Moordene Ltd & Anor v Trans Global Chartering Ltd & Ors [2006] EWHC 1407 (Ch)

NO: 2819 OF 2005[2006] EWHC 1407 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Venue Royal Courts of JusticeDate 9 th May 2006
Strand
London
BEFORE HIS HONOUR JUDGE MACKIE QC
IN THE MATTER OF TRANS GLOBAL CHARTERING LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 1985
Between
MOORDENE LIMITEDPetitionerZONDIC ENTERPRISES INC BVIPetitionerTRANS GLOBAL CHARTERING LIMITEDRespondentTRANS GLOBAL PROJECTS LIMITEDRespondentBARRY JOHN RUCKRespondentMARTIN GILBERT WELCHMANRespondentCOLIN BRUCE CHARNOCKRespondent
Mr Peter Susman QC instructed by Hextalls LLP appeared for Petitioner.Mr Andrew Clutterbuck instructed by Cripps Harries Hall appeared for First, Second and Third Respondents.Mr Tiran Nersessian instructed by Thompson Snell and Passmore, appeared for Fourth and Fifth Respondents.
Judgment
[1]This Petition is brought under Section 459 of the Companies Act 1985 by two minority shareholders seeking authority to bring proceedings on behalf of the Company against three of its directors and the majority shareholders.

The Parties and the Background

[2]The Company, Trans Global Chartering Limited (“Chartering”) effectively started business in 2002 with a capital of £50,000 to operate as a ship charterer. The Petitioners, Moordene and Zondic each hold 20% of the Company’s shares. Mr. Wardell and Mr. Khanbabi, directors of Chartering, say that Moordene and Zondic are their alter egos and it is accepted that there is, at least, a close connection between these companies and these individuals. The remaining 60% of Chartering’s shares are held by Trans Global Projects Limited (“Projects”). Projects in turn is owned as to 60% by Trans Global Group Limited (“Group”) in which Moran Holdings plc has a majority interest. The remaining 40% of Projects is owned by a company controlled by Mr. Charnock, Mr. Welchman and their wives. Mr. Charnock, Mr. Welchman and Mr. Ruck are all directors both of Chartering and Projects. Mr. Ruck is Chairman of Projects but has no shares in Chartering or Projects and is a qualified accountant employed within the Group. Group is a substantial shipping and freight business with a turnover in 2003 of some £71m. In that year Projects had a turnover of some £36m.[3]Chartering, a dormant company for some years, was revived to be the vehicle for collaboration between Projects and Mr. Wardell and Khanbabi, who both had substantial experience of chartering in general and of dry bulk vessels in particular. Mr. Wardell and Mr. Khanbabi were at first retained by Projects as consultants. Projects, a project freight management company, wished to expand into dry bulk chartering and this led to the venture now undertaken by Chartering.

Shareholders Agreement

[4]Projects, Zondic and Moordene entered into a Shareholders Agreement in conventional terms on 1st February 2002. Although the Petitioners have not relied upon alleged breaches of this agreement in their petition, their submissions at the Hearing placed emphasis on Clause 3. Clause3.1 identifies the business, which Chartering will be engaged in as carrying out freight forwarding, brokering, chartering and operating ships. Clause3.2 restricts the categories of any further business, which the company undertakes. Clause3.3 provides:- “The Parties undertake to act in the best interests of the Company in its initiation and expansion of such business”.

Facts agreed or not greatly in dispute

[5]Chartering’s workforce consists only of Mr. Wardell and Mr. Khanbabi who work in an office in Feltham. Administration is provided to Chartering by Projects for which the latter charges. When Chartering got underway Mr. Ruck sought to open bank accounts but there was an initial problem caused by a small but overlooked debenture, which affected all Group companies. Once this problem had been overcome further difficulties arose in January 2003 because Group’s shareholders were exasperated by the detail of the money lending requirements which had to be met. Another problem was cross guarantees of the Group’s bank indebtedness which would extend to any Chartering account. Mr. Wardell and Mr. Charnock were understandably irritated by lack of progress on this score. The Company’s turnover at first was modest, £235,666 in 2002. The processing of receipts and payments was carried out by Projects on Chartering’s behalf. Throughout 2002 and 2003 Chartering was not trading at a profit, a problem which accounting through Projects was able to accommodate.[6]After the spring of 2004 Chartering began to make profits as a result of the first of three ad hoc charters for Sumitomo Company and then as a result of an advantageous contract with Sumitomo Company Europe (“SCE”) itself. The introduction to this customer came through Projects and a framework agreement it had with BP. It was clinched through hard work on all sides. Under that contract Chartering, as sub-contractor to SCE , was to ship gas pipeline materials from the Far East to Black Sea Ports on the way to gas fields in the Caucasus. That contract is contained in a letter dated 2nd July 2004 from SCE to Chartering which appears to have been agreed to and signed by Mr. Khanbabi on 5th July but, on his evidence ,was in fact backdated and signed some months later. As significance is attached to the terms of this contract I set out below the three main paragraphs. “1 The Contract is hereby sub-contracted to you on the same terms and conditions, unless otherwise stated herein, and you hereby agree to directly perform all of the obligations of CONTRACTOR under the Contract (as defined therein) as if you were CONTRACTOR. You agree to be responsible for resolving any issues arising from your performance of the Contract.[2]The remuneration terms between us shall be as follows: We shall be first due 1% of the relevant payment received from COMPANY (the “Payment Amount”. This 1% shall be guaranteed as our base profit of the CONTRACT. After deduction of the actual cost of performing the CONTRACTOR’S scope of work under the CONTRACT and the base profit for us, provided that a positive balance remains, you shall be due 1% of the Payment Amount. Any remaining balance after such deductions shall then be divided equally between us.[3]The payment terms between us shall be as follows: Trans Global will advance the funds to cover the “Liner In” costs of any particular loadout and the wages for Safety Personnel in Kuantan. Thereafter, Sumitomo will deduct 1% from the amount due from COMPANY and remit the balance amount due to Trans Global within a maximum 3 days after completion loading for any particular shipment. Trans Global will arrange for payment of the freight due to the Owner of the performing vessel. Trans Global will undertake to reconcile the final accounts for the shipments as per Point 2 above and will remit to Sumitomo the amount due after completion of all contractual shipments.”[7]Up to this point there do not appear to be any further complaints by Chartering about the lack of a bank account and indeed in an email of 15th June 2004 from Mr. Wardell to Mr. Ruck dealing with a rolling financial forecast it is implicit that more money coming in under the SCE contract would benefit Group rather than Chartering.[8]It is traditional in commerce for participants in a joint venture to over estimate the value of their own contribution and to under estimate that of their colleagues. The relationship between the shareholders of Chartering is no exception particularly over the SCE contract. Group and Projects had long-standing relationship with clients, an established name and a secure financial base. Mr. Wardell and Mr. Khanbabi were very well qualified having the special experience and skill to meet the requirements of the contract on offer. It is clear when one looks at the documents proposed at the time for marketing purposes that Projects was presented as the holder of a transportation frame contract with the BP, Chartering was put forward as the specialist subsidiary, specialising in private shipments. The experience and expertise of Group as a whole was also seen as a selling point – see for example the email of 27th January 2002 and the Profile submitted by Mr. Khanbabi in his email of 16th April 2004. In view of some of the claims made later I quote albeit out of context two examples of descriptions by Mr Khanbabi of the role of Projects within the Group:- “Whilst, you may be familiar our parent company, Trans Global Projects Ltd, you may be less with our company. At the beginning of July, 2001 Trans Global Projects launched its latest subsidiary company – Trans Global Chartering Ltd, specialising in ship chartering.” [sic] “TGC handles the Trans Global Group’s requirements for chartering both in the wet and dry markets, including heavy lifts and all manor [sic] of cargo associated with those projects. This activity covers both the carriage of imported raw materials to those particular projects and subsequent distribution from those projects. A major part of TGC’s work is providing ship broking and chartering services to Trans Global Projects whose cargoes are often time-related and extremely time sensitive”.[9]The correspondence contains little more than the usual niggles that beset any venture until August 2004. On 12th August Mr. Wardell and Mr. Khanbabi wrote in formal terms from Chartering to Mr. Ruck at Projects with copies to Mr. Charnock and Mr. Welchman in the following terms:
“It is as a matter of grave concern that we write to you in respect of the financial arrangements of Trans Global Chartering Ltd (TGC). It is over two and a half years since the Company was incorporated and it is still without its own operable U.S. Dollar bank account. Whether this is due to the negligence or apathy of Trans Global Projects Ltd., or Trans Global Group, or indeed Moran plc, we do not know. In your absence on holiday we collected freight in due time for the last two SCP loaders. This freight was remitted into Trans Global Projects Account, as TGC’s account still remains unworkable. Notwithstanding, that TGC have been forced to delay payments to its contractors and staff in Malaysia, TGC’s freight remittances were then delayed by whom we do not know nor do we know for what reason. Whatever the circumstances the result was totally unacceptable to TGC who as you know are running a positive cash flow and whose business is self-financing at this stage. This occurrence has caused TGC extreme embarrassment, particularly with one Owner with whom we have a Contract of Affreightment in our joint venture business with Sumitomo Corporation Europe plc. In order that further disruption to TGC’s business does not re-occur we have to insist that the TGC U.S. Dollar bank account be made operable with immediate effect, with the intention that it should be used as from the next SCP loader at the end of this month. Furthermore, we are very mindful that due to the joint venture arrangement with Sumitomo Corporation Europe plc, the Sumitomo portion of the profitability of these last two voyages has simply disappeared into the cash flow of Trans Global Projects Ltd. We are sure that we do not have to remind you that these monies are legally considered to be “trust funds” and should not be used for the purpose of financing non-contracted parties’ business. Within this week we will calculate the extent of the monies due to Sumitomo Corporation Europe plc and will tat that time insist that these funds are transferred to TGC’s account for disbursement to Sumitomo as required by our Joint Venture agreement. We fear that these monies are being used in an account, which is cross guaranteeing the banking facilities afforded to other parts of this Group. As you are well aware under the Shareholders Agreement, TGC’s bank account forms no part of such cross guarantees. Lastly, we come to the thorny question of the accrued surplus in TGC’s trading position. As you are aware these too have been swallowed into the cash flow of the majority partner i.e. Trans Global Projects Ltd. We also expect that TGC’s account to accurately reflect the cash position of the company in the very near future. Certainly, we do not recall any such mandate being approved by the Board of Trans Global Chartering Ltd. Is this something that the majority shareholder has taken upon itself without reference to the minority shareholders’ rights? It is difficult not to conclude that this might be the prime cause why it has taken so long for TGC to get a workable bank account. Your urgent confirmation that the bank account problem will be rectified immediately and that the Sumitomo funds will be paid into it as soon as they are advised to you would be appreciated.”
[10]Mr. Khanbabi emailed the letter to Mr. Ruck who responded that a Chartering account would not achieve the objective sought as it would, under the terms of Projects’ bank arrangements, have to be opened by RBS with cross guarantees between all the companies and the Chartering account being part of the Group facility. He said that “in the real world a TGC separate account achieves nothing”. In a further response he describes Project’s position as being “(1) we own 60%. (2) it’s a TGC client, (3) so sorry chaps we decide”. Very forceful exchanges followed. Mr. Ruck took the position that Projects’ own position could not be weakened by being deprived of Chartering’s cash flow. Conflicts of interest would not arise so long as creditors got paid on time. Mr. Wardell and Mr. Khanbabi objected that Chartering’s minority interest was being neglected because they had played no part in a decision to link Chartering to the financial structure of Group. As they saw it if Chartering received revenue there was no reason not to pay debts promptly or to risk damaging goodwill by delaying payment. There was a Board Meeting of Chartering on 16th August at which Mr. Wardell and Mr. Khanbabi pressed their demands. The matter was not forced to a vote however. On 20th August Mr. Wardell and Khanbabi wrote to Mr. Ruck stating that they had obtained legal advice that money due to Sumitomo was trust funds and needed to be treated as such. They stated “we have spoken with Sumitomo who are in no hurry to receive those funds into their bank account at the moment, however, they have to be removed from the TGBP cash flow”. After the end of August the issue receded. Eventually at the beginning of 2005 a sterling bank account was set up for Chartering. On one occasion Mr. Khanbabi was content for a payment of U.S. $30,000 due to Chartering to pass through Projects account instead.[11]The Respondents claim that the disagreement in August 2004 was an artificial one deliberately created to increase the prospects of success and to reduce the price, of a proposed Management Buy Out (“MBO”) of Projects. A number of documents have been produced by Mr Charnock and Mr Welchman about the MBO venture which, they say, involved and motivated Mr Wardell and Mr Khanbabi, An email dated 11th August from a Mr. Doggett, an associate of Mr Charnock involved in the MBO attempt, to Mr. Wardell and Mr. Khanbabi copies to Mr. Charnock and Mr. Welchman went as follows:
“Colin and I have continued to discuss the situation and as a preparation for MBO, could you send a DRAFT message to us (off record) stating TGC’s concerns about the consolidated bank account and TGC’s fiduciary responsibility towards is partners. Viz You record the concern over the late payment of freight & the consequent risk. You record the need for a ‘client account’ under TGC’s US$ account, so that Sumitomo’s money doesn’t get washed through in the Group’s money system. You state an early date by which this must be in place (like 1st September).”
Viz You state an early date by which this must be in place (like 1st September).”[12]Mr. Wardell said that he received the email because Mr. Doggett had told him two or three weeks earlier that he would like him to become involved in the MBO. Mr. Khanbabi’s recollection was that this email came to him out of the blue from someone who was not a director of Chartering and he was annoyed to receive it and indeed ignored it.[13]There is also a note of a meeting at a solicitors office on 19th August at which Mr. Wardell, Mr. Charnock, Mr. Welchman and Mr. Khanbabi received advice. This seems to have been advice to the minority shareholders of Chartering about their rights mixed in with consideration of the MBO.[14]While there was some confusion about the meeting from the witnesses the notes contain references consistent with Mr Charnock, Mr Welchman, Mr Khanbabi and Mr Wardell, discussing the application of pressure on Group to agree an MBO. The Notes must be read as a whole but contain references, for example, to “By putting pressure – scupper new provision for facility” (ie new bank facility).[15]Shortly after this point tension recorded and did not re appear until early 2005. The Petitioners say that this was because of the heavy workload they were under aggravated by the problems caused by Projects. The Respondents say that things went quiet because the MBO was postponed for a while. Projects was short of capital and was benefiting from Chartering’s cash flow.[16]At the beginning of February 2005 Mr. Khanbabi emailed Mr. Ruck with information about what was due to SCE, he attached a Statement of Account which he said he would be sending to Sumitomo that week with a view to them being paid U.S. $871,742.36 by the 15th April. There followed exchanges with Mr. Ruck who advised that Projects would not have funds to pay Sumitomo in full and Mr. Wardell offered to negotiate. Chartering had it in mind to pay 50% in April and the remainder over some subsequent period. Mr. Saha, a senior Officer of the parent company was copied in to some of these emails by Mr. Wardell. A message to Mr. Charnock from Mr. Wardell, copied to Mr. Khanbabi dated 23rd March 2005 states: “I have agreed a transfer to Sumitomo of $350,000 between 15th/20th April as a starter. This will leave Barry precious little cash to run the company, so from 20th onward the heat really gets turned up on Kolkata. Suggest you get your “ducks in a row” for end of April because we will be pushing again for another payment in early May." This message appears to suggest that if money is paid to Sumitomo, the pressures on the ultimate parent in Kolkata will be increased so it would therefore be appropriate for the ducks of the proposed MBO to be placed in a row. In evidence however, this was denied by Mr. Wardell who suggested that “we” was a reference not to himself and his colleagues but to Sumitomo. The email of 23rd March was not copied to Mr. Ruck. An email from Mr. Charnock to Mr. Wardell on 22nd April suggests that the MBO project is moving forward as does a further message of 28th April. On the following day however Mr. Wardell emailed those involved in the proposed MBO that the terms were unacceptable for him and that he would not be proceeding.[17]On 28th April 2005 this Petition was presented and the Petitioners applied for an expedited hearing date. This application did not reach a substantive hearing until 22nd June. Mr. Justice Etherton refused interlocutory relief but expedited the trial so that it could be heard last August. The case was not listed for trial for some months and it was no doubt for this reason that the Court refused expedition when the matter came up last October. As soon as the Petition had been issued Mr Charnock and Mr Welchman sought to engage with SCE. Mr. Charnock and Mr. Welchman reached an instalment agreement with SCE on 13th May. Despite that Mr. Khanbabi visited SCE both on 16th May and two days later with his solicitor, Mr. Vassiliades. Chartering paid SCE $100,000 on 19th May and a further $100,000 on 8th June. On 10th June SCE issued an invoice for the entire $671,742.36 and withdrew from the agreement reached on 13th May. A fresh agreement was reached with SCE involving a parent guarantee. Further payments were made to SCE of £200,000 on 29th June, $120,000 on 5th August, $120,000 on 6th September and a final payment on 25th January 2006. Before turning to the more contentious facts I should summarise the position adopted by the parties in the Petition.

The Petition

[18]The Petitioners claim that the contract between Chartering and SCE was a joint venture, that Chartering was under a duty to account to SCE for its share of the profits and that these should be held by Chartering on trust for SCE. The Petitioners claim that Mr. Ruck, Mr. Welchman and Mr. Charnock abused their position as directors of Chartering to misappropriate the assets of Chartering and in particular the funds generated by the SCE contract. The Respondents are accused of procuring that all sums payable under the SCE contract went into the Project bank account to meet long standing Group indebtedness. They claim that this alleged misappropriation was to the knowledge of the Respondents without any legal or other justification. The Petitioners claim that they spent between August 2004 and March 2005 trying to persuade the Respondents to regularise the position and that this resulted in a promise to re-negotiate finance with new banks. The Petitioners complain that throughout that period they were fully occupied in operating the SCE contract but also had to engage in lengthy disputes with the Respondents to get Chartering’s suppliers paid. It is claimed that the Respondents were indifferent to this and that (in April 2005 when this Petition was issued) accounting to SCE cannot be delayed beyond the end of May 2005. It is claimed that the Respondents are indifferent to the fate of Chartering and content for SCE to place the company into insolvent liquidation. It is also alleged that as a result of the misappropriation it is very likely that SCE will seek a liquidation to pursue the directors personally with consequent damage to the reputation of Mr. Wardell, Mr. Khanbabi and their companies. The Petitioners say that the Respondents could have no defence to an action by Chartering to recover the misappropriated money. As a result the remedy sought is an Order under Section 461 authorising Mr. Wardell and Mr. Khanbabi to bring Civil Proceedings in the name of and on behalf of Chartering against the Respondents and also companies further up the line.[19]The Defence denies all allegations of misappropriation. It claims that SCE had not even requested payment or issued an invoice and were content to be paid at any time in the tax year beginning April 2005. The Respondents claim that Mr. Wardell and Mr. Khanbabi were content with Chartering being treated as a company within the Group having access to the Groups and Project’s facilities, services and cash flow and in turn, when Chartering might need it, make cash available to the Group. The Defence contrasts the recent profitable period of Chartering with the losses of £44,720 and £30,622, which it made in 2002 and 2003. The Defence turns to what were then recent events and claims that if SCE does take action and Chartering suffers damage it is the result of the Petitioners conduct not that of the Respondents. The Defence says that Mr. Charnock negotiated an arrangement with SCE on 13th May 2005 by which the debt would be paid over eight monthly instalments from July 2005. Once details of that agreement had been passed to the Petitioners Mr. Khanbabi arranged meetings at which he told SCE about the allegations of misappropriation and insolvency and sought to persuade SCE, despite the instalment agreement they had entered into, to issue an invoice for the whole amount due for immediate payment. The Defence claims that it was as a result of Mr. Khanbabi’s visit that SCE asked for a bank guarantee and issued an invoice for all sums due. The Defence alleges that Mr. Khanbabi’s actions are in effect those of Zondic and are a breach of Zondic’s duty under the shareholders agreement to act in the best interests of Chartering.

Evidence for the Petitioner

[20]Both Mr. Wardell and Mr. Khanbabi served witness statements and were cross-examined at length. I concentrate only on the points of particular controversy in the evidence.[21]Mr. Wardell’s witness statements presented an alarming picture. He states that he always assumed that his fellow directors would ensure that there were proper accounting and banking procedures in place for Chartering but that in July 2004 he “realised that something was very wrong” as Chartering seemed to have no real bank account. He suggests that it was a result of this revelation that he and Mr. Khanbabi raised the matter and wrote the 12th August letter. He accused Mr. Ruck, Mr. Welchman and Mr. Charnock of engineering a situation whereby Chartering’s entire income was being funnelled into Projects for the benefit of the Group. He correctly points out that in 2004 Chartering was making money but the other Group operations were losing it. He claims that by February 2005 problems with creditors were acute and it became apparent that the Respondents were prepared to let Chartering go to the wall. He and Mr. Khanbabi saw the position as unacceptable and dishonest and he says he felt, and had been advised the previous summer that the money due to SCE was held on trust. He claimed that if “some money is not paid to SCE by the end of May, the game will be up”. He was at that point convinced that Mr. Ruck, Mr. Welchman and Mr. Charnock had no intention of putting Chartering in funds so that anything would be paid to SCE. He developed and brought up to date some of these matters in his second witness statement of September 2005. In this he suggested that Mr. Ruck had purposely withheld the fact that new bank accounts would be subject to existing cross guarantees, an observation which he withdrew in cross-examination. In his first witness statement Mr. Wardell said nothing about an MBO but by the time of his second the evidence of Mr. Welchman and Mr. Charnock about this had been disclosed together with some of the material I have referred to above. Mr. Wardell says that it was not until about August 2004 that he was aware of the proposed MBO for Projects. He said that the MBO was only of interest to Mr Khanbabi and him and because they wanted to know the facts.[22]The e-mails in mid August 2004, arose, so far as Mr Wardell was concerned, from advice he had received from his lawyer that the SCE money was trust money, he was irritated that Mr Doggett was included in the correspondence and saw the matter as being simply manipulation by Mr Charnock.[23]As Mr Wardell saw it the potential MBO in which he was interested for information purposes only, was unconnected to the burning question of normalising Chartering's affairs.[24]Mr Wardell accepted that being within the Group was a benefit to Chartering at least to the extent of benefiting from the Trans Global name.[25]Mr Wardell was cross examined at length about some of the matters I refer to above..At times Mr Wardell’s recollection was at fault. For example he suggested that Chartering should not pay for legal advice about the status of the SCE money. He was then shown an e-mail he had sent proposing that an EGM be called so that Chartering should resolve to take that very advice. When this was put to him, he suggested ,incredibly, that the proposal for an EGM was for Projects not Chartering.[26]Mr Khanbabi’s first witness statement dealt with the position in June 2005 at which point he saw the Respondents’ wish to resist interlocutory relief as motivated by the ir wish to postpone matters in the expectation that Chartering could in the meantime be forced into an insolvent liquidation.[27]He was concerned that at the outset he and Mr Wardell had been shown very little financial or accounting documentation.He explained that they had complained about the absence of the bank account over a prolonged period and that their efforts on behalf of Chartering were greatly hindered by Projects’ self interested decisions to pay Chartering’s debts late.[28]The decision to make an application to the court followed what they saw as a refusal by Mr Ruck to allow proper access to Chartering’s accounting records. They also learned in their meetings with their fellow directors that an MBO was proceeding.They were concerned that Chartering would be put into insolvent liquidation to make it cheaper for the MBO participants to acquire Projects.[29]Mr Khanbabi said that he was astonished that Mr Ruck, Mr Welchman and Mr Charnock would wish to expose Chartering’s difficulties to SCE and it was learning about a deal being done, that caused him to visit Mr Ueno of SCE.[30]He said that he learned from Mr Ueno that Mr Charnock and Mr Welchman had visited SCE and requested stage payments as there was a management buy-out taking place.During the course of his own meetings with Mr Ueno, Mr Khanbabi ---- was appalled to learn the extent to which his colleagues has misled SCE and, he “put our cards on the table” stating that Projects had abstracted all Chartering’s money, including that held on trust for SCE. Mr Khanbabi had explained about Chartering and the Petition and as a result it was agreed that SCE would issue an invoice for the whole amount due.There followed a further meeting in which Mr Khanbabi was accompanied by his solicitor Mr Vassiliades.[31]Mr Khanbabi explained that he and Mr Wardell had received some draft accounts which were “grossly wrong” and these led him to conclude that accounting documents were being manipulated as a preliminary to putting Chartering into liquidation.As he saw it, the draft accounts were bogus and had been intentionally drawn to conceal a massive misappropriation of Chartering’s money by Projects.[32]During cross examination, Mr Khanbabi had various documents drawn to his attention which suggested that he had himself been involved in the MBO, that SCE had not been pressing for payment and it was put to him that any breach of duty in visiting SCE was his, not that of his fellow directors.Mr Khanbabi stuck to his position.[33]Mr Khanbabi asserted that Chartering did not need the support of Projects when seeking to do business and that the position was, if anything, the opposite. He was taken to the sales documents which promoted Chartering as an integral part of the Trans Global group.

The evidence for the Respondents

[34]Mr Ruck is the Executive Chairman of Projects with no direct interest in either that Company or Chartering. He explained the difficulties which occurred when he tried to set up a bank account for Chartering and accepted that it would have been much better for that Company to have its own bank account and financial existence.[35]He pointed out that Mr Wardell and Mr Khanbabi had generated and sent out invoices on behalf of Chartering, but passed them to the Projects accounts department for processing. Invoices they sent out would require payment to a Projects bank account number. They would have been well aware of these arrangements.[36]Mr Ruck explained his role in the re-negotiation with SCE. He had not himself met Mr Ueno until 25 May 2005 by which time SCE were clearly concerned. In the event an agreement was entered into requiring the ultimate parent company of Chartering, Moian to guarantee the debt which would be met by Projects.[37]Mr. Ruck insisted that the inter group accounting and bank arrangements were common knowledge among all Group personnel. If Chartering’s cash flow had not been channelled through one of the Group accounts, the company would not have had access to the Group borrowing facilities which was so vital to it in its early days. He pointed to the initial ad hoc SCE charters at the beginning of 2004 as an example. While payments were generally prompt Mr. Ruck accepted that these were sometimes late as part of the ordinary run of the business and the usual commercial pressures. He said that Mr. Wardell and Mr. Khanbabi would assist with these problems in helping to defer payment. He felt that at least some of the complaints made by Mr. Wardell and Mr. Khanbabi at the time were more related to building up pressure to help the MBO than to genuine commercial concerns.

Evidence of Mr Charnock

[38]Mr. Charnock has been involved in freight forwarding for about 24 years. With Mr. Welchman he is a director of Breezeline the vehicle by which they participate in Projects and ultimately in Chartering. Much of his evidence supports and is consistent with that of Mr. Ruck. The particular significance of his evidence lay in what he had to say about the efforts by him, Mr. Welchman and Mr. Doggett to pursue the MBO of Projects. He said that in July or August 2004 Mr. Wardell and Mr. Khanbabi became interested in joining forces with them in undertaking the MBO. They all thought it might be difficult to persuade the Group to sell its 60% shareholding in Projects. They all decided to apply pressure in different ways upon Moran. Mr. Wardell thought pressure would be brought to bear on the Group by persuading them that SCE’s profit share in its contract with Chartering was trust money and should therefore be removed from cash projections. Mr. Wardell also mentioned the possibility of legal action against the Group and directors. That was the motivation behind the letter to Mr Ruck proposed in August 2004. Mr. Charnock considered that Mr. Wardell and Mr. Khanbabi were not truthful in their claims that the email was sent for a genuine commercial reason and not to apply pressure for the purposes of the MBO. They also all decided to use the late payment of invoices as a tool to push the Group to enter into the MBO. Mr Charnock referred to a series of other incidents which he said were consistent with the application of pressure to promote the MBO rather than genuine concerns about improving the position of Chartering.[39]Mr. Charnock went to meet Mr. Ueno of SCE on 13th May 2005 with a view to agreeing a schedule for payment. He said that this was at his own initiative to establish likely payment dates to assist with cash projections for the MBO. He said there was no apparent urgency from SCE to receive money. This relaxed attitude was consistent with the absence of an invoice at that point. Mr. Ueno readily accepted that payment schedule. Mr. Charnock denied financial irregularities. He said it would be obviously disastrous for the Trans Global brand name and the MBO if he or his colleagues sought to put a subsidiary company into insolvent liquidation. Like the other Respondents he was confident that SCE would be paid in full. Mr. Charnock is critical of Mr. Wardell and Mr. Khanbabi and feels they are ruining Chartering by their actions since April 2005. He is also critical of the fact that despite receiving their salaries and expenses for 2005 they have brought no further business has come in to Chartering. Evidence of Mr. Welchman[40]Mr. Welchman is a director of Chartering, Projects and Breezeline. He has been the Director of Operations for the Group since 1988. His background is in ship broking. His evidence supports that of Mr. Charnock particularly with regard to the role of Mr. Wardell and Mr. Khanbabi in seeking to progress the MBO. He also reaffirmed his commitment to the future of Projects. He said that with its business history and substantial reputation in the oil and gas pipeline industry Projects would not wish Chartering to become insolvent. Conclusions about relevant disputed facts[41]Mr. Wardell was not convincing in his evidence about the matters directly in dispute. I have no doubt that Mr. Wardell is an essentially honest man but he seemed to be driven by loyalty to his absurdly exaggerated first witness statement. In cross examination he more than once sought to place an interpretation on e-mails which defied belief. I have already given one example. Mr. Khanbabi was less satisfactory than Mr. Wardell and seemed driven by a wish to stick to his first statement and also by a mixture of grievance and active hostility towards the Respondents. I shall refer further to his evidence.[42]Mr. Ruck was an entirely straightforward and accurate witness with no axe to grind. Mr. Charnock and Mr. Welchman do have an interest to pursue, which is why they were separately represented, but their evidence rang true, obviously so as regards the MBO, and was consistent with the documents albeit that Mr. Charnock seemed to take pride in successful commercial duplicity.[43]Projects had much to gain from Chartering. But Chartering was dependent on Projects for administration, longer term finance and commercial support. Chartering could not flourish without the benefit of the Trans Global name.[44]The picture which the Petitioners sought to paint of commercial pressure and impatience on the part of SCE was an invention. There was no sign of this in a single document from SCE or in the accounts of that company’s position given by Mr. Ruck, Mr. Charnock and Mr. Welchman. It was almost surreal to hear witnesses claiming that they were under pressure to pay debts for which no invoice had been issued. If Sumitomo had concerns about recovering a debt it would have been well able to make its views known. Chartering may well by now have lost the goodwill of SCE and that is not something that one would expect them to record in writing. Common sense suggests however that loss of goodwill was more likely caused by the extraordinary events in May 2005 than by any delay in payment. It was commercially foolish and not in the best interests of Chartering for Mr. Khanbabi to approach SCE when he knew that two other directors had already negotiated an arrangement. That visit was calculated to break SCE’s confidence in Chartering by making claims about its poor financial position. I reject as humbug Mr. Khanbabi’s claim that he felt driven to alert SCE about internal events at Trans Global by moral and ethical concerns. His visits appear to have served no purpose beyond trying to improve the Petitioner’s prospects in this litigation.[45]It is perfectly clear from the evidence of Mr. Welchman and Mr. Charnock and from the contemporaneous documents that Mr. Wardell and Mr. Khanbabi were closely involved in the proposed MBO transaction until April 2005 and were conducting themselves to promote it rather than to pursue any genuine grievance of Chartering.[46]Mr. Wardell and Mr. Khanbabi fairly objected to the decision that Chartering should not have a bank account but should operate through Projects They were unhappy with this but went along with the arrangement without serious concerns particularly when Chartering were relying on the credit of the Group. It is not correct that money was “diverted” into Project’s bank account. Chartering and Projects had legitimate interests in assisting each other’s cash flow. Claims by the minority directors that they had not been given information about what had happened money are not true. I accept Mr Ruck’s evidence. Projects have from time to time caused Chartering to pay late but this appears to be no more than a result of common commercial and cash flow pressures on Projects. I reject the Petitioner’s claims that their hard earned client contacts were constantly ruined by late payment. Their moralistic claims about the right approach to commercial debt were unconvincing, particularly given their wide experience and obvious business skill.

Current Position

[47]The draft accounts for the years ended 2004 and 2005 have been prepared. These show that at the end of 2005 Chartering had a retained profit after tax of £246,000 and total net worth of some £296,000. The notes to the financial statement show a balance due to Chartering from Projects of £1,250,977 for the year ended 31st December 2004, reduced to £338,948 for the year ended 31st December 2005. Mr. Wardell and Mr. Khanbabi claim that that balance should in truth be more like £750,000 taking account of claims that they make about the level of management charges and other matters. It seems that in practice Chartering’s operating expenses, including salaries, are now being paid by Projects thus gradually discharging the admitted debt to Chartering. Mr. Ruck, Mr. Charnock and Mr. Welchman have proposed payment of a dividend by Chartering of £200,000. As yet Mr. Khanbabi and Mr. Wardell have not been able to agree either the accounts or the proposal for a dividend.[48]An MBO for Projects has now been agreed with some of the terms dependent on the result of this litigation.

The Petitioners Submissions

[49]The Petitioners were represented at trial by Mr. Susman QC. Coming fresh to this case he put forward a more moderate and realistic case than his predecessors. He submits that Projects was starved of funds by its own shareholders and lacked the capital for its own business. At the outset Chartering accepted money to carry on its chartering business in accordance with conventional commercial morality. Chartering should have had control of its own banking receipts and payment of creditors as well as power to preserve its reputation in the market and the good names of Mr. Wardell and Mr. Khanbabi. That control was lacking. Projects did not co-operate and the majority of directors had lost sight of Chartering best interest. The Sumitomo monies were held on trust and should not have been used for any other purpose. Mr. Ruck made the wrong choices in August 2004 when placed in a dilemma not of his own making, with disastrous results for Chartering. The “MBO” theory is fanciful nonsense fermented by Mr. Charnock. The shareholders of Projects will not put in funds to disgorge to Chartering its own money. Litigation is now required to compel them to do so. For reasons I have already given I do not accept much of even this more realistic summary of the facts the Petitioners seek to establish.[50]All parties submitted at trial that it was unnecessary for me to decide whether the Sumitomo profit was held by Chartering on trust so I have not received detailed submissions on that issue. I will merely state my first impression which, given the commercial context and the equivocal wording of the July Agreement, is that Chartering did not hold out money on trust. Initially Chartering did not treat that money as held on trust and SCE never asked that it should be.[51]Mr. Susman submits that the obligation in Clause 3.3 of the Shareholders Agreement by which the parties “undertake to act in the best interest of the Company in its initiation and expansion of such business” gives rise to a higher duty than that normally owned by shareholders or directors of a company. This compounds the unfairness of what he submits is the continuing course of contract by the majority of directors acting in the interests of Projects against Chartering.

Submissions of the first three Respondents

[52]Mr. Clutterbuck for the first three Respondents submits first that the factual foundations for the Petitioner’s case are missing.. He submits that the arrangement by which Projects and Chartering are treated for cash flow purposes as within one Group is not prejudicial to the Petitioners. At times Chartering has relied on Projects for support and that pendulum may continue to swing in both ways. Further, Chartering’s business depends upon the existence of Projects and the Group’s standing name and contacts-this seems to me quite clear from the documents I have referred to, the evidence and common sense. It is not accepted that Projects was an unsafe haven for Chartering’s money. Even if that were true the Petitioners must accept that it was to Chartering’s benefit to preserve Projects from collapse. The arrangement was not unfair since the Petitioners had gone along with the idea and no breach of the Company’s Articles or the Shareholders Agreement was alleged. In this context Mr. Clutterbuck cites Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 where a parent company withheld payments to its 75% subsidiary because it could not afford to pay them. The subsidiary was, as here, dependent on the parent. Fox LJ commented as follows on a s.459 petition brought by a minority shareholder in the subsidiary:
“It seems to me that [X Ltd – the parent] in a desperate financial situation was using what assets it could lay its hands on to keep the group afloat. To attempt to do so by withholding debts was not, I think, unfair. It was in the interests of the company that [X Ltd] should not go into liquidation. The company had to pay a price to help secure that., It is the fact that the price – the withholding of debts – left the company critically short of money. But the attempt to keep the group afloat by recourse to the assets of both companies was a reasonable commercial judgment in the circumstances, which existed, and was not unfair. It no doubt caused harm to the company but worse harm would probably have followed from a liquidation of [X ltd].”
[53]Obviously two cases cannot be factually the same. But if, as the Ps contend, the prospects of Projects being able to pay its debts was ever in doubt then, given the dependence of the Company’s business on Projects, it would have been a reasonable commercial judgment to have determined that the Company’s money, which was not immediately needed by it, should be used to save Projects and thereby secure the Company’s own business. In post-O’Neill terms, the commercial judgment was in the Company’s best interests and involved no or no material breach of duty There was accordingly no unfairness.[54]Mr Clutterbuck rejects the allegations of late payments and disputes the claims of loss of reputation to Mr. Wardell and Mr. Khanbabi and their companies which were pursued very little at trial. The Petitioners reject claims for the existence of quasi-partnership between Messrs Wardell, Khanbabi, Charnock, Welchman and Ruck not least because not one is a shareholder in Chartering. Quasi – partnership similarly was not seriously pursed[55]In answer to the Petitioners reliance on Clause 3.3 of the shareholders agreement the Respondents say that this is a standard provision which does not elevate the duties of the shareholders beyond the ordinary. Further they point out that it would not lie within the powers of the directors of Chartering to agree to act otherwise than the interests of the company in the conventional sense even if the Shareholders’ Agreement had imposed some special different duty on its parties. Submissions of Fourth and Fifth Respondents[56]Mr. Nersessian appeared on behalf of Mr. Welchman and Mr. Charnock, who became separately represented once the nature of their evidence about the MBO became clear. For all relevant purposes the fourth and fifth Respondents adopted the submissions of the first three. Conclusions[57]Section 459 (1) provides:- “A member of a company may apply to the Court by petition for an order under this Part on the grounds that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”. The leading guidance on Section 459 is set out in O’Neill v Phillips [1999] 1WLR 1092. Lord Hoffmann points out that a member of a company will not ordinarily be entitled to complain about unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. He adds that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal rights. The unfairness may consist in breach of the rules or using the rules in a manner which equity would regard as contrary to good faith.[58]The Group structure containing 2 layers of companies each with minority holdings, the absence of free standing banking and accounting facilities for Chartering and the presence of Mr Charnock and Mr Welchman with ambitions for an MBO, may have created a potential for unfair prejudice.But in truth there was none. Chartering was dependent upon Projects for its survival. Justified irritation on the part of the Petitioners about the unsatisfactory banking arrangements were no serious prejudice to the progress of Chartering or the interests of its Shareholders and indeed that was in time put right. Tensions which came to a head in the summer of 2004 and the spring of 2005, were created not by any unfair prejudice to the minority Shareholders, but by the MBO ambitions of Mr Wardell and Mr Khanbabi and others. As the prospect of an MBO fell away in the autumn 2004, so did the tensions. Mr Wardell and Mr Khanbabi presented the SCE debt as an urgent problem for Chartering when it was no such thing.SCE became a problem as a result of Mr Khanbabi’s inappropriate actions.There was no unfair prejudice in Projects benefiting from Chartering’s cash. The roles were reversed previously and have been subsequently.[59]My conclusions on the facts do not require me to appraise Clause 3.3 of the Shareholders Agreement but as I see this provision it gave no special rights to the parties requiring some special subordination of the position of Projects when considering the best interests of Chartering.[60]There has been no breach of the terms on which the parties agreed that the affairs of Chartering should be conducted. There is nothing in my judgment which has made it unfair for the majority to rely on its legal rights. The litigation which the Petitioners wish the Company to take would be bound to fail. This petition is dismissed.[61]I shall be grateful if Counsel will let me have corrections of the usual kind and a brief note setting out what they seek and why at the handing down of Judgment.