March 2012, Balbir chased Rishi for the Company’s Sage files. Rishi responded informing him that Raghbir had asked him not to send the Sage data out of the office, until they had verified the figures.
Balbir takes action with the Bank
Then on 4 April 2012 Rishi provided Balbir with the Sage backup for 2011. The Sage data provided indicated “consultancy payments” to D Chaggar on a monthly basis in late 2011 and 2012 and substantial payments from the Company to Ypsilon between 2009 and 2011, including consultancy fee payments in 2010 and 2011 in the region of £70,000 annually. In his witness statement, Balbir stated that these entries reflected the profit and loss statement that he had been provided with on 29 February 2012.
On the same date Rishi wrote to Balbir and Raghbir confirming that he had now had instructions from both of them that the Company would not now be acquiring Balbir’s shares and that Balbir was not prepared to sell his shares “at the heads of terms mentioned in previous emails”. This however does not detract from the conclusion that, in fact, the earlier buy-out discussions had come to an end earlier in February.
Balbir takes action in relation to the Company’s bank accounts : 10 April 2012
On 10 April 2012, Balbir wrote to Paul Elliott of the Bank, by recorded delivery, in the following terms:
“Regarding Hi-Tech Auto-parts Limited and Delta Properties
Please action the following with immediate effect:
1. All future cheques and payment instructions are to be counter-signed only by myself, Balbir Chaggar, and Raghbir Chaggar or Tejinder Bahra.
2. Any current signatures other than the above mentioned are to be indefinitely removed for any payment instructions/authorisations.
3. Only myself, Balbir Chaggar, and Raghbir Chaggar are to be allowed access to the company bank accounts. Any other persons with access to the company bank accounts must be removed.
4. All Internet banking and telephone banking is to be stopped and cancelled.
5. All future correspondence and meetings must be addressed to and include myself, Balbir Chaggar and Raghbir Chaggar together.”
The letter was signed by Balbir in his capacity as “managing director” of the Company. This did not constitute a freeze on the bank accounts of the Company. Rather it sought to limit the authorised signatories on all payments by the Company and to put a stop to Internet banking and telephone banking. Internet banking facilities were stopped; they were reinstated subsequently on 18 April.
In his witness statement, Balbir said “Paul rang me and suggested that if we were in dispute I could freeze the company bank account but the consequences could be serious, particularly for Hi-Tech.” In re-examination, he said that that conversation had taken place about around 10 April and not around 18 April.
The freeze of the Company’s bank accounts: 18 April 2012
On 18 April 2012, the Company’s bank account was frozen on the instructions of Balbir, by an email to Paul Elliott in the following terms:
“Further to your telephone conversation yesterday, I want you to freeze the Hitech Autoparts Account immediately as Raghbir Chaggar and myself are in dispute.
Yours sincerely
BS Chaggar
Managing Director”
Balbir was clear that significant sums of money were being spent by Raghbir which did not appear to be legitimate. He felt that he had no option but to freeze the account and that this was in the best interests of the company, its shareholders and its employees. He vehemently denied, in his witness statement, that he was acting in breach of his duties as a director of the Company. In re-examination, he said that what had caused him to freeze the account was that he saw first the profit and loss sheet and that Raghbir had taken £110,000 and then he saw the Sage file and that Raghbir had been paying his son backdated salary, even though he had only just come back from Australia. Then, Raghbir had told him that he could not stop internet banking and that he, Balbir, would not get paid any salary. Raghbir was taking decisions on his own.
During a meeting that day between Kiran and Paul Elliott, the latter said that, unless the brothers could resolve matters, the bank would have no option but to appoint administrators the following morning. In the course of that meeting Kiran contacted, and instructed, Andrew Nugent Smith for the first time.
At that time Raghbir was on holiday in Portugal. Deepak Johar was with him. Raghbir called Balbir asking him to unfreeze the accounts, and was in regular telephone contact with Kiran who was trying to contact Balbir to find out why he had frozen the accounts. Raghbir was told, by both Kiran and Rishi, that Balbir said that he did not care if the Company had to close as a result of his actions. Kiran’s evidence was that he had been told of the same attitude by Paul Elliott and Rishi.
At 7pm on 18 April 2012, Mr Nugent Smith sent the following email, headed “URGENT – THREAT OF LEGAL ACTION”:
“Dear Mr Chaggar
I have been instructed by Hi-Tech Autoparts Limited and Mr Raghbir Singh Chaggar.
My instructions are that you have instructed Clydesdale Bank that no payments are to be made out of Hi-Tech’s bank accounts with Yorkshire Bank. I am instructed that this arises out of a dispute between you and Mr RS Chaggar relating to the potential purchase of shares in Hi-Tech belonging to you and your wife. Your instruction is for no legitimate reason. Hi-Tech is in no financial difficulty and it must therefore be assumed that it is for personal reasons alone.
Your action is in breach of your duties as a director to promote the success of Hi-Tech in accordance with Section 172 of the Companies Act 2006. It also gives rise to an action by Mr Raghbir Singh Chaggar under section 994 of the Companies Act 2006.” (emphasis added)
The email continued, requiring Balbir to withdraw the instruction to freeze and pointed out that if it was not withdrawn it would cause serious and unquantifiable loss to the Company’s business and would cause the Company to fail. The email continued:
“I therefore look forward to hearing from you with confirmation that the instruction has been withdrawn and giving the undertaking that you will not reinstate this instruction without first giving Mr RS Chaggar 7 days written notice. If no such confirmation is received by 930 am tomorrow, I anticipate being instructed to apply to the Court for urgent injunctive relief without further notice to you.” (emphasis added)
It is noteworthy that Mr Nugent Smith was purporting to act both for the Company and for Raghbir personally, and in particular pointed out a right of action vested in Raghbir personally under section 994 CA 2006.
19 April 2012
At 912 am on the next morning, 19 April 2012, Balbir replied to Mr Nugent Smith (cc. Mr Elliott) as follows:
“Hi-Tech Autoparts Limited has not and cannot instruct you without my authority.
…
Let me stress and make it clear that the action taken by me with Clydesdale Bank, has no connection whatsoever with the potential purchase of shares in Hi-Tech Auto-parts Ltd belonging to me and my wife, by Mr RS Chaggar.
Let me further stress and make it clear, that the action taken with Clydesdale Bank has been taken as a last resort and not due to personal reasons as you have implied. I have been made to believe that there may be inconsistencies within Hi-Tech Auto-parts Ltd for many reasons. Furthermore, this action was taken in order to protect my investment in Hi-Tech Autoparts Ltd, Hi-Tech Autoparts Ltd employees, debtors and creditors.” (emphasis added)
The email went on to indicate that Balbir would not withdraw his instructions to freeze the account until he had been provided with a number of items of information: “I have continually and persistently requested information from Mr RS Chaggar, who has not been forthcoming”.
The email then listed eight conditions required for the freeze to be withdrawn. These requirements included payment of unpaid salary, access to his office and access to all computers and Internet banking documentation, full company accounts and financial statements of Hi-Tech Autoparts and of Alpha Products SRL, Delta Properties SRL and Chaggar Trust at ITL. He further required that all monies given to Gaggandave without his approval or knowledge to be returned to the Company, the agreement between them that none of the children were to be employed by the Company should be honoured, and that Kiran be removed from the bank account as a signatory. Finally he repeated his request that only he and Raghbir were to be signatories for the Company bank account with Yorkshire Bank. The letter contained no demand for, or even mention of, a buy-out. In his witness statement, Raghbir pointed out that since Raghbir’s salary had stopped some years previously, the claim for salary was a pretext and that Balbir was pressurising him with a view to extracting money from the Company.
Half an hour later, Balbir wrote to Paul Elliott requiring, within seven days, copies of all transactions of the Company and of Delta made by the Bank to date on the instructions of Raghbir without his, Balbir’s, signature.
Mr Nugent Smith replied at 959am repeating the assertion that Balbir had frozen the bank account “in an attempt to gain commercial leverage in a wider dispute between you and the other directors and/or shareholders of Hi-Tech”. He continued: “You have not frozen the bank account to promote the success of Hi-Tech. This is in clear breach of your duties owed to Hi-Tech as a director under Section 172 of the Companies Act 2006 and your comments below support Hi-Tech’s application for an injunction.” He went on to repeat that if the instruction was not withdrawn, the Company “will have no option but to proceed with its application for an injunction. The relevant papers will be prepared immediately.” He emphasised the urgency of the matter.
In the meantime, the freeze had an effect on payments, in particular of wages to staff. A number of direct debits and payments were stopped.
By this stage, Clarke Willmott had been instructed to act for Balbir. At 1235pm, Mr Nugent Smith sent an email to Mr Carr. He proposed, as an interim solution, that in return for Balbir lifting the freeze on the bank account, the Company undertake not to make any payments other than to staff or suppliers without first obtaining Balbir’s consent, not to be unreasonably withheld. Thus payments to staff or suppliers were excluded from the control proposed by on behalf of Raghbir. Balbir’s evidence is that he was not happy as it related only to future payments and did not include the provision of information in respect of monies which had already been made.
At just after 2pm, Mr Nugent Smith chased a response from Clarke Willmott, failing which an application to the court might be needed. Mr Carr replied immediately saying that he was awaiting instructions. Just under 15 minutes later, Mr Nugent Smith wrote back to Mr Carr stating that he needed a response by 330pm “otherwise my instructions are to press on”.
At 233pm Mr Carr responded to Mr Nugent Smith with Balbir’s proposals to resolve the situation. Essentially, Mr Carr rejected Mr Nugent Smith’s proposal. Instead his proposal was that the freeze would be lifted immediately if Raghbir and the Company agreed that no payments in excess of £500 were to be made by the Company without Balbir’s express written agreement and on condition that Balbir was given full and permanent access to the Company’s internet banking facilities.
At 549pm Mr Nugent Smith responded to Mr Carr’s proposal as follows:
“The proposal in your below email is not acceptable to Hi-Tech. Mr BS Chaggar is clearly in breach of his duties under the Companies Act and continues to use the freezing of the bank account to attempt to gain commercial leverage in his wider disputes with RS Chaggar and Hi-Tech. I am confident (as I think you accept) that Hi-Tech will obtain an injunction to compel withdraw of the relevant instruction to the Bank. Hi-Tech therefore requires Mr BS Chaggar to agree to the proposal in my email of 1235 today. Hi-Tech is willing to give your client until 12 pm tomorrow to reconsider his position but in the absence of a satisfactory response will have little option but to take the relevant Court action.…” (emphasis added)
Thus at this point Raghbir’s position is that he was not willing to agree to a limit on the authority to make payments from the Company’s bank accounts and his solicitors were asserting with confidence that Raghbir would obtain an injunction from the court to unfreeze the account. In his evidence, Kiran commented that he kept Mr Nugent Smith’s email from the Bank as he was fearful of them appointing an administrator.
20 April 2012: Raghbir suggests a buy-out for the first time
The next morning at 927am, and before receiving any response to his email of 549pm the previous evening, Mr Nugent Smith wrote to Mr Carr with a proposal for a buy-out of Balbir’s shares, offering to purchase his and his wife’s shares for the sum of £300,000, in full and final settlement and in return for a withdrawal of the freeze.
“I now have instructions to put forward a proposal to bring a final resolution to the issues between Hi-Tech, BS Chaggar and RS Chaggar.
The proposal is as follows:
- RS will reinstate his offer to purchase the 50% of the shares in Hi-Tech owned by BS Chaggar and his wife for the sum of £300,000.
- BS Chaggar will resign as a director of Hi-Tech with immediate effect.
- Payment of the £300,000 referred to above will be in full and final settlement, and be paid in full within 7 days of the conclusion of a suitable settlement agreement.
- BS Chaggar will clearly withdraw the instructions made to Yorkshire Bank and Hi-Tech will not pursue an injunction in this regard.
… I also understand that BS Chaggar was prepared to accept zero value for his shares in Hi-Tech on Wednesday when he was informed his actions could lead to the closure of the company.” (emphasis added)
Balbir relies upon the above underlined words as showing that Raghbir (and the parties) were canvassing the possibility of the shares being purchased by Raghbir (as well as by the Company). I do not accept that that can be read into those words. Whilst the previous “offer” may have come from Raghbir, the “offer” that was being reinstated was itself an offer for the Company to buy Balbir’s shares: see paragraphs 64 and 66 above.
In his witness statement, Raghbir said that it was clear to him that Balbir was trying to leverage a buy-out, and that Mr Nugent Smith’s offer was sent to try and resolve matters. He confirmed that the email amounted to a proposal to reinstate his previous offer (which was for Hi-Tech to purchase its own shares in accordance with Rishi’s advice). Similarly Kiran’s evidence was that “once it was clear that Balbir was applying commercial leverage, Raghbir decided to reinstate Hi-Tech’s offer of £300,000, but this time Hi-Tech would pay within seven days”.
Some 13 minutes later, at 940am, Mr Nugent Smith followed up on his proposal from the previous day (paragraph 81 above), inviting a response to that proposal. He repeated the threat of an injunction, asserting that it was “beyond doubt that the court will grant that injunction”. At 1226pm, Mr Carr replied to that email. He asserted that Balbir had been acting in the best interests of the Company and of the shareholders and believed that there were irregularities in the conduct of the Company’s affairs. He offered a further compromise, by removing the requirement for access to the Company’s Internet banking facilities, leaving therefore the only condition for withdrawal of the freeze as the agreement to approval of payments greater than £500. Mr Carr went on to question the authority of Mr Nugent Smith to act for the Company and asserted that it was inappropriate for Raghbir to use the Company as a vehicle to take legal action. He closed by indicating that the freeze would be withdrawn if Raghbir agreed to Balbir’s very reasonable request to allow him control over payments. Once that was done, then the parties could resolve the underlying issues between them.
At 1227pm, Mr Carr sent a further email, this time responding to the buy-out offer in Mr Nugent Smith’s email of 927 am (paragraph 85 above), stating that Balbir was not in a position to make an informed decision in respect of the offer, that he required much more information to establish the true financial position of the Company and connected companies and dealings and that they would be asking for the information which Balbir needed in order to make an informed decision about settlement proposals. In cross-examination, Balbir confirmed that he would not accept £300,000, because he wanted to get to the bottom of the accounts to find out why, by that time, the valuation was so low.
At 244pm Mr Nugent Smith responded to Mr Carr’s email of 1226pm, with a counter proposal for the lifting of the freeze. He proposed that, in return for Balbir agreeing to withdraw, and not reimpose, the freeze of the bank accounts:
“Hi-Tech undertakes not to make any payments in excess of £30,000 other than to staff, suppliers or in respect of loans without first obtaining the consent of BS Chaggar, such consent not to be unreasonably withheld and to be given within 48 hours of a request by email to bschaggar@hotmail.com for the same. Staff for these purposes will exclude are RS Chaggar, GS Chaggar, BS Chaggar, and Hardev and Valvinder Chaggar, who will be removed from the payroll. Kiran Chaggar is a key member of staff, and Hi-Tech needs to be able to continue to pay him.
…
… A threshold of less than £30,000 will therefore inhibit the proper management of Hi-Tech, and it may lose suppliers of approved materials.”
The effect of these revised proposed limits on authority was as follows. Balbir would have no control upon payments to staff, suppliers or in respect of loans. In cross-examination, Raghbir accepted that Ypsilon was considered to be a supplier to the Company. As regards other payments, there would be no control upon any payments of £30,000 or less. To this extent, the control offered by Raghbir to Balbir was weaker than that which had been offered in the email the previous day at 1235pm (paragraph 81 above). However in respect of other payments in excess of £30,000, these would be subject to approval by Balbir. Whilst payments to Raghbir, Balbir and Gaggandave were excluded from payments to staff, the proposal would not have stopped payments to Raghbir or to Gaggandave of any sum up to and including £30,000. In his witness statement, Balbir said that he considered the proposal to be clearly unacceptable.
Mr Carr responded, by email at 528pm, rejecting Mr Nugent Smith’s proposal, but putting forward a further and less stringent proposal than the one he had put forward at 1226pm and on the previous afternoon. The ceiling for payments which did not require the approval of Balbir was increased from £500 to £2000, but there were to be no payments to Raghbir or any of, or any company connected with, his family without Balbir’s approval. Otherwise the proposal was along the same lines as previously put forward. No response to this revised proposal was ever sent by or on behalf of Raghbir.
On 22 April Raghbir returned from holiday in Portugal and made efforts to contact Balbir to set up a meeting, which was set up for the next day. In his witness statement, Raghbir said that, following the making of arrangements for the meeting at the Temple:
“On Sunday late evening, my son, Dave, told me that Balbir had spoken to his father-in-law, Harbinder Sethi, and told him that he was looking for a settlement similar to that which was paid in respect of Jasbir and Dave mentioned that he had been told a figure of £1.6 m was what Balbir wanted”
The sequence of the communication of what Balbir was looking for was thus: Balbir told Harbinder Sethi; Harbinder Sethi told Gaggandave; Gaggandave told Raghbir.
Monday 23 April 2012
Raghbir’s telephone calls with Deepak Johar early on 23 April 2012
On the morning of the 23 April 2012, Mr Johar received a telephone call from Raghbir, in relation to his dispute with Balbir. According to Mr Johar’s attendance note, Raghbir indicated that he might need Mr Johar to draw up an agreement urgently because there was a problem with the Bank and the account had been frozen. A further attendance note records a second telephone call from Raghbir. Mr Johar raised with Raghbir whether or not it would be better for Raghbir to use the solicitors he had already instructed. When Raghbir said that he would prefer Mr Johar to deal with the matter, Mr Johar recorded that “there was a conflict of interest between me acting for him or acting for Balbir but if each of the parties were separately represented and I was basically acting as an informal mediator then I could probably deal with the matter”.
Meeting at 10am at the Temple
At 10am that day, Raghbir and Balbir, together with Manveer and Kirpal Singh Sagoo, met at the Temple and reached terms to resolve their dispute. It was agreed that in principle Raghbir would buy out Balbir’s interest in the Company and in Delta for the sum of £1.6 million.
Balbir’s evidence as to what happened at the meeting was that Raghbir offered to buy him out. He agreed to accept the £1.6 million offer and they discussed the mechanics of payment which would involve an upfront payment of £300,000 in the first year and further payments thereafter. Raghbir’s evidence in his witness statement was that, by the conclusion of the meeting, Raghbir agreed in principle to pay the same amount for Balbir’s shares as they had both paid for Jasbir’s shares in Hitech and Delta and that he thought (wrongly) that this was £1.6 million.
Unbeknown to Raghbir, Balbir recorded this meeting. There is an agreed transcript of that recording. The transcript is lengthy and I do not refer to it in detail. The following is relevant.
First, Raghbir raised the issue of Manveer having previously hacked into the Company’s computers. Balbir denied that it was hacking. Secondly, Raghbir referred to the company in Cyprus as being his company and also to being involved in the management of Australia.
Thirdly, Raghbir accepted that when Balbir had said that he had wanted to sell the Company then, he, Raghbir had started movements of money afterwards. He said:
“Only the point it happened was when you said that I thought that you desired to be bought out and I used the Company to my advantage that is the time I started using it.”
Later, Raghbir asserted (page 12) that the money that he had been moving was his money and that:
“I don’t want to go through that proving to the taxman or anybody as to how I’ve moved my money”.
Then Raghbir referred again (page 17) to starting to use the Company for himself and that if Balbir had not offered to sell it to him he would not have done any of this:
“I put all the expense receipts in and took the money out on Kiran’s name or my name. Now I’ve told Rishi Chandarana that they’ve got to be reversed on this years accounts if we want to go forward like this.”
Fourthly, Balbir indicated that he did not care if the Company had to shut down, as a consequence of investigations.
Fifthly, they discussed the purchase price. After Balbir suggested that Raghbir had “fiddled” substantially and had insulted him, Raghbir said (pages 13-14):
Subsequently in the meeting, the question of the price came up again. Raghbir stated (pages 18-19):
“We can get together with Rishi, you want to take 1.6 million. I don’t think it comes to 1.6. I was sitting with him just now you have 800,000 in Delta and it comes to 1.6 million balance sheet after taking out the loans etc that comes to 800,000 and I will give you 500 from Hi-Tech and if I have got money I will give you 200,000 from Romania but I can’t put that in writing, whenever the property value goes up at present it zero that I can promise you so 1.8 , comes to 1.3. That 500 will give you I don’t know I will pay but because buying from the company will cost you 10%. Then Delta when the properties get sorted sometime I will pay you then.”
There was a discussion (pages 27-28) about the precise terms of the agreement. Balbir insisted that whatever they agreed, it had to be agreed between solicitors. At that point Raghbir stated “I’ll propose to pay 1.6”. Balbir replied “Whatever, how are you…” Raghbir stated “I’m propose to pay you 1.6, whether it’s property division or its a settlement in 1.6”. In response, Balbir insisted that it was all put in writing and through solicitors.
Finally there was a conversation (page 17) which appears to be about a visa and Sunny. Balbir complained that Raghbir had paid Sunny, but had not paid him. Raghbir continued:
“I’m telling you listen to me fully. Since you started to compromise I spoke to Deepak about how to put his application. Have to show he has income here right listen to me, I put a contract and backdated it so he has a little income start, you hadn’t say no by then whether you wanted to sell shares or not.”
When asked in cross-examination about the application and the need to show income, Raghbir invoked the privilege against self-incrimination. He said that Sunny was due consultancy fees and denied that he was seeking to create the illusion of income.
Later in the meeting (at pages 22-24) Manveer expressed to his father his dissatisfaction with the deal and that Balbir should discuss it with his son first. In cross-examination, Balbir accepted that at the time of the deal and time of the meeting at the Temple, his sons were pressing him not to accept it because it was too cheap. However he had refused to take his sons’ advice. When it was put to him that in the period after 25 April, his sons continued to tell him that the deal was “too cheap”, his answer was somewhat unconvincing, saying first “I don’t think that they told me” and then, firming up his answer, “No they didn’t”.
After the meeting at the Temple
Following the meeting, at 1255pm Raghbir sent an email to all parties, including Balbir and Kiran and solicitors, marked “without prejudice and subject to contract” summarising what had been agreed at the meeting. It had been agreed in principle that Balbir and Hardev would sell 50% of the Company and of Delta Properties for a total of £1.6 million, on condition that the offer was in full and final settlement and that legal action would be withdrawn. There would be stage payments over 3 to 5 years. Balbir and his family would be responsible for taxation out of the settlement. Balbir would withdraw the bank action before the end of business that day. He concluded by stating “Lawyers to draw up agreement. Johar & Company will act on RS Chaggar’s behalf for purchasing shares.”
At 526 pm, Mr Thomas of Clarke Willmott responded to Raghbir’s email, with copy to all parties, stating that Balbir was broadly in agreement with the proposals but needed to clarify a few points of detail. In particular he pointed out that if payment of the £1.6 million was to be made over time then the relevant proportion of the shares and interest in the property would only be transferred against payment of the relevant part of the price. Nevertheless the terms would mean that both sides would be contractually obliged to sell and purchase, on a pre-agreed date, and Balbir wanted the payment schedule to be agreed immediately. For the avoidance of doubt, the contract would be between Raghbir and Balbir/Hardev personally, and was not dependent on the Company having the requisite funds. In addition Mr Thomas sought confirmation that Raghbir would provide Balbir with an indemnity in respect of any tax liability that may be demanded of him in respect of the sale of land in Romania earlier in the year.
Tuesday 24 April 2012
At 815am on 24 April 2012, Mr Johar telephoned Raghbir returning his call. Raghbir had informed him of the terms of the agreement which had been reached. In his attendance note, Mr Johar recorded that the £1.6 million figure was based on the figure that had been paid to Vijay Chaggar (Jasbir’s widow), but based on 2005 valuations of the properties which were likely to have gone down considerably and that:
“Raghbir’s attitude is that if he is able to settle at £1.6 million even though that is probably a higher price than he would like, he would like to proceed otherwise he will have to let Hi-Tech and Delta Properties go and the bank sort it out. I said of course I could not advise whether the £1.6 million that he was proposing to pay was the right amount or not but that was a commercial matter for him. He understood and said that he had already spoken to Rishi and discussed with Chubby and he was prepared to go with this.”
In a subsequent telephone conversation between Mr Johar and Balbir, it was agreed that there would be a meeting with Raghbir at 3pm. At 1250pm Raghbir sent an email to Balbir and others confirming the meeting at 3pm and informing him that the Bank had said that the Company would be placed into administration by 12 noon the following day. In that email Raghbir commented that it would take time to complete the process and that a period of 31 days was required to negotiate and implement the deal.
Mr Johar spoke to Balbir again at 125pm. According to Mr Johar’s attendance note (with which Balbir agreed), Balbir had expressed his unhappiness with an email he had received from Raghbir which went against what he thought had been agreed, that he was absolutely fed up and that he had proof that Raghbir had been money-laundering, committing fraud, siphoning money out of the Company and treating the Company as his personal bank account. Balbir told Mr Johar that he, Balbir, was quite happy for the business to go under, and even if he got nothing, was absolutely fed up and would let this go.
By email at 209pm Mr Thomas wrote to Raghbir with copy to all other parties (responding to Raghbir’s email at 1250pm) indicating that Balbir would agree to unfreeze the account only if, inter alia, there was legally binding documentation setting out the deal prior to the unfreezing.
At 226pm, Mr Johar wrote to Balbir and Raghbir in advance of the 3pm meeting suggesting that they should list points that need to be agreed. He stated it would not be possible to have a full settlement agreement in time for the Bank’s deadline; he would draw up heads of terms which they would agree during the 3pm meeting. He made it clear that he was happy to act as informal mediator but he could not act for either party if there was a conflict of interest.
In his witness statement, Mr Johar said that he understood there was great urgency to resolve matters because the Bank were threatening to place the Company into administration. He assumed that that threat was due to the Company not being able to make payments due to the freeze on the account He said that the heads of terms could be drawn up quickly in order to appease the Bank. He understood that there were issues, for instance in respect of tax and how the purchase of the shares in the Company would be funded, upon which Balbir and Raghbir needed to take advice prior to final terms being agreed.
The meeting at Mr Johar’s offices at 3 pm on 24 April 2012
The three men met at 3pm. The meeting lasted three hours. Mr Johar made a detailed attendance note of the meeting. In that note he stated as follows:
“I began by outlining my role as informal mediator because both Balbir and Raghbir had their own solicitors. Raghbir indicated that he had now not instructed Wragge & Co because he wanted to end the litigation as it was becoming too expensive. Balbir said that he was continuing to use Clarke Willmott and I said that I would act as an informal mediator between them and prepare a settlement agreement if matters could be agreed today but if there was any conflict of interest at all I could not act for either of them. They understood and Raghbir said that he had suggested that he and Balbir meet with me because they both trust me to act fairly. I said that was fine but I would still prefer that once the settlement agreement is done that it is explained and witnessed separately by independent solicitors because I do not want to be in a situation where my position is compromised in any way.”
It appears therefore that by this time Wragge & Co were no longer acting. The attendance note also recorded that Raghbir confirmed the value of £1.6 million was “an old valuation of 5 years old” when they did the deal in respect of Jasbir’s shares. Item 12 of the note recorded that they needed to sort out Inland Revenue clearance for the Company. Raghbir telephoned Rishi who said it would take approximately 28 days.
There is also a transcript of a recording of that meeting. At pages 12-13 of that transcript, there is discussion of the fact that it was the Company that would be buying the shares. Mr Johar asked who was actually buying the shares. Raghbir responded that it was the Company that was buying the shares and that that would give rise to entrepreneurs’ relief and that the Company was raising the money. Mr Johar then raised the question about whether the Company articles allowed the Company to buy back the shares. Raghbir pointed out that they had discussed earlier last year the process had to go through the Revenue and Mr Johar agreed that Revenue clearance was needed. Raghbir pointed out that if he himself bought the shares, he had to raise the money but that if the Company was buying it would need to have Revenue clearance. Balbir commented that he thought that they had got Revenue clearance a year ago, but Raghbir pointed out that they had stopped that process in the middle.
In his witness statement, Balbir said that a key issue for him was that it was agreed that the settlement was in full and final settlement of all claims. He had had enough of the upset and wanted to ensure that there was a clean break between himself and Raghbir. They would both be bound by the terms of the agreement which had taken some time to negotiate and each could move on with their lives. (In cross-examination, he accepted that at that time his attitude was that he did not need to investigate further). It was agreed that Mr Johar would draft a formal settlement agreement setting out the terms that had been agreed. Balbir was adamant that the initial agreement needed to be legally binding so that he could have sufficient certainty to enable him to instruct the Bank to unfreeze the account.
At 8pm that evening, Mr Johar sent an email to Mr Thomas with copies to Raghbir and Balbir, saying that he had just finished his meeting and setting out the agreed heads of terms. He would draft the Settlement Agreement, the SA, once Mr Thomas confirmed agreement. He then set out “Heads of Terms”; these were very close to the terms of the ISA as concluded.
The Bank imposed a revised deadline of 12 noon on 25 April 2012, after which it proposed appointing administrators if the parties remained in dispute.
Wednesday 25 April 2012
At 1040am on 25 April, Mr Thomas called Mr Johar on the telephone indicating that Balbir fundamentally agreed to the terms. Mr Johar’s own attendance note of that call continued as follows:
“He explained that his clients were in a position where they had lost trust and confidence with our client. The heads of terms are obviously detailed but not detailed enough and he notes that a settlement agreement is to follow.” (emphasis added)
The note recorded that whilst Mr Thomas recognised the need for a subsequent settlement agreement, the payment of the £60,000 on the release of the accounts needed to be on the basis that “there is a legally binding agreement based on the heads of terms”. The attendance note continued:
“I said that as a matter of law even if you express a document to be legally binding does not necessarily make it legally binding because of uncertainty. Mr Thomas agreed and said in the circumstances. however there needs to be some attempt to make the document legally binding. I said that the heads of terms is the route that I went for in the timescale available because it certainly sets out the intentions of the parties. He said that things like how the properties and shares are to be transferred needs to be agreed also but this is a detail that has to go into the settlement agreement.
I said that trying to express that the heads of terms are going to be legally binding is not in my view going to be controversial but I will take instructions.
He then went on to explain that the only leverage his client had was the freezing of the bank accounts and they did not want to lose that leverage unless that something was legally binding.” (emphasis added)
Mr Johar was cross-examined about this passage and in particular the reference to his own note referring to Raghbir as his own client and to the fact that he would take instructions from Raghbir. He accepted that at that point he was taking instructions from Raghbir. In a further part of that attendance note, which had originally been redacted but which was put to Mr Johar in cross-examination, Mr Johar recorded that he had “telephoned Raghbir to discuss and advise on the above”. He accepted that, by then, he must have transitioned into acting for Raghbir.
At 1148am on 25 April 2012, Mr Thomas emailed Mr Johar, with copies to Balbir, Manveer and Raghbir attaching a revised agreement “which as you will see is expressed to be legally binding as discussed and with such other changes as my client requires in order to sign this document today”. The attached, track change, draft of the agreement included, for the first time what became clause 16 of the ISA. At approximately the same time Mr Johar had telephoned Mr Thomas indicating that the deadline with the Bank was approaching. In response Mr Thomas informed Mr Johar that, at Balbir’s request, the Bank had given an extension until 4pm. In an email at 215pm to Mr Thomas, Mr Johar indicated that he was going into a meeting and would discuss this “with my client and come back to you”. In cross-examination, Mr Johar accepted that, by that time, he was acting for Raghbir.
The ISA was signed at around 320pm by Balbir and Raghbir at Mr Johar’s offices and the instruction to the bank to unfreeze the bank account was signed at the same time. The sum of £60,000 was paid to Balbir.
At the time of the signing of the ISA, the most recent accounting information available to the brothers indicated net assets on the Company’s balance sheet of £678,855.55.
In his witness statement, Balbir stated that, shortly after the ISA had been signed, Raghbir’s daughter got married and Balbir did not attend. He believed that Raghbir felt insulted by his non-attendance, and that, as appeared from what he said subsequently at the 16 January 2013 meeting, it was that which he believed caused Raghbir to break the promises he had made in the ISA agreement.
Certain findings of fact as at the signing of the ISA
Who made first offer and who mentioned £1.6 m first?
First, the initial negotiations for a buy-out between early 2011 and February 2012, had come to an end by 16 February 2012. Secondly, in April 2012 and in the context of the freeze of the bank account, it was Raghbir, and not Balbir, who first suggested a buy-out of Balbir’s interest as a solution to the then dispute. This is clear from Raghbir’s own witness statement and from the sequence of correspondence.
However there is an issue as to which party first suggested the figure of £1.6 million as the price for the shares and the interest in Delta. Balbir contends that it was Raghbir who first mentioned that figure at the meeting at the Temple in April, as can be seen from the transcript; and in any event, that the source of that figure is not relevant. Raghbir contends that in fact it was Balbir who had first mentioned the figure of £1.6 million in a conversation with Harbinder Sethi. He relies upon the passage in his witness statement referred to in paragraph 91 above.
As regards the meeting itself, in the transcript at three points, there are specific references to the figure of “1.6”: see paragraphs 99 and 100 above. Raghbir contends that the reference, in two places in the transcript, to Balbir wanting £1.6 million, and the fact that when that figure was mentioned, Balbir did not seek to negotiate or haggle, support what he had been told about the conversation between Balbir and Harbinder Sethi i.e. that it was the price which Balbir had asked for before the meeting. By contrast, in a telephone conversation of 26 June 2017 between Gaggandave and Balbir, Gaggandave stated that Harbinder had never mentioned to him that Balbir was looking to get £1.6 million or that he had had any discussions with Raghbir in relation to the issue. That conversation was recorded by Balbir and provided to Raghbir and his legal representatives. Mr Pepperall did not contest that the recording was genuine nor its contents. Gaggandave was not called and so this was not explored in cross-examination.
On this issue, I conclude, first that this is a dispute which does not require resolution. It is common ground that the idea for the buy-out came from Raghbir. There is no evidence that, as at the time of the meeting of 23 April (and regardless of subsequent exchanges on 25 April), Balbir was demanding a buy-out, at any price, as a condition of the lifting of the freeze of the bank account. Secondly, if, contrary to my conclusion, a finding on this issue is necessary, I am not satisfied, on the evidence, that Balbir was the initial source of the figure of £1.6 million. First, as already stated, the idea for the buy-out itself came from Raghbir. Secondly, the evidence of the conversation between Balbir and Harbinder Sethi is third-hand hearsay and as such cannot be given substantial weight. Thirdly, that evidence is directly contradicted by the evidence of the recorded telephone conversation between Balbir and Gaggandave, the contents of which are not disputed. Fourthly, and in any event, Gaggandave has not been called to give evidence. Fifthly, whilst I can see that the precise words used by Raghbir at the first Temple meeting referring to the figure are capable of being interpreted as a statement of something which Balbir had previously stated, it is not possible to reach a firm conclusion to that effect, without having heard the tape. Other passages in the transcript do not support that interpretation. Further support is provided by Mr Johar’s attendance note of 11 May 2012 (see paragraph 141 below). Further the previous buy-out of Jasbir’s interest had been at around that figure and, indeed, Raghbir in other evidence stated that the figure he had in mind was the price that had been paid previously for Jasbir’s interest (see paragraphs 94 and 111 above).
Practical alternatives
Balbir contends that, confronted with the freeze imposed upon the Company’s bank account, there were two practical alternatives available to Raghbir other than entering into the ISA.
First, as regards the option of accepting the proposed conditions relating to the restriction on authorised payments from the Company’s accounts, Raghbir contends that the proposals put forward by Balbir (see paragraphs 83, 87 and 90 above) were not practical. Further, he was not prepared for Kiran to be excluded from the business. In my judgment, Raghbir could have accepted, but did not accept, the conditions proposed for the lifting of the freeze. First, no evidence has been adduced to demonstrate why the initial proposal would have caused any significant difficulties. Secondly, given Balbir’s genuine concerns about the appropriateness of payments which had been made, the proposed limits were reasonable and over time changed in such a way as to indicate that Balbir was seeking a compromise solution. Thirdly, on the other hand, Raghbir’s own proposals in this regard, far from showing a willingness to find a solution, hardened as time went on. His second proposal (email 20 April at 244pm) was offering less by way of assurance than the first offer (email 19 April at 1235pm). The second proposal would not have stopped continued payments to himself or other members of his family of up to £30,000 at a time. Moreover, there would have been no control on payments to Ypsilon (which Raghbir accepted was a “supplier”). Finally, there was no response at all to Balbir’s final suggested restrictions in his 20 April email at 528pm, let alone an explanation as to why they were not acceptable.
Secondly, as regards the option of seeking an injunction to lift the freeze, Raghbir contends that this was not a practical alternative for two reasons. The first suggested reason is that, as in fact Clarke Willmott had stated at the time, Wragge & Co could not act for the Company (relying on the case of Mitchell & Hobbs, supra). In my judgment, this objection is not well founded. It is clear that injunctive relief was being seriously contemplated at the time. Indeed it was being asserted with confidence. Raghbir has chosen not to waive privilege as to the legal advice he was receiving, which might have demonstrated that that was no more than bravado. The claim now that in fact no such injunctive relief could have been obtained because Raghbir had no authority to act on behalf of the Company bringing a claim against a co-director is met by the fact that injunctive relief could have been sought in Raghbir’s name alone under section 994 CA 2006. Further the case of Mitchell & Hobbs is distinguishable because there the shareholder did not have his own claim or a derivative claim. At the time Wragge & Co was also acting for Raghbir personally and not just for the Company, as stated in the email of 18 April 2012 at 7pm. The second suggested reason was that because Balbir had put forward proposals for spending limits, the court might have regarded those as reasonable, thus rendering it less likely that the court would grant an injunction. However, that argument only supports the view that accepting the proposal for such limits was itself a reasonable practical alternative.
I conclude therefore that Raghbir had realistic alternatives to offering and, subsequently, entering into the ISA.
The role of Deepak Johar
Raghbir contends (and his evidence in his witness statement was) that until 3 May 2012 (after the conclusion of the ISA) Mr Johar’s role was limited to that of independent mediator. Mr Johar’s evidence in his witness statement was that “after the Initial Settlement Agreement had been executed, from 3 May 2012 I began acting for the First Defendant in connection with the drafting of a detailed Settlement Agreement”. However, as Mr Johar fairly accepted in cross-examination, that did not tell the full story in the light of other evidence. Immediately following the meeting at the Temple, Raghbir told everyone that Mr Johar would be acting for him (see paragraph 103 above). Moreover, and in particular, there is the reference to “our client” in the attendance note of 25 April 2012 (which Mr Johar was unable adequately to explain in his evidence); the redacted part of that attendance note, which referred to Mr Johar “advising” Raghbir and the likely basis of the redaction having been that of legal privilege between Mr Johar and Raghbir. Further, there is Mr Johar’s email at 215pm on 25 April stating that he was going to discuss “with my client”. In his oral evidence, Mr Johar confirmed that, in the light of this material and by the time of that email at the latest, he had transitioned into acting for Raghbir. Finally, I note that clause 13 b of the ISA itself provides that the fees of Mr Johar’s firm are to be paid by the Company and/or Raghbir.
In the light of this evidence, I find that by the morning of 25 April 2012 at the latest and before the signing of the ISA, Mr Johar was acting as a legal adviser to Raghbir personally and upon Raghbir’s instructions, as well as seeking to play the role of an informal mediator. I further find that he continued to act for Raghbir in the course of the drafting and negotiating of the SA, up until 22 May 2012.
The position of Hardev under the ISA
In his witness statement, Balbir stated: “I want to make clear that throughout the negotiations leading up to and including the Agreement, I discussed developments with my wife, Hardev. She was therefore fully aware of what was going on.”
In her witness statement, Hardev explained that although all the wives were shareholders, none of them had any sort of role within the business. They had been given shares for reasons of tax efficiency. The men made all the decisions. “It was always clear beyond doubt that Balbir was fully authorised to act on my behalf, in the same way as Raghbir was authorised to act on behalf of his wife”. She continued “I was more than happy for Balbir to settle this dispute with Raghbir by selling my and his share to Raghbir.” She concluded by confirming that “I am happy with the terms of the written agreement dated 25 April 2012”. That evidence was not challenged in cross-examination and, given my findings as to her reliability as a witness, I accept it. In cross-examination, Hardev stated clearly that she had conferred complete authority upon Balbir to sell her shares on whatever terms he considered appropriate. She said:
“My husband is acting on my behalf. I authorise him to act. He is acting on my behalf. He did everything on my behalf. I trust them completely… I agreed to sell my shares. He had authority to act on my behalf”.
That evidence was consistent with other evidence in the case that the women in the family were not involved in the business and that their shareholdings were there for reasons of tax efficiency. Raghbir accepted that that was the reason why his wife held some shares.
In the light of this evidence, I find that Hardev authorised Balbir to act as her agent for the purpose of selling her shares in the Company and for the purpose of concluding the ISA. Insofar as he signed the ISA and to the extent that it purported to transfer Hardev’s shares, Balbir was acting as agent for Hardev as undisclosed principal. I therefore conclude that Hardev was a party to the ISA.
Balbir’s motives – intention to close down company
Raghbir’s case is that, in imposing the freeze on the Company’s account, Balbir both foresaw and positively intended that the Company would close down.
In his evidence, Balbir accepted that he had genuine concerns about misappropriation and that was why he asked for information and had imposed the freeze. However, in cross examination, his evidence as to precisely what he wanted and his motives was inconsistent. For example, he said that the benefits of the deal as far as the Company, its employees and creditors were concerned was the lifting of the freeze itself. This had little logic in circumstances where it was he who had imposed the freeze in the first place.
I find as follows. Balbir was aware that the consequence for the Company of the freeze could be very serious. He foresaw that the freezing would be likely to lead to the Company’s failure, as accepted in cross examination. He made statements in correspondence and at the April meeting that he did not care if the Company closed down: see evidence of Kiran and Paul Elliott (paragraph 74 above), statements at Temple meeting on 23 April (paragraph 98 above) and Mr Johar’s attendance note of 24 April 125pm (paragraph 107 above). Moreover in his oral evidence he accepted that he understood the consequences as being that the business would close down. Finally, when asked “you are doing this to cause the Company to fail” he answered “if no result, that would be the outcome”. I accept and find that on the evidence he was clearly aware and prepared for that consequence.
I do not accept that Balbir’s motive or intention in imposing the freeze was to close down the Company. Nevertheless, I accept and find that he did foresee that the possible consequences of his actions in freezing the account was that the Company would close down.
(3)Post-ISA. May to August 2012: negotiations for the detailed Settlement Agreement (SA)
The ISA provided for the SA to be drawn up within 14 days. On 2 May 2012, Mr Thomas sent an email to Mr Johar with copies to Balbir, Raghbir and Manveer, asking how he was getting on with the draft Detailed Settlement Agreement and pointing out that he was mindful that the 14 day period was ticking and that it would be great to see a draft as soon as possible. Two days later on 4 May 2012 Mr Johar sent to Mr Thomas a draft Settlement Agreement for his approval.
On 9 May 2012, Mr Thomas replied to Mr Johar stating as follows:
“Just to keep you in the loop on this, I have been through the draft with my client and made a few comments.
Balbir is waiting for input from his accountant who in turn is waiting for some underlying financial information from Delta and Hi-Tech’s accountants Haines Watts.
I will therefore be in touch as soon as I have the go-ahead from my client following the accountant/tax advice.”
Clause 4 of the ISA provided that the parties considered that financial due diligence was unnecessary. In his evidence, Raghbir commented that he could not believe that Balbir was not satisfied with the amount of money he had extracted from him and that he could not understand why Raghbir was approaching Haines Watts, who were the company’s previous accountants, and not Rishi.
At 1045am on 11 May 2012 there was a telephone call between Mr Johar and Balbir, in the course of which Balbir indicated that he was seeking more information from Raghbir, including information as to whether or not he had received his dues in respect of dividends and profits. In his attendance note of that call, Mr Johar recorded that Balbir said that if he did not get the information he wanted “he will instruct a forensic accountant to investigate matters”. In cross-examination, Balbir denied that he had indicated that he was going to instruct a forensic accountant. He had not used the word “forensic”; those were Mr Johar’s words. In his oral evidence, Mr Johar said to the contrary: they were Balbir’s words.
Mr Johar then telephoned Raghbir and Balbir then called Mr Johar back and in the course of that conversation, Mr Johar put to Balbir points which Raghbir had made to him in their prior call. Balbir repeated that he would have to instruct a forensic accountant to check everything (point 4). Balbir denied that he was after more money (point 5). Mr Johar’s attendance note then continued:
“When the £1.6 million was offered by Raghbir at the Gurdwara he did not argue or negotiate. He merely accepted it. That is okay from on but he wants to make sure on having received a second opinion that he has received all his dues in the past and that is why he needs information so his accountants can check.”
At 458 pm, Mr Johar sent back to Mr Thomas an amended, track change, version of the SA. He also mentioned that Balbir had called him seeking further information and that he had asked that this was put in writing to avoid any doubts, at the same time explaining why it was required in the context of what has already been agreed. The email concluded by pointing out that the deadline of 9 May had passed and that he waited to hear from Mr Thomas as soon as possible.
17 May 2012 letter
At 12 noon on 17 May 2012, Mr Johar wrote an email to Mr Thomas, with copy to Balbir and Raghbir, in the following terms:
“Dear Simon
WITHOUT PREJUDICE & SUBJECT TO CONTRACT
I note I have not heard from you substantively in response to the draft SA I sent to you, or following your email of 9 May in which you stated you were waiting for the go-ahead from your client. The deadline of 14 days agreed in the ISA has expired. As I mentioned in my email of 11 May Balbir called me seeking further information and I asked for this request to be put in writing with reasons why this information was required in the context of the ISA. He stated that he would be seeking further financial disclosure before signing the SA and had instructed another firm of accountants and implied that this may have an impact on the terms of the ISA. This would make it difficult for the parties to agree the SA.
… I am instructed there are further issues in relation to your client’s breach of his duties as a director and the disclosure of the Confidential Information.
My clients’ consider that in view of the above the ISA is now null and void.
In those circumstances I do not believe I can take this matter further. If there is any continuing dispute then, as I have made clear to all parties from the outset, I would withdraw from acting in this matter due to a potential conflict of interest.”
In his witness statement, Raghbir explained the reason for this email being sent. He and Kiran were very unhappy about the delay and the requests for information. He felt that was a breach of the ISA and that he wanted to withdraw. He instructed Mr Johar that he wished to withdraw and in any event the £1.6 million was not appropriate to pay. In fact prior to the sending of this email, Mr Johar had advised Raghbir by email at 1042am that just because a document was expressed to be legally binding does not mean that it is.
Raghbir relies upon the terms of this email as constituting, first, the avoidance of the ISA on grounds of economic duress, or, alternatively an acceptance of repudiation arising from Balbir’s failure to agree the terms of the SA. I address this further at paragraphs 243 and 265 below.
On the same day, and after the email, Mr Johar and Mr Thomas spoke on the telephone. Mr Johar’s attendance note recorded as follows. Mr Thomas had been told by his client to hold off for a while whilst he took further advice. He, Mr Thomas, had expressed his concern to Balbir that the position between the parties appeared to be widening. Balbir had spoken to another accountant regarding his tax position and Balbir’s main concern was to make sure that there was no comeback in relation to tax from HMRC in respect of any tax enquiry either individually or through the Company or Delta. He wanted to protect himself from any tax investigation, particularly from the Romanian authorities and he also wanted to make sure that he had received everything that he was due from the Company and Delta. Mr Thomas had discussed with Balbir that if what Balbir was seeking in terms of questions would result in a request for more money, then obviously that would be a change in the deal and the parties may be “back to square 1”. Balbir’s instructions were that the accountant needed some information before he could advise Balbir. Mr Thomas indicated that they had some concerns with the settlement. The main concern was the “effective date” insofar as Delta was concerned, as Balbir did not want to relinquish his interest in Delta until he had been paid in full for that interest. That would mean that he would be entitled to any income in Delta until payment of the final £800,000. In summary Mr Johar recorded that the purpose of Mr Thomas’ call was that he wanted to know whether the position is that the parties are to fight it out or whether there is the possibility of the settlement being salvaged. The note further recorded Mr Thomas saying that he was “trying to steer Balbir from changing the goal posts.
In response - the note records - Mr Johar reiterated a number of points about the tax position, pointing out in particular that Raghbir was not going to put more money on the table. The note concluded by recording a number of points that the two agreed as the way forward:
“a. He will go back to Balbir and ascertain if Balbir is trying to get more money out of deal then this may be a deal breaker.
b. If Balbir wants income from Delta until he is paid this may be a deal breaker.
c. Is there any merit in flipping the deal so that Delta monies are paid first and the Hi tech monies paid second?
d. He will write to me with Balbir’s precise position after take instructions to include factually what he requires and what he wants it.
e. I will then take instructions from R S Chaggar.
f. He should also indicate whether he wants to meet face-to-face to canvass the possibility of salvaging the settlement.
g. One other point he raised was a dispute appears to have occurred because Balbir’s Bupa membership had been cancelled. He is still a director of the company and is upset that his Bupa membership has been cancelled. Simon also said that he can understand why RS Chaggar has done this because based on the initial settlement agreement Balbir is to have resigned as director. I said that I will take instructions but that may be a minor matter in the scale of things.”
18 May 2012 letter
Following the telephone conversation, in an extensive letter dated 18 May 2012, written “without prejudice and subject to contract”, Mr Thomas pointed out, first, that Balbir had stressed to him that his intention remained, subject to resolving the other points of detail in a comprehensive settlement agreement, to honour the terms set out in the ISA. He went on to re-iterate the point, made in the telephone conversation, about concerns about Balbir’s tax position and about the concept of the “effective date” as defined in the draft agreement. In particular he suggested in relation to Delta (alone) the payment for those assets should be accelerated, if Raghbir wanted Balbir’s involvement with Delta to cease earlier. Mr Thomas further rejected the suggestion that the ISA was null and void by reason of breach of confidentiality obligations on the part of Balbir. Finally, he pointed out that until the settlement agreement was concluded Balbir remained a director and shareholder of the Company and continued to enjoy his various rights and obligations as such, including the benefit of BUPA health insurance. The letter then attached a two-page document with a list of information sought, including detailed information related to Alpha Products SRL, Delta Properties SRL, Hi-Tech Auto parts Australia and offshore trust activities. As regards that list of information, in cross-examination, Balbir denied that he was interested in investigating suspicions about his brother. He wanted to ensure that his name was not linked to any other businesses.
On 22 May 2012 Mr Johar responded, indicating that, in the light of what was seen as an attempt to change the deal significantly, Mr Johar was not now instructed to respond, adding that, as he could see a potential conflict of interest, he could not act further.
In late May and June 2012, Balbir made requests for financial information in relation to the Trust, as it had held shares in the Romanian companies, Alpha Products SRL and Delta Properties SRL. Relations deteriorated further. On 31 May 2012, Raghbir sought to remove Balbir and Hardev from the Company’s BUPA policy on the basis that Balbir’s interest in the Company had effectively ceased. Balbir responded that he was still a director. As regards this period up to the end of May 2012, my findings of fact are at paragraphs 256 to 259 below.
18 June 2012 letter from Clarke Willmott to Mr Johar
On 18 June 2012, Mr Thomas of Clarke Willmott wrote to Mr Johar. This letter is relied upon by Raghbir as a repudiatory breach of the ISA. It stated:
“Dear Deepak
Without prejudice
Dispute between BS Chaggar and RS Chaggar
I am mindful that we haven’t had any contact since your email of 17 May when negotiations over the Final Settlement Agreement broke down, and you said that you were withdrawing from acting in the matter.
I understand that since that date, Raghbir has been refusing to engage with my client on this ongoing issue and I would therefore be grateful if you could pass the following communication onto him.
In short, my client is not prepared to accept that this matter is just closed and a resolution to the current situation must therefore be found. Both Balbir and Raghbir have received correspondence from Paul Elliott of Yorkshire Bank requesting certain payments to be made as well signing offer letters in relation to a restructure of loans and renewal of overdraft facilities in Delta. Notwithstanding that this is likely to result in Yorkshire Bank determining that the facilities with Delta are in default, Balbir will not sign any of the additional documentation unless a deal is finalised to buy out his interests. He will also contact the bank again in relation to once again freezing Hi-Tech’s bank accounts (which he only agreed not to do if the original agreement was finalised) as it seems that this is the only way that he can get his brother to address the situation.
Balbir has been to Hi-Tech’s premises on several occasions in the last few weeks and has been met with hostility and abuse from Raghbir. This has reinforced Balbir’s concerns that any deal reached between him and his brother must involve a “clean break” where Balbir’s side of the family’s interests are bought outright for cash on completion without deferred payment terms. Raghbir will then have full control of Hi-Tech, Delta and all related entities as soon as the deal is signed.
In the light of this, Balbir is now only prepared to sell out all of his and his family’s interest in Hi-Tech and Delta and waive any claims that he has against Raghbir in return for the payment of £1.6 million cash on completion.
If this is not agreed, Balbir will not sign any documentation agreed by the Bank and will instruct the bank to freeze the Hi-Tech and Delta bank accounts. He will also instruct this firm to formally commence proceedings against Raghbir for breach of his fiduciary duties in respect of Hi-Tech, including involving misappropriation of company monies.
Balbir appreciates that result of this could involve Yorkshire Bank appointing receivers under their security over Delta’s properties and potentially also the insolvency of Hi-Tech. Whilst this is clearly not financially in either his or his brother’s interest, Balbir is prepared for it to happen in order to finally bring closure to this dispute. Therefore unless Raghbir enters in negotiations to reach agreement to separate their respective business interests Balbir is left with no other option.” (emphasis added)
Mr Johar responded on the same day indicating that he would pass the letter on to Raghbir.
On 3 July 2012, Mr Nugent Smith, referring to a conversation the previous week, asked Mr Thomas whether he had managed to take instructions from Balbir and whether he should expect a further mark-up of the draft Final Settlement Agreement. In his witness statement Raghbir omitted reference to this.
On 4 July 2012 Rishi Chandarana wrote to Balbir in respect of a request by Balbir to inspect the books and records of the Company, informing him that Raghbir was adamant that “you are effectively no longer a director of the company”. The email continued that “in fact, Raghbir arranged for the books and records to be picked up from our premises this afternoon and let me have sight of a legal document which confirmed you are effectively no longer a director of the company”. Again Raghbir made no reference to this in his witness statement. However, in cross examination, he confirmed that the “legal document” referred to was the ISA and that the conversation with Rishi where Raghbir relied upon the ISA had taken place about 7 to 10 days before the email.
By email dated 18 July 2012, Mr Thomas wrote to Mr Nugent Smith, without prejudice and subject to contract:
“I have had a number of further discussions with my client and whilst he is prepared to go back to the original deal as set out in the “Initial Settlement Agreement” dated 25 April 2012, he feels that a clean break with a lump sum payment is the only sensible way to resolve matters. On this basis a number of our concerns with the settlement agreement drafted by Johars would go away and a deal could be swiftly concluded.”
After pointing out that issues had arisen in relation to Balbir signing cheques for the Company and also the fact that Balbir had received a tax bill in relation to Delta, he continued:
“I have persuaded him that he does not need to carry out a full forensic accounting exercise in relation to Delta and/or Hi-Tech but he will need to have sufficient information to make sure his tax affairs are properly dealt with.
Can you therefore take instructions from your client on the terms of a settlement involving an upfront payment and limited provision of information in order to ensure that my client’s personal tax affairs are correctly resolved and we can then try to get this resolved one way or another in the near future. This will allow all parties to move on without the need for continued engagement between them in relation to the businesses.”
In his witness statement, Raghbir commented that he could not entertain negotiations for a lump sum payment or indeed “any payment at the level of the ISA”.
On 6 August 2012, Mr Nugent Smith wrote by email to Mr Thomas, again “without prejudice” stating as follows:
“I have now taken instructions from RSC.
Whilst he is content to proceed as per the terms of the Initial Settlement Agreement, RSC is concerned that your client has no intention of honouring the agreed deal. There is concern in particular at the lack of progression on the Detailed Settlement agreement over the past 2-3 months and a feeling that your client is trying to renegotiate the fundamentals that were agreed. On this basis, we can see the benefits of a clean break for all parties. Otherwise there is a real risk of further dispute and unnecessary expenditure on legal costs. I think we are agreed on that at least.
In order to achieve this clean break, I am therefore instructed to offer the following alternatives to your client:
…”
The letter then proceeded to put forward three alternative structures for the proposed “clean break”.
On 9 August 2012 Mr Thomas responded to Mr Nugent Smith, without prejudice, stating that Balbir was willing to proceed on the terms of the ISA, and pointing out that the lack of progression towards a final Settlement Agreement had not been solely due to Balbir. He had instructions to proceed with the SA.
From August 2012 onwards
As regards the lack of action between August and November, Balbir explained that as far as he was concerned there was a binding agreement in place. Payment was not due until later in the year, so there was simply no need for him to do anything further at that time. Raghbir’s evidence was that Balbir’s proposals were of no interest to him and accordingly there was no reply on his behalf. It is noteworthy that Raghbir did not respond, to the 9 August 2012 email, by asserting that the ISA was no longer in operation.
26 November 2012 letter
Raghbir changed his legal representation, instructing the firm of Freeths. By letter dated 26 November 2012 to Clarke Wilmott, Freeths set out at length Raghbir’s then position. They asserted as follows: first that the ISA was always only heads of terms and that fundamental terms remain to be agreed. Secondly, and in the alternative, even if the ISA was a binding legal document, Balbir had clearly breached the ISA on a number of occasions. The letter then set out a number of breaches, in particular a statement that the 18 July 2012 email (rather than the 18 June 2012 email) indicated that Balbir would no longer abide by the agreement for instalment payments and that the Settlement Agreement had not been entered into within 14 days. The letter further relied upon the email of 17 May 2012 as rescinding the terms of the ISA. The letter sought repayment of £30,000 of the £60,000 which had been paid at the outset. On 7 December 2012, Clarke Willmott replied indicating they were no longer instructed.
Meeting on 16 January 2013
A further meeting at the Temple, to explore settlement, took place on 16 January 2013. There is a transcript of a recording of that meeting. In that meeting Raghbir said that he had offered £1.6 m without thinking and that he could no longer afford to pay £1.6 m. The portfolio valuation was down by half a million; he reminded Balbir that Balbir had wanted earnings if the valuations had gone up. Raghbir said that he would have carried on if Balbir had come to his daughter’s wedding and if Balbir had not gone digging down deep in relation to his financial situation. Raghbir said that it was “important have non-disclosure and not to go through investigations”. Balbir asked Raghbir why he had not shown him his books, suggesting that Raghbir had something to hide. Raghbir replied “Yeah but when you have signed an agreement that you are not going to due diligence, then you do not do due diligence after that”. Raghbir admitted that he had put in false invoices to take money out for himself and to pay for the wedding. He said he would reverse the entries.
In June 2014, Balbir raised his claim under the ISA. He had instructed direct-access counsel, Brett Wilson. On 13 June 2014 Mr Wilson wrote to Freeths asserting that Balbir was still a director and sought to enforce the ISA. On 16 June 2014 Balbir emailed Kiran and Raghbir reaffirming his position as a director and shareholder of the Company and a partner in Delta and stated he wanted to continue to be involved in all decision-making. Yet on 24 June 2014 Mr Wilson wrote to Freeths stating that clause 7 of the Agreement operated as Balbir’s resignation as a director.
As indicated above, the Company was placed into administrative receivership on 26 June 2014. On 11 July 2014, Mr Wilson responded to Freeth’s letter of 26 November 2012 asserting that the ISA gave rise to valid and binding agreement that had not been breached.
The administrative receivers, Mazars, filed its report on 5 September 2014, showing total estimated realisations from assets of £892,722, and liabilities of £591,902 in respect of bank indebtedness, £22,517 preferential creditors and £528,094 unsecured creditors, giving total liabilities of in excess of £1.14m.
Findings of fact: Misappropriation in Fact
It is common ground that in the period up to and including April 2012 Balbir had genuine concerns that Raghbir had been misappropriating sums from the Company. Mr Wilson invites the Court to go further and find that Raghbir did in fact misappropriate substantial sums from the Company, use the Company as a means of committing tax evasion (by making payments through Ypsilon and other entities abroad, in seeking to make income look like foreign income as a non-domiciled person), and generate a backdated agreement in order to support a fraudulent visa application on behalf of Gaggandave’s wife. This, it is said, is of particular relevance to the reasonableness of Balbir’s investigations into the Company, both before and after the ISA, and to whether the true cause of Raghbir’s offer to buy out Balbir was Raghbir’s wish to avoid investigation into his misconduct. In this connection he relies upon admissions made by Raghbir in the course of the two meetings at the Temple; the invocation, by Raghbir in the course of his cross-examination, of the privilege against self-incrimination; the Sage files; and Raghbir’s failure to answer the allegations in Balbir’s witness statement.
As regards the admissions made at the meetings at the Temple, at the April 2012 meeting, Raghbir admitted that he had taken money out of the Company and had used the Company to his advantage. He had done that once he had been told by Balbir that Balbir wanted to sell his shares. He then said that he admitted it was a mistake, he started too early and that if Balbir had not offered to sell the shares then he would not have done it. Raghbir accepted that he had started to treat the company as if it were wholly-owned by him and he did transfer funds for his personal use; he accepted that it was wrong and had said that it would be remedied.
The dispute centres upon whether in fact Raghbir did cause the accounting entries to be reversed. Raghbir submits that it is clear from what was said at the meeting that he had in fact caused the accounting entries to be reversed. However the statement relied upon that he had told Rishi to reverse the payments (see paragraph 97 above) does not in my judgment establish that the entries were in fact reversed. A comparison of the draft profit and loss account provided in February 2012 and the unaudited accounts of the Company for the year ended November 2012 do appear to show lesser amounts in relation to travel expenses and consultancy fees for 2011. However these are unaudited accounts and there has been no full disclosure of the Company’s Sage files. In any event, those accounts still show substantial sums for travelling expenses and, more particularly consultancy fees, both in 2011 and 2012.
Further at the April meeting, Raghbir referred to back-dating a contract in order to support a visa application made by his son Gaggandave (see paragraph 101 above). At the second Temple meeting in January 2013 Raghbir admitted that the Company had been used to pay for various expenses associated with his son’s wedding.
As regards the Sage files showing the Company’s accounting records, Raghbir had not disclosed them in their entirety. In any event the data showed that substantial payments had been made to Gaggandave, most particularly at a time when, according to Raghbir, he was not even working for the Company. There was no underlying documentation to support the contention that the £1 million plus paid to Ypsilon was properly in respect of goods or services supplied for or to the Company. The suggestion of Balbir is that the payments to Ypsilon were effectively payments of salary or remuneration to Raghbir as being foreign income and so not subject to taxation in the hands of Raghbir as a “non-domiciled person.”
Privilege against self-incrimination
In the course of his cross-examination, Raghbir was asked a substantial number of questions relating to payments made from the Company to Ypsilon, his role in relation to the company in Australia, his concerns about the tax authorities, the visa application and the reversal of payments from the accounts. He repeatedly declined to answer many of these questions on the basis of the privilege against self-incrimination.
Where a witness invokes the privilege against self-incrimination, the balance of case authority (absent a Supreme Court decision) is that the court is entitled to draw an adverse inference against the witness upon a refusal to answer questions: see Phipson on Evidence (19th edn) at §24-56 and R (Binyam Mohamed) v. Sec of State for Foreign and Commonwealth Affairs [2008] EWHC 2048.
From Raghbir’s failure to answer questions I draw the inference that, at the very least, Raghbir had no answer to the questions he was asked which would indicate that in relation to those matters, he had been, or could show that he had been acting lawfully and honestly and further that he had significant concerns about the legality of his conduct and that it might (not did) involve criminal activity. Raghbir believed that he had or might have committed criminal and/or unlawful acts in relation to the Company’s funds.
Findings
These allegations are serious matters, and were not directly in issue in the case. The case is not about misappropriation. On the incomplete material before me, it is neither necessary nor appropriate for me to make specific findings of misappropriation, fraud or criminal conduct and on the material before me I am not able to do so.
However, I do find that there are clear admissions in transcript of the Temple meeting of April 2012 by Raghbir that he had in fact taken sums out of the Company. In the transcript he goes on to suggest that he intended to repay or credit those sums back to the Company. There is no clear evidence to show that those amounts had been reversed. That could only be shown by the Sage accounting data. However Raghbir had chosen not to disclose all that data. On the other hand there is clear evidence that amounts were taken out; and there is clear evidence that Raghbir accepted that those payments were improper.
In my judgment, whether or not there was in fact misappropriation or fraud, I am satisfied on the basis of the evidence which is before the court that, not only did Balbir have genuine concerns in this regard, but that Raghbir himself was at the time concerned about these matters, and about the fact that Balbir was, from April 2012 onwards, seeking to investigate the Company’s affairs. I further find that those concerns were sufficient that he wished to avoid further investigation by Balbir. His subsequent statements at the January 2013 Temple meeting (paragraph 158 above) support this conclusion.
I find, and indeed Mr Pepperall accepted, that given his answers in cross-examination, the Court could infer that Raghbir had concerns about his tax affairs and the international element of his business. He went on to submit that that was not related to the affairs of the Company, insofar as sums were going out of the Company to foreign businesses diverting income for tax purposes. However, in circumstances where Raghbir was telling Balbir that neither he nor his son were taking remuneration from the Company, then in my judgment that was sufficient ground for Raghbir not to wish there to be further investigation of these payments.
I further find as a fact that Raghbir’s motivation for offering a buy-out and accepting the ISA was not the pressure of the freeze of the bank account, but the possibility of an investigation into his financial dealings for fraud or misappropriation. He feared he might get found out and thus he did not wish to allow limits to be placed on financial matters, nor for there to be further investigation.
(E)Discussion and Analysis of the Issues
Preliminary: the terms of the ISA
The signatories to the ISA are Balbir, Raghbir and the Company (with Raghbir signing on its behalf).
Clause 1 provides for immediate payment by the Company to Balbir of £60,000, by way of dividend, on condition that the bank accounts are unfrozen. It further provides for a letter instructing the lifting of the freeze to be sent, in terms which confirm that the dispute is settled, and state that, subject to detailed legal documentation being entered into, Balbir would not reimpose the freeze.
The transfer of, and payment for, Balbir and Hardev’s shares in the Company and Balbir’s interest in the Delta properties are dealt with in clauses 2 to 5. In summary, the total price is £1.6 million, split as to £800,000 for each of the two interests. Transfer and payment is to be made in tranches over the following three years. Clause 12 provides that Raghbir guarantees all payments due from the Company.
Clauses 6 to 8, and 11 and 14 and 15 provide for the conclusion of, and terms to be included in, a detailed settlement agreement (the SA). Clauses 9 and 10 deal with tax issues. Clause 13 addresses legal costs. Clause 16 is important; it provides, first, that the ISA gives rise to legally binding obligations, notwithstanding that an SA is to be put in place; secondly that the SA will be put in place as soon as practicable and in any event within 14 days; thirdly that the parties will act in good faith to put it in place as soon as practical; and fourthly, that once in place, the SA will supersede the terms of the ISA.
I consider at this stage more precisely the nature of the transfer/sale and purchase of both the shares in the Company and the interest in Delta. First, it is the case, as submitted by Balbir, that as regards the payment obligations arising under the ISA, those obligations are undertaken by, and imposed upon, both the Company and Raghbir. Clause 2 states “Hitech and/or RSC will pay”. (Clause 6 similarly provides for joint and several obligation in respect of monthly sums following the SA). Clause 12 then goes on to provide that if the Company does not pay, Raghbir guarantees such payment as “principle obligor”. It is clear therefore that Raghbir is liable to pay the sums due in respect of Balbir and Hardev’s shares in the Company.
Secondly, as regards the obligations, in return for those payments, to transfer the property owned by Balbir and Hardev, that property comprises, first, Balbir’s interest in the Delta properties and secondly, Balbir and Hardev’s shares in the Company.
As regards Balbir’s interest in the Delta properties, the ISA contemplates two different mechanisms for transfer. First, clause 4 envisages, as a possible mechanism, a transfer of the properties into an “SPV” (Special Purpose Vehicle). In that event, Balbir’s shares in such an SPV are then to be transferred in the same way as the shares in the Company are to be transferred under clause 3 (which I address in the next paragraph). The second possible mechanism is provided for in the second part of clause 5: Balbir “will transfer the properties owned by Delta to [Raghbir] or any nominee of his”. In my judgment, it is clear that as a matter of construction of the ISA, the position is that, absent agreement to transfer to an SPV, clause 5 provides that Balbir’s interest in the Delta properties is to be transferred to Raghbir (or at his direction). The second part of clause 5 is to be read as, effectively, including the words “if an SPV is not formed”.
As regards Balbir and Hardev’s shares in the Company, the only transfer mechanism provided for, and contemplated by, the ISA is for them to be transferred by Balbir and Hardev to the Company. Clause 3 provides expressly that they “will [be] transferred to Hitech”. Clause 5 confirms this. “For the avoidance of doubt” they are to be transferred “to Hitech subject to the parties obtaining HMRC approval” (I deal in paragraphs 208 to 212 below with the effect of the requirement for HMRC approval). There is no provision in the ISA making any reference to the shares in the Company being transferred to Raghbir either in the alternative or at his option or as a fallback. Whilst it is correct, as Mr Wilson submitted, that the ISA conferred upon Raghbir the option to decide who, and in what proportions, would pay the contractual sums due for the shares, in so far as the right, and obligation, to purchase is concerned with the transferee of the property purchased, then that right and obligation is vested in, and imposed, upon the Company alone. To that extent, the ISA does require the Company to acquire the shares. Mr Wilson’s submission to the contrary fails to distinguish between the payment of the price and transfer of the property.
This construction of the express terms of the ISA is supported by the fact that in the course of the previous buy-out discussions between early 2011 and February 2012, the parties expressly addressed the issue of how the buy-out would be structured and whether the “buyer” would be the Company or Raghbir. It is clear that at that time, what was being contemplated (by the offer then made) was a purchase by the Company (see paragraphs 60 to 66 above – this is confirmed by Rishi’s email of 4 April 2012) and one where payment was to be made by the Company. Balbir’s characterisation, in his email of 19 April 2012, of those discussions as “purchase … by RS Chaggar” does not detract from that conclusion. In my judgment, this is objective factual background admissible on any issue of construction of the ISA.
Then, when the buy-out provided for by the ISA was being discussed, in the email at 927am on 20 April, Raghbir proposed that “his offer to purchase” would be reinstated. Given the nature of the earlier offer, in my judgment what was being proposed then was a deal which involved transfer of the shares to/acquisition of the shares by the Company (rather than an offer that Raghbir personally would acquire the shares). This is confirmed by the content of discussions at the meeting at Mr Johar’s offices at 3pm on 24 April 2012 at which the detailed terms were negotiated, and in particular the transcript of that meeting at pp 12-13 (see paragraph 112 above). It is clear that, for similar tax reasons, the buy-out would be structured so that the shares would be transferred to the Company. If and to the extent that this evidence is admissible on the issue of construction, it supports (rather than detracts from) my conclusion in paragraph 182 above.
In the light of the foregoing conclusions, the ISA comprises a number of distinct promises relating to the shares and payment:
A promise by Balbir/Hardev made to the Company to transfer the shares to the Company, in return for a promise by the Company to pay the price.
A promise by Balbir/Hardev made to the Company to transfer the shares to the Company, in return for a promise by Raghbir to pay the price.
A promise by Balbir/Hardev made to Raghbir to transfer the shares to the Company, in return for a promise by the Company to pay the price.
A promise by Balbir/Hardev made to Raghbir to transfer the shares to the Company, in return for a promise by Raghbir to pay the price.
Issue (1): Binding Agreement?
The relevant legal principles
The construction of contracts in general.
First, the exercise of construction is one in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been made available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so the court must have regard to all the relevant circumstances. Further if there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other: Rainy Sky SA v Kookmin [2011] UKSC 50 at §21.
Secondly, the courts will strive to uphold agreements which were intended to be binding. For a contract to be found to be uncertain it has to be legally or practically impossible to give to the parties’ agreement any sensible content. The court will do its best, if satisfied that there was an ascertainable and determinate intention to contract, to give effect to that intention looking at substance and not mere form. It will not be deterred by mere difficulties of interpretation. Difficulty is not synonymous with ambiguity so long as any definite meaning can be extracted see Dicker v Scammell [2005] EWCA Civ 405 at §§ 30, 31 and 40.
In Durham Tees Valley Airport Ltd v BMI Baby Limited [2010] EWCA Civ 585 Patten LJ said at §54:
“For a contract to be binding its terms must be sufficiently definite to enable the court to give it a practical meaning. Its terms must be so definite, or capable of being made definite without further agreement of the parties, that the promises and performances to be rendered by each party are reasonably certain…. But, in applying this test the court has an established reluctance to strike down what were obviously intended to be legally enforceable commercial agreements, citing Hillas v Arcos
“… It is clear that the parties both intended to make a contract and thought they had done so. Businessmen often record the most important agreements in crude and summary fashion; modes of expression sufficiently unclear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but on the contrary, the court should seek to apply the old maxim of English law “verba ita sunt intelligenda ut res magis valeat quam pereat”. That maxim, however does not mean the court is to make a contract for the parties, or to go outside the words they have used, except insofar as that appropriate implications of law, as, for instance, the implication of what is just and reasonable to be ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail…. Thus in contracts for future performance over a period the parties may neither be able nor desire to specify many matters of detail, but leave them to be adjusted in the working out of the contract. Save for the legal implication I have mentioned, such contracts might well be incomplete or uncertain; with that implication in reserve they are neither incomplete nor uncertain.”
Thirdly, where the words of a contract are capable of two meanings, one of which is lawful and the other unlawful, the former interpretation should be preferred, even if it is the less natural construction: Lewison: the Interpretation of Contracts (6th edn) §7-11 and Great Estates v Digby [2011] EWCA Civ 1120.
Whether there is a binding contract: intention to create legal relations, agreements to agree and incomplete agreements/certainty of terms
First, neither an agreement to negotiate in good faith nor an “agreement to agree” creates an enforceable contract: Walford v Miles [1992] 2 AC 128 per Lord Ackner at 138B-H.
Secondly, in this context, the question is whether, upon consideration of what was communicated between the parties, that leads objectively to a conclusion that the parties intended to create legal relations and had agreed upon all the terms which they regarded, or the law requires as essential for the formation of legally binding relations: see RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14 [2010] 1 WLR 753 at §45.
The relevant principles to be applied in answering that question are "clearly stated” in 
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 (as approved by the Supreme Court in the RTS Flexible Systems case (at §§48-49). In that case the parties to a contract of sale had agreed certain terms but other terms of economic significance were not agreed. They regarded those terms as relatively minor details which could be sorted out without difficulty once the bargain was struck. It was held both by Bingham J and by the Court of Appeal that neither party intended agreement of those terms to be a precondition to a concluded agreement. At page 619 col 1 to col 2, Lloyd LJ stated as follows:
“As to the law, the principles to be derived from the authorities, some of which have already mentioned, can be summarised as follows:
(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole …
(2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary “subject to contract” case.
(3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed; …
(4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled …
(5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.
(6) It is sometimes said that the parties must agree on the essential terms that it is only matters of detail which can be left over. This may be misleading, since the word “essential” in that contact is ambiguous. If by “essential” one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by “essential” one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by “essential” one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by [Bingham J] “the masters of their contractual fate”. Of course the more important the term is the less likely it is that the parties would have left it for future decision. But there is no obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called “heads of agreement”. (emphasis added)
Contrary to Mr Pepperall’s submission, Pagnan is not authority for the proposition that even where the parties intend that their initial agreement is to be binding, a subsequent failure to agree essential further terms will render the contract unenforceable.
The above principles were applied by the Court of Appeal in Barbudev v EuroCom Cable Management Eood [2012] EWCA Civ 548 (especially at§§ 30, 37, 42, and 52). In that case, the claimant and the first defendant, in the context of the sale of shares in a cable TV company by, inter alia, the claimant to the first defendant and others entered into a “side letter”. The purpose of the side letter was to give the claimant at least some comfort that the first defendant would subsequently enter into a distinct investment and shareholders agreement (“the Investment Agreement”). The side letter provided that in consideration for the claimant entering into the share sale, the defendant “agreed that… we shall offer you the opportunity to invest in the [defendant] on the terms to be agreed between us which shall be set out in the [Investment Agreement] and we agree to negotiate the [Investment Agreement] in good faith with you”.
The claimant sued for damages for loss sustained as a result of the first defendant’s failure to honour the terms of the side letter. Of the five issues identified by Aikens LJ (§28), three issues are relevant for present purposes, namely: (2) whether the parties intended to create legal relations by virtue of the side letter; (3) whether the side letter was an “agreement to agree” or an enforceable contract giving the claimant rights to purchase a stake in the defendant; (4) if the side letter was in principle a binding contract giving the claimant such rights, whether it was nevertheless unenforceable because of uncertainty of terms.
At §§30-32, Aikens LJ identified the legal principles to be applied which were not in doubt, citing in particular the passages in RTS Flexible Systems cited above and referring also to both the Pagnan and Rainy Sky cases. As regards issue (2), he stated that in a commercial context the onus of demonstrating that there was a lack of intention to create legal relations lies on the party asserting it and it is a heavy one. Specifically on issues (3) and (4), he stated, citing both RTS and Pagnan in support, as follows, (at §32):
“On the question of an enforceable contract or not, it is for the parties to decide at what stage they wish to be contractually bound. To use the vivid phrase of Lord Bingham (as Bingham J) the parties are “masters of their contractual fate”. They can agree to be bound contractually, even if there are further terms to be agreed between them. The question is whether the agreement is unworkable or fails for uncertainty. However, where commercial men intend to enter into a binding commitment the courts are reluctant to conclude that such an agreement fails for uncertainty. [footnote citing Hillas v Arcos]”
Applying these principles, he concluded in relation to issue (2) that it was clear from the terms of the side letter itself that the parties intended to create legal relations. In that context he suggested that part of the agreement could be contractually enforceable, whatever might be the status of other parts of the letter. However he continued (at§38) that, even though the parties may have intended to create legal relations, it did not follow that the effect of the side letter was to create a legally enforceable contract. The court had to analyse carefully the nature of any agreement which the parties had reached in order to see whether it constituted an enforceable contract. That required him to go on to consider issue (3).
In relation to issue (3), he found (§42) that, although it was the claimant’s intention to have a binding agreement in the side letter that safeguarded his right to purchase a stake, “the question is whether he succeeds in this. That necessarily involves a close examination of the terms of the Side Letter itself, set against commercial background…” After referring to the precise terms of the side letter (the essential points of which are set out above), he continued (at §44).
“In my view this Side Letter is, without doubt, no more than an “agreement to agree”. It is an agreement to offer Mr Barbudev “the opportunity to invest in the Purchaser on the terms to be agreed between us”. That is not the language of a binding commitment and no amount of taking account of the commercial context and Mr Barbudev’s concerns and aims can make it so. Moreover the next phrase makes it clear that the terms of the [Investment Agreement] are not agreed; they are to be negotiated “… in good faith with you.””
On this ground alone, the claim failed.
Aikens LJ then went on to consider issue (4), namely certainty of terms, concluding (at §51) that even if the side letter had been more than an “agreement to agree”, it was not sufficiently certain to be an enforceable contract. That was because many crucial matters for what the parties contemplated, namely an investment and shareholder agreement, were not dealt with in the side letter.
Discussion and Conclusions
Taking a hypothetical example where parties agree terms 1-5 of their agreement but fail to reach agreement on terms 6-10, and applying the Pagnan principles, the position is as follows:
– If the parties’ intention is that terms 1-5 are not to be binding unless and until terms 6-10 are agreed, then there is no binding agreement; this is Pagnan, proposition (3) (“Pagnan (3)”)
– If the parties’ intention is that terms 1-5 are to be binding immediately, despite the fact that terms 6-10 are not agreed, then there is a binding agreement in relation to terms 1-5; this is Pagnan (4)
– If the parties’ intention is that terms 1-5 are to be binding immediately, but the failure to agree (absence of agreement in relation to) terms 6-10 makes the whole contract (including terms 1-5) unworkable, then there is no binding agreement at all; this is the second part of Pagnan, proposition (5) (“Pagnan (5)”).
In the present case, Balbir submits that the ISA falls within Pagnan (4). By contrast Raghbir submits that the ISA falls within Pagnan (5) on grounds of unworkability or uncertainty.
I have already addressed the terms of the ISA, concluding that it provides for the transfer of the shares to the Company (and not elsewhere). Just as in Barbudev, there can be no doubt that in the present case the parties intended to create legal relations. That is clear from both from the terms and terminology of the ISA and the manner in which it was drafted and negotiated. This is put beyond any doubt by the specific inclusion of Clause 16. Further they intended that the obligations specifically created by the ISA, including the obligations to buy and sell the shares and the interest in the Delta properties should be immediately binding. The parties understood that there was further detail to be worked out, yet intended that the terms that they had agreed upon should be immediately binding. Moreover, although Clause 16 contemplates, and even on its face obliges, the parties entering into an SA which, when entered into, will supersede the terms of the ISA, in my judgment, given clause 16 and the “legally binding obligations” it refers to, the ISA is certainly intended to be a binding contract, even if, in the event, no SA is ever concluded. This is put beyond doubt by the word “notwithstanding” in clause 16. Were it otherwise, the ISA would be no more than an agreement, subject to contract i.e. Pagnan (2) or (3). Clause 16 is designed to avoid that outcome.
The question here, however, is whether Clause 16 has the effect intended by the parties i.e. whether, in the absence of an SA and of agreement as to the further terms to be dealt with in it, the ISA as it stands is workable, lawful and sufficiently certain, or, rather, in fact falls within Pagnan (5). Mr Wilson submitted that the test is “can the judge enforce the contract?” I agree.
I address those aspects of the ISA which Raghbir contends are unworkable or insufficiently certain, in the absence of a concluded SA.
First, the fact that Hardev is not a signatory to the ISA does not render it unenforceable. As I have found in paragraph 133 above, Hardev was a party to the ISA, as an undisclosed principal.
Secondly, the ISA does specify how and to whom Balbir’s interest in the properties owed by Delta are to be transferred: see clause 5 and paragraph 181 above. An SPV is no more than an option, and, absent agreement in relation to an SPV, properties fall to be transferred to Raghbir, or at his direction.
Thirdly, clauses 6 to 8 and 11 to 14 are all matters framed by reference to the conclusion of the SA, Raghbir contends that they refer to matters which are essential terms and, in the absence of an SA, the agreement is incomplete and unworkable. However the key issue is whether the ISA is workable, even if SA was never entered into and not whether what other terms would, or would not be negotiated, in the SA. Clause 11 refers to particular terms which will be incorporated into the SA. They are provisions of detail. The fact that they have not been agreed, or indeed that they may never be agreed, does not, without more, mean that the existing terms of the ISA are unworkable or uncertain.
Fourthly, and in particular, as regards clauses 7 and 8, Raghbir contends that, absent an SA, Balbir remains involved (as director and bank signatory) in the running of the Company, even though under the ISA it is envisaged that he will not longer be a shareholder and his involvement is supposed to cease. However, this does not make the ISA unworkable or uncertain. I agree with Balbir’s case here. Upon the shares being transferred pursuant to clause 3, Raghbir would have control of the Company and would thus be able to remove Balbir as a director and from the bank mandate.
Fifthly, as regards the condition of obtaining HMRC approval for the transfer of the shares to the Company provided for in clause 5, as a matter of construction of the clause, the need for HMRC approval is not confined to the transfer of shares in “the SPV if formed”. The immediately following words, “to Hitech”, apply to both shares in the Company and to shares in the SPV (if formed) and make it clear that the HMRC approval (if required) applies to the transfer of both sets of shares. It is the case that the parties did not agree the nature of the approval nor how it was to be obtained. Moreover the ISA is silent as to what is to happen if approval were not forthcoming.
Contrary to Mr Wilson’s submission, I do not consider that it is possible to imply a term into the ISA that if HMRC approval were not forthcoming, the obligation would be to transfer the shares to Raghbir or at his direction. It might be that such an implied term would not necessarily contradict the express term in clause 3 for transfer to the Company. However, in my judgment, a contract for the acquisition of the shares by Raghbir, as opposed to the Company, would be a contract of a different nature. It is clear that the parties specifically structured the deal as involving transfer to the Company and that if it had been structured such that the transfer of the shares was to be made to Raghbir, that it might have given rise to different funding issues and to different tax consequences for the parties (as pointed out in Rishi’s email of 20 April 2011). It is not clear that the parties would have agreed to a transaction in that form, without altering the overall structure of the deal, including, for example, the price. In my judgment the likely response if the parties had been told that HMRC approval (if required) would not be forthcoming, is that they would have gone back to renegotiate the deal. To imply such a term was neither necessary to give the contract business efficacy nor so obvious that it must have gone without saying: see, Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72.
HMRC approval in this context relates to the tax treatment of payments made where a company acquires its own shares, under the provision of ss. 1033 to 1048 Corporation Tax Act 2010 and the circumstances in which HMRC will treat payments made as “exempt distributions” and so subject, if anything to capital gains tax, rather than income tax. The legislation provides for a clearance procedure under which advance confirmation can be sought and obtained from the HMRC that the transaction is an “exempt distribution”.
First, in the present case, the “subject to HMRC approval” requirement in the ISA is not such as to make the contract uncertain or otherwise unworkable, within Pagnan (5) and (6). Rather, as a matter of contractual analysis, at most it provides for contingent “condition subsequent”: see Chitty, supra, §§2-158 and 13-030. If the relevant approval was required and were not to be obtained, then the obligation to transfer the shares would no longer be binding. Secondly, the obtaining of HMRC approval is not a legal requirement. It is an optional procedure available to the Company. Moreover, in the present case, the parties agreed that that procedure should be sought - it was a condition agreed by the parties, for the benefit of Balbir/Hardev, and could be waived by them. The parties could proceed with the transfer, even if HMRC approval is not obtained. Thirdly, and, most critically, in any event, as the guidance makes clear, the relevant tax provisions and the HMRC clearance procedure apply to payments made by the company when a company acquires its own shares. In the present case, therefore, it does not, and could not apply where the payments are to be made by Raghbir under the ISA. As explained under Issue (2) below, payment by Raghbir is the only lawful means of performance of the ISA. It follows that the contingent condition of HMRC approval would not arise on the facts.
For these reasons, the existence of the HMRC approval condition and the failure of the parties to agree what was to happen in the event of HMRC approval not being obtained is not such as to render the ISA, without further agreement, either unworkable or uncertain within Pagnan (5); the ISA can be enforced without such approval.
Finally, the facts of the present case are distinguishable from those in Barbudev. As regards issue (3) (“agreement to agree” or enforceable contract), there was no equivalent in Barbudev, to Clause 16. Further the language of agreement and what exactly was being agreed is different in the present case. The side letter in Barbudev refers merely to an opportunity to invest, “on terms to be agreed” and “to a negotiation in good faith”. In the present case the parties had reached agreement on the deal, with detail to be worked out afterwards. In the Barbudev case the basic structure of the deal itself was not agreed. As to issue (4), the agreement in contemplation in the Barbudev case, namely an investment and shareholder agreement, was more complicated than a simple share agreement for an agreed percentage of shares at an agreed price. Crucial matters that were not agreed had to be agreed before there could be a sufficiently certain contract: see in particular §§50 and 51. In the present case, the key elements of the sale of the shares had been agreed: the shares to be sold, the price at which they are to be purchased, the manner in which the price is to be paid, the sale and purchase of the Delta Properties. The matters which remained outstanding and which were to be covered by the SA in the present case were not “crucial” or critical”.
I conclude that, even in the absence of an SA, the ISA was workable and certain and falls within Pagnan (4). The answer to the question posed by Mr Wilson is “Yes, the court can enforce the contract”. The defence on Issue (1) fails.
Issue (2): Companies Act 2006
The Companies Act 2006
CA 2006 contains provisions addressing (1) the acquisition by a company of its own shares and (2) reduction in capital. Provisions relating to the former are contained in Part 18 of the Act (ss.658-737); those relating to the latter are contained in Chapter 10 of Part 17 of the Act (ss.641-653) (Part 17 as a whole is entitled “A company’s share capital”).
Acquisition of own shares
As regards acquisition of own shares, s.658 CA 2006 provides the “general rule”, in the following terms:
“General rule against limited company acquiring its own shares
(1) A limited company must not acquire its own shares, whether by purchase, subscription or otherwise, except in accordance with the provisions of this Part. [i.e. Part 18]
(2) If a company purports to act in contravention of this section –
(a) an offence is committed by –
(i) the company; and
(ii) every officer of the company who is in default, and
(b) the purported acquisition is void.” (emphasis added)
The underlined words in s.658(1) have the effect of excluding from the general rule acquisitions which are expressly contemplated elsewhere in Part 18. Such permitted acquisitions under Part 18 include the redemption of redeemable shares, the purchase of own shares (whether out of capital or otherwise) in accordance with the provisions in Part 18 and the acquisition of treasury shares. I address these permitted acquisitions in paragraphs 218 and 219 below.
Section 659 CA 2006 then provides for “Exceptions to general rule”, as follows:
“(1) A limited company may acquire any of its own fully paid shares otherwise than for valuable consideration.
(2) Section 658 does not prohibit-
(a) the acquisition of shares in a reduction of capital duly made;
(b) the purchase of shares in pursuance of an order of the court under [various specified other provisions CA 2006]
(c) the forfeiture of shares, or the acceptance of shares surrendered in lieu, in pursuance of the company’s articles, for failure to pay any sum payable in respect of shares.” (emphasis added)
These exceptions in s.659(2) are in addition to the exceptions arising from proviso in s.658(1): see Dougherty and Fairpo: Company Acquisition of Own Shares (6th edn) §2.3.
Turning back to s.658 (1) and the permitted acquisitions in accordance with Part 18, Chapter 3 covers redemption of redeemable shares, Chapter 4 deals with purchase of own shares and Chapter 5 deals with redemption or purchase of own shares out of capital. Redemption and purchase in accordance with those provisions are permitted exceptions in s.658(1). Chapter 4, in particular, addresses purchase by a company of its own shares. Section 690(1) confers, subject to the ensuing provisions of Chapter 4, a power on a company limited by shares to purchase its own shares subject to any restriction or prohibition in its articles. Section 691 provides, inter alia as follows:
“Payment for purchase of own shares
(1) A limited company may not purchase its own shares unless they are fully paid.
(2) Where a limited company purchases its own shares, the shares must be paid for on purchase.
…”
However s.691(2) does not prevent a single contract from specifying separate completion dates for different shares, as long as payment in full is made on each completion date for the shares then being purchased: see Dougherty and Fairpo, supra, §5.5(b).
By ss.693 and 694 (in its terms in force before April 2013), a limited company may only purchase its own shares by an off-market purchase (applicable in the present case) in pursuance of a contract approved prior to the purchase, where (a) the terms of the contract have been authorised by a special resolution of the company before the contract is entered into or (b) the contract must provide that no shares may be purchased in pursuance of the contract until its terms have been authorised by a special resolution of the company. (The requirement for a special resolution was removed with effect from 30 April 2013). Sections 695 and 696 contain further provisions relating to the resolution authorising an off-market purchase and in particular prohibits the member holding the shares to be purchased from voting.
Reduction of share capital: Part 17, Chapter 10
Reduction in share capital is addressed distinctly in sections 641 to 649 CA 2006. Section 641, headed “Circumstances in which a company may reduce its share capital”, provides as follows:
“(1) A limited company having a share capital may reduce its share capital-
(a) in the case of a private company limited by shares, by special resolution supported by a solvency statement (see sections 642 to 644);
(b) in any case, by special resolution confirmed by the court (see section 645 to 651).
…
(2A) A company may not reduce its share capital under subsection (1) (a) or (b) as part of a scheme by virtue of which a person, or a person together with its associates, is to acquire all the shares in the company or …
…
(2C) In this section –
“associate” has the meaning given by section 988 (meaning of “associate”) , reading references in that section to an offeror as references to the person acquiring the shares in the company.
…”
By s.283(1), a special resolution of the members (or of a class of members) of a company means a resolution passed by a majority of not less than 75%. Section 988 CA 2006 defines “associate” to include:
“(1) In this Chapter “associate”, in relation to an offeror, means-
(a) a nominee of the offeror,
…
(e) (where the offeror is an individual) his spouse or civil partner and any minor child or step-child of his.”
Sections 642-644 contain detailed provisions concerning the making of a solvency statement. Sections 645-659 contain detailed provisions governing a reduction of capital confirmed by the court, including a procedure under which every creditor of the company is entitled to object to the reduction of capital.
In this case, the prohibition in section 641(2A) could not apply to the acquisition of shares pursuant to the ISA, because the effect of the acquisition in this case would be that, whilst Raghbir and his wife would hold together 90% of the shares, his adult son Kiran would hold 10% of the shares. Kiran is not an “associate” within the meaning of s.988 (1) because he is an adult child. Thus it would not be the case that Raghbir and his associates would acquire all the shares in the company.
Discussion and Conclusions
First, under CA 2006, a reduction in Company’s capital and acquisition by a Company of its own shares are distinct concepts, as demonstrated by their distinct treatment in different parts of CA 2006. I address reduction in capital further below.
Secondly, as to acquisition of own shares, s.658 is directed to the “acquisition” of shares by the company (and not specifically, or merely, to a purchase by a company of its own shares). The first question under s.658(1) is whether a transaction is an acquisition of its own shares. If it is then, prima facie, the prohibition applies, unless one of the exceptions applies. A further question is “is the acquisition by purchase?” If so, then it is necessary to consider the detailed provisions governing acquisition by purchase.
Here, as regards the first question – “acquisition” - the starting point for the discussion is my conclusion that, pursuant to the terms of the ISA, it is the Company (and not Raghbir) which is the intended transferee of Balbir and Hardev’s shares in the Company: see paragraph 182 above. It follows that the ISA provides for the Company “to acquire its own shares” within the meaning of that term, and thus the transaction prima facie falls within the prohibition, in s.658(1). Further in my judgment that acquisition is “by purchase”, even though it may be Raghbir who is obliged to pay the price for the shares. It is a transfer of shares for cash: see Dougherty and Fairpo, supra, §5.17.
As regards Balbir’s contention that the transaction is not prohibited because it falls within the exception in s.659(1), as being an acquisition “otherwise than for valuable consideration”, the latter words have possibly, two different meanings, namely (1) “with no valuable consideration provided at all i.e. by way of gift” or (2) “otherwise than for valuable consideration provided by/moving from/paid for by the company”. In my judgment, the second of these constructions is correct. What is prohibited is payment by the company for the shares. This is supported by the words “a limited company may acquire … its shares … for valuable consideration” which suggest an “exchange” in return i.e. the receiving, and giving, by the company of, respectively, the shares and the consideration. The historical underlying mischief behind the prohibition on acquisition of own shares was the reduction or depletion of the company’s resources, a reduction in its capital, without appropriate safeguards and proceeds. If however the consideration is provided by a third party, those issues do not arise. Thus, here, in so far as the ISA provides for payment of the price by the Company, then it is an acquisition for valuable consideration (i.e. not an acquisition “otherwise than for valuable consideration”), the exception in s.659(1) cannot apply. The transaction to that extent falls prima facie within the prohibition in s.658. However, in so far as under the ISA, the price falls to be paid by Raghbir and is thus an acquisition by the Company of its own shares in return for consideration provided by a third party, no valuable consideration is provided by the Company. It is an acquisition otherwise than for valuable consideration provided by the Company. Accordingly, in so far as under the ISA, the obligation to pay for the shares is upon Raghbir, I conclude that this is an acquisition which falls within the exception in s.659(1) and to that extent the acquisition is not prohibited by CA 2006. Thus, even if performance of the ISA involving payment by the Company would involve a prohibited acquisition and would thus be unlawful, the ISA can nevertheless be performed lawfully (through payment by Raghbir). For this reason alone, I conclude that Raghbir’s defence on Issue (2) fails.
Nevertheless I go on to address the further CA 2006 issues that have been raised. First, I do not accept Raghbir’s contention, under the “purchase” provisions of Chapter 4, that the ISA breaches the prohibition on payment “by instalments” i.e. the requirement, under s.691(2), that the shares must be paid for “on purchase”. Clauses 2 and 3 of the ISA provides for transfer of shares and payment to occur simultaneously, but in tranches. It is a single contract specifying separate completion dates for different shares, with payment in full, on each completion date, for the shares then being purchased.
Secondly, as an acquisition by purchase, the question would arise as to whether the transfer provided for by the ISA complies with the requirements of ss.693 and 694 and is thus excepted from the prohibition in s.658(1). Balbir has not submitted that it does so comply. Raghbir pleaded at paragraph 15.3 of the Amended Defence that the procedures in ss.694-695 relating to resolutions were not followed (although Mr Pepperall did not develop the point further in argument). In order to meet those requirements, the contract, pursuant to which the acquisition by purchase takes effect, (i.e. the purchase contract) must satisfy condition (a) or condition (b) in s.694 (see paragraph 219 above). In the present case, neither condition is satisfied. Balbir’s case is that the contract, pursuant to which the shares in the Company are to be transferred and acquired, is the ISA. However, the ISA was not authorised by a special resolution prior to being entered into (condition (a)). Nor is there a term of the ISA expressly providing that the shares cannot be purchased until the terms of the ISA have been authorised by such a special resolution (condition (b)). I accept that, looking forward from the ISA, it was, and perhaps might be still, possible that the parties might enter into a further, subsequent, contract providing for the purchase by the Company of those shares – the SA, or a different contract. In that event the purchase might then be said to be pursuant to that further contract, and that contract might be approved by special resolution before conclusion or provide, by its terms, for such a resolution. In that event, the acquisition would be lawful. However, at the time of the ISA and indeed even now, there can be no guarantee that these events would or will happen. Even if it were possible to suggest that ISA itself comprised an agreement that the parties should enter into such a further contract, such an agreement is unenforceable as an “agreement to agree”: see paragraph 190 above.
Accordingly the transfer of the shares provided for by the ISA would not meet the conditions for an off-market purchase of own shares provided for in ss.693-695 and could not be excepted from the prohibition in s.658(1) on those grounds.
Finally, I consider that the exception in s.659(2)(a) for an “acquisition of shares in a reduction in capital” would not apply. First, the acquisition by the Company of its shares provided for in the ISA is not an acquisition “in” a reduction in capital. The ISA does not contemplate a reduction of capital at all and there is no other provision suggesting that the parties have agreed that there is to be a reduction in capital. “Acquisition of own shares by purchase” and “reduction in capital” are two distinct concepts: see paragraph 223 above. The ISA contemplates an acquisition “by purchase” and not by reduction in capital. In my judgment, s.659(2)(a), by the use of the word “in”, contemplates a reduction in capital under the provisions of Chapter 10 and, as part and parcel of that reduction in capital, the company acquiring its own shares. That is not the present case. As Mr Pepperall put it, the parties could have contracted for a reduction in share capital (under s.641 et seq), but they did not.
I add, that, even if, contrary to this conclusion, it could be said that the transfer of shares under the ISA might potentially fall within s.659(2)(a) because the parties could have proceeded subsequently to put in place a reduction in capital, as matters stood the parties could not, without more, have ensured that such a reduction in capital would take place. In my judgment, it was not clear at the time that the conditions for a reduction in capital in s.641(1) could be met and thus that the ISA could be performed without breaching the prohibition in s.658(1). Even if they could ensure that a special resolution was passed authorising a reduction in capital, a solvency statement would have been required; it is not certain that, at that time and following the ISA, the Company was solvent: see paragraph 161 above. As regards a court order under s.641(1)(b), it is far from certain that the court would have confirmed the capital reduction, given possible objections from creditors and the fact that Kiran, the other shareholder, was not offered like terms.
I conclude that the transfer of shares to the Company provided for by clause 3 and 5 of the ISA constituted an acquisition by the Company of its own shares, and in so far as that transfer was to be paid for by the Company, the acquisition falls within the prohibition in s.658 (1) CA 2006 . However in so far as, under the ISA, that transfer was to be paid for by Raghbir, the acquisition falls within the exception in s.659(1) CA 2006 and so is not prohibited by s.658(1) CA 2006. If a contract can be performed in two ways, one of which is lawful, it will be construed as a contract to perform in a lawful manner. Here, as regards the shares in the Company, the ISA does expressly provide for a mode of performance (transfer to the Company for valuable consideration provided by Raghbir) which is lawful. Whilst if the Company chose to perform it in an unlawful way, then the acquisition by the Company of its own shares would be void, that does not necessarily render the entire ISA invalid or unenforceable.
Issue (3): Economic Duress
Relevant legal principles
As regards the circumstances in which a contract is affected by duress, I have been referred to a number of authorities, including in particular Chitty, supra, §§8-006, 8-008, 8-038 and 8-046 to 8-047, Universe Tankships of Monrovia v International Transport Workers Federation [1983] AC 366; Huyton v Cremer [1999] 1 Lloyds Rept 620 at 636-637; two decisions of Dyson J (as he then was) in 2000, namely DSND Subsea v. Petroleum Geo Services ASA [2000] BLR 530 at §131, Carillion Construction v Felix UK Ltd (2000) 74 Con LR 144 at §24. Most recently, in Progress Bulk Carriers v Tube City IMS [2012] EWHC 273 (Comm) [2012] 1 CLC 365, Cooke J reviewed and approved the earlier authorities. From these authorities, the following principles can be stated:
A contract which has been entered into as a result of duress may be avoided by the party threatened. One such form of duress is “economic duress” i.e. where the wrongful or illegitimate threat is to economic interests.
There are two minimum necessary elements to establish economic duress: first, the exertion by one party on the other of “illegitimate pressure”; secondly, “causation” i.e. the illegitimate pressure must cause the pressurised party to enter into the contract that he seeks to avoid.
As regards the first element, “illegitimate pressure”, whilst in the normal course it will be constituted by unlawful conduct, it may be constituted by conduct which is not in itself unlawful; that will be an unusual case, particularly in the commercial context: see Progress Bulk Carriers at §§29, 30 and 36. The threat of lawful action when coupled with an illegitimate or unreasonable demand may constitute illegitimate pressure.
In DSND Subsea, in a passage subsequently approved, including by Cooke J in Progress Bulk Carriers at §33, Dyson J identified a range of factors which the court takes into account in determining whether there has been illegitimate pressure, as including:
“whether there has been an actual or threatened breach of contract; whether the person allegedly exerting the pressure has acted in good or bad faith; whether the victim has any realistic practical alternative but to submit to the pressure; whether the victim protested at the time and whether he affirmed and sought to rely on the contract.”
He added that illegitimate pressure “must be distinguished from the rough and tumble of the pressures of normal commercial bargaining”.
As regards the second element, “causation”, it must be shown that the illegitimate pressure was “a significant cause inducing the [claimant] to enter into the contract”: see The Evia Luck [1992] 2 AC 152 at 165G per Lord Goff, cited in Huyton v Cremer and in Progress Bulk Carriers at §32. In Huyton, Mance J (as he then was) at 636 col 2 interpreted this approach as giving rise to a minimum basic test of subjective causation, being a “but for” test.
“The illegitimate pressure must have been such as actually caused the making of the agreement, in the sense that it would not otherwise have been made at all, or at least, in the terms in which it was made. In that sense the pressure must have been decisive or clinching.”
However he went on to add that a simple “but for” test in conjunction with the requirement of actual or threatened breach of duty could lead too readily to relief being granted:
“It would not, for example, cater for the obvious possibility that, although the innocent party would never have acted as he did, but for the illegitimate pressure, he nevertheless had a real choice and could, if he had wished, equally well have resisted the pressure and for example, pursued alternative legal redress.”
The foregoing propositions refer to the significance of the claimant having a “realistic practical alternative” to concluding the contract. In the authorities and in academic discussion, there are differing views as to the role played by the presence or absence of such an alternative in the proper analysis of the law on economic duress: see for example Progress Bulk Carriers at §23. Dyson J appeared to consider it to be a relevant factor in determining whether there has been illegitimate pressure; see also Universe Tankships at 400E-F. Mance J suggested, in Huyton, that it goes to the issue of causation. Chitty, supra, §8-023 suggests it is a matter of evidence relevant to causation. For the purposes of this case, I consider that it matters not precisely where in the analysis this issue falls to be considered. In any event, the presence or absence of a realistic practical alternative is, at least, relevant evidence to be taken into account in considering whether the contract has been procured by economic duress.
Finally, a contract procured by economic duress is voidable, rather than void. If the victim of the pressure has acted voluntarily with full knowledge of all the circumstances, he may be held bound on the ground of ratification or, if after escaping from the duress, he takes no steps to set aside the transaction, he may be found to have affirmed it: see Chitty, supra, §8-054.
Discussion and Conclusions
The issue is whether the ISA was voidable for economic duress, and, if it was, whether Raghbir did in fact avoid the contract on that ground. The following findings of fact are relevant to these issues.
By 25 April at the latest, Mr Johar was acting for Raghbir in the negotiations and conclusion of the ISA: see paragraph 130 above.
In the lead up to the ISA, and certainly from 4 April 2012 onwards, Balbir had genuine concerns that Raghbir might be misappropriating funds from the Company and Delta: see paragraph 20 and 162 above.
In the lead up to the ISA and certainly from 4 April 2012 onwards, Raghbir had reason to believe he had, or might have, been acting unlawfully: see paragraph 172 above.
The first offer of a buy-out came from Raghbir, and not Balbir. It does not matter who was the first to mention the figure of £1.6 million as the price for the buy-out: see paragraph 121 and 124 above.
Following the imposition of the freeze, Raghbir was contemplating an application for an injunction to lift the freeze, and that that application might be made not only on behalf of the Company, but in his own right: see paragraph 127 above.
Balbir offered to lift the freeze on the bank account if Raghbir accepted the placing of controls on payments being made from the bank account. Raghbir did not respond to the final offer in that regard made by Balbir. That final offer was reasonable: see paragraph 126 above.
Illegitimate Pressure
Considering the factors identified in DSND Subsea, first, as regards legal representation, at the point where the first offer of a buy out was suggested, 20 April, and until 24 April, Raghbir was represented by Mr Nugent Smith. Then, from early 25 April (when the detailed terms of the ISA were being negotiated) and thereafter, Raghbir was legally represented by Mr Johar. At no point, either during that negotiation or in the immediate period following its conclusion, did Raghbir or Mr Johar raise any objection that the ISA had been entered into under duress. Mr Johar did not raise any issue with Raghbir concerning duress, albeit he accepted, in cross-examination, that he was aware that under his professional rules he should not act where there is a suspicion of duress.
Secondly, I conclude that, given that Balbir’s concerns about misappropriation were genuine, he acted in good faith in, first, seeking further information about the Company’s financial affairs and secondly, in imposing the freeze on the bank accounts on 18 April. I do not accept that Balbir’s actions were unlawful. Whilst it is the case that Balbir foresaw that the consequence of his action in freezing the Company’s bank account was that the Company would or might fail, I do not accept that that was his motive, nor that acting in that way cannot have been in the interests of the Company nor thus that therefore he was acting unlawfully and illegitimately.
Causation
As regards the causal link between, on the one hand, the freeze and with it the risk of the Company failing, and on the other hand, the conclusion of the ISA:
The freeze was originally imposed in order to restrict bank payments and to obtain financial information. There was no “demand” by Balbir for a buy-out of his interest, linked to the imposition, or the lifting, of the freeze. The idea for buy-out came from Raghbir.
In seeking, and agreeing to a buy-out, Raghbir was acting not because of the freeze and the threat of the Company going into administration, but out of concern that the investigations sought by Balbir might reveal wrongdoing on Raghbir’s part. Raghbir’s offer at the April Temple meeting was mentioned in the context of the consequences for him of further investigation: see paragraphs 172 and 174 above.
I accept and find that, however, at the point of signing the ISA on 25 April, Balbir did use the continuing pressure of the freeze and the Bank’s impending deadline as commercial leverage to secure Raghbir’s agreement to the specific terms of the ISA and in particular the acceptance of Clause 16 and the immediate binding effect: see the attendance note of 25 April (paragraph 116 above). However the ISA itself was implementing what the parties had already agreed in principle at the meeting at the Temple on 23 April. That does not take away from the fact that the idea for the agreement had come from Raghbir and at no stage had been demanded by Balbir as the price for the lifting of the freeze. Moreover, in this regard, I accept Mr. Johar’s oral evidence that “there wasn’t anything to indicate that someone was pointing a gun to Raghbir’s head in that context”. In these circumstances, I conclude that the refusal, on 25 April, to lift the freeze until a binding agreement was signed amounted to no more than the “rough and tumble of the pressures of commercial bargaining”.
Realistic practical alternatives
In any event, I consider that, faced with the threat arising from the freeze of the bank accounts and the risk of the Company being placed into administration, Raghbir had two practical courses of action other than entering into the ISA. First, he could have sought a court injunction to lift the freeze: see paragraph 127 above. Secondly, he could have agreed to Balbir’s proposals for the placing of restrictions on payments from the bank accounts: see paragraph 126 above.
I conclude therefore that the ISA was not entered into by Raghbir as a result of economic duress arising from illegitimate pressure exerted by Balbir.
Avoidance/affirmation of the contract
Even if, contrary to the foregoing, the ISA was entered into as a result of economic duress, I conclude that Raghbir did not elect to avoid the ISA, but rather affirmed and sought to rely upon it.
First, at no point between the conclusion of the ISA and December 2014 (some 2½ years later) did Raghbir or anyone acting on his behalf raise any concern that he had entered into the ISA under duress.
Secondly, in the period immediately following its conclusion and up until 17 May 2012, Raghbir instructed Mr Johar to produce drafts of the SA. That amounted to affirmation of the ISA.
Thirdly, the assertion in the 17 May 2012 letter that the ISA was “null and void” was not based upon a claim of duress. That letter cannot, in my judgment, be construed as an unequivocal election to avoid the ISA on grounds of duress. I am aware of no authority for the proposition that, in a case of duress, it is possible to avoid a contract on grounds of duress, even when at the time the party is unaware of the facts that might give rise to the duress or does not rely on such facts. In any event, thereafter Raghbir took steps consistent only with him considering that Balbir’s involvement with the Company had ceased as a consequence of the ISA. In late May he requested removal from the BUPA policy (see paragraph 149 above); on 3 July Mr Nugent Smith sought comments on the draft SA (see paragraph 151 above). Some time in late June or early July Raghbir told Rishi Chandarana, relying expressly on the ISA, that Balbir was no longer a director and had arranged for books and records to be collected: see paragraph 152 above. Raghbir’s solicitors’ letter of 6 August indicated that Raghbir was content to proceed as per the terms of the ISA (paragraph 154 above). Whilst much of these exchanges was marked “without prejudice”, the physical steps taken by Raghbir and referred to in Rishi’s email of 4 July cannot have been “without prejudice”.
Conclusion
In light of the conclusions in paragraphs 239 and 240 above, Raghbir’s defence of economic duress fails.
Issue (4): Repudiatory Breach
The relevant legal principles
First, one party to a contract may, by reason of the other’s breach, be entitled to treat himself as discharged from his liability further to perform his own unperformed obligations under the contract and from his obligation to accept performance by the other party if made or tendered. Not every breach of contract has this effect; only breaches which are “repudiatory”. There are three circumstances which will give rise to a repudiatory breach: first, renunciation by a party of his liabilities; secondly, impossibility self-created; and thirdly, total or partial failure of performance. The term “repudiation” applies to all three of these circumstances although it is more particularly used of renunciation before the time of performance has arrived. See Chitty supra, §24-001 and Heyman v Darwins Ltd [1942] AC 356 at 397. The breach must deprive the other party of substantially the whole benefit which it was the intention of the parties that he should obtain: Photo Productions Limited v Securicor Transport [1980] AC 827.
Secondly, as to the effect of a repudiatory breach, the position was concisely summarised by Flaux J (as he then was) in Alan Ramsay Sales, supra, at §68:
“The relevant legal principles are well-established and can be summarised as follows: (1) in order for a repudiatory breach to bring the contract to an end, the innocent party must accept the repudiation, as “an unaccepted repudiation is a thing writ in water”…. Acceptance of a repudiation must be clear and unequivocal and there must be a “conscious intention to bring the contract to an end, or the doing of something which is inconsistent with its continuation”… see Chitty on Contracts, 31st edn (2012) at [24-003] and [24-013]. (2) In those circumstances mere inactivity or acquiescence will generally not be regarded as acceptance for this purpose. However there may be circumstances where a continuing failure to perform will be sufficiently unequivocal to constitute acceptance of a repudiation: see Chitty at [24-013] again;… (3) If the innocent party who is entitled to treat himself as discharged from the contract by the other party’s breach, elects, with full knowledge, to treat the contract is continuing, he will be taken to have affirmed the contract. Affirmation can be express or implied. It will be implied if, with knowledge of the breach and of his right to choose whether to accept a repudiation or to affirm the contract, the innocent party does some unequivocal act from which it may be inferred that he intends to go on with the contract or that he will not exercise his right to treat the contract as repudiated: see Chitty at [24-003] (4) The innocent party is not required to make his election immediately after he learns of the repudiatory breach, but will have a reasonable time in which to decide what to do. How long will depend on the facts of the case, but if he does nothing for too long, he runs the risk that he will be taken to have affirmed: see Chitty at [24-002]…”
Thirdly, in Alan Ramsay Sales, Flaux J considered the position where the alleged repudiation of a contract was to be found within “without prejudice” emails sent by the party alleged to be in repudiatory breach. The question was “whether there is a public policy against parties engaging in repudiatory or renunciatory conduct being able to avoid the normal consequences of such conduct (that the innocent party is entitled to treat the relevant contact as an end) because the repudiation or renunciation occurs in without prejudice communications”.
In the course of his analysis, at §§12-15 Flaux J set out the legal principles applicable in determining the scope of without prejudice privilege; the essential rule being that communications made for the purpose of a genuine attempt to compromise a dispute between the parties will not generally be admitted in evidence. There must be a dispute in existence between the parties for correspondence marked “without prejudice” to be protected by the privilege. However not every use of the words “without prejudice” makes a communication privileged, because the words may be used in other senses than pursuant to intention to settle an existing dispute. A particular example (§15) is the “use of the words “without prejudice” where negotiations between the parties are subject to contract, in other words where the parties wish to negotiate a contract but in doing so, do not wish to become contractually bound during the negotiations unless and until they have reached a satisfactory agreement. Unless the agreement they are trying to reach is in settlement of an existing dispute, the use of the words “without prejudice” in that sense would not attract the privilege, although of course the pre-contractual negotiations may be inadmissible in evidence for other reasons….”
At §§32-33, Flaux J concluded:
“…, on the assumption that the two emails of 18 and 26 March 2013 form part of a chain of without prejudice privileged correspondence seeking to resolve an extant dispute, I would not be prepared to conclude that the claimant could rely upon the emails in evidence, essentially for two reasons. First, I rather doubt whether there is any public policy requiring repudiatory conduct to be opened up when it occurs as part of a without prejudice sequence of communications, which overrides the public policy that such communications should be privileged. It seems to me that this is exactly the sort of statement which might be characterised as a threat which is part of the continuum of without prejudice negotiations which Robert Walker LJ considered in Unilever should not be filleted out and made admissible, but should remain protected by the privilege.
The second reason is that it seems to me that if the emails were part of a continuum of without prejudice discussions, it would simply not be possible to construe them as sufficiently unequivocal to constitute renunciation or repudiation of the agency agreement.”
He expanded upon the second reason (at §66); even if he had been prepared to accept the submission:
“that the correspondence was not protected by without prejudice privilege, because the two emails form part of a continuum of negotiations between the parties to reach an agreement on the basis for termination, I would not regard them as repudiatory. Taken in the context of the negotiations as a whole, they simply cannot be regarded as unequivocal statements amounting to a renunciation or repudiation of the defendant’s contractual obligations.” (emphasis added)
Discussion and Conclusions
Raghbir relies on two matters as constituting a repudiatory breach of the ISA by Balbir: his failure to agree the SA (in breach of clauses 14 and 16 of the ISA); and secondly, specifically, the letter of 18 June 2012 in which Balbir refused to accept instalment payments as provided for by the ISA but instead insisted on an upfront lump sum payment and thereby indicated an unwillingness to abide by the existing terms of the ISA.
As regards the former, in my judgment, the failure to agree the SA, as envisaged by clauses 14 and 16 of the ISA, does not constitute a repudiatory breach of the ISA. Such obligations as the ISA imposed upon the parties to conclude an SA, whether within 14 days or at any time, were not capable of being more than an “agreement to agree”. This is confirmed by the agreement, in the final part of clause 16, to “act in good faith in order to put in place the SA as soon as reasonably practical”. These are unenforceable obligations: see Walford v Miles, supra. It follows that since the ISA imposed no enforceable obligation to conclude an SA, a failure to do so cannot amount to a breach, let alone a repudiatory breach, of the ISA. This basis of the defence fails.
However, Raghbir goes further, contending that Balbir not only failed to enter into the future agreement (the SA), but indeed indicated that he would not abide by the terms of the existing agreement, i.e. the ISA. This is a contention of greater substance.
I consider this issue under three heads: first whether, as a matter of fact, Balbir did change his mind and in so doing committed a repudiatory breach; secondly, the effect, if any, of the fact that certain key correspondence, and in particular, the letter of 18 June 2012, was marked “without prejudice” and thirdly, whether Raghbir accepted any repudiation as terminating the ISA, or alternatively affirmed the ISA.
Repudiation in fact
As regards Balbir’s conduct following the ISA, Raghbir submits that Balbir never returned a marked up draft of the SA. Instead, he turned to investigating all aspects of the brothers’ business dealings, seeking many years’ worth of books and records from numerous parties. Balbir was intent on a forensic analysis of the business dealings with a view to pressing further potential claims. By June 2011 Balbir was only content to proceed on the basis of cash on completion. The letter of 18 June 2012 (see paragraph 150 above) was a clear renunciation of the terms of the ISA and as such a repudiatory breach. Further Balbir did not chase payment of sums which fell due and did not press his claim until June 2014. Balbir did not respond to Freeth’s letter of 26 November 2012 until 11 July 2014.
Balbir’s evidence on post ISA conduct
In his witness statement, Balbir categorically denied that in the period following the agreement, he was trying to renegotiate the terms or acting in a way that suggested that they should no longer be bound by it. He accepted that he continued to have suspicions about how other businesses had been run. He was not trying to reopen those issues but simply trying to protect himself from any potential tax liability or investigation and this was particularly in relation to the overseas assets and those in Romania. By May 2012 he wanted Raghbir to provide him with any evidence to confirm that he would have no liabilities in relation to the business relating to Romania and ITL. As regards the letter of 18 June 2012, he said it reflected his frustration at Raghbir’s failure to engage in correspondence following the ISA. In cross-examination, he accepted that he had never sent a draft of the SA back nor was he aware of his solicitors having done so. However, he was unable to explain what was meant in that letter to the reference to Raghbir “refusing to engage”. He said: “I thought it better to make a full and final deal and wanted all the money upfront”. He accepted that that was not the original deal but described it as “a suggestion” and “just another offer” and that if the upfront payment was not acceptable, then the ISA was still binding. When the terms of the letter were put to him, he was unable to maintain a consistent position and concluded by refusing to answer questions on the basis that the letter had been sent without prejudice.
Findings on Balbir’s post ISA conduct and the letter of 18 June 2012
I find, that by 17 May 2012, Balbir was stalling on proceeding to an agreed SA; he was seeking to find out further information about both the Company and about Delta, in circumstances where it was assumed under the ISA that there was going to be no further due diligence; and there was a suggestion that he might be seeking more money. The parties’ legal representatives recognised that, by this time, the settlement was in jeopardy and were considering whether it was possible to salvage the agreed settlement terms.
I do not accept Balbir’s evidence that by making these enquiries he was looking purely at his own tax position, in the light of the attendance note of the conversation on 11 May (paragraph 141 above), and in particular points 4 and 5 stating that he was going to instruct a forensic accountant to check everything, including whether he had received all his dues in the past. In this regard, I prefer Mr Johar’s evidence (see paragraph 141 above). Nor is that claim credible in the light of the long list of information requested accompanying Mr Thomas’s letter of 18 May 2012.
I find as a fact that, after the conclusion of the ISA and in particular in May 2012 Balbir was seeking to re-open wide-ranging investigations into the financial position over a number of years of the Company and all related businesses and that he was not just concerned with his own personal tax position; and further that he was seeking to go behind the terms of the ISA and put forward different terms.
However, despite raising a variety of matters which were inconsistent with the terms, Mr Thomas’ letter of 18 May 2012 (paragraph 147 above) was an express affirmation of an intention to continue with the ISA and did not amount to an unequivocal repudiation of the ISA. I find that as at this point in time, assuming that the ISA has not been avoided for economic duress, there had been no repudiatory breach on the part of Balbir.
Turning then to the letter of 18 June 2012, it is a clear statement of a change in the terms of the ISA. I do not accept Balbir’s evidence that the proposal for upfront payment was merely “another offer” or merely “a suggestion”. The reference in the fifth paragraph to “only”… makes it plain that at that stage what was on the table, albeit on “without prejudice”, was only a deal comprising immediate full payment. Whilst it might have been permissible for the SA to have changed or superseded the detail of the terms of payment for the ISA, what Balbir was putting forward amounted to a different agreement altogether. It is certainly not an assertion Balbir intends to honour the fundamental terms of the ISA. Balbir was indicating that he was not prepared to abide by his obligations to sell his interests in the Company and in Delta in instalments over a three year period, but was insisting on a different structure to the transaction, which he regarded as more beneficial.
Subject to the further issues of “without prejudice” point and affirmation, then there is a strong prima facie claim for repudiatory breach. I find that Balbir was seeking to move the goalposts. Even if he had continued, and increased, suspicions of misappropriation on the part of Raghbir, he had agreed under the deal not to seek further information.
On the other hand, the email of 18 July 2012 (see paragraph 153 above) was a more measured email. It asserted a continued willingness to stick by the ISA. It also put forward an alternative and different proposal, to avoid some of the difficulties caused by the ISA, namely a lump sum upfront payment; and it also highlights a more sensible and restrained basis for the need for Balbir to seek further financial information i.e. in relation to his own tax affairs. Its terms can be seen as a contrast to those of the 18 June letter which is a more robust and aggressive statement. If this had been sent on 18 June, then I would have concluded that this was not a repudiation.
“Without prejudice”
The 18 June 2012 letter was marked “without prejudice”, as indeed was much of the other correspondence in that period. Mr Pepperall seeks to distinguish the present case from the facts in the Alan Ramsay Sales case. First, whilst it is the case that the “without prejudice” correspondence was admitted into evidence in this case, without objection from any party, there was no argument on this point at the time and I am prepared to treat the court’s consideration of it as “de bene esse” in any event. Secondly, however, I do agree that these exchanges between May and August 2012 were not exchanges primarily intended to settle an existing dispute between the parties. Rather they were part of an ongoing contractual negotiation between the parties for the purpose of seeking to conclude the envisaged SA: see Alan Ramsay Sales, §15. The first of the two reasons given in Alan Ramsay Sales (at §33) does not therefore apply. Thirdly, however that still leaves Flaux J’s second reason (§§33 and 66) for not allowing reliance upon a without prejudice communication as repudiatory. In my judgment, the letter of 18 June 2012 formed part of an ongoing chain of negotiations, constituting a continuum of negotiations seeking agreement as to the way forward. Taken in that context, and taking account of the correspondence both before and after, the letter of 18 June 2012, I conclude that its contents cannot be regarded as sufficiently unequivocal to amount to a renunciation or repudiation of the ISA.
Acceptance of repudiation or affirmation of the contract
In any event, even if the letter of 18 June 2012 did amount to a repudiatory breach of the ISA, Balbir did not accept that repudiation as terminating the ISA. Rather, by his conduct, he elected to treat the ISA as continuing, or, at the very least, failed unequivocally to accept the repudiation for such a period of time that he is to be taken to have affirmed the ISA.
First, the letter of 17 May 2012 cannot be construed as acceptance of the alleged repudiation, for the simple reason that it was written a month before the 18 June 2012 letter.
Secondly, it was not until more than 5 months later, on 26 November 2012 that Raghbir purported expressly to accept Balbir’s breaches of the ISA as terminating the ISA. However in the meantime, Raghbir had affirmed the ISA. First, on 3 July 2011 Mr Nugent Smith sought a further mark-up of the ISA indicating a continuing desire to proceed with the ISA. Then there is Rishi Chandarana’s email of 4 July 2012 referring to Raghbir relying upon the validity of the ISA in seeking to have Balbir excluded from the Company. Further, by Mr Nugent Smith’s email of 6 August, Raghbir unequivocally indicated that, for his part, he was content to proceed with the ISA and the negotiation for the SA. Whilst this email was also marked “without prejudice”, that cannot assist Raghbir’s case. The position must be the same as for the 18 June letter itself. Either both communications are admissible, in which case, even if the 18 June letter amounts to repudiatory breach, the 6 August email amounts to affirmation of the contract; alternatively both are inadmissible in which case Raghbir cannot rely upon the 18 June letter as amounting to a repudiatory breach.
I conclude therefore, first, that Balbir’s conduct did not constitute a repudiatory breach of the ISA and, in any event Raghbir subsequently affirmed the ISA. Raghbir’s defence on Issue (4) fails.
Issue (5): Estoppel
At the outset of the trial, in response to an application to strike out the defence based on estoppel, Raghbir applied for permission to amend his pleaded case on this issue. Despite objection from Mr Wilson I allowed that amendment. In short, my reasons were that, depending on how the evidence came out in the course of the trial, the pleaded facts might just give rise to a defence of estoppel, and since Raghbir did not seek to rely on any fresh evidence, no prejudice would arise from allowing the amendment.
The relevant legal principles
In order to establish a defence of “equitable” or “promissory” estoppel, the following elements need to be established (Chitty, supra, §4-087):
a legal relationship giving rise to the rights and duties between the parties;
a promise or a representation by one party that he will not enforce against the other his strict legal rights arising out of that relationship;
an intention on the part of the promisor that the promisee will rely on the representation;
reliance by the promisee on the representation;
it is inequitable for the promisor to go back on his promise.
As regards element (2), a promise or representation may be made by conduct, but mere inactivity will not normally suffice; otherwise mere failure to assert a contractual right could lead to its loss. There is no ground for saying that mere delay, however lengthy, destroys contractual rights: Chitty, supra, §4-093.
As regards element (4), there is no requirement for “detriment”. It is enough if the promisee has altered his position in reliance on the promise so that it would be inequitable to allow the promisor to act inconsistently with it: for example, if the promisee has forborne from taking steps that he would otherwise have taken to safeguard his legal position, or made efforts to perform the altered obligation (for example, where a seller after being promised extra time for delivery has continued his efforts to perform after the originally agreed delivery date had gone by). On the other hand, the fact that the promisee has not suffered any prejudice by acting in reliance on the promise may be relevant for the purpose of the element (5); in such circumstances it may not be “inequitable” for the promisor to go back on his promise: Chitty, supra, §4-095.
Discussion and Conclusions
In my judgment, Raghbir’s case on estoppel falls at the first hurdle. Element (1) is not established. There was no clear promise or representation by Balbir, by words or by his conduct, that he would not insist on his strict rights (as opposed to a statement that he would not abide by his obligations) under the ISA. His post-ISA conduct did not impliedly so represent. As regards continuing to engage as a director of the Company, under the terms of the ISA, until the conclusion of the SA, he remained entitled to act as a director. As regards the fact that he continued to seek due diligence and to investigate the affairs of the Company in circumstances where the ISA envisaged that he would not do this, that cannot be taken as a clear promise not to enforce his rights under the ISA. In so far as such conduct was contrary to his obligations under the ISA, it was not relied upon as part of Raghbir’s case on repudiatory breach, and in any event, as I have found above, Raghbir affirmed the ISA. As to seeking to renegotiate the deal, again in my judgment, if anything, this amounted to breach of obligations, rather than a failure to insist on rights. At the relevant time, no specific rights under the ISA had arisen – the first payment was not due until December 2012. Moreover subsequent failure on the part of Balbir to seek payments as they fell due under clause 2a and 2b in December 2012 and December 2013 respectively did not amount to a promise or representation. Rather there was mere silence and inactivity, amounting to no more than delay.
As regards reliance (element (4)), Raghbir “permitting or allowing or suffering” certain events to take place would be sufficient for reliance, if it could be shown that Raghbir forbore from taking steps he would otherwise have taken or been entitled to take. As regards allowing Balbir’s continued involvement in the business and refraining from removing him as a director, Raghbir effectively contends that, if Balbir had made clear that he was seeking to enforce his rights under the ISA to the payments and the transfer of shares, then he would have sought to remove Balbir as a director. However, unless and until Balbir had actually enforced his right to payment, with the result that shares had been transferred, Raghbir would not have been able to remove Balbir as a director and from the bank mandates and Balbir would have remained entitled to do all things he did as a director.
As regards the payment over of half of the proceeds from the sale of the Delta properties, it is the case that if Balbir had indicated that he intended to enforce his rights under the ISA to payments in respect of his interest in those properties, then it is likely that Raghbir would not have agreed to Balbir receiving those proceeds. To that extent, there was reliance. However, Balbir agrees to give credit for those proceeds and is thus not now seeking to enforce any rights under the ISA to the extent of that amount. In these circumstances, as regards the balance between the proceeds received and the £800,000, Raghbir has not sustained any prejudice and it would not have been inequitable for Balbir now to seek payment of that balance.
In the light of my conclusion in paragraph 272 above, Raghbir’s defence based on Issue (5) fails.
Conclusions
My conclusions are as follows:
The ISA was and is a binding agreement between the parties (paragraph 214 above).
In so far it provides for payment by Raghbir for the transfer to the Company of Balbir and Hardev’s shares in the Company, the ISA does not give rise to an acquisition of shares prohibited by s. 658(1) CA 2006 (paragraphs 226 and 232 above).
The ISA is not voidable and, in any event, was not avoided on grounds of economic duress (paragraph 244 above).
The ISA was not terminated as a result of acceptance of a repudiatory breach (paragraph 267 above).
Balbir is not estopped from enforcing his rights under the ISA (paragraph 275 above).
I conclude therefore that Balbir and Hardev are entitled to enforce their rights under the ISA.
As regards the remedy, Balbir seeks, by way of damages, the contractual price less the sums Balbir received in respect of the Delta Properties, being £570,820.32, giving a net figure of £1,029,179.68. Balbir contends that he is entitled to damages for non-performance. Balbir and Hardev have at all times been, and remain, willing to transfer the shares and the Delta Properties. Raghbir has been, and is, in breach by refusing to accept that performance and to pay contractual sums due. Balbir is thus entitled to the difference between the value of the property contracted to be sold and the agreed price. In the present case, it is common ground that, following the receivership, the shares in the Company are worth no more than a nominal value. As regards the Delta Properties, the claim has been overtaken somewhat by the agreed sale of the Properties. Accordingly he is entitled to damages in the amount of the agreed price of £1.6 million less the sum of £570,820.32.
Whilst, in principle, this seems to be the correct approach and there may be no dispute as to the principal sum due, I invite further submissions on the proper analysis of the measure of damages, and in particular, as to whether the contractually agreed price was £1.6 million in total, or rather two separate prices of £800,000 for the shares and the Delta Properties respectively and thus as to how, if at all, the subsequent agreed sale of the Delta Properties affects the position. Accordingly, at this stage there will be judgment for Balbir on liability. I will also hear submissions on further consequential issues, including interest and costs.