Secretary of State for Business, Innovation & Skills v Doffman & Anor [2010] EWHC 3175 (Ch)

Case No 7019 of 2008

[2010] EWHC 3175 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 06/12/2010

Before

MR JUSTICE NEWEY

Between

IN THE MATTER OF:Claimant

STAKEFIELD (MIDLANDS) LIMITEDClaimant

AXELPARK (HULL) LIMITEDClaimant

CINDAN LAND (LITTLEDEAN) LIMITEDClaimant

CINDAN LAND (SOUTHAMPTON) LIMITEDClaimant

AND IN THE MATTER OF THE COMPANY DIRECTORS DISQUALIFICATION ACT 1986Claimant

THE SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLSClaimant

GREGORY SEAN DOFFMANDefendants

MARTIN CHARLES ISAACSDefendant

Mr Malcolm Davis-White QC and Miss Ruth Jordan (instructed by Wragge & Co) for Claimant

Mr Stuart Adair (instructed by Segens) for Defendants

Hearing Hearing dates: 6, 7, 11-15, 18-20, 25 and 26 October 2010

Judgment

Mr Justice Newey :

Introduction

[1]In these proceedings, the Secretary of State for Business, Innovation and Skills (“the Secretary of State”) seeks orders pursuant to the Company Directors Disqualification Act 1986 (“the CDDA”) against Mr Gregory Doffman (“Mr Doffman”) and Mr Martin Isaacs (“Mr Isaacs”). The application is founded on the defendants’ conduct as directors of four companies: Stakefield (Midlands) Limited (“Stakefield”), Axelpark (Hull) Limited (“Axelpark Hull”), Cindan Land (Littledean) Limited (“Cindan Littledean”) and Cindan Land (Southampton) Limited (“Cindan Southampton”).

[2]The application is made under section 6 of the CDDA. That section requires the Court to make a disqualification order against a person where his conduct as a director of one or more companies which have become insolvent makes him unfit to be concerned in the management of a company. In the present case, it is not in dispute that Stakefield, Axelpark Hull, Cindan Littledean and Cindan Southampton have become insolvent, nor that the defendants were directors of those companies (although there is an issue as to exactly when the defendants ceased to be directors of Cindan Southampton). The key question is whether the conduct of each defendant as a director of the companies makes him unfit to be concerned in the management of a company.

[3]The defendants are both solicitors. Mr Isaacs is the older of the two. After graduating from University College, London, he trained with Lovell White & King. Having qualified, he stayed with Lovell White & King, working in their company and commercial department, for five or six years. He subsequently joined Kanter Jules Grangewoods, where he was a partner and head of the commercial department. It was there that he met Mr Doffman, who was doing his articles there. After Kanter Jules Grangewoods split into two (in about 1993), Mr Doffman and Mr Isaacs both became partners in one of the successor firms, the Grangewoods Partnership. While there, the two began to deal in property together, and in 1997 they left the Grangewoods Partnership to establish their own firm, the Doffman Isaacs Partnership, on the basis that this would enable them to concentrate on their property dealing. The new firm undertook legal work for outside clients as well as in relation to the defendants’ own projects, but in decreasing quantities; Mr Isaacs explained that he had not carried out any material legal work for outside clients for the past four or five years. The work for outside clients tended to comprise conveyancing, but the firm was also instructed in relation to wills and on some commercial matters (for example, joint venture or shareholders’ agreements). Mr Doffman being a conveyancer, he would generally undertake that work, both for outside clients and as regards his and Mr Isaacs’ own property ventures, and he was also more involved than Mr Isaacs in the management of their properties. In contrast, Mr Isaacs would be more involved than Mr Doffman in the negotiation of property transactions.

[4]Mr Doffman and Mr Isaacs came to deal in property on a substantial scale. Mr Doffman estimated that in 2005 they were doing two or three of their own deals a month, and Mr Isaacs thought that at that time they had some 40 or 50 properties. The defendants’ aim, Mr Isaacs said, was to “make a profit by ‘spotting a bargain’” – that is to say, by “identifying properties that are being sold at prices which are lower than their true market values or do not reflect their development or management potential”.

[5]The companies in respect of which the Secretary of State makes allegations were all used by Mr Doffman and Mr Isaacs for property transactions. One of them, Axelpark Hull, was still under their control when it went into liquidation in 2007. In contrast, the other three companies were no longer in their ownership when they went into administration (in 2006).

[6]The Secretary of State’s allegations, which I shall set out in detail later in this judgment, have two broad themes. Some of them concern the basis on which money was borrowed, specifically from Barclays Bank (“Barclays”) and, in one instance, Dunbar Bank (“Dunbar”), and how the loans were used. In other cases, the focus is on transactions to the benefit of other companies and persons associated with the defendants. Certain allegations have both elements. Recurring elements Barclays

Recurring elements

[7]Three of the companies where allegations are made (namely, Cindan Southampton, Cindan Littledean and Stakefield) borrowed money from Barclays.

[8]The defendants’ relationship with Barclays went back to 2002, when the Doffman Isaacs Partnership began to bank with Barclays. For a period, the relevant manager at Barclays was a Mr John Havard (“Mr Havard”), but he left the bank in 2004 to set up his own business as a broker (in particular, through a company called “The FinanceXChange Limited”). From late 2004 or early 2005, a Mr Shaun Bradshaw (“Mr Bradshaw”) was the manager responsible for the bank’s connection with Mr Doffman and Mr Isaacs. In early 2006, a Mr Glenn Taylor (“Mr Taylor”) (of Barclays’ business support department) took over.

DTZ Debenham Thorpe Tie Leung

[9]Property owned by each of the companies in respect of which the Secretary of State makes allegations was valued by DTZ Debenham Tie Leung (“DTZ”), the well-known property advisers. Between 1999 and 2005 DTZ also prepared valuations of numerous other properties (more than 50) which companies associated with Mr Doffman and Mr Isaacs owned or were to acquire. DTZ valued, too, certain properties which were owned or to be acquired by companies associated with Mr Havard (formerly of Barclays) and a Mr Mark Segal (“Mr Segal”) and a Mr William Corbett (“Mr Corbett”) (who are referred to further below).

[10]The defendants’ main point of contact at DTZ was a Mr Sean Wordley (“Mr Wordley”), a director.

[11]In December 2007, DTZ agreed, without any admission of liability, to pay Barclays £5.25 million in settlement of any claims Barclays might have against them in relation to valuations they had prepared for Barclays of properties referred to below (viz. a property called “Wellington Farm” and a portfolio of properties in Nottinghamshire) and of three other properties. DTZ also agreed, at about the same time, to pay £50,000 to each of five companies linked to the valuations in question, two of which were Cindan Littledean and Stakefield. In total, therefore, DTZ will have paid £5.5 million.

Company sales

[12]As already mentioned, Mr Doffman and Mr Isaacs no longer owned three of the companies in respect of which allegations are made by the time they entered into insolvency regimes.

[13]Two of the companies, Cindan Southampton and Cindan Littledean, were acquired from Mr Doffman and Mr Isaacs by companies controlled by Mr William Corbett. Mr Corbett, I gather, had worked as an estate agent and owned various properties himself. Mr Doffman and Mr Isaacs had come to know him because he worked near their offices.

[14]Stakefield was sold to Mr Segal, who was already running a business carried on by a subsidiary of the company. Mr Doffman and Mr Isaacs had been introduced to Mr Segal in the previous year and led to believe, so they say, that Mr Segal was a qualified accountant and an “HBOS company doctor”. That description is borne out by a curriculum vitae for Mr Segal, which states that between 2000 and 2004 he was an associate in BDG Consulting and as such worked “with HBOS to provide turnaround services for their recovery clients”.

Grant Thornton

[15]Barclays appointed Mr Daniel Smith (“Mr Smith”) and Mr Martin Ellis (“Mr Ellis”) of Grant Thornton as administrators of three of the companies in respect of which allegations are made. At much the same time, Mr Smith and Mr Ellis were appointed, again by Barclays, as administrators of a number of other companies with links to Mr Doffman and Mr Isaacs, Mr Corbett or Mr Segal.

Evidence

[16]The Secretary of State called Mr Elliott Burns (“Mr Burns”), a chief examiner in the Investigations Directorate of the Insolvency Service, and Mr Smith (of Grant Thornton). Mr Isaacs and Mr Doffman both gave evidence themselves, and they also called a Mr Seamus Ferguson (“Mr Ferguson”), a chartered accountant they consulted on a number of occasions.

[17]Mr Burns expressly pointed out in his affidavit evidence that he had no contemporaneous or direct evidence of the relevant matters and was not purporting to give expert evidence; his role was essentially to outline the Secretary of State’s case and to produce materials relied on in support of it. Mr Burns was cross-examined briefly, and I have no doubt that he was a truthful witness. He was not, however, in a position to add anything important to his written evidence.

[18]Mr Smith was also, I am sure, a truthful witness. However, he had no personal knowledge of events pre-dating his appointment as an administrator, and indeed limited personal knowledge of some of the work undertaken post-administration by others at Grant Thornton or by solicitors on the administrators’ behalf. This lessened the significance of his evidence.

[19]There was clearly legal input into the drafting of Mr Ferguson’s witness statement, and Mr Ferguson spoke during his oral evidence of “the verbiage that is being used by the solicitors in the legalese drawing up the document”. It may be that, in places, that “legalese” imposed on Mr Ferguson’s witness statement a precision going beyond his recollection. Mr Ferguson struck me, however, as a truthful witness.

[20]Mr Isaacs was a polished and fluent witness, Mr Doffman a somewhat more defensive one. I do not regard the evidence of either of them as wholly reliable. To some extent, deficiencies in their evidence can be attributed to the lapse of time and the natural tendency to reconstruct events. I also think, however, that Mr Isaacs and Mr Doffman were not in every respect truthful in the evidence they gave.

[21]Only hearsay evidence is available from Mr Bradshaw (of Barclays), Mr Havard (who left Barclays to set up his own business), Mr Wordley (of DTZ), Mr Corbett and Mr Segal. This primarily consists of notes or transcripts of interviews or other meetings with representatives of Grant Thornton and/or Simmons & Simmons (acting either for the administrators or Barclays). The relevant individuals not having been called, I think I should be slow to place substantial weight on this material when considering factual disputes, especially in the context of allegations of serious impropriety. That is particularly so since there are, on the face of it, certain inconsistencies within the material. Asked in cross-examination about one of the apparent inconsistencies, Mr Smith observed, “certainly the evidence of [Mr] Wordley and Mr Bradshaw contradict, and one of them is not telling the truth”.

[22]There was no evidence at all from Ms Alison Lees (“Ms Lees”) or Ms Rosie Brown (“Ms Brown”), who were assistants to Mr Bradshaw when he was responsible for Mr Doffman’s and Mr Isaacs’ accounts, nor from anyone from Barclays’ loan servicing centre. Mr Smith was not aware of either Ms Lees or Ms Brown having been interviewed.

[23]There was no evidence either from anyone from Dunbar, aside from a letter from solicitors who had acted for Dunbar in which they stated certain matters having “checked with our client”. Legal points Unfitness

Legal points

[24]In In re Sevenoaks Stationers (Retail) Ltd

[1991] Ch 164

, the Court of Appeal emphasised the importance of adhering to the statutory words, “unfit to be concerned in the management of a company”. Dillon LJ (with whom the other members of the Court agreed) said this (at 176):

“It is beyond dispute that the purpose of section 6 [of the CDDA] is to protect the public, and in particular potential creditors of companies, from losing money through companies becoming insolvent when the directors of those companies are people unfit to be concerned in the management of a company. The test laid down in section 6 - apart from the requirement that the person concerned is or has been a director of a company which has become insolvent - is whether the person’s conduct as a director of the company or companies in question ‘makes him unfit to be concerned in the management of a company.’ These are ordinary words of the English language and they should be simple to apply in most cases. It is important to hold to those words in each case.”

[25]When considering whether a person’s conduct makes him unfit to be concerned in the management of a company, the Court is required by section 9 of the CDDA to have regard, in particular, to the matters specified in schedule 1 to the Act. In the present case, the Secretary of State relies on paragraph 1 (“Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company ... ”), paragraph 2 (“Any misapplication or retention by the director of, or any conduct by the director giving rise to an obligation to account for, any money or other property of the company”) and paragraph 6 (“The extent of the director's responsibility for the causes of the company becoming insolvent”).

[26]As, however, Lawrence Collins J explained in Re Bradcrown Ltd, Official Receiver v Ireland

[2001] 1 BCLC 547

(in paragraph 7):

“The matters listed in Sch 1 are not exhaustive of the matters which may be taken into account in determining unfitness …. Accordingly, a finding of breach of duty is neither necessary nor of itself sufficient for a finding of unfitness ….”

[27]Incompetence “to a very marked degree or a high degree” can amount to unfitness: see the Bradcrown case (at paragraph 10). The “degree of incompetence should not be exaggerated”: see Re Barings plc (No 5), Secretary of State for Trade and Industry v Baker

[2000] 1 BCLC 523

(at paragraph 35).

Taking advice

[28]The fact that a defendant took advice can be relevant. In Bradcrown, Lawrence Collins J said (at paragraph 12):

“The fact that a director had professional advisers who failed to draw attention to the impropriety of transactions may negative a finding of unfitness or be a mitigating factor in the period of disqualification to be imposed ….”

The burden and standard of proof

[29]The burden of proof rests, of course, on the Secretary of State, and the standard of proof is the ordinary civil standard. It is, accordingly, incumbent on the Secretary of State to establish his case on the balance of probabilities. If and to the extent that what he alleges is inherently improbable, that is a factor to be taken into account when considering whether the event in question is more likely than not to have occurred.

[30]Lord Hoffmann explained the civil standard of proof as follows in Home Secretary v Rehman

[2003] 1 AC 153

(at paragraph 55):

“The civil standard of proof always means more likely than not. The only higher degree of probability required by the law is the criminal standard. But ... some things are inherently more likely than others. It would need more cogent evidence to satisfy one that the creature seen walking in Regent’s Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian. On this basis, cogent evidence is generally required to satisfy a civil tribunal that a person has been fraudulent or behaved in some other reprehensible manner. But the question is always whether the tribunal thinks it more probable than not.”

[31]In In re B (Children)

[2008] UKHL 35

, to which I was referred by Mr Malcolm Davis-White QC, who appears with Miss Ruth Jordan for the Secretary of State, Baroness Hale of Richmond pointed out that seriousness and probability need not be related. She said (in paragraph 72):

“… there is no logical or necessary connection between seriousness and probability. Some seriously harmful behaviour, such as murder, is sufficiently rare to be inherently improbable in most circumstances. Even then there are circumstances, such as a body with its throat cut and no weapon to hand, where it is not at all improbable. Other seriously harmful behaviour, such as alcohol or drug abuse, is regrettably all too common and not at all improbable. Nor are serious allegations made in a vacuum. Consider the famous example of the animal seen in Regent’s Park. If it is seen outside the zoo on a stretch of greensward regularly used for walking dogs, then of course it is more likely to be a dog than a lion. If it is seen in the zoo next to the lions’ enclosure when the door is open, then it may well be more likely to be a lion than a dog.”

[32]Nonetheless, in so far as the Secretary of State makes allegations of serious impropriety (in particular, fraudulent conduct) against Mr Doffman and Mr Isaacs, who are both solicitors and against whom there is no other evidence of dishonesty, I think I should approach matters on the basis that what is alleged is inherently improbable and, therefore, that cogent evidence is required.

Allegations

[33]In Secretary of State for Trade and Industry v Goldberg

[2004] 1 BCLC 597

, Lewison J said this:

“[51] Rule 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987 … requires the affidavit served in support of the application to contain ‘a statement of the matters by reference to which the defendant is alleged to be unfit to be concerned in the management of a company’. More than one judge has said that this requirement should not lead to the technicalities associated with the framing of a criminal charge. I am not sure how helpful this is as practical guidance, since the statement of offence in an indictment simply sets out the statutory provision which creates the offence, and the particulars of the offence are often extremely terse. A pleading in a civil case is usually very much more detailed and precise. However, it is clear that the affidavit must set out the substance of the case that the defendant is required to meet. [52] It is equally clear that the Secretary of State is not necessarily confined to the allegations as formulated in the affidavit originally served in support of the application. As Dillon LJ said in Re Sevenoaks Stationers (Retail) Ltd ... : ‘as a result of the evidence subsequently filed or for some other reason the official receiver may wish to change the nature of the allegations on which he is going to rely. Alternatively the official receiver may wish to add further allegations in the light of further evidence which has become available. … The court has a discretion to allow the official receiver to rely on the altered or additional allegation provided that can be done without injustice to the accused director. What justice requires must depend on the circumstances of the particular case. In some cases it would be necessary for the official receiver to have given prior notice of the new allegation before the effective hearing of the disqualification application, and to raise it for the first time in the course of the hearing would be too late. In other cases, when a new allegation is raised for the first time in the course of the hearing, it may be appropriate to allow an adjournment for further evidence to be obtained. In yet other cases, particularly where the director is represented by experienced counsel, counsel may be able to take a new or altered allegation in his stride without any adjournment. But the paramount requirement on this aspect is that the director facing disqualification must know the charges he has to meet.’” ‘as a result of the evidence subsequently filed or for some other reason the official receiver may wish to change the nature of the allegations on which he is going to rely. Alternatively the official receiver may wish to add further allegations in the light of further evidence which has become available. … The court has a discretion to allow the official receiver to rely on the altered or additional allegation provided that can be done without injustice to the accused director. What justice requires must depend on the circumstances of the particular case. In some cases it would be necessary for the official receiver to have given prior notice of the new allegation before the effective hearing of the disqualification application, and to raise it for the first time in the course of the hearing would be too late. In other cases, when a new allegation is raised for the first time in the course of the hearing, it may be appropriate to allow an adjournment for further evidence to be obtained. In yet other cases, particularly where the director is represented by experienced counsel, counsel may be able to take a new or altered allegation in his stride without any adjournment. But the paramount requirement on this aspect is that the director facing disqualification must know the charges he has to meet.’”

[34]Lewison J went on to comment specifically on allegations of dishonesty. He said: “[53] If dishonesty is to be alleged against a director, the allegation must be fairly and squarely made in the affidavit, and must be fairly and squarely put in cross-examination. As Millett LJ said in Paragon Finance plc v D B Thakerar & Co (a firm), Paragon Finance plc v Thimbleby & Co (a firm)

[1999] 1 All ER 400

at 407, in the context of the amendment of pleadings: ‘It is well established that fraud must be distinctly alleged and as distinctly proved, and that if the facts pleaded are consistent with innocence it is not open to the court to find fraud. An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the court is satisfied that there was actual knowledge. An allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud. It will not support a finding of fraud even if the court is satisfied that the failure to disclose was deliberate and dishonest. Where it is expressly alleged that such failure was negligent and in breach of a contractual obligation of disclosure, but not that it was deliberate and dishonest, there is no room for treating it as an allegation of fraud.’ [54] I do not believe that proceedings for disqualification of a director are any different ….” ‘It is well established that fraud must be distinctly alleged and as distinctly proved, and that if the facts pleaded are consistent with innocence it is not open to the court to find fraud. An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the court is satisfied that there was actual knowledge. An allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud. It will not support a finding of fraud even if the court is satisfied that the failure to disclose was deliberate and dishonest. Where it is expressly alleged that such failure was negligent and in breach of a contractual obligation of disclosure, but not that it was deliberate and dishonest, there is no room for treating it as an allegation of fraud.’

[35]With respect, my own view is that this goes too far. It is, of course, important to recognise the serious nature of allegations of dishonesty. If, however, it is evident in the context that a “matter determining unfitness” expressed in “knew or ought to have known” terms was intended to encompass, as one alternative, an allegation of dishonesty, I cannot see why the Secretary of State should be precluded from alleging fraud at trial. What is crucial is that a defendant should have fair notice of an allegation and a fair opportunity to respond to it. If, in respect of a particular allegation of fraud, that is in fact the case, I do not think that the mere fact that a “knew or ought to have known” formula was adopted should mean that the Secretary of State cannot pursue the allegation, especially if the defendant has sought to answer it in his evidence. That, as it seems to me, would be an overly-technical approach for disqualification proceedings (compare Re Westmid Packing Services Ltd (No. 2)

[1998] BCC 836

, at paragraph 9).

[36]These conclusions appear to me to be consistent with the following passage from the judgment of Morritt V-C in Re Clean & Colour Ltd (unreported, but quoted in Kappler v Secretary of State for Trade and Industry

[2006] BCC 845

“The courts have recognised that the director is entitled to fair notice of what is alleged against him … But this requirement must not be taken too far. The prescription of the relevant matters in the affidavit is not an indictment for a criminal charge and should not be treated as if it was .... As the former Master of the Rolls pointed out in Re Westmid Packaging Services Ltd … in exercising this jurisdiction the court should adopt a ‘broad brush approach’.”

The Duomatic principle

[37]Mr Stuart Adair, who appears for the defendants, placed considerable reliance on the Duomatic principle.

[38]That principle takes its name from the decision of Buckley J in In re Duomatic Ltd

[1969] 2 Ch 365

. In that case, Buckley J said (at 373):

“where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

More recently, Neuberger J summarised the principle in the following terms in EIC Services Ltd v Phipps

[2003] 1 WLR 2360

Neuberger J’s decision was reversed by the Court of Appeal, but on other grounds: see

[2004] 2 BCLC 589

at 650-661. (in paragraph 122):

“The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.”

[39]Three limitations on the Duomatic principle are, however, of potential relevance.

[40]The first is that, unless at least it has become “inequitable for them to deny that they have given their approval”, the principle will not apply if the shareholders did not address their minds to the matter in question. This is apparent from ReD'Jan of London Ltd

[1994] 1 BCLC 561

. Hoffmann LJ there referred (at 563) to a submission that the company in question “could not complain of the breach of duty because it is a principle of company law that an act authorised by all the shareholders is in law the act of the company”. Hoffmann LJ, however, observed (at 564) that this principle:

“requires that the shareholders should have, whether formally or informally, mandated or ratified the act in question. It is not enough that they probably would have ratified if they had known or thought about it before the liquidation removed their power to do so.”

[41]Secondly, the Duomatic principle will not extend to an unlawful distribution. This is a point which emerges from the decision of Hoffmann J in Aveling Barford Ltd v Perion Ltd

[1989] BCLC 626

. There, the plaintiff company had sold a property at an undervalue to a company controlled by the same individual. It was argued that the sale was not open to challenge because it had been unanimously approved by the plaintiff’s shareholders. Hoffmann J rejected that submission. He explained (at 630-631):

“The general rule is that any act which falls within the express or implied powers of a company conferred by its memorandum of association, whether or not a breach of duty on the part of the directors, will be binding on the company if it is approved or subsequently ratified by the shareholders .... But this rule is subject to exceptions created by the general law and one such exception is that a company cannot without the leave of the court or the adoption of a special procedure return its capital to its shareholders. It follows that a transaction which amounts to an unauthorised return of capital is ultra vires and cannot be validated by shareholder ratification or approval. Whether or not the transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it. The court looks at the substance rather than the outward appearance.”

At 632, Hoffmann J said:

“So it seems to me in this case that looking at the matter objectively, the sale to [the purchasing company] was not a genuine exercise of the company's power under its memorandum to sell its assets. It was a sale at a gross undervalue for the purpose of enabling a profit to be realised by an entity controlled and put forward by its sole beneficial shareholder. This was as much a dressed-up distribution as the payment of excessive interest in Ridge Securities or excessive remuneration in Halt Garage. The company had at the time no distributable reserves and the sale was therefore ultra vires and incapable of validation by the approval or ratification of the shareholder. The fact that the distribution was to [the purchasing company] rather than to [the controlling shareholder] or his other entities which actually held the shares in [the plaintiff] is in my judgment irrelevant.”

Hoffmann J went on to say (at 633):

“As for the transaction not being a sham, I accept that it was in law a sale. The false dressing it wore was that of a sale at arms' length or at market value. It was the fact that it was known and intended to be a sale at an undervalue which made it an unlawful distribution.”

[42]The Aveling Barford case was considered by the Court of Appeal in Progress Property Co Ltd v Moorgarth Group Ltd

[2009] EWCA Civ 629

, [2009] Bus LR 1535. Mummery LJ (with whom the other members of the Court agreed) noted (at 1542):

“Hoffmann J plainly made it an essential part of the reasons for his decision that the sale of the company’s assets was not a genuine sale, as it was known and intended to be a sale at an undervalue. That was what made it an unlawful distribution and ultra vires.”

Later in his judgment (at 1543), Mummery LJ said:

“The authorities demonstrate that the issue is whether, on the facts as they were genuinely perceived by [the defendant] to be, and having regard to the nature and character of the payment, it could properly be characterised as something other than a gratuitous distribution to shareholders.”

[43]During the period with which I am concerned in the present case, the extent of a company’s distributable profits fell to be determined in accordance with Part VIII of the Companies Act 1985. Section 263(1) of that Act barred a company from making a distribution otherwise than out of “profits available for the purpose”, and section 263(3) stipulated that such profits were the company’s:

“accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made”

Under section 270 of the Act, the existence of such profits fell to be determined by the company’s accounts.

[44]Thirdly, a company’s financial circumstances may preclude the application of the Duomatic principle. While the interests of a company are normally identified with those of its members, the interests of creditors can become relevant if a company has financial difficulties. In West Mercia Safetywear Ltd v Dodd

[1988] BCLC 250

, Dillon LJ (with whom the other members of the Court agreed) approved the following statement of Street CJ in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722:

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

[45]It has been said that the interests of creditors can “intrude” (and the application of the Duomatic principle can, accordingly, be barred) even when a company may not strictly be insolvent. In Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd

[2003] 2 BCLC 153

, Mr Leslie Kosmin QC (sitting as a Deputy High Court Judge) put the position as follows (at paragraph 74):

“Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors’ money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.”

In similar vein, Park J said in Re MDA Investment Management Ltd

[2004] 1 BCLC 217

(at paragraph 70): “… when a company, whether technically insolvent or not, is in financial difficulties to the extent that its creditors are at risk, the duties which the directors owe to the company are extended so as to encompass the interests of the company’s creditors as a whole, as well as those of the shareholders” (The emphasis has been added in each case.)

The significance of separate legal personality

[46]Directors owe duties to the particular companies of which they are officers. In Secretary of State for Trade and Industry v Goldberg, Lewison J explained as follows (in paragraph 29):

“Central to the concept of limited liability is the concept that a company has a separate legal personality. A company retains its separate legal personality even if it is a member of a group of companies. Every director of a company, whether executive or non-executive, owes fiduciary duties to that company. Respect for the separate legal personality of each company, and recognition of a director’s duty to exercise his powers in the best interests of the particular company of which he is a director are essential attributes of fitness to be concerned in the management of a company. These duties are personal and inescapable ….”

De facto and shadow directorship

[47]It is the Secretary of State’s case that Mr Doffman and Mr Isaacs were directors of one of the companies at issue (viz. Cindan Southampton) after they had formally resigned.

[48]For CDDA purposes, a person can be a “director” (and his conduct as such can be taken into account when assessing unfitness) if, although not formally appointed, he is either a “shadow” or a “de facto” director.

[49]Section 22(5) of the CDDA defines the expression “shadow director” in the following terms:

“‘Shadow director’, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity).”

[50]As regards “de facto” directors, in Re Kaytech International plc, Secretary of State for Trade and Industry v Kaczer

[1999] 2 BCLC 351

Robert Walker LJ (with whom the other members of the Court of Appeal agreed) said (at 423-424): “On the primary facts found by the judge (which Mr Potier realistically did not seek to challenge) his conclusion that Mr Potier was a de facto director seems to me to have been inevitable and incontrovertible. That is enough to dispose of his appeal and I am doubtful whether it is appropriate to add much comment on some of the detailed submissions which were made to this court about the tests for determining de facto directorship. I see much force in what Jacob J said in the Tjolle case

[1998] 1 BCLC 333

at 343–344 when declining to formulate a single test, ‘... it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks “was this individual part of the corporate governing structure”, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.’ I do not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director.” ‘... it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks “was this individual part of the corporate governing structure”, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.’

Approach

[51]I shall consider the four companies in respect of which allegations are made individually before asking the question whether, taken together, the matters proved establish unfitness. Cindan Southampton Factual history

Cindan Southampton

[52]Cindan Southampton was incorporated in June 2002 and at once acquired as a special purpose vehicle for the purchase of a property in Southampton (“the Southampton Property”) from another company associated with Mr Doffman and Mr Isaacs, Cindan Land Limited (“Cindan Land”). Mr Doffman and Mr Isaacs became Cindan Southampton’s directors. The company’s shares were held by Cindan Land, of which Mr Doffman and Mr Isaacs’ wife were the shareholders.

[53]The Southampton Property comprised 106-113 St Mary Street and 1 and 2 Jail Street in Southampton. The first floor of the premises was subject to a long lease held by an unconnected company called Priyanka Limited.

[54]The Southampton Property was transferred to Cindan Southampton on 27 June 2002 at a consideration of £660,000. In August, Cindan Southampton borrowed £400,000 from Dunbar on the security of the property, DTZ having valued the property at £660,000. At that stage, planning permission had been obtained for 20 flats.

[55]In the following year, the first floor lease was purchased from Priyanka Limited by another company of which Mr Doffman and Mr Isaacs were directors, Axelpark (New Forest) Limited (“Axelpark New Forest”). There is no clear evidence as to the price, but Mr Isaacs and Mr Doffman each thought that it was in the region of £250,000. When asked about the transaction in cross-examination, Mr Isaacs suggested that the lease had been acquired by Axelpark New Forest rather than Cindan Southampton because the former company would have been better placed to raise funds from Barclays, whose rates were cheaper than those available from Dunbar, Cindan Southampton’s funder. Mr Doffman gave a similar explanation.

[56]It was alleged in the Secretary of State’s written closing submissions that the opportunity to purchase the first floor lease had been wrongfully diverted to Axelpark New Forest. It was made clear that the point was not relied on as of itself evidence of the defendants’ unfitness, but as relevant to other allegations made against the defendants. However, Mr Adair objected to the point being put forward at all, and it seems to me that his objection was well-founded. The allegation had not featured either in the Secretary of State’s evidence or in his opening submissions. Moreover, the issues were not fully explored during the oral evidence: for example, Mr Isaacs was not challenged on the explanation he gave of why the acquisition was effected by Axelpark New Forest, and it was not suggested to him that the transaction involved any impropriety. In the circumstances, I do not think it would be fair for me to take any account of the allegation.

[57]In May 2004, DTZ prepared a further valuation of the Southampton Property. This time, the value given was £4.25 million. By now, draft planning consent had been obtained for a development involving 63 units of residential accommodation. DTZ said that they “would expect the value of the subject property to be in the order of £8,408,500” when the works were completed.

[58]There is some room for doubt as to exactly what DTZ saw themselves as valuing. For example, the report suggests that they thought that the property was held on a 999-year lease whereas Cindan Southampton was in fact the freeholder. However, there is no reason to think that the defendants understood the valuation to be of anything other than Cindan Southampton’s interest in the Southampton Property. They each explained that they had not seen the report itself until they did so in the present proceedings.

[59]On the strength of this report, Barclays made a loan of £2.55 million to Cindan Southampton, taking a charge over the Southampton Property by way of security. The offer letter described the loan as being “to assist with the equity release of 106-113 St Mary Street, Southampton”. Some £480,000 of the money advanced was used to discharge Cindan Southampton’s indebtedness to Dunbar. Part of the remainder was used, it seems, to pay Cindan Land the balance of what was due to it in respect of its sale of the Southampton Property to Cindan Southampton. It is not very clear how the remainder of the loan was applied, the relevant records having been lost. However, Mr Isaacs accepted that some of the money might have been lent to other companies associated with himself and Mr Doffman: there was, he said “always a need for equity, so if there was a surplus it would have been used”. For his part, Mr Doffman accepted that there may well, overall, have been net lending by Cindan Southampton.

[60]A couple of days after Barclays had advanced the £2.55 million, Cindan Southampton granted Axelpark New Forest, for £1, an option to purchase the Southampton Property. The option agreement (which was dated 27 May 2004) provided for Axelpark New Forest to be entitled to purchase “the beneficial interest in freehold property known as 106-113 St Marys Street, Southampton … (‘the Property’) subject to the existing mortgage to Barclays Bank Plc for the sum equivalent to £3,000,000.00 less the current amount of indebtedness secured against the Property to Barclays Bank Plc (which shall be limited to £2,550,000.00) (‘the Indebtedness’) ….” The option agreement further stated that, in the event of the option being exercised, Cindan Southampton was to hold the property “as nominee for Axelpark [New Forest] subject to Axelpark [New Forest] indemnifying Cindan [Southampton] against the Indebtedness”.

[61]The Secretary of State contends that this agreement served to give Cindan Southampton a right to buy for £3 million a property valued at £4.25 million. Exercise of the option would thus, the Secretary of State says, have resulted in a sale at an undervalue of £1.25 million.

[62]In cross-examination, Mr Isaacs said that he did not remember taking valuation criteria into account when deciding on the £3 million price. The thrust of his evidence was to the effect that Mr Doffman’s and his concern was to ensure that creditors (and, in particular, Barclays) did not go unpaid. He appears to have proceeded on the basis that a sale at an undervalue would be unobjectionable if no creditors were put at risk. He said for example:

“if we had two companies, company A and company B, … and company A owned a property for £300,000 but there were no creditors at all of that company, it could sell to company B at an undervalue if it wished to provided no creditors were put at risk.”

[63]For his part, Mr Doffman said that, while he could no longer remember the basis for the option agreement’s terms, he thought it was linked to the marriage value to be derived from joining Cindan Southampton’s freehold with the leasehold interest held by Axelpark New Forest. My impression, however, is that Mr Doffman’s evidence in this respect represented reconstruction. In any case, it seems to me that both Mr Doffman and Mr Isaacs must have understood DTZ’s £4.25 million valuation to have been in respect of just Cindan Southampton’s interest, without any marriage value. On that basis, the option will have been seen as entitling Axelpark New Forest to buy the freehold of the Southampton Property for less than it had been valued at.

[64]Before entering into the option agreement, Mr Doffman and Mr Isaacs consulted Mr Ferguson. Mr Ferguson was (and remains) the senior partner of Goldblatts, a firm of chartered accountants with offices in London and Chatham to which, at the time, Mr Doffman and Mr Isaacs were considering transferring their accounting business. Mr Isaacs, Mr Doffman and Mr Ferguson all testified that they discussed the option agreement at a meeting at Mr Ferguson’s offices lasting perhaps an hour or an hour and a half. Mr Ferguson explained his position in his witness statement as follows:

“As Cindan Southampton was solvent and there was no prospect at the time of the company being or becoming insolvent, Gregory [Doffman] and Martin [Isaacs] considered that there was no danger to creditors in entering into the Option Agreement, and I also advised that this was the case.”

It is to be noted, however, that Mr Ferguson was not provided with any papers before the meeting, nor even given advance notice of what Mr Isaacs and Mr Ferguson wished to discuss, and that the advice was not recorded in writing. Moreover, Mr Ferguson explained in his oral evidence that he thought that the equity in the property which was the subject-matter of the option amounted to only £450,000, so that Axelpark New Forest “were only getting £450,000 out of it”. Mr Ferguson also said that he did not “give any advice about a dividend”.

[65]Six weeks or so later, on 12 July 2004, a deed of variation was executed. This provided as follows:

“1. In consideration of the sum of £100.00 paid by Axelpark [New Forest] to Cindan [Southampton] … and Axelpark hereby agreeing that in any future sale by Cindan [Southampton] of the Property, Axelpark [New Forest] shall sell its long leasehold interest in the first floor of the property for £1.00, Axelpark [New Forest] and Cindan [Southampton] hereby agree that all the loans referred to in 2 below are cancelled and the option pursuant to the Option Agreement is varied in that the Option thereunder is hereby deemed to have been exercised by Axelpark [New Forest] and the obligation upon Axelpark [New Forest] to pay the Option Strike Price shall for the purposes of the Option Agreement be deemed to have been fulfilled and the requirement upon Axelpark [New Forest] to pay the Option Strike Price be waived but that the sale proceeds to be received for the Property (in respect of any future sale thereof by Cindan [Southampton] as nominee for Axelpark) in excess of £3,250,000.00 shall as and when received belong to Cindan [Southampton]. 2. The parties agree to procure that all inter-company loans between all companies of which Gregory and/or Martin are officers, whether due to or from such companies shall not be repayable and shall be null and void and where and to the extent such loans shall not be capable of being declared null and void they shall be treated as having been extinguished in each case in consideration of £1.00 and without prejudice to the generality of the foregoing this shall include all loans made by Cindan [Southampton] to Axelpark [New Forest] or from Cindan [Southampton] to such parties as Axelpark [New Forest] directed it to make.”

[66]Mr Isaacs said that he could not remember why this variation was effected. He thought, though, that he and Mr Doffman might have been trying to simplify matters – specifically, by dispensing with cross-loans. Mr Doffman said that he could not now recall what the reason was, but that it would have concerned the relationship between the leasehold and freehold interests.

[67]The Secretary of State argues that the result was that Axelpark New Forest became the beneficial owner of a property valued at £4.25 million subject only to indebtedness of some £2.55 million to Barclays and an obligation to account to Cindan Southampton for any proceeds in excess of £3.25 million. Axelpark New Forest was thus, the Secretary of State submits, better off to the tune of some £700,000 (the difference between £2.55 million and £3.25 million). On top of that, the Secretary of State points out, Cindan Southampton waived loans that were due to it. In this regard, Mr Isaacs thought that the loans might “potentially” have totalled up to £100,000 or more.

[68]On the other hand, the variation agreement was, on the face of it, less advantageous to Axelpark New Forest than the original option agreement had been. Axelpark New Forest was now to have to surrender to Cindan Southampton all proceeds in excess of £3.25 million, and Cindan Southampton stood to benefit from Axelpark New Forest’s leasehold interest (which Axelpark New Forest was to sell for just £1). Axelpark New Forest was no longer to receive the £1.25 million benefit for which the original option could be said to provide.

[69]Leaving aside the debt waivers, the combined effect of the original option agreement and the variation to it was, in broad terms, that Axelpark New Forest was to receive some £700,000 for the long lease it held. That figure is plainly much larger than the £250,000 or so that Axelpark New Forest may have paid for its lease. On the other hand, Axelpark New Forest could reasonably have been thought to be entitled to share in any marriage value.

[70]The upshot is that Mr Doffman and Mr Isaacs must, as it seems to me, have considered the original option agreement to be financially advantageous to Axelpark New Forest. That agreement gave Axelpark New Forest for just £1 the right, if it chose, to acquire for £3 million a property which Mr Doffman and Mr Isaacs knew to have been valued at £4.25 million. In fact, Mr Doffman and Mr Isaacs bore that valuation in mind when considering Cindan Southampton’s solvency.

[71]On the other hand, the variation agreement seems of itself to have been beneficial to Cindan Southampton. Moreover, I do not think that it has been proved that the overall effect of the two agreements (the original option agreement and the variation agreement) was necessarily disadvantageous to Cindan Southampton, nor that Mr Doffman and Mr Isaacs so perceived them.

[72]As with the original option agreement, Mr Doffman and Mr Isaacs spoke to Mr Ferguson before the deed of variation was executed. According to Mr Isaacs, Mr Ferguson advised that, since Cindan Southampton was and would remain solvent and able to meet its debts as they fell due, the proposed variation was perfectly proper. Once again, Mr Ferguson was advising without having been provided with documents, or told what Mr Doffman and Mr Isaacs wished to discuss, in advance of the meeting, and Mr Ferguson’s advice was not recorded in writing. Further, Mr Ferguson could not remember whether he had understood Cindan Southampton to be a net creditor or a net debtor.

[73]On 26 August 2004, Cindan Southampton entered into an agreement with Barratt Homes Limited (“Barratts”) and Southampton City (“the City Council”) by which Barratts agreed to pay Cindan Southampton, via the City Council, £632,000 in return for Cindan Southampton providing some affordable housing. Barratts was thereby to be relieved of obligations to provide affordable housing at a site it was developing elsewhere in Southampton. The £632,000 was to be paid into an account in the joint names of Cindan Southampton and the City Council until certain conditions had been satisfied and, even when released to Cindan Southampton, was not to be used otherwise than towards the costs of developing the affordable housing.

[74]In the latter part of 2004, arrangements were made for both the Southampton Property and Cindan Southampton to be transferred to Hallyard Limited (“Hallyard”), a company controlled by Mr Corbett. On 27 October, Axelpark New Forest, Cindan Southampton and Hallyard entered into an agreement for the sale of the Southampton Property to Hallyard for £4.25 million. £2.5 million was to be paid to Axelpark New Forest on completion and a further sum of £500,000 within the next two days. Hallyard was to pay the balance of the price within two years or, alternatively, to transfer seven completed flats to Axelpark New Forest. Completion was to take place on 22 November. Axelpark New Forest was to transfer the lease of the first floor to Cindan Southampton in advance of completion.

[75]On 26 November 2004, Cindan Land sold Cindan Southampton to Hallyard for £1, and Mr Doffman and Mr Isaacs resigned as directors of Cindan Southampton. The share sale agreement contained the following provision:

“The parties agree and agree to procure that all inter-company loans between the Company [i.e. Cindan Southampton] and all other companies, whether due to or from the Company and all loans between the directors and the Company whether due to or from the Company shall not be repayable and shall be null and void and the Purchaser [i.e. Hallyard] shall indemnify the Seller [i.e. Cindan Land] for all losses, costs and liabilities in this respect and where and to the extent such loans shall not be capable of being declared null and void they shall be treated as extinguished in consideration of the sum of £1.”

[76]Mr Doffman and Mr Isaacs once again consulted Mr Ferguson. Each of the three gave evidence to the effect that Mr Ferguson said that the terms of the sale to Hallyard were permissible.

[77]Although the 27 October agreement had provided for a completion date of 22 November, the sale of the Southampton Property to Hallyard was not in fact completed until 7 December 2004. Mr Isaacs said that the delay resulted largely from negotiations as to how Axelpark New Forest would be protected pending receipt of the deferred consideration.

[78]The transfer to Hallyard was signed on behalf of Cindan Southampton by Mr Doffman and Mr Isaacs. At one stage, the Secretary of State took this as evidence that Mr Doffman and Mr Isaacs had continued to act as directors of Cindan Southampton after they had formally resigned on 26 November. However, it is now common ground that the transfer had been executed in escrow before Mr Doffman and Mr Isaacs resigned. The Secretary of State no longer, therefore, relies on the transfer in support of the submission he makes that Mr Doffman and Mr Isaacs were de facto and/or shadow directors after 26 November.

[79]£2.5 million was paid to Cindan Southampton on 7 December pursuant to the agreement for the sale of the Southampton Property, enabling the company’s indebtedness to Barclays to be reduced to about £117,000. A further sum of £500,000 was paid to Axelpark New Forest by Hallyard on 8 December.

[80]The £500,000 proves to have been derived from the £632,000 which Barratts had undertaken to pay. On 3 December, Mr Doffman had written to the City Council on Cindan Southampton’s behalf asking for the £632,000 to be released to the company, and the sum was paid into a Cindan Southampton account that same day. Mr Corbett then transferred £500,000 from that account into an account in the name, “William Corbett trading as St Johns Wood Estates”. The money was transferred again, on 8 December, to Hallyard, which in turn paid the sum to Axelpark New Forest.

[81]Mr Smith explained in his affidavit that he had been told by a colleague at Grant Thornton, Mr Darren Reeds (“Mr Reeds”), that Mr Reeds had discussed Cindan Southampton’s affairs with Mr Corbett in 2006. Mr Smith reported that Mr Corbett had told Mr Reeds during their conversation that the £500,000 had been transferred through the different accounts on the instructions of Mr Doffman and Mr Isaacs. Mr Smith said that, according to Mr Corbett, Mr Doffman and Mr Isaacs had “explained that the banks liked to see big financial transactions going through their bank accounts and that this improved the financial standing of the relevant companies”.

[82]There is, as Mr Smith accepted, no proper note of the conversation in question. A file note exists in respect of a meeting between Grant Thornton and Mr Corbett in August 2006, but there is nothing in that note about Cindan Southampton. Mr Smith indicated that Mr Reeds had annotated a bank statement when talking to Mr Corbett about Cindan Southampton, but the annotations do no more than trace the transfers of the £500,000. There is no reference to the transfers having being made on the instructions of Mr Doffman or Mr Isaacs.

[83]Mr Doffman and Mr Isaacs reject Mr Corbett’s account of events. They deny having given any instructions or suggestions to Mr Corbett, and maintain that they understood Hallyard to be raising funds for the purchase through AIB Group UK plc. With regard to the letter which Mr Doffman wrote to the City Council on Cindan Southampton’s behalf on 3 December, Mr Doffman says that he wrote it at Mr Corbett’s request so as not to cause confusion at the City Council.

[84]Nearly two years passed before Cindan Southampton went into administration. In the intervening period, Mr Corbett seems to have continued to pursue the development of the Southampton Property and to have obtained an enhanced planning consent, providing for the construction of an extra floor and further flats. However, on 21 September 2006 Mr Smith and Mr Ellis were appointed as administrators by Barclays. At that stage, the company appears to have had no assets and debts of £803,000. £632,000 was shown as owing to the City Council and the balance to Barclays. Barclays has since recovered what it was owed from Maltcity Limited, another company associated with Mr Doffman and Mr Isaacs, pursuant to a cross-guarantee which Maltcity Limited gave to Barclays in May 2004. The £632,000 debt to the City Council will, of course, relate to the £632,000 paid to Cindan Southampton at the beginning of December 2004, after Mr Doffman and Mr Isaacs had formally resigned as directors of Cindan Southampton.

[85]On 9 August 2007 the administration was succeeded by compulsory liquidation.

[86]Hallyard has not made any payment to Axelpark New Forest in respect of the balance of the price of the Southampton Property. Axelpark New Forest has thus received, overall, £500,000 as a result of its purchase of the first floor lease for some £250,000.

Excessive borrowing

[87]The first allegation made against Mr Doffman and Mr Isaacs in relation to Cindan Southampton is, as stated in the Secretary of State’s evidence, this:

“Each of the Defendants caused and/or permitted Cindan Southampton to obtain funds from Barclays which exceeded the amounts required for Cindan Southampton’s legitimate commercial purposes.”

[88]In the course of his closing submissions, Mr Davis-White argued that the allegation should be read as encompassing, with appropriate adjustments, extra elements which are to be found in comparable allegations made with regard to Cindan Littledean and Stakefield. On that basis, the Cindan Southampton allegation would be taken to be:

“Each of the Defendants caused and/or permitted Cindan Southampton: a) to obtain funds from Barclays which exceeded the amounts required for Cindan Southampton’s legitimate commercial purposes; b) to apply those sums otherwise than properly in the interests of Cindan Southampton and on a commercial basis (including by paying monies to themselves or to connected entities); c) thereby to expose Cindan Southampton and its creditors to an unwarranted risk that Cindan Southampton’s borrowings could not be repaid.”

[89]Mr Adair objected to the allegation being widened in this way. He said that he had not been aware prior to Mr Davis-White’s closing submissions of any question of the allegation being enlarged, and he submitted that it was now too late to do so. He said that, had the allegation been understood to extend to (b) and (c) above, the defendants might have led evidence on them (or, at least, that there might have been re-examination on them) and that he would himself have wanted to spend time marshalling the evidence and arguments for submissions. This, he contended, was a case of a fundamentally new allegation which had simply not been defended.

[90]For his part, Mr Davis-White pointed out that Mr Burns’ original affidavit in support of the proceedings had referred to his having seen “no evidence to suggest that the excess borrowings were applied by Cindan Southampton either in purchasing assets for the benefit of Cindan Southampton or in the interests of Cindan Southampton generally”. Mr Davis-White noted, too, that uses to which the money Cindan Southampton borrowed from Barclays was put featured both in Mr Isaacs’ witness statement and in cross-examination.

[91]On the other hand, Mr Isaacs dealt with the subject only briefly in his witness statement, and some of his answers in cross-examination suggested incomplete knowledge (when, for instance, he responded to a question, “I can’t say for certain but that may well have been the case”). Further, I do not question Mr Adair’s account of what he understood the Secretary of State’s case to be and how he might have approached matters differently had he known that a broader allegation was being put forward. It is to be noted, moreover, that the allegation was set out in the more limited form not only in Mr Burns’ original affidavit, but in his second affidavit and in the Secretary of State’s opening submissions. In all the circumstances, I do not think it would be fair for me now to allow the Secretary of State to rely on the wider allegation.

[92]I am not sure how far Mr Davis-White developed the allegation in its narrower form. For his part, Mr Adair submitted that it was not the role of the Courts to make a judgment as to whether an individual commercial transaction was legitimate and that, here, Barclays had agreed to lend money to Cindan Southampton by way of “equity release”, to be used as Cindan Southampton’s directors considered appropriate. Mr Adair said that borrowing from a bank is, of itself, balance sheet neutral, that the Secretary of State had not in this respect proved either breach of duty or unlawful conduct and that, overall, this allegation did not provide evidence of unfitness.

[93]I agree with this conclusion.

Agreements with Axelpark (New Forest) Limited

[94]The second allegation made in relation to Cindan Southampton is this:

“Each of the Defendants caused and/or permitted Cindan Southampton to enter into two agreements with Axelpark (New Forest) Limited (a company of which Mr Doffman and Mr Isaacs were shareholders and directors at the relevant time) neither of which was in the commercial interests of Cindan Southampton and the combined effect of which was substantially to divest Cindan Southampton of its beneficial interest in the property at 106-113 St Mary’s Street, Southampton for no adequate consideration and to the detriment of Cindan Southampton and its creditors.”

[95]This allegation relates, of course, to the option agreement of 27 May 2004 and the variation agreement of 12 July 2004.

[96]As regards the variation agreement, I have already expressed the view that this was of itself beneficial to Cindan Southampton. I do not think, in the circumstances, that the variation agreement can afford any evidence of unfitness.

[97]Turning to the original option agreement, I have concluded above that Mr Doffman and Mr Isaacs must have seen this as entitling Axelpark New Forest to buy the freehold of the Southampton Property for less than it had been valued at and, hence, as financially advantageous to Axelpark New Forest (and correspondingly disadvantageous to Cindan Southampton). It follows, in my judgment, that the transaction was contrary to Cindan Southampton’s interests and improper. That the shareholders consented is not an answer because the agreement provided, as I see it, for a sale at a price which the defendants knew and intended to be an undervalue and, hence, for an unlawful distribution. Cindan Southampton can have had no distributable profits since(a) it had not realised any profits and

(b) it had not yet, it seems, filed any accounts at all.

[98]Further, I do not consider that the advice Mr Doffman and Mr Isaacs obtained from Mr Ferguson exonerates them. The limitations on the advice from Mr Ferguson are apparent from paragraph 64 above. Aside from the informal manner in which Mr Ferguson was consulted, it seems that the defendants did not ensure that Mr Ferguson understood that the transaction was at an undervalue. In the circumstances, Mr Doffman and Mr Isaacs were not entitled to take Mr Ferguson to have blessed a transaction which they knew to be at an undervalue.

[99]It is a mitigating factor that, within a short period, the defendants entered into the variation agreement. It nonetheless appears to me that the original option agreement provides some, albeit on its own not that much, evidence of unfitness. The agreement is symptomatic, as I see it, of a failure on the part of the defendants to have proper regard to the interests of individual companies (in this instance, Cindan Southampton).

Failure to safeguard funds totalling £632,000

[100]The final allegation made in relation to Cindan Southampton is this:

“Each of the Defendants caused and/or permitted Cindan Southampton to fail to safeguard funds totalling £632,000 which were provided for the purposes of developing affordable housing at a property (106-113 St Mary’s Street) owned by Cindan Southampton and then to divert those funds to Axelpark [(New Forest)] As framed, the allegation refers to “Axelpark (Nottingham) Limited”, but this is clearly a slip. Limited (of which Mr Doffman and Mr Isaacs were shareholders and sole registered directors at the relevant time) thereby putting it beyond the power of Cindan Southampton to apply such funds to developing affordable housing (or return the money), in breach of the agreement between Cindan Southampton and Southampton City Council and to the detriment of Southampton City Council and Cindan Southampton and its creditors.”

[101]Since it is only conduct as a director that can give rise to unfitness, this allegation requires the Secretary of State to prove that Mr Doffman and Mr Isaacs remained de facto or shadow directors of Cindan Southampton after their formal resignations on 26 November 2004. In this regard, Mr Davis-White relied on(a) Mr Corbett’s reported claim that the transfers were made on Mr Doffman’s and Mr Isaacs’ instructions,

(b) Mr Doffman’s letter to the City Council of 3 December 2004 and

(c) an internal City Council email of 3 December 2004 referring to a conversation with Mr Doffman. On the other hand, the defendants deny having acted as directors, Mr Doffman has provided an explanation of his contacts with the City Council, and the Mr Corbett comment is multiple hearsay and was not recorded in writing. In the circumstances, I agree with Mr Adair that it has not been established that Mr Doffman was a de facto or shadow director, let alone that Mr Isaacs (as regards whom there is no evidence of contact with the City Council after his formal resignation on 26 November) was one.

[102]Nor, in my judgment, has the Secretary of State demonstrated that the transfers of the £500,000 were orchestrated by Mr Doffman and Mr Isaacs. I do not consider that the hearsay evidence from Mr Corbett can suffice to prove such a serious allegation in the face of the defendants’ denials.

[103]This allegation has not been made out. Cindan Littledean Factual history

Cindan Littledean

[104]Cindan Littledean was incorporated on 14 February 2005 so that it could be used for the purchase of a property in Gloucestershire called Wellington Farm (“Wellington Farm”). Mr Doffman and Mr Isaacs became directors on incorporation.

[105]Wellington Farm comprised a house, stable, outbuildings and some 60 acres of land. It was being used as an equestrian centre and boarding kennels, but Mr Doffman and Mr Isaacs saw it as having considerable potential for residential development.

[106]Mr Doffman and Mr Isaacs had apparently become interested in Wellington Farm in the previous month, and Mr Doffman had visited the property. By 1 February, Mr Doffman and Mr Isaacs had agreed with the vendors that they would buy the property and had written to DTZ about valuing it. Mr Doffman and Mr Isaacs said in their letter to DTZ that they assumed that they “would have little difficulty in providing a valuation of £3.975 million for the entire site”. Mr Isaacs said in evidence that he would already have spoken to Mr Wordley about the property and been given the £3.975 million figure as a “desktop” (or informal) valuation.

[107]Mr Doffman gave evidence to the effect that he had been led to believe that the vendors were emigrating to Spain and would sell for a reduced price if the transaction could be completed quickly. A Mr Quinn, a solicitor who acted for the vendors, has apparently contradicted this account: a note made by a Mr West of Grant Thornton records that he was told by Mr Quinn that the vendors of Wellington Farm were not emigrating and did not discount the price. The price at which the property was sold to Cindan Littledean was, according to the note, only slightly below the price the vendors had sought.

[108]Funding was sought from Barclays. On 10 February 2005 Mr Isaacs sent Mr Bradshaw a projected trading and profit and loss account for a 12-month period from completion; he explained, however, that “the development potential is of greater interest to us given the massive uplift that would be anticipated therefrom”. On 15 February Barclays offered to make a loan of £2.3 million to Cindan Littledean, subject to certain conditions. The security was to comprise a charge over Wellington Farm, a debenture over Cindan Littledean’s assets and a cash deposit of £150,000 (designed, as I understand it, to provide some cover for interest payments on the loan). The facility letter stated that the loan was to be used only to finance the purchase of Wellington Farm and that the borrower was to ensure that the loan did not exceed 60% of Wellington Farm’s value.

[109]The Doffman Isaacs Partnership were asked to act for Barclays in connection with the transaction. Barclays’ loan servicing centre set out the bank’s requirements in a letter to the Doffman Isaacs Partnership dated 16 February 2005. In the course of that letter, the loan servicing centre stated that a cash consideration of £3.975 million was payable on completion. That led Mr Isaacs, who was handling the conveyancing temporarily in Mr Doffman’s absence, to telephone Mr Bradshaw. Mr Isaacs made a manuscript note dated 21 February in respect of this conversation. It reads:

“Spoke SB re letter of 16th from Barclays which said price was £3.95m … he said it was a mistake by securities but no worries [because] its L to V as usual. Asked him to send funds asap as we were hoping to complete early.”

[110]Mr Isaacs explained in evidence that he rang Mr Bradshaw to advise him that the 16 February letter wrongly referred to the purchase price as being £3.975 million. He said that he had probably said something like, “I’ve got a report on title. I don’t normally fill it out but I have seen on the instruction letter it says a price of £3.95 million, you know of course that’s not what we are paying for it”. Mr Bradshaw, Mr Isaacs said, confirmed that the reference to £3.975 million was simply a mistake by the loan servicing centre and that the transaction was on the basis of “loan to value as usual”.

[111]The Secretary of State has made the point that the administrators have not found any note of the conversation between Mr Isaacs and Mr Bradshaw in Barclays’ files. However, it is not clear how thoroughly those files have been inspected. In any case, the Secretary of State accepts that the conversation took place. That being so, I do not think that the absence of a Barclays note is significant.

[112]Mr Isaacs did not dispute that he had not contacted the loan servicing centre about the error in the 16 February letter. He said that he saw no need to do so given his conversation with Mr Bradshaw. That does not strike me as unreasonable position if, as Mr Isaacs maintains, Mr Bradshaw was aware that the price was nothing like £3.975 million.

[113]It was also on 21 February 2005 that the Doffman Isaacs Partnership submitted a report on title to Barclays. Mr Isaacs had completed this with the assistance of a pro forma which Mr Doffman had left for him. The report contained a box for the purchase price to be entered, but Mr Isaacs here wrote “see disclosure”, and he later in the document stated, “we are informed that this is a loan against valuation and that therefore the price being paid is not relevant”. The report provided for a number of standard undertakings to be given by those completing it. One of these was that they would apply all moneys received from Barclays “towards the purchase of the Property or in accordance with [Barclays’] instructions”.

[114]The Barclays loan servicing centre forwarded the report on title to the branch. Among other things, the branch was asked to satisfy itself that the purchase price was “in line with the valuation figure and in accordance with [the branch’s] understanding of the transaction”. On 22 February Mr Bradshaw confirmed to the servicing centre that the report on title had been considered and that the charge could be proceeded with. He wrote “OK” against the request to check that the purchase price was in line with the valuation figure.

[115]Contracts had been exchanged on 17 February. Under the contract, Cindan Littledean was to buy Wellington Farm for £950,000. Following exchange, Mr Doffman emailed Mr Wordley to warn him that Barclays would need the DTZ valuation comfortably before 2 March, the completion date. Mr Doffman also said in the email that he and Mr Isaacs had told Barclays that DTZ had arrived at a valuation of about £4.2 million.

[116]Formal instructions to provide a valuation were sent to DTZ on 23 February, apparently by Ms Brown (one of Mr Bradshaw’s assistants). The instructions gave £3.975 million as the “Purchase Price”.

[117]On 28 February 2005, DTZ issued a report in which they valued Wellington Farm at £4.2 million. The report stated that, with planning consent, DTZ would anticipate that the development land at the property would have a gross value in the order of £11.2 million.

[118]Someone within Barclays, having seen the report, made a note to the effect that it was not clear how the value had been assessed and that there was therefore a need to revert to the valuer to check this. The note ends, “We must ensure that [the figure] completely excludes any hope value for residential development”. On 2 March 2005 Mr Wordley emailed Mr Bradshaw to confirm that the property had been “valued to Market Value reflecting existing planning consents”.

[119]Barclays’ instructions to DTZ asked them to send a copy of their valuation report direct to the bank’s solicitors (namely, the Doffman Isaacs Partnership). However, Mr Doffman and Mr Isaacs said that they did not receive a copy of DTZ’s report on Wellington Farm (or, in fact, copies of DTZ’s reports for Barclays on other properties). Mr Doffman and Mr Isaacs said that they were aware of the figure at which DTZ had valued Wellington Farm, but that they did not see the valuation report itself until after Cindan Littledean had gone into administration.

[120]Completion took place on 3 March 2005. At this stage, Barclays advanced the £2.3 million which had been referred to in the offer letter and also, it seems, an extra £85,000. The purchase costs (including the purchase price and incidental costs) amounted to just over £1 million, and £150,000 was deposited in an account (in accordance with the facility letter). All, or nearly all, of the balance of the loan was used to pay for an option to purchase a property known as the “Humbrol Site” from Axelpark Hull.

[121]Cindan Littledean entered into the relevant agreement with Axelpark Hull on 3 March 2005. The agreement provided for Cindan Littledean to pay Axelpark Hull £1,216,487 (representing £1.225 million less certain fees and disbursements) for an option to purchase the “Humbrol Site” for a net further sum of £5.775 million (i.e. £7 million less £1.225 million). The option was to be exercised by service of a written notice within 18 months and, if it was not exercised, the £1,216,487 was to be forfeit.

[122]The Humbrol Site comprised factory premises in Hull. Axelpark Hull had acquired the property in October of the previous year in a sale and leaseback arrangement. As part of this, Axelpark Hull had leased land at the Humbrol Site to Humbrol Limited (“Humbrol”), a company which manufactured and sold paints for modelling purposes and which at the time had no other connections with Mr Doffman and Mr Isaacs, for a 20-year term. The rent, which was to be subject to periodic review, was initially to be £246,000 per year. At this stage, DTZ valued the Humbrol Site, on completion of the leaseback, at £4.5 million. That, however, was on the basis that the lease contained a break clause in favour of Humbrol.

[123]When the option was granted, the lease of the Humbrol Site still contained that break clause, under which Humbrol was entitled to break the lease in 2009 or 2014. However, on 12 May 2005 Axelpark Hull and Humbrol entered into a deed of variation by which the break clause was excised from the lease and the extent of the property demised was increased (though Humbrol was to enjoy a two-year rent-free period on the additional space).

[124]Mr Isaacs said that, when the option agreement was entered into, it was already anticipated that the lease of the Humbrol Site would be varied in the ways that it in fact was soon afterwards. Mr Isaacs said in a witness statement that that DTZ had been asked to provide a desktop valuation of the Humbrol Site and had given a figure of about £7 million. In cross-examination, Mr Isaacs said that Mr Wordley of DTZ had suggested that the property would be worth £8 million or £8.5 million once the lease had been varied. It was pointed out that, in April of the following year, DTZ formally valued the property at £8 million.

[125]As for why the option agreement was entered into, Mr Isaacs said this in a witness statement: “To the best of my recollection, this option agreement was entered into in order to provide Cindan Littledean (which at the time had just acquired [Wellington Farm] and did not have an income pending development of the property) with a potential stream of rental income from the Humbrol Site if it chose to exercise the option, and to raise funds for Global Natural Fuels Limited as nominee of Axelpark Hull for the investment in Heller [i.e. Heller SA, a French company in which Mr Doffman and Mr Isaacs wished to invest].” (The investment in Heller SA (“Heller”) is considered further in paragraphs 221-223 and 231 below.)

[126]There was reference, too, to tax considerations. The evidence in this regard was somewhat vague, but Mr Isaacs gave the following explanation during cross-examination:

“we believed that the [Humbrol Site] was rising and rising in value. We wanted to get it over to Cindan … Littledean. Now, had we just entered into a contract to do so in 2010 or 2009, just when that was done without there having been the option agreement, at whatever price we had transferred the Revenue would have imputed market value and the fact was that we were able to justify that the value was only £7 million before the break clause was removed, i.e. on the date of the option but … when the Humbrol break clause was removed and more space taken in May 2005 then the position was that the value would have risen and there would have been a greater tax liability on [Axelpark] Hull.”

[127]The equestrian centre which had been operated at Wellington Farm before it was sold was not continued after the sale. Mr Isaacs said that he and Mr Doffman had envisaged appointing a manager to deal with the business on a short-term basis, but that had not in fact happened: he and Mr Doffman had had someone in mind as a possible manager, but that had come to nothing, and they had then needed to concentrate on the Heller investment. Mr Isaacs said that Heller “became increasingly time consuming and increasingly exciting from a potential point of view”.

[128]As Wellington Farm was not generating any income, money had to be injected into Cindan Littledean to enable it to meet accruing liabilities. By mid-May, the company had an (unauthorised) overdraft of some £32,000 on its current account. Soon afterwards, the £150,000 cash deposit was transferred into the current account, returning it to credit, but the account was again overdrawn by late June. In August, the overdraft was almost eliminated when £30,000 was deposited, and the account was briefly in credit in January 2006 after another £107,000 had been paid in.

[129]In December 2005 the Doffman Isaacs Partnership sent Barclays’ loan servicing centre a number of documents relating to the registration of Cindan Littledean as the proprietor of Wellington Farm and of the charge in favour of Barclays. The registry entries showed the price which Cindan Littledean had paid for the property as £950,000.

[130]On 7 February 2006, Mr Doffman and Mr Isaacs sold Cindan Littledean to Summergaze Limited (“Summergaze”), which Mr Corbett controlled,for £1. Challenged on why Cindan Littledean had been sold for just £1 if Wellington Farm and the option to purchase the Humbrol Site were considered to be valuable, Mr Isaacs said that he and Mr Doffman wished to concentrate on Heller and knew that they were not giving sufficient time to Cindan Littledean’s activities. Mr Isaacs said, too, that he and Mr Doffman wished to disengage themselves from Barclays and that Mr Corbett thought that he could make a success of a business at Wellington Farm. Finally, Mr Isaacs said that there had been a gentlemen’s agreement with Mr Corbett that he would make sure that Mr Doffman and Mr Isaacs were rewarded if things went well.

[131]Mr Davis-White was somewhat scornful of the supposed gentlemen’s agreement, which, as he pointed out, had not been mentioned in Mr Doffman’s or Mr Isaacs’ written evidence. It is noteworthy, however, that a note of a meeting between representatives of Grant Thornton and Mr Corbett includes this in relation to Cindan Littledean:

“Similar to other deals, there was supposed to be profit share agreement (50:50) with D&I, subsequent to the initial sale however the profit share document was never drawn up.”

[132]The share sale agreement, the parties to which were Mr Doffman and Mr Isaacs, Cindan Littledean, Summergaze and Mr Corbett, contained a provision (clause 5.1) in these terms:

“The parties agree to procure that all inter-company loans between [Cindan Littledean] and all Associated Companies [i.e. companies of which Mr Isaacs and/or Mr Doffman were directors], whether due to or from [Cindan Littledean] and all loans between the directors and [Cindan Littledean] whether due to or from [Cindan Littledean] shall not be repayable and shall be null and void and [Summergaze] together jointly and severally with [Mr Corbett] shall indemnify [Mr Doffman and Mr Isaacs] for all losses, costs and liabilities in this respect and where and to the extent such loans shall not be capable of being declared null and void they shall be treated as extinguished in each case in consideration of the said sum of £1.00 receipt of which is hereby acknowledged.”

[133]At the time of the sale, Mr Doffman and Mr Isaacs agreed to inject £100,000 into Cindan Littledean, and this in fact happened. The £100,000 was described in minutes of a Cindan Littledean board meeting as “by way of loan introduction”, but Mr Isaacs said that the waiver of loans for which the share sale agreement provided extended to the £100,000. On that basis, Mr Isaacs was probably correct when he said that he thought that Cindan Littledean was, overall, a net debtor. There is evidence that, between March and October of 2005, Mr Isaacs, Mr Doffman and the Doffman Isaacs Partnership received a total of about £137,000 from Cindan Littledean. That, however, is substantially less than the aggregate of the £100,000 mentioned in this paragraph and the payments of £30,000 and £107,000 referred to in paragraph 128 above.

[134]Mr Doffman and Mr Isaacs once again saw Mr Ferguson, who advised that the transaction would not be detrimental to creditors.

[135]Mr Doffman and Mr Isaacs resigned as directors of Cindan Littledean when the company was sold, and they were not thereafter involved in its running or management.

[136]Minutes of a Cindan Littledean board meeting on 7 February 2006 record that it was resolved, among other things, that the original of the option agreement dated 3 March 2005 should be handed to Mr Corbett. However, the option was never exercised.

[137]Mr Isaacs said that he and Mr Doffman understood that Mr Corbett intended to reopen the equestrian centre and kennels. In the event, that does not appear to have happened. Mr Isaacs said that Mr Corbett had apparently become involved in contentious divorce proceedings which had taken up a significant amount of his time.

[138]Mr Smith and Mr Ellis were appointed as administrators of Cindan Littledean by Barclays on 22 August 2006. At this point, the company’s only known asset was Wellington Farm, which was estimated to be worth £700,000. The only known liability was indebtedness to Barclays of about £2.5 million.

[139]On 9 August 2007 the administration was succeeded by compulsory liquidation.

Allegations

[140]The allegations made in respect of Cindan Littledean are as follows:

“i) Each of the Defendants caused and/or permitted Cindan Littledean: a) to obtain funds from Barclays which exceeded the amounts required for Cindan Littledean’s legitimate commercial purposes; b) to apply those sums (i) for purposes other than those contractually agreed with the lender, and (ii) otherwise than properly in the interests of Cindan Littledean and on a commercial basis (including by paying monies to themselves or to connected entities); c) thereby to expose Cindan Littledean and its creditors to an unwarranted risk that Cindan Littledean’s borrowings could not be repaid; In particular (and as regards (b) and (c) above), each of the Defendants caused and/or permitted Cindan Littledean to pay the sum of £1,225,000 (less legal costs) in March 2005 (out of the sum of £2,385,000 which it borrowed from Barclays) to Global Natural Fuels Limited (of which Mr Doffman and Mr Isaacs were shareholders and sole registered directors at the relevant time) for an option to purchase the Humbrol Site for £7,000,000, when it had been acquired for only £2,900,000 some 6 months earlier. This transaction was not in the interests of Cindan Littledean or on any realistic commercial terms. The transaction gave no adequate consideration to Cindan Littledean for the money paid away, and did not result in any income for Cindan Littledean. The result was that Cindan Littledean was impaired in its ability to repay its loans, which was to the unwarranted detriment of Cindan Littledean and its creditors; ii) Further, or alternatively, if (contrary to the Claimant’s case and as Mr Doffman and Mr Isaacs have suggested) the Humbrol Site did in fact increase materially in value between October 2004 (when it was acquired for £2,900,000) and 3 March 2005 (the date when the Humbrol Option was entered into for £7,000,000) or thereafter, so as to render the option of any commercial value to Cindan Littledean, each of the Defendants caused and/or permitted Cindan Littledean to fail to take any steps to exercise the Humbrol Option between 3 March 2005 and the date of its administration on 22 August 2006; iii) Each of the Defendants caused and/or permitted Cindan Littledean to fail to disclose to Barclays or DTZ the actual purchase price of Wellington Farm, Littledean. Further, Cindan Littledean thereby obtained funds which exceeded the amount that Barclays would have loaned had the actual purchase price been disclosed; iv) Each of the Defendants caused and/or permitted Cindan Littledean to become party to a share sale agreement for the sale and purchase of the whole of the issued share capital of Cindan Littledean to Summergaze Limited under which the parties purported to agree to procure that all liabilities from the vendors and all inter-company loans between Cindan Littledean and any associated companies (defined as those of which Mr Doffman and Mr Isaacs were directors) be waived and/or declared null and void and/or to treat such loans as extinguished.”

[141]It is convenient, I think, to consider the allegations under the following headings: i) the Humbrol Site option; ii) borrowing from Barclays; and iii) waiver of inter-company loans.

The Humbrol Site option

[142]This allegation concerns the option to buy the Humbrol Site which Axelpark Hull granted to Cindan Littledean on 3 March 2005. It is the Secretary of State’s case that there was never any intention that the option should be exercised. The £1,216,487 which Cindan Littledean paid for the option represented, the Secretary of State contends, a disguised return of capital.

[143]The defendants maintain that the option was attractive from Cindan Littledean’s point of view because, if exercised, it would give the company an income stream (in the form of the rents from the Humbrol Site). I have already quoted evidence which Mr Isaacs gave to this effect (paragraph 125). Mr Doffman said in cross-examination:

“That was the whole intention of doing this option, so that it could have an income.”

The defendants say, too, that there were tax considerations (paragraph 126) and that there was a prospect of the Humbrol Site coming to be worth more than the £7 million price at which Cindan Littledean was to be able to buy the Humbrol Site.

[144]A variety of factors, however, undermine the defendants’ explanations. They include these: i) in the context, £1,216,487 was a very large sum to pay for an option which was to last only 18 months; ii) the £1,216,487 figure was not arrived at in any scientific way or with the benefit of expert advice. It was simply what Cindan Littledean was in a position to pay. Thus, Mr Isaacs said, “The 1.2 was the best amount of money that Cindan Littledean could offer, because that was the surplus funds that it had”, and Mr Doffman gave evidence to similar effect; iii) to exercise the option, Cindan Littledean would have needed to be able to raise a further £5.775 million. I do not consider that Mr Doffman and Mr Isaacs can have thought that there was any real prospect of Cindan Littledean achieving this, at any rate within the 18-month period; iv) supposing that Cindan Littledean had somehow managed to borrow enough money to exercise the option, it would then have had to pay interest on the money it had borrowed. While, therefore, exercise of the option could have been expected to give Cindan Littledean the benefit of the rents from the Humbrol Site, the defendants would have known that it would also have imposed on the company very considerable interest liabilities; v) I do not think that the defendants will have thought that there was much prospect of the Humbrol Site being worth substantially more than the £7 million Cindan Littledean would have had to pay for it. They will have known that DTZ had valued the property at £4.5 million only about five months previously and (if Mr Isaacs’ evidence in this respect is to be accepted) that DTZ had recently provided a desktop valuation of about £7 million; vi) the Humbrol Site was already held by an appropriate special purpose vehicle (Axelpark Hull). It is hard to see why the defendants would have wanted to transfer the property into a different company which had a property of its own (viz. Wellington Farm); vii) the references to tax considerations were rather vague; viii) had the option genuinely been considered valuable, Cindan Littledean could have been expected to exercise it, or at least to take steps to do so. It did not.

[145]Overall, it seems to me that the defendants were much too shrewd, and much too experienced in property matters, to think that it made commercial sense to stake £1,216,487 on the chance that it would be possible and in the interests of the company for Cindan Littledean to exercise the option before it lapsed after 18 months. The reality, in my judgment, is that the defendants wanted to raise money so that they could invest, through a company other than Cindan Littledean, in Heller. The option agreement represented a device for transferring £1,216,487 out of Cindan Littledean.

[146]On that basis, the Duomatic principle can be of no help to the defendants here. The £1,216,487 will, as the Secretary of State alleges, have represented a disguised return of capital and, as such, have been unlawful. It is to be noted in this context that Cindan Littledean did not have distributable profits to the tune of £1,216,487; in fact, it had no distributable profits at all. Mr Adair sought to suggest otherwise on the basis that the company had realised profits by charging its property, but I do not think that borrowing money on security can constitute a realisation. In any case, a company’s distributable profits are assessed by reference to its accounts, and there is no evidence that Cindan Littledean had prepared any accounts.

[147]It is, moreover, far from clear that Cindan Littledean was solvent on a cash flow basis when the option agreement was entered into. Once the £1,216,487 had been paid away, Cindan Littledean was left with no reserves and no income, yet ongoing interest liabilities and costs from its ownership of Wellington Farm.

[148]Further, there is no question of the defendants having entered into the option on the strength of advice from Mr Ferguson. Mr Ferguson was not asked to advise on whether the option should be entered into.

[149]In short, this allegation has been proved. The defendants acted contrary to the interests of Cindan Littledean, and in breach of their duties to that company, in causing it to pay the £1,216,487 (plus costs) for the option.

Borrowing from Barclays

[150]The Secretary of State makes several allegations in relation to Cindan Littledean’s borrowing from Barclays. In broad terms, he says, first, that the defendants failed to disclose Wellington Farm’s purchase price to Barclays or DTZ, secondly, that the money borrowed was applied for purposes other than those agreed with Barclays and, thirdly, that money was borrowed and applied otherwise than in the interests of Cindan Littledean.

[151]So far as the first of these complaints is concerned (failure to disclose the purchase price), it is the defendants’ case that the price was disclosed to Barclays and that it was not incumbent on them also to disclose it to DTZ.

[152]The defendants say, specifically, that Mr Bradshaw was told the price. That claim receives a degree of support from the documents. In the first place, there is the note of Mr Isaacs’ conversation with Mr Bradshaw on 21 February 2005. As explained above, Mr Isaacs said that he had referred to the price in that (admitted) conversation. Mr Davis-White said that price might not have been mentioned, but(a) I find it hard to see how the conversation could have taken place without it being either said or implied that the price was not the £3.975 million given in the 16 February letter and

(b) I doubt whether Mr Isaacs would have wanted to risk the conversation with Mr Bradshaw if he had been trying to withhold the true price. Secondly, on 2 March Mr Doffman sent “Ms Rosie Brown/Alison Lees”, Mr Bradshaw’s assistants, a fax in which he asked them to arrange for £902,500 to be transferred telegraphically to Gregg Latchams Quinn, who were the vendors’ solicitors. Mr Doffman said in cross-examination that he would have chased Ms Brown/Ms Lees about this and discussed with them the fact that the money was required to complete the purchase of Wellington Farm. Whether or not that is right, it is of some significance that Mr Doffman was prepared to refer in his fax to a figure which the recipients might have been expected to appreciate represented the bulk of the purchase price.

[153]There is hearsay evidence that Mr Bradshaw was not told the purchase price. A meeting note dating from January 2007 includes the following:

“[Mr Bradshaw] was clear that he always believed in respect of all the acquisitions by [Mr Doffman and Mr Isaacs], Havard, Corbett and Segal that the bank was advancing less than the purchase price of the properties – i.e. that the borrower was contributing equity in order to complete the purchase. [Mr Bradshaw] said that he would never have lent £2.3m on Littledean if had he known that the actual purchase price was £950,000 ….”

[154]However, Mr Bradshaw has not given evidence in these proceedings, and no explanation for that has been proffered by the Secretary of State. Moreover, while I am certainly in no position to make any adverse findings against Mr Bradshaw (and am not to be taken as doing so anywhere in this judgment), it can be seen that there are matters which the defendants might have wished to explore in cross-examination had he given evidence. Mr Adair pointed out that, to judge from the meeting notes, Mr Bradshaw himself accepted, for example, that deals had been “‘dressed up’ as something else … so as to be compliant with Barclays lending policy”, that “for [relationship managers] [such as himself] the emphasis was on getting the deal done” and that “if every [relationship manager] did everything by the book and as per sanction, then a lot less business would be done”. There appear, moreover, to be inconsistencies between the (hearsay) evidence of Mr Bradshaw and things Mr Wordley, Mr Havard and Mr Corbett have said. As regards Ms Brown and Ms Lees, there is no evidence that they have even been interviewed.

[155]It is true, as Mr Davis-White submitted, that judges often have to make decisions without evidence from someone who might have been a relevant witness. Even so, I do not consider that, in the present case, the Secretary of State has proved that Barclays was not informed of Wellington Farm’s purchase price, especially as the Secretary of State’s allegation potentially has a connotation of fraud. Further, I have not been persuaded that there is scope for an independent complaint that DTZ was not told the price. If Barclays was told, I cannot see how failure to tell DTZ can provide evidence of unfitness.

[156]For similar reasons, I reject the second complaint (that that the money borrowed was applied for purposes other than those agreed with Barclays). It is true that the Barclays facility letter stated that the loan was to be used only to finance the purchase of Wellington Farm, but if Barclays was told the purchase price it will have known that it was lending much more than was required for the purchase, and, that being so, it cannot have supposed that the whole loan would be used for that purpose.

[157]As regards the third complaint (that money was borrowed and applied otherwise than in the interests of Cindan Littledean), I have already found that £1,216,487 of the money borrowed from Barclays was used to make a disguised return of capital. I am satisfied, moreover, that money was borrowed from Barclays with that objective in view. The option agreement was entered into immediately after the Barclays advance had been made, and Mr Doffman accepted in cross-examination that the option “may well” have been in planning for some time before that. I find, accordingly, that the defendants borrowed money from Barclays with a view to applying it otherwise than in the interests of Cindan Littledean.

[158]The Secretary of State contends that the money borrowed from Barclays was also used to make inter-company loans. I cannot see how that can be right as a matter of arithmetic. In total, £2.385 million was borrowed from Barclays. £1,034,154 was applied in paying costs associated with the purchase, there was a cash deposit of £150,000, and £1.225 million (including costs) was spent on the Humbrol Site option. Those sums amount, in aggregate, to slightly more than the £2.385 million.

Waiver of inter-company loans

[159]I can deal with this allegation shortly. The Secretary of State’s complaint is essentially that the defendants caused Cindan Littledean to enter into an agreement (viz. the agreement for the sale of the company to Summergaze) which provided for inter-company loans to be waived. However, the evidence indicates that Cindan Littledean was a net debtor, implying that the waiver was, overall, in its interests. That being so, the Secretary of State has not shown that it was improper for the defendants, as directors of Cindan Littledean, to cause the company to enter into the agreement. It follows that this allegation has not been made out. Stakefield Factual history

Stakefield

[160]Stakefield was incorporated on 8 April 2005 for the acquisition of a sports car business and the properties from which that business traded. Mr Doffman and Mr Isaacs became directors at once.

[161]The business in question was carried on by one or more subsidiaries of Oxclose Holdings Limited (“Oxclose”), which was owned by a Mr Richard Stewart. Mr Stewart was also, in his own name, the owner of the properties. As Mr Doffman and Mr Isaacs saw matters, it was the properties that were the main attraction: they considered, they have explained, that the properties had significant residential development potential and could be sold at auction for much more than Mr Stewart wanted for them as part of a business sale. As regards the sports car business, the plan was for this to be run by Mr Segal, who, Mr Doffman and Mr Isaacs say, believed the business to be highly profitable and potentially suitable for listing on the Alternative Investment Market.

[162]The properties were at 7 Oxclose Lane, Woodhouse, Mansfield, Nottingham, and in Mansfield Street, Sherwood, Nottingham. The premises in Mansfield Street were registered at the Land Registry under title numbers NT120172 and NT373963. Confusingly, NT120172 comprised two plots that were not adjacent to each other: 70 and 78 Mansfield Street. These plots were separated by 72 Mansfield Street, which was comprised in NT373963. To make matters worse, 70 and 72 Mansfield Street represented, for practical purposes, a single unit. They were occupied by a factory building, which had a yard at first floor level on one side. There was vehicular access to each of 70 and 72 from the road, but there was only one pedestrian entrance to the site.

[163]The plan came to be for Stakefield to buy Oxclose and the various properties for a total of £1.5 million. The properties were to be leased to Oxclose, which would continue the sports car business.

[164]Mr Isaacs wrote to Mr Wordley on 6 April 2005 about valuing the properties. He explained that the properties were to be let on 20-year leases to Oxclose at annual rents of £198,000 for 7 Oxclose Lane, £90,000 for 70-72 Mansfield Street and £8,000 for 78 Mansfield Street. After taking account of the rent, Mr Isaacs said, Oxclose’s “net profits for the year to 31st March 2006 should exceed £380,000 and for the year to 31st March 2007 should exceed £695,000”. Mr Isaacs went on to say that Barclays would be instructing DTZ imminently and “are expecting a combined valuation on the three properties together of £3.475 million”. When giving evidence, Mr Isaacs explained that the £3.475 million figure would have been based on a desktop valuation already provided by DTZ.

[165]On 15 April 2005 a Mr Glenn of DTZ reported to Mr Wordley following visits to the properties. He expressed the view that the proposed rents were “wholly unsustainable and totally divorced from Market levels”. He estimated the rental values of the properties at “circa £80,000 p.a.” for 7 Oxclose Lane, “£30/35,000 p.a.” for 70-72 Mansfield Street and £5,400 a year for 78 Mansfield Street. He considered that the combined value of the properties on a vacant possession basis was around £1.2 million. On 19 April, Mr Glenn asked Mr Wordley in an email about the basis of valuation to be adopted, observing:

“The investment basis is obviously a difficult one given the size of the company and the degree of over renting.”

[166]DTZ sent draft valuation reports to Barclays (in the person of Ms Lees, one of Mr Bradshaw’s assistants) on 22 April 2005. The drafts put the market rents of the properties at £78,500 (7 Oxclose Lane), £31,250 (70-72 Mansfield Street) and £5,400 (78 Mansfield Street). The market values of the properties, on the basis of the proposed leases, were given as £2.27 million (7 Oxclose Lane), £1.025 million (70-72 Mansfield Street) and £95,000 (78 Mansfield Street). A degree of caution was, however, expressed as regards the leases. For example, the draft report for 70-72 Mansfield Street included these passages:

“The proposed sale and leaseback figure is £90,000 per annum which is in excess of current market values and is, in our view, unsustainable for a property of this type and location. An investor would have to rely upon the fixed RPI increases for any type of rental growth and this large degree of over-renting would be a disincentive to some investors. … Whilst the tenant cannot be described as a strong covenant, it is understood you have made your own enquiries and are satisfied as to the tenant’s ability to pay rent. We would view this investment therefore as a secondary property with a local covenant. We would apply an initial yield of 8.25% to the proposed income stream which would give a value of £960,000. It should be noted that this value is in excess of the vacant possession value. … The property therefore does not compare well with other investments on the market. However, given the lack of supply and the current weight of money chasing this limited supply, even secondary properties with poorer covenants are receiving satisfactory demand on offer to the market place.”

[167]When, four days later, DTZ finalised its report on the properties, some of the caution had gone. There was, for instance, no longer any mention of the £90,000 rent for 70-72 Mansfield Street being “in excess of current market values” or “unsustainable”, and the market rent was not now given. Nor was it still said that £960,000 was “in excess of the vacant possession value”. Further, the reference to the property comparing poorly with other investments had been excised. The market value of 78 Mansfield Street was, moreover, raised to £135,000 (from £95,000), to take account of the development potential of part of the property. The properties were thus valued at a total of £3.43 million.

[168]How these changes came to be made is not clear from the evidence before me. A meeting note records Mr Bradshaw’s explanation when asked about the alterations:

“SB [i.e. Mr Bradshaw] said that he could recall discussing this matter with Sean Wordley. SB’s concern was that the effect of the comments about unsustainable rack-renting in the draft report sent to him on 22nd April undermined the investment-basis of the valuation given at the end of the report. It was not acceptable for DTZ to provide an opinion of value at the end of the Report which was arguably undermined by statements that they had made earlier in the text. SB wanted a clear and unequivocal report which gave a valuation that DTZ were hanging their hat on and on which the bank could safely rely. He did not want to see ambivalent statements which potentially contradicted or undermined the valuation earlier in the report. He therefore asked Wordley to reconsider the draft and to revert to him with an unequivocal version which he duly did shortly afterwards.”

When, however, Mr Wordley was asked about this account of events, he said (as the transcript shows) that that “was not the impression [he] got” and that he had felt that he was being asked to amend the report “because [Mr Bradshaw] just wanted to lend”. At all events, there is nothing in the documents to show that the defendants were involved in, or even knew of, the alterations.

[169]On 22 April 2005 Barclays’ loan servicing centre sent the Doffman Isaacs Partnership, who were to act for them in connection with the charges which Stakefield was to grant, letters giving them instructions. These gave the “consideration” for the properties as £2.19 million (7 Oxclose Lane), £995,000 (70-72 Mansfield Street) and £98,000 (78 Mansfield Street). The same figures were given as the “purchase price” of the properties in valuation instructions which the Barclays branch sent to DTZ on 25 April gave the “purchase price” of the properties as £100,000 (7 Oxclose Lane), £995,000 (70-72 Mansfield Street) and £1 million (78 Mansfield Street). Perhaps 7 Oxclose Lane and 78 Mansfield Street had been confused, but there is no obvious explanation for the disparity between the £2.19 million and £1 million figures.

[170]When, also on 25 April, Mr Doffman sent the loan servicing centre reports on title, these were stated to relate to 7 Oxclose Lane, 78 Mansfield Street and, notably, “72 Mansfield Street” (as opposed to 70-72 Mansfield Street). Further, Mr Doffman wrote “N/A” in the box on each form asking for “the purchase price stated in the transfer”, adding in a schedule, “we are informed that this is a loan against value so that notwithstanding your letter dated 22nd April 2005 price is not applicable”.

[171]On the following day, the loan servicing centre told Mr Doffman that the reports on title were being forwarded to the branch for its comments. On 27 April 2005 the loan servicing centre sent Ms Lees a fax relating to “70-72 MANSFIELD STREET”. This asked, among other things, that the branch consider certain comments on the report on title. One of the comments was to the effect that the address of the property on the report on title differed from that on a form the branch had submitted to the loan servicing centre; there was no direct response to this from the branch. In contrast, “OK” was written, seemingly by Mr Bradshaw, against each of the following comments:

“Your Asset Submission Form states that this was to be a purchase. However, this does not agree with the solicitor’s comments …. You should ensure this is in line with your understanding and confirm to us that you are happy to proceed on this basis” “The Solicitors have produced this Certificate / Report on Title before they have reviewed the property valuation …. You should forward a copy of the valuation to the Solicitors for their attention prior to completion and obtain their written confirmation that it does not affect the Certificate / Report on Title and forward this to us in due course. Also: • You should satisfy yourselves that the purchase price is in line with the valuation figure and in accordance with your understanding of the transaction. Please forward a copy of the valuation and proforma to us”

Mr Bradshaw signed on 27 April to confirm, among other things, that “all matters raised in the attached Report have been considered [and] action taken where necessary”. Also: Please forward a copy of the valuation and proforma to us”

Also:

[172]Contracts for the sale of 7 Oxclose Lane, 70-72 Mansfield Street and 78 Mansfield Street were exchanged late on 27 April 2005. The contracts gave the price of 7 Oxclose Lane as £500,000, that of 70 and 78 Mansfield Street (i.e. title NT120172) as £250,000 and that of 72 Mansfield Street (i.e. title NT373963) as £250,000. On 28 April Mr Doffman spoke of having been able to exchange the previous day following a conversation between Mr Isaacs and Mr Bradshaw.

[173]Also on 28 April Mr Doffman returned to Mr Bradshaw, signed, the facility letter. This stated that the facility Barclays was offering was to be used only to assist with the purchase of 7 Oxclose Lane, 78 Mansfield Street and “70-72 Mansfield Street”.

[174]The matter proceeded to completion on 29 April 2005. At that stage, the shares in Oxclose, and all the properties, were transferred to Stakefield, but 70 Mansfield Street (under the description, “Robin Hood Works, Mansfield Street”) was transferred on to Axelpark Hull (according to the transfer, “not for money or anything which has a monetary value”). Barclays was granted charges over 7 Oxclose Lane, 72 Mansfield Street and 78 Mansfield Street, but its security did not extend to 70 Mansfield Street.

[175]On the same day, Stakefield granted a number of leases to Oxclose. Each lease was for a 30-year term. The initial rents were £79,000 per annum in the case of 70 Mansfield Street, £90,000 per annum in the case of 72 Mansfield Street, £8,000 per annum in the case of 78 Mansfield Street and £198,000 per annum in the case of 7 Oxclose Lane.

[176]In their written evidence, Mr Doffman and Mr Isaacs explained the transfer of 70 Mansfield Street to Axelpark Hull on the footing that they had originally intended Axelpark Hull to be the properties’ purchaser and that it had always been their intention that the beneficial interest in 70 Mansfield Street should belong to Axelpark Hull. In the course of cross-examination, Mr Doffman and Mr Isaacs explained the transfer to Axelpark Hull, and the fact that Barclays was not granted security over 70 Mansfield Street, along the following lines: i) Mr Segal had been introduced to Mr Doffman and Mr Isaacs at a meeting concerned with the Humbrol Site, of which Axelpark Hull was the owner. Mr Doffman and Mr Isaacs thought it appropriate that Stakefield should pay some sort of fee to Axelpark Hull on the basis that it had introduced Mr Segal to Stakefield. “If it hadn’t been for [Axelpark] Hull,” said Mr Isaacs, “there would not have been a Mr Segal and [Stakefield] would not have entered into this transaction.” Mr Isaacs further said that the transaction would have been undertaken by Axelpark Hull had that been possible from a banking point of view; ii) In mid to late April 2005, but before he submitted the reports on title on 25 April, Mr Doffman discovered that 70 and 72 Mansfield Street were comprised in different titles, and, when he asked Mr Segal about this, he was told that 70 Mansfield Street was a self-contained unit; iii) Mr Doffman and Mr Isaacs thought that Axelpark Hull’s fee should be of the order of £50,000 and that 70 Mansfield Street would be worth this on a vacant possession basis; iv) When Mr Segal was approached, he agreed that the lease that Oxclose was to take at a £90,000 rent should be limited to 72 Mansfield Street; v) Mr Isaacs then spoke to Mr Bradshaw, who agreed that 70 Mansfield Street could be left out of Barclays’ security. Mr Bradshaw, Mr Isaacs explained, said that “he did not care so long as he had the rental coming in on the properties that exclude 70”. Subsequently, Mr Doffman also spoke to Mr Bradshaw about the exclusion of 70 Mansfield Street and was told, “I know all about that”; vi) Shortly before completion (or perhaps earlier), Mr Segal told Mr Doffman and Mr Isaacs that he wanted a “slice of the action”. That led to an agreement that Mr Segal would procure Oxclose to take a lease of 70 Mansfield Street at an annual rent of £79,000 and that Mr Segal would receive 50% of the proceeds of 70 Mansfield Street when it was sold.

[177]Barclays advanced £2.625 million. £1.436 million was paid to Mr Stewart. Another £127,539 is accounted for by stamp duty, the cost of company searches, a loan to Oxclose and a commission to Mr Havard’s company, The FinanceXChange Limited, leaving a balance of £1,061,461. £653,762 of this was transferred, at Barclays’ insistence, to other companies associated with Mr Doffman and Mr Isaacs and to the Doffman Isaacs Partnership; Barclays had required these transfers to be made to clear or reduce overdrafts on accounts the entities held with Barclays. All or most of the remainder also appears to have been used to make payments to connected companies and persons. Sums amounting to £87,000 are known to have been paid to the Doffman Isaacs Partnership in April 2005, and Mr Isaacs has referred to other sums going “between the companies”.

[178]The terms of an agreement with Mr Segal were set out in a letter dated 29 April 2005. This recorded, among other things, that Mr Segal had acquired a 50% shareholding in Oxclose for £1 and was to be chief executive of Oxclose and its subsidiaries, for which he was to receive remuneration (or equivalent dividends) of £100,000 per annum. The letter also stated that Mr Doffman and Mr Isaacs had agreed to lend Oxclose up to £100,000 on a long-term basis and that, on repayment, 50% of the money should be paid to Mr Segal and the balance “re-paid to us” (which Mr Isaacs said in evidence meant Stakefield).

[179]On 8 June 2005 DTZ valued 70 Mansfield Street at £900,000 (see paragraph 224 below).

[180]In August 2005 78 Mansfield Street was sold to a third party for £111,000. The net proceeds were used to reduce Stakefield’s indebtedness to Barclays.

[181]On 25 October 2005 Mr Doffman and Mr Isaacs sold Stakefield (with Barclays’ consent) to Mr Segal, and Mr Doffman and Mr Isaacs resigned as directors of the company. The share sale agreement, as well as specifying that the consideration was £1, contained a provision in these terms:

“The parties [namely, Mr Doffman and Mr Isaacs, Stakefield and Mr Segal] agree to procure that all inter-company loans (if any) between [Stakefield] and all Associated Companies [i.e. companies of which Mr Doffman and Mr Isaacs were directors], whether due to or from [Stakefield] shall not be repayable and shall be null and void and [Mr Segal] indemnifies [Mr Doffman and Mr Isaacs] for all losses, costs and liabilities in this respect and where and to the extent such loans shall not be capable of being declared null and void they shall be treated as extinguished in each case in consideration of the sum of £1.”

The agreement was signed on behalf of Stakefield by Mr Doffman and Mr Isaacs.

[182]On the same day, Stakefield paid £23,500 to the Doffman Isaacs Partnership and sums totalling £50,000 to another company associated with Mr Doffman and Mr Isaacs, Cindan Land (St John’s Wood) Limited. The administrators have calculated that, in aggregate, Stakefield was owed nearly £1.3 million by associated entities. Whether or not the administrators’ figure is precisely accurate, it seems likely that Stakefield was owed something of that order.

[183]Mr Isaacs explained the sale of Stakefield in these terms in a witness statement:

“Our decision to agree to the transfer of these shares to Mr Segal was motivated by Mr Segal’s threat to cause the tenant of Mansfield Street, Oxclose, to fail to pay the rents due on the property unless [Mr Doffman] and I transferred our shares in Stakefield to him. … Mr Segal was running Oxclose and its subsidiary companies, and was therefore entirely in control of whether and when those companies made their rental payments to Stakefield.”

[184]As on some other occasions, Mr Doffman and Mr Isaacs spoke to Mr Ferguson. Mr Isaacs said that Mr Ferguson had advised that writing off inter-company loans in the context of a sale of shares was lawful and proper. However, Mr Ferguson said in evidence (and I accept) that he did not recall being told of advances beyond the payments of £653,000 made in April 2005 and that he was told that there was little prospect of the inter-company debts being repaid. Mr Ferguson agreed, moreover, that his views as to Stakefield’s solvency were reliant on what he was being told by Mr Doffman and Mr Isaacs. More specifically, he said (and I accept) that it was not explained to him that Stakefield’s properties had been acquired for no more than about £1 million or that DTZ’s valuation of them at £3.4 million was dependent on above-market rents being paid by a company connected with Mr Doffman and Mr Isaacs. Further, Mr Ferguson was advising without having been provided with documents, or told what Mr Doffman and Mr Isaacs wished to discuss, in advance of the meeting, and his advice was not recorded in writing.

[185]On 26 October 2005 the Doffman Isaacs Partnership forwarded to Barclays’ loan servicing centre “for your safe keeping” title information, charges and leases in respect of 72 Mansfield Street and 7 Oxclose Lane.

[186]Mr Isaacs referred to himself and Mr Doffman as “dormant shareholders in Oxclose” in July 2006.

[187]Barclays appointed Mr Smith and Mr Ellis as administrators of Stakefield on 22 August 2006. The company had assets which have realised £400,000, but owed Barclays £2.845 million.

[188]Mr Doffman and Mr Isaacs have attributed the demise of Stakefield and companies associated with it (including Oxclose) to the way in which they were managed by Mr Segal. I am in no position to judge whether that explanation is correct or not.

[189]Following their appointment, the administrators consulted GVA Grimley, property advisers, on “70-72 Mansfield Street” and 7 Oxclose Lane. GVA Grimley’s advice included this:

“The ‘inter-company’ leases were all executed on 29 April 2005 and the current rents passing are ‘artificially’ high. The leases run for 30 years without break clauses, which is totally uncommon in today’s rental market. In view of the artificially high rent, prospective purchasers of the properties are likely to assume that the rent will not be paid and therefore will not have regard to the existence of the leases and are likely to submit offers based upon vacant possession value.”

[190]On 15 August 2008 the administration was succeeded by compulsory liquidation.

Allegations

[191]The allegations made in respect of Stakefield are as follows:

“i) Each of the Defendants caused and/or permitted Stakefield: a) to obtain funds from Barclays which exceeded the amounts required for Stakefield’s legitimate commercial purposes; b) to apply those sums otherwise than properly in the interests of Stakefield and on a commercial basis (including by paying monies to themselves or to connected entities); c) thereby to expose Stakefield and its creditors to an unwarranted risk that Stakefield’s borrowings could not be repaid; ii) Each of the Defendants caused and/or permitted Stakefield to fail to disclose to Barclays or the valuers, DTZ, the actual purchase prices of the Mansfield Street and Oxclose Lane properties. Further Stakefield thereby obtained funds which exceeded the amount that Barclays would have loaned had the actual purchase price been disclosed; iii) Each of the Defendants caused and/or permitted Stakefield to transfer the title to a property (70 Mansfield Street) which was described as “Robin Hood Works” to Axelpark Hull (a company of which Mr Doffman and Mr Isaacs were shareholders and directors at the relevant time) in April 2005: a) for nil consideration, and hence at a substantial undervalue; b) notwithstanding that they were aware that Barclays provided funding to Stakefield on the basis that 70 Mansfield Street would be the subject of a legal charge in their favour; c) so as to impair the security of Barclays (including the remaining security over the premises of which the title to 70 Mansfield was part); and d) contrary to the commercial interests of Stakefield, and to the detriment of Stakefield and its creditors; iv) Each of the Defendants caused and/or permitted Stakefield to become party to a share sale agreement for the sale and purchase of the whole of the issued share capital of Stakefield to Mark Segal under which the parties purported to agree to procure that all liabilities from the vendors and all inter-company loans between Stakefield and any associated companies (defined as those of which Mr Doffman and Mr Isaacs were directors) be waived and/or declared null and void and/or to treat such loans as extinguished”

[192]The allegations can be conveniently considered under the following headings: i) borrowing from Barclays; ii) the transfer of 70 Mansfield Street to Axelpark Hull; iii) waiver of inter-company loans.

Borrowing from Barclays

[193]Various complaints are made about Stakefield’s borrowing from Barclays. They are broadly(a) that the defendants failed to disclose to Barclays or DTZ the prices at which they were acquiring the Mansfield Street and Oxclose Lane properties,

(b) that the defendants transferred 70 Mansfield Street to Axelpark Hull even though they knew that the property was intended to form part of Barclays’ security and

[194]Allegation (a) obviously has much in common with an allegation relating to Cindan Littledean which I have already addressed (paragraphs 150-155 above).

[195]The defendants’ response to the allegation is essentially that Mr Bradshaw and others at the Barclays branch were informed of the purchase prices and that they (the defendants) were under no obligation to tell DTZ the prices. The Secretary of State, in contrast, contends that no one at Barclays was told the purchase prices.

[196]Support for the Secretary of State’s case is to be found in the notes of Mr Bradshaw’s meetings with Grant Thornton and Simmons & Simmons and also, to an extent, in the contemporary documentation. Further, it has to be said that the defendants’ version of events strains credulity to a degree at points.

[197]On the other hand, no representative of the entity allegedly misled (viz. Barclays) has given evidence before me, and no explanation has been given for that. It is noteworthy in this context that, while the defendants’ explanation of events may have become more developed during cross-examination, Mr Isaacs said in his first witness statement (with which Mr Doffman agreed) that Barclays “knew that the funds being advanced to Stakefield exceeded the sums needed to meet the purchase price” and that Mr Bradshaw was “fully apprised of the details of the purchases undertaken by Stakefield in April 2005”; there is, nevertheless, no direct evidence from Mr Bradshaw. Further, as with the equivalent Cindan Littledean allegation (see paragraph 154 above), it can be seen that there are matters which the defendants might have wished to explore with Mr Bradshaw (and other individuals from Barclays) in cross-examination. It is relevant to note too (as with Cindan Littledean) that there appear to be inconsistencies between the (hearsay) evidence of Mr Bradshaw and (hearsay) evidence from Mr Wordley, Mr Havard and Mr Corbett, and that Ms Brown and Ms Lees of Barclays do not seem even to have been interviewed.

[198]Some (albeit perhaps not that much) support for the defendants’ account can, moreover, be found in the documents. On 28 April 2005 Mr Doffman sent Mr Bradshaw/Ms Brown a fax asking for £1,436,000 to be paid to Mr Stewart’s solicitors, and Mr Doffman gave evidence that he would have chased after sending the fax. Here, as with the similar fax for the purchase of Wellington Farm, it is of some significance that Mr Doffman was referring to a figure from which the recipients might have been expected to infer, if they had not already known, that the purchase price was of that order; Mr Doffman went further and said in cross-examination:

“they would be aware that that would have been the completion monies. They saw what came in and out of our account.”

The note of Mr Isaacs’ telephone conversation with Mr Bradshaw in connection with Wellington Farm (as to which, see paragraphs 109-111 and 152 above) also lends some support to the defendants’ case. If it is to be supposed that Mr Bradshaw may have been happy for Barclays to lend Cindan Littledean much more than was required for the purchase of Wellington Farm, why should he have objected to lending Stakefield more than it needed to complete its purchase?

[199]At the end of the day, I do not consider that the Secretary of State has discharged the burden of proving this allegation, especially as it potentially has a connotation of fraud, and I do not consider that there is scope for a free-standing allegation that DTZ was not told the prices.

[200]Turning to allegation (b), Mr Davis-White recognised in his closing submissions that the case he was advancing was essentially one of fraud: Barclays, he said, had been tricked.

[201]Mr Adair said that the Secretary of State was not entitled to advance such a case. He relied on the passage from Lewison J’s judgment in Secretary of State for Trade and Industry v Goldberg quoted in paragraph 34 above.

[202]I have concluded that Mr Adair is correct. The Secretary of State had not originally, as I understand it, seen the allegation as necessarily one of fraud. That being so, the allegation was not clearly framed as such, and it was not obviously approached that way either in opening submissions or during cross-examination. While I can very well understand how matters developed as they did, the fact remains that the fraud case was not “fairly and squarely made in the affidavit, and … fairly and squarely put in cross-examination” (to use words of Lewison J in Goldberg). In all the circumstances, I do not think that I should allow the Secretary of State to pursue allegation (b).

[203]As regards allegation (c), I accept that money borrowed from Barclays was used to make payments to connected companies and persons (see paragraph 177 above) and that the defendants probably had such payments in mind when arranging the Barclays loan. However, the Secretary of State has not persuaded me that the payments involved breaches of duty on the part of the defendants. In particular, I am not satisfied that loans on uncommercial terms could not have been sanctioned under the Duomatic principle. In the circumstances, I do not consider that any unfitness has been proved in this respect.

The transfer of 70 Mansfield Street to Axelpark Hull

[204]The Secretary of State alleges that Mr Doffman and Mr Isaacs caused Stakefield to transfer 70 Mansfield Street to Axelpark Hull for no consideration. That, it is said, was contrary to their duties as directors of Stakefield.

[205]The defendants deny that there was a transfer on a gratuitous basis. Their case is, in essence, that Axelpark Hull was considered to be entitled to an introduction fee and that it was decided that Axelpark Hull should have 70 Mansfield Street in lieu of a monetary payment. They add that, when that decision was made, 70 Mansfield Street was not considered to be worth more than the £50,000 or so that they thought was appropriate as an introduction fee. The lease at £79,000 a year which soon led DTZ to value 70 Mansfield Street at £900,000 (see paragraph 179 above) was not yet, the defendants say, in contemplation.

[206]I am unable, however, to accept this explanation. My reasons include these: i) It is difficult to see why the defendants would have thought that Axelpark Hull was entitled to any introduction fee, let alone one of £50,000. The simple fact is that Axelpark Hull did not introduce Stakefield to Mr Stewart or his companies or properties. That Mr Segal, who was subsequently brought in to run Oxclose, may have been introduced to Mr Doffman and Mr Isaacs at a meeting concerned with the Humbrol Site does not strike me as a sufficient reason for Stakefield to pay an introduction fee; ii) There was no mention of the supposed introduction fee in the defendants’ written evidence. It is fair to say that there was a reference to an “arrangement for the payment of commission by Stakefield Midlands to Axelpark Hull” in a letter which the defendants’ then solicitors sent to the Secretary of State’s solicitors on 19 June 2008, but(a) no detail was provided and

(b) as can be seen from paragraph 176 above, an essentially different account was given in the written evidence; iii) It was not until the trial that the defendants first claimed that the lease of 70 Mansfield Street had been thought of only after Axelpark Hull had become entitled to 70 Mansfield Street. Even during the trial, the defendants were not wholly consistent in the explanations they gave. Thus, Mr Isaacs referred at one point to Mr Segal wanting more action at a time when “he knew that 70 was excluded”, but the previous day Mr Isaacs had spoken of Mr Segal’s desire for a “slice of the action” being “the genesis of number 70 being separated out”. The latter version of events would, of course, imply that the £79,000 lease was already in contemplation when it was decided that 70 Mansfield Street should belong to Axelpark Hull; iv) The truth, in my judgment, is that Mr Doffman and Mr Isaacs decided to transfer 70 Mansfield Street to Axelpark Hull not because they considered it to be owed anything, but because they wanted the company to be able to raise money on the security of the property for the Heller project. I find that the property was transferred on a gratuitous basis and at a time when the defendants were already intending that Oxclose should take a lease at £79,000 per annum. In my judgment, the defendants knew and intended that the property should be transferred at an undervalue.

[207]In the circumstances, I consider that, in causing 70 Mansfield Street to be transferred to Axelpark Hull, the defendants acted contrary to the interests of Stakefield and in breach of their duties to that company. I do not think it would matter in this context if, as the defendants allege, Mr Bradshaw had agreed to 70 Mansfield Street being excluded from Barclays’ security: the transfer would still have been in breach of the defendants’ duties to Stakefield. Further, the Duomatic principle cannot be in point since the transfer involved an unlawful distribution; Stakefield will have had no distributable profits since it(a) had not prepared any accounts showing such profits and

(b) had not in fact realised any profits. (As already mentioned, borrowing money on security cannot constitute a realisation.) It is also of relevance that the defendants should, as it seems to me, have regarded Stakefield’s balance sheet position as fragile: they will have known that DTZ’s valuations depended on Oxclose’s ability to pay rents far above market figures and that, were Oxclose to be unable to maintain the rental payments, there would be no prospect of re-letting at comparable figures.

[208]I should mention that the defendants did not accept that it was appropriate to speak of 70 Mansfield Street being “transferred” to Axelpark Hull. They maintain that Stakefield was a trustee for Axelpark Hull from the moment it acquired any rights and that 70 Mansfield Street never belonged to Stakefield beneficially. For my part, I do not see that this is a point of any importance. Were Stakefield to have been a trustee for Axelpark Hull, that would be because a trust to that effect had been declared; it would remain the case that Stakefield had “given” 70 Mansfield Street to Axelpark Hull. It is to be noted, too, that Stakefield executed a formal transfer in Axelpark Hull’s favour.

[209]No advice was sought from Mr Ferguson on the transfer.

[210]This allegation has been proved.

Waiver of inter-company loans

[211]This allegation arises out of the clause in the share sale agreement providing for inter-company loans to be waived. It is the Secretary of State’s case that Mr Doffman and Mr Isaacs thereby caused Stakefield to give away assets of substantial value.

[212]As mentioned earlier (paragraph 182), the likelihood is that Stakefield was owed of the order of £1.3 million. In cross-examination, Mr Isaacs accepted that he and Mr Doffman, through their companies, benefited from the waiver to the tune of £1 million. Stakefield was deprived of assets to a corresponding extent. The transaction was not, and will not in my judgment have been considered by the defendants to be, in Stakefield’s interests. On the face of it, the defendants will have committed breaches of duty by causing Stakefield to enter into the transaction.

[213]One of Mr Adair’s answers to the allegation was, once again, to say that the Duomatic principle applied. However, the Duomatic principle cannot sanction an unlawful distribution. Here, the defendants knowingly caused Stakefield to enter into a transaction at an undervalue (in fact, on a gratuitous basis). The waiver represented, to my mind, a distribution to shareholders, and Stakefield did not have distributable profits of the size of the debts waived (or, in fact, any distributable profits at all).

[214]Mr Davis-White said that Stakefield’s financial circumstances also meant that the Duomatic principle could not apply. In this regard, he questioned the prospects of Oxclose being able to sustain the rents due from it, and he referred to evidence of rent arrears. He also referred to the fact that the rents for which Oxclose was liable (and which were fundamental to DTZ’s valuations) were known to be far above market rates, so that there was no likelihood of anyone else agreeing to pay them.

[215]Since I have concluded above that waiver involved an unlawful distribution, I do not need to decide whether the Duomatic principle was also precluded from operating by Stakefield’s financial circumstances. That there were grounds for doubting Stakefield’s future prospects has a bearing, however, on the defendants’ culpability.

[216]Mr Adair also relied on the advice Mr Doffman and Mr Isaacs received from Mr Ferguson. As is apparent from paragraph 184 above, however, Mr Ferguson was not given anything like the full facts. In particular, he was not told either of advances beyond the £653,000 paid in April 2005 or that the debts were recoverable; to the contrary, he was told that there was little prospect of the debts being repaid. He will not, therefore, have appreciated that what was in prospect was the waiver of assets with a value of upwards of £1 million. Further, Mr Ferguson had (and will have been known by the defendants to have) limited understanding of Stakefield’s financial circumstances. It is significant, too, that Mr Ferguson’s views were sought on an informal basis, without advance provision of documentation or even the topic to be discussed and without any advice being recorded in writing.

[217]This allegation has been proved. Axelpark Hull Factual history

Axelpark Hull

[218]Axelpark Hull was incorporated on 26 August 2004 for the acquisition of the Humbrol Site. Mr Doffman and Mr Isaacs became directors at once, and they were still directors when the company went into liquidation.

[219]As already mentioned, sale and leaseback arrangements in respect of the Humbrol Site were concluded in October 2004 (see paragraph 122 above). At that stage, Axelpark Hull borrowed some £3.15 millionfrom Dunbar. The security included a charge over the Humbrol Site and a joint and several guarantee (limited to £1 million) from Mr Doffman and Mr Isaacs.

[220]On 3 March 2005, as previously mentioned (paragraph 121 above), Axelpark Hull granted Cindan Littledean for £1,216,487 an option to purchase the Humbrol Site. The £1,216,487 was remitted to Global Natural Fuels Limited (“Global Natural”), another company associated with Mr Isaacs and Doffman, by way of payments of £1,131,487 and £85,000 on 3 and 7 March respectively. Each payment was described at the time in a Doffman Isaacs Partnership ledger as “For Axelpark (Hull) Ltd – option”.

[221]In May 2005 Mr Doffman and Mr Isaacs bought two thirds of the shares in Heller, which was a leading manufacturer of scale model kits of aircraft, ships and cars. The investment appears to have been effected through Global Natural, but according to Mr Doffman and Mr Isaacs Global Natural was a nominee for Axelpark Hull. Global Natural was, Mr Doffman and Mr Isaacs said, a shell company which had been incorporated to be involved in the management of petrol stations but never used. Mr Isaacs gave evidence to the effect that French requirements meant that a trading company injecting funds direct into Heller would have needed to have recently audited accounts (which Axelpark Hull did not have).

[222]On 27 May 2005 Global Natural lent €3.4 million (equivalent at the time, I am told, to about £2.8 million) to Heller. The sum advanced derived in part from the money Cindan Littledean had paid for the Humbrol option.

[223]Earlier in May 2005, Axelpark Hull had approached Dunbar with a view to raising further funds for the Heller venture on the security of 70 Mansfield Street, which it had acquired via Stakefield at the end of April (see paragraph 174 above). On 16 May 2005 Dunbar offered to lend Axelpark Hull £600,000 as “working capital”. The security was to include a charge over “the freehold property known as The Robin Hood Works, 70 Mansfield Street, Nottingham” (i.e. 70 Mansfield Street) and also a joint and several guarantee, limited to £200,000, from Mr Doffman and Mr Isaacs. The offer letter described the property over which the charge was to be granted as comprising “an 8,000 sq ft, 1980s brick built, part single storey, part two storey warehouse with internal offices and a 5,000 sq ft part covered rear yard”.

[224]On 8 June 2005 DTZ valued 70 Mansfield Street for Dunbar at £900,000. The report, which was signed by Mr Wordley, is an unsatisfactory one in more than one way. One of its puzzling features is that DTZ confirmed that they had had “no previous involvement with the property or parties to the transaction” even though they had valued 70-72 Mansfield Street for Barclays only about six weeks previously. Further, the property described in the report would appear to be 70-72 Mansfield Street rather than just 70 Mansfield Street. In fact, the description of the property being valued in the Dunbar report corresponds closely to that used in the Barclays report.

[225]However, Mr Doffman said in evidence that he had not seen the DTZ report, while Mr Isaacs said that(a) he had no recollection of having seen it and

(b) had he seen it, he “probably would have just looked at the total valuation figure and the address to which it related”. Mr Isaacs said that he thought that the report’s description of the relevant property might have been based on something he had supplied to DTZ, but said that, if there was a mistake, “it was an entirely innocent error at the time”.

[226]On 8 June 2005 Fladgate Fielder, who were acting for Dunbar, wrote to the Doffman Isaacs Partnership asking “why the price paid by the borrower [i.e. Axelpark Hull] had not been entered on the register” and for confirmation both of that price and “that the sale and purchase was at arms length and that the parties were not connected”. Mr Doffman replied on the same day by a letter in which he said:

“I do not know why the price has not been entered on to the register but cannot see the concern because the price is irrelevant in any event. I can confirm, however, that the purchase of the property from the Vendor was at arms length and that Axelpark (Hull) Limited were not connected with the Vendor, Mr Richard Stewart.”

On the next day, Fladgate Fielder again asked for confirmation of “the purchase price paid by the borrower for the property”, but Mr Doffman replied:

“The price paid is irrelevant because the property was acquired as part of a larger business asset transaction. Your clients are fully aware of this. For your records I can confirm that the property was not acquired at an undervalue.”

It was on this basis, presumably, that Fladgate Fielder reported to Dunbar on 13 June in the following terms:

“We are informed that the Property was acquired as part of a larger business asset transaction and a purchase price has not been stipulated in the title register. The borrower has confirmed that the Property was not acquired at an undervalue and in our view, you are entitled to rely on this statement.”

[227]Fladgate Fielder also raised queries relating to the title of the land to be charged. On 9 June 2005, Fladgate Fielder said (among other things):

“Please can you explain why the lease is not registered against the freehold title. Please indicate whether solicitors were instructed by the tenant to act on the grant of the lease. It may be there are requisitions raised by the Land Registry and it would be helpful to know what these are.”

Mr Doffman replied:

“The lease was completed a relatively short time ago. As you will appreciate we cannot control when the tenant registers their lease. We will request that they proceed as quickly as possible with this. The legals were dealt with by the tenant in-house.”

Fladgate Fielder appear to have been satisfied with this response; they proceeded to report to Dunbar that Axelpark Hull had a good title to the property to be charged.

[228]On 14 June 2005 Dunbar made an advance of £600,000 in accordance with the facility letter.

[229]A Mr Laly agreed to buy 70 Mansfield Street for £481,000 at an auction in December 2005. However, the sale was not completed, and, when Axelpark Hull brought proceedings for specific performance, Mr Laly claimed to be entitled to rescind the contract. Axelpark Hull’s claim was dismissed on a summary basis in July 2006, on the basis (so Mr Isaacs said) that 70 Mansfield Street was no longer owned by Axelpark Hull. (It had by now been transferred to Axelpark (Nottingham) Limited (“Axelpark Nottingham”) – see below.)

[230]By May 2006 Axelpark Hull was seeking to refinance the Humbrol Site with Barclays. Barclays agreed to provide funding, but required first-ranking security from Axelpark Hull. It came to be agreed that 70 Mansfield Street, over which Dunbar had security, should be held by a different company. 70 Mansfield Street was accordingly transferred to Axelpark Nottingham, which had been established for the purpose, at a price of £900,000 but subject to the charge in favour of Dunbar. Not long afterwards, Axelpark Hull refinanced again, with HSBC Bank (“HSBC”). By then, Mr Doffman’s and Mr Isaacs’ relationship with Mr Taylor of Barclays’ business support department, who had taken over responsibility for the accounts linked to Mr Isaacs and Doffman, was not good.

[231]In July 2006 Heller entered into insolvency proceedings in France, and it has since been dissolved. The money which had been invested in the company via Global Natural was lost. Humbrol went into administration on 30 August 2006, with the result that Axelpark Hull lost the rental income it had been enjoying.

[232]It seems that in mid-2007 there was a fire at the Humbrol Site which rendered the property unfit for occupation.

[233]On 13 November 2007 HSBC appointed two individuals from GVA Grimley as Law of Property Act receivers of the Humbrol Site, and the company went into creditors’ voluntary liquidation on 6 December 2007. Mr Mark Reynolds of Valentine & Co is the liquidator.

[234]A statement of affairs prepared on liquidation gave freehold land and property as the company’s only asset. This was estimated to realise £3.4 million, as compared with a book value of £8 million. The company was stated to owe about £5.7 million to HSBC, some £87,000 to trade and expense creditors and £50,000 in respect of loans from associated companies.

[235]GVA Grimley have since said that £1.725 million has been obtained from realisations, £1.675 million less than the £3.4 million estimated.

[236]So far as I know, Axelpark Nottingham, to which 70 Mansfield Street was transferred subject to the charge in favour of Dunbar, has not entered into any insolvency regime and is solvent.

Diverting money to Global Natural

[237]The first allegation made in respect of Axelpark Hull is this:

“Each of the Defendants caused and/or permitted Axelpark Hull to divert to Global Natural Fuels Limited (a company of which they were shareholders and directors) the sum of £1,225,000 paid by Cindan Littledean in respect of the option granted by Axelpark Hull for the purchase of the Humbrol Site for no demonstrable benefit to (and contrary to the interests of) Axelpark Hull”

[238]This allegation concerns the sums totalling £1,216,487 (representing £1,225,000 less costs) which were remitted to Global Natural and invested in Heller on behalf (as the defendants say) of Axelpark Hull.

[239]The Secretary of State disputes that Global Natural acted on behalf of Axelpark Hull. In support of this submission, Mr Davis-White referred to Axelpark Hull’s audited accounts for the period ended 25 February 2006, which were approved by the directors in May 2007. Mr Davis-White said that it was odd that the accounts made no reference to the losses which were (now) said to have been suffered in the summer of 2006, when Heller failed. He also pointed out that there was no reference to those losses either in the report to creditors which Mr Doffman provided when Axelpark Hull went into liquidation or in the statement of affairs for the company.

[240]On the other hand, Global Natural’s receipt of the £1,216,487 was linked to Axelpark Hull in records made at the time (in that the Doffman Isaacs Partnership ledger described each payment as “For Axelpark (Hull) Ltd – option”). Further, Axelpark Hull’s accounts refer to “debtors” of £2,180,417, and that figure is likely to include the £1,216,487; this suggests at least that it was recognised that Global Natural had not received the money on a gratuitous basis. It is fair to say that the accounts do not reveal Global Natural to have invested in Heller on Axelpark Hull’s behalf, but Mr Davis-White accepted that Axelpark Hull’s accounts “are fairly puzzling whichever way one looks at it”. As regards the report to creditors and statement of affairs, Mr Doffman said that he had been guided by Valentine & Co as to how to deal with matters and that he felt that the report to creditors included the direct causes of Axelpark Hull’s failure. In any case, the points which Mr Davis-White made about the absence of reference to losses suffered on the failure of Heller would seem to apply equally whether Global Natural was Axelpark Hull’s nominee (as the defendants say) or Axelpark Hull made “some kind of loan” to Global Natural (as the Secretary of State ultimately said was probable); in the latter case, Heller’s insolvency would presumably have meant that Global Natural was unable to repay the loan.

[241]In all the circumstances, I do not consider this allegation to have been made out.

Borrowing from Dunbar

[242]The other allegations made in respect of Axelpark Hull relate to the £600,000 which the company borrowed from Dunbar in June 2005. The allegations are expressed in these terms:

“Each of the Defendants caused and/or permitted Axelpark Hull to obtain funding from Dunbar: a) against a property (70 Mansfield Street) that Axelpark Hull had in fact acquired from Stakefield for nil consideration; and b) against security that was impaired because the property formed part of the premises over which Barclays already had security” and “Each of the Defendants caused and/or permitted Axelpark Hull to obtain this funding from Dunbar when they knew or should have known Dunbar was misled as to the price paid by Axelpark Hull for the property, as to the extent of the property and as to the nature of the transaction pursuant to which it was acquired by Axelpark Hull”

[243]This allegation is, in essence, one of fraud. The Secretary of State contends that Dunbar was deliberately misled.

[244]Mr Adair objected to the Secretary of State’s case being put in this way. He pointed out that it had been alleged that the defendants “knew or should have known Dunbar was misled”, and he relied on the passage from Millett LJ’s judgment in the Paragon case which Lewison J quoted in Secretary of State for Trade and Industry v Goldberg (see paragraph 34 above) for the proposition that an allegation that a defendant “‘knew or ought to have known’ is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the court is satisfied that there was actual knowledge”. On the facts of the present case, however, it was, as it seems to me, apparent that the Secretary of State’s allegations encompassed an allegation that the defendants had deliberately misled Dunbar, at least as one alternative. In the circumstances, it seems to me that the defendants can reasonably be expected to answer a fraud allegation and that it would be overly technical to debar the Secretary of State from pursuing such an allegation merely because a “knew or should have known” formula had been used.

[245]The defendants maintain that the background to the relevant transaction was explained fully to Mr Carroll Raphael of Dunbar. For example, Mr Isaacs said in cross-examination:

“ … I would have told [Mr Raphael] that for about £1.4 and a half million the business had been acquired, we owned 50 per cent of the tenant and that out of that deal Axelpark (Hull) as a fee acquired the property which is now the subject of a lease to Oxclose which we hold a 50 per cent interest in.”

Mr Isaacs also said:

“ … I remember [Mr Raphael] saying that it was a connected tenant and he was less detailed about examining the covenant because he said, ‘Well, you have obviously got faith in it, you have been reassured,’ and from memory he asked us, Gregory and I, … to provide a joint and several [personal] guarantee for £200,000 so that he could be less concerned.”

Mr Doffman similarly said that Mr Raphael “was fully aware of the entirety of the transaction”. If that is right, Dunbar was not misled at all, let alone deliberately so.

[246]Mr Davis-White argued that I should reject the defendants’ evidence on this. He asked rhetorically why Dunbar would have gone ahead if it had known the facts. He pointed to Mr Doffman’s correspondence with Fladgate Fielder, in which (he said) the defendants(a) failed to inform Fladgate Fielder (and Dunbar) that the purchase price of 70 Mansfield Street had been nil,

(b) falsely stated that the property had been acquired as part of a larger business asset transaction and not at an undervalue and

(c) gave the misleading impression that the tenant (namely, Oxclose) was not a connected company when it was; this correspondence was referred to as a “careful fandango”. Mr Davis-White relied, too, on a letter sent to the Secretary of State’s solicitors by Fladgate Fielder in which they stated that they had “checked with [their] client” and that:

“They [i.e. Dunbar] were certainly not aware of the sub-sale although they believed the original structure of the transaction was to have some corporate element. It is therefore completely inaccurate to say that our client was aware that the property had been sub-sold to the borrower for nil value.”

Fladgate Fielder went on to say:

“I have tried to explain that a property transferred for nil value would not have constituted acceptable security to the bank because of the transaction at undervalue provisions of the Insolvency Act 1986 and would have left the transfer open to attack on the basis that it could have been set aside in the event of Stakefield (Midlands) Limited subsequently being liquidated. Evidence of purchase is the most important extraneous and independent evidence as to the market value of the property. This would have affected the bank’s decision to lend.”

[247]Mr Adair, however, stresses that there is no direct evidence from Mr Raphael or anyone else from Dunbar. He says, moreover, that no one from Dunbar has even been interviewed. As regards the correspondence with Fladgate Fielder, Mr Doffman explained in cross-examination that in his 8 June 2005 letter (as to which, see paragraph 226 above) he was “talking about the main transaction, which is what [Dunbar] would have been concerned about” and that “all I am saying is that it was an arm’s length transaction and that they weren’t connected to Mr Stewart”. Mr Adair made the point that, when Mr Doffman wrote on 9 June that Dunbar was “fully aware” that “the property was acquired as part of a larger business asset transaction”, Fladgate Fielder did not dissent, indicating that that was indeed the position.

[248]As regards the absence of evidence from Dunbar personnel, Mr Davis-White noted that the defendants had not said in their written evidence that matters had been fully explained to Dunbar, but rather that there had been no intention to mislead. It remains the case, however, that, in the context of a fraud allegation, there is no direct evidence from the person alleged to have been misled. It is noteworthy, too, that Dunbar does not appear, in the event, to have suffered any loss and that the defendants were prepared to give (and in fact gave) a personal guarantee in respect of the funding of which complaint is made.

[249]I have concluded, not without a degree of hesitation, that this allegation has not been proved.

Unfitness

[250]I have found proved allegations relating to(a) the option which Cindan Southampton granted to Axelpark New Forest in May 2004 (paragraphs 94-99 above),

(b) the £1,216,487 which Cindan Littledean paid in March 2005 for an option to buy the Humbrol Site and the borrowing from Barclays for this purpose (paragraphs 142-149 and 157 above),

(d) the waiver of debts owed to Stakefield in October 2005 (paragraphs 211-217 above).

[251]Do these matters establish unfitness? To my mind, they do. While I recognise that a breach of duty will not necessarily show a director to be unfit, the allegations which have been proved involved a series of breaches of duty, in each case to the benefit of the defendants or entities associated with them, and large sums of money or assets of substantial value. The allegations have, moreover, a common theme: disregard for the separate interests of the individual companies. A person who, like the defendants, uses a company as a special purpose vehicle seeks to take advantage of the entity’s separate legal personality; he must also recognise the concomitant duties.

[252]In my judgment, the defendants’ conduct does make each of them unfit to be concerned in the management of a company, with the result that I must impose disqualification orders. I shall hear further submissions as to the length of those orders.

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