City of London Group Plc & Anor v Lothbury Financial Services Ltd & Ors [2012] EWHC 3148 (Ch)

Neutral Citation Number: [20121 EWHC 3148 (Ch)Case No HC10C03878
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Rolls Building, Fetter Lane, London, EC4A 1NLDate 8 November 2012
Before
MRS JUSTICE PROUDMAN
Between
(1) CITY OF LONDON GROUP PLCClaimants(2) CITY OF LONDON PUBLIC RELATIONS LIMITEDClaimant(1) LOTHBURY FINANCIAL SERVICES LIMITEDDefendants(2) MICHAEL PADLEYDefendant(3) ELIZABETH MOSSDefendant(4) SIMON ASTLEYDefendant(5) PETER PHILIP WOODDefendant(6) JOHN GARY MIDDLETONDefendant
Michael Booth QC and Mark Watson-Gandy (instructed by Gardner Leader LLP, solicitors) for ClaimantsRupert Higgins (instructed by Ronaldsons LLP, solicitors) for 1 st, 2 nd, 4 th and 6 th DefendantsHearing Hearing dates: 19,20,23,24,25,26 and 27 July 2012
JudgmentMrs Justice Proudman : The claim
[1]This is the trial of an action against personnel involved in the running of Lothbury Financial Limited (“LF”), a company which traded as a financial public relations (“PR”) consultancy, and against a company called Lothbury Financial Services Limited (“LFS”). On 29 March 2010 LF was placed into administration by an order of the Court on the application of the claimants.[2]The claim is for declarations, accounts, damages and injunctive relief for alleged breach of fiduciary duty, passing off, conversion, money had and received and conspiracy. By an Agreement dated 3 August 2010 LF’s administrators have assigned LF’s residuary rights of action to the claimants.[3]On 2 April 2010 the second claimant (“CoLPR”), a company of which the first claimant (“CoLG”) is the parent, bought the business, name and assets of LF from the administrators for the sum of £91,000, only to discover, the claimants allege, that the cupboard was bare. In short, it is said that former directors and employees of LF committed serious acts of misfeasance in a conspiracy to milk LF by transferring its business to LFS, which had been formed a year previously with that transfer in mind.[4]The claimants claim that the defendants misappropriated client contacts, confidential information and the business opportunities afforded by LF’s client list. It is said that they conspired together systematically to hive out LF’s business.[5]The remedies sought fall under five heads:• Declarations that the business and assets of LFS are held on a constructive trust for CoLPR.• An account (and subsequent payment) of equitable compensation for breach of fiduciary duty, framed against the second defendant as a director, against the third defendant as an employee, against the fourth defendant as a de facto director and against the sixth defendant as a consultant or employee.• Damages for conspiracy.• Damages for conversion/money had and received.• An injunction to restrain passing off by LFS.[6]It is an integral part of the claim that LFS was formed with the intention of being utilised in this way. The claimants’ case is not that the conduct of the individual defendants at the time of the administration crossed the line of what was proper for a director, consultant or employee; instead the allegation is that the financial collapse of LF and the transfer of business to LFS was the aim of a conspiracy between everyone involved in LF down to and including the office administrator.[7]It is said that LFS was deliberately set up in competition with LF, that the business, moneys and contracts of LF were transferred to LFS and funds were diverted, that LFS was passed off as LF and clients were told that LF had changed its name to that of LFS in order to secure transfer of the business. Similarly it is alleged that clients were told that they were to pay their debts to LFS under the pretence that LFS’s bank details were the new account details of LF, that domain names were registered for LFS which belonged to LF, that LF’s files and data were accessed remotely and transferred to LFS, and that LF continued to trade while insolvent.[8]LFS is the first defendant. The second defendant, Michael Padley, (“Mr Padley”) was at the material times LF’s sole director and shareholder. The fourth and sixth defendants, (respectively “Mr Astley” and “Mr Middleton”) were both consultants to LF providing PR consultancy services to LF through companies unrelated to LF, respectively Corporate & Financial Communications Services Limited (“Corporate & Financial”) and St Swithins PR Limited (“St Swithins”). The third defendant, (“Ms Moss”) was employed by LF as its office administrator. She did not attend the trial and, although she has filed a defence and Mr Higgins of counsel lodged a skeleton argument on her behalf as well as on behalf of the 1st, 2nd, 4th and 6th defendants, her solicitors came off the record at the start of the trial. The action has been settled against the fifth defendant, (“Mr Wood”), and he has neither been represented nor taken any part in the trial.

The claimants’ case on the facts

[9]The claimants’ case is heavily fact-reliant in order to demonstrate the alleged conspiracy to milk LF in favour of LFS. Mr Booth QC and Mr Watson-Gandy, counsel for the claimants, called LF “Oldco”, and LFS “Newco”, and submitted that LFS traded under a name deliberately designed to suggest a formal link between the two companies which did not exist. It is alleged that misrepresentations were made to LF’s clients to persuade them to move to LFS such as that the bank account was moving, the name was being changed, there would be no one left at LF to service clients, that Ms Moss took information away with her and that LF’s server was accessed remotely for the benefit of LFS.[10]The defendants answer these allegations in the following way. It is said that LFS was a company set up as a vehicle through which to operate non-PR business, specifically by assisting small companies to move into the AIM market. Mr Padley acted as a consultant to LFS on the understanding that LF would receive the PR work. Until the administration there was a clear dividing line between the two companies and their businesses. There were only a few payments made by clients to LFS prior to 7 April 2010 and those were not for PR work. In any event, Mr Eric Anstee (“Mr Anstee”), CoLG’s Chief Executive, undertook a full due diligence exercise before CoLPR’s purchase.[11]The defendants say that the background is more complex than that adverted to by the claimants. In 2008 Mr Padley utilised LF to acquire a financial PR business run by CoLG. In the summer of 2009 LF was in financial difficulties (the principal debt being a debt to CoLG in respect of the acquisition cost for the business, (Mr Padley felt he had “bought a pup”)) and Mr Padley sought advice from an insolvency practitioner, Mr Jamie Taylor, a partner at Begbies Traynor. As a result of that advice a ‘pre-pack’ administration was on the cards and that possibility remained live in February and into March 2010.[12]Mr Padley’s preference was nevertheless to try to rescue LF by renegotiating terms with CoLG. He was, it is said, trying to protect the business for the benefit of LF’s creditors. On 19 January 2010 Mr Padley received a letter from Mr Anstee, which Mr Padley regarded as affording significant comfort, in particular that CoLG was, “prepared to wait for these [stipulated] cash flows to materialise and that it is not our current intention of enforcing the debt... ...Similarly we are prepared to appoint [LF] as our PR adviser and offset reasonable fees against the outstanding debt.”[13]Mr Padley says that the PR work went elsewhere and CoLG had no intention of honouring the terms of that letter. As a result, LF could not trade out of difficulty. Instead, by an application dated 23 March 2010 CoLG sought the appointment of administrators. There is plainly a very great deal of bad feeling on both sides between Mr Anstee and Mr Padley.[14]It is accepted that misrepresentations were made by Ms Moss as to LF’s bank account and name. However, Mr Padley’s case is this was merely as a result of overzealousness on her part and no-one relevant was misled by or relied on them. The true position was explained to the administrators. There is no evidence that any documents were ever deleted from the server.[15]It is admitted that Mr Padley did take payment personally from clients in some instances. For example he took shares in Amur Minerals Corporation (“Amur”) and Avia Investments plc (“Avia”), both in the autumn of 2009. However, these payments were properly recorded in Board Minutes and Mr Padley says they were taken in lieu of unpaid salary. While it is true that at this stage Mr Padley was worried about cash flow, the claimants’ insistence that he should have reported his agreement to take shares “to LF” is unreal as he was at that stage the sole shareholder and director of LF and was working towards a management buy-out.[16]The claimants rely on an exchange of emails on 3 February 2010 in which a change of location is discussed, culminating in an email of 4 February 2010 from Ms Moss to Mr Middleton and Mr Ashley in the following terms:
“Subject: We don’t need new furniture Cos we have desks: AO, Peter, the one opposite Peter, Myo’s, the one opposite Myo’s, Spriggs/Price desk, that is 6 and there are 6 of us. We take the following: [there follows a list of items of furniture and other office chattels]. We close down [LF] on a Friday and move everything out on Saturday to new premises. CoLG come in on Monday to find the office empty... We also have to get Graham away from doing our accounting stuff, cos he can’t have access to Padley’s accounts. We have to get back ups of all the accounting stuff he has done for Padley. I can do the basic stuff, we hire Heather Parker for 4 hours per week to make sure I have done things correctly and she runs the payroll. If we do become LFS then we have to get the clients to change contracts to LFS cos we have shitload of trouble with some clients when we went from Bankside to LF and they did not recognise that we took them and they were our clients...”
[17]The triumphalist note of this email (“CoLG come in on Monday to find the office empty'’’) does not represent the reality of what actually happened. A coffee-maker, glasses and some of the items of furniture mentioned were in any event the personal property of the defendants. Mr Middleton’s evidence was that he regarded this email as a rant on Ms Moss’s part and not one to be taken seriously. Furniture that did not belong to the defendants was not in fact taken and in any event such an email does not go far enough to fix Ms Moss with a fiduciary duty or a breach of that duty.[18]The claimants also place stress on a draft letter to clients which Mr Astley sent to Mr Padley, Mr Middleton and Ms Moss on 8 April 2010. The draft was never sent, and Mr Astley says it was written when he had had too much to drink, a fact which is evident from the terms of the covering email (“Bit tired by now (7)”), the time when it was sent and other internal evidence. The draft refers to the renaming of LF as LFS and there is no suggestion in it that LF and LFS were two separate entities. However the fact that they were is clear from some additional paragraphs (“Paras I have drafted and deleted so to speak"; “I wrote lots of bollox but think its best to omit it but have left it at the bottom so you know”). To my mind it is clear that the omissions were for the reasons given in those paragraphs and to avoid criticisms of CoLG which would appear undignified to clients rather than in order to hide the fact of the administration. Indeed the draft, taken as a whole, assumes knowledge by the clients of the administration and of CoLG’s involvement in it.[19]The claimants say that as (on his own admission) Mr Middleton, Mr Padley and Mr Astley frequently had lunch together it was inconceivable that there was no discussion about moving the business to LFS or indeed about the email. It seems to me that there must have been some discussion about the future of LF including the possibility that in the event of an administration its personnel would leave. I do think that there was more discussion about future proposals than the parties now admit; it is indeed inconceivable that they would not have considered some sort of contingency plans. However, I do not consider that there is any evidence of wrongdoing.[20]Moreover, as I have said, it is the claimants’ pleaded case that Mr Padley set up LFS in 2009 with the aim of moving the PR business from LF. There is no evidence to that effect at all. All the evidence is that LFS was properly run as a bona fide separate business and that the way in which PR consultancy services were supplied by LF and other consultancy services by LFS was for the benefit of both.[21]Ms Moss’s email must be read in its context. Matters at the stage it was written were very unsettled; Mr Padley had only received the letter of comfort from Mr Anstee three weeks earlier, all the personnel regarded the clients they had introduced as “theirs” and not that of LF, Mr Padley was still talking about a pre-pack as a possibility and there were several different ways in which things might turn out.[22]Again, it is said that Ms Moss’s email is instructive because LF’s contracts in the name of clients were transmuted into new contracts with LFS at much the same time. Mr Middleton was cross-examined at length about a contract with Beowulf Mining Plc (“Beowulf’) which was sent out as an LFS contract on 1st March 2010. Apart from the fact that there was a client folder on his computer labelled “Beowulf ’, Mr Middleton said he had no recollection of the matter at all. So, Mr Booth QC submitted, either there was only one contract in the folder, which had to have been created for the purpose, or there were two, in which case Mr Middleton must have made a conscious choice to send out the LFS version. The covering email simply referred to “an updated contract to take account of the increased fees for Lothbury Financial’'. Mr Middleton’s explanation was that he did not notice that the contract was with LFS and he could only assume that it was prepared by Ms Moss.[23]I observe that the contract with Beowulf is the only contract which, properly analysed, can be criticised in this way. I do not find that, as alleged in the Particulars of Claim, contracts and invoices were “altered replacing [LF]’s name with that of [LFS]". Some of the contracts with LF in the bundles are only in draft form and there is no evidence that they were ever signed or submitted for signature. Others were lawfully terminated according to their terms. Yet others showed a division of work between LF (PR) and LFS (non-PR).[24]In cross-examination Mr Anstee suggested that Amur’s termination (by letter dated 22 December 2009) of its contract with LF was some sort of sham constructed after the event. That was not pleaded and cannot now be relied upon as the defendants have had no opportunity to call a witness from Amur to rebut or examine the allegation.[25]On 1 March 2010, the same day as the draft contract was sent to Beowulf, Mr Padley sent out a draft contract to another client, Suretrack Monitoring Plc. The contracting party was named as LFS but the PR work was to be done by LF and only the non-PR work by LFS. Again, two months earlier, on 18 January 2010, two contracts were sent out to Avia Investments Plc, one for PR services by LF and one for other services by LFS.[26]As to Lowes Wealth Management Distribution LLP, Mr Astley’s longstanding arrangement with Mr Padley was to invoice clients as he chose. He frequently billed them through his own company. I find that he had no underlying duty to invoice clients such as Lowes through LF. He said that the reason he invoiced in the name of LFS was to cover the directors’ fees. The claimants find that sinister; I do not.[27]Ms Moss’s conduct is in my judgment very far from demonstrating that she was behind, or participated in, the alleged conspiracy for LFS to “churn” (to use the claimants’ word) LF’s contracts to LFS. I accept that Ms Moss was reckless as to how the succession from LF to LFS was managed, that is to say the method in which it was to occur but having observed all the defendants’ witnesses minutely I saw no evidence of a conspiracy.[28]I was taken to various assertions that LF had changed its name to LFS and that there was merely a move of offices. I note particularly a letter from Ms Moss to the London Stock Exchange’s Regulated News Section of 7 April 2010. There is no doubt that she overreached herself on that occasion; as Mr Booth QC pointed out, her assertion saved LFS the fee which would have been levied on a new customer. Again, on invoices, there was a note saying “Please note the new Bank details”, but that is a prompt or reminder to change the clients’ mandate to its own bank and not necessarily a representation that there had merely been a change of name.[29]I find that computers and data remained in LF’s offices. The claimants rely in support of their allegation that back-up data was removed on an email dated 26 March 2010 from Mr Stephen Cullen of Vanilla Technology Limited, formerly OOH IT, (the IT company which maintained LF’s server) to Ms Moss, copied to Mr Padley, stating: “The server is now backing up everything onto the hard disk I will double check that this has been completed successfully in the morning and email you to remove the hard disk and store it nice and safe in your hand bag. This backup will contain everything that you could possible need from that server."[30]Mr Padley says there is nothing sinister in this email. At the relevant time there was no reliable backup for the server and the existing backups' were not running properly. Accordingly, Mr Cullen used a USB hard disk as a temporary backup solution. That is the hard disk referred to in the email and I accept the defendants’ contention that they did not remove any data after or as a consequence of the administration order.[31]There is a stark difference of fact between the claimants’ case and the defendants’ case as to the ownership of LFS. Mr Padley maintains that LFS was originally beneficially owned by the fifth defendant Mr Wood. The claimants say that LFS was owned by Mr Padley from the outset. They also say that if Mr Padley’s account is rejected in this respect that is fatal to his entire story as it undermines his credibility as to what his intentions were as to what he was intending to do with LFS from the start. LFS was, it is alleged, set up as Mr Padley’s exit route for LF at a time when he knew that LF was going to fail. Mr Padley was the true owner of LFS and Mr Wood was no more than a stooge standing in for him.[32]The claimants rely on the delay in filing Mr Wood’s appointment as director of LFS until 5 August 2009 to await the return of Mr Padley’s accountant Ms Chantal Baker, the fact that LFS’s registered office is her address, the fact that Mr Padley sought advice in July 2009 as to who should be directors and shareholders of LFS if LF were to be liquidated, the fact that LF permitted LFS to use a similar name without any formal agreement, the fact that LF allowed LFS to use its offices and administration without any contribution to the costs and the fact that Mr Padley sought advice as to whether he should be a director and whether LFS should remain a separate entity.[33]However I note two things about this period. First, Mr Padley was contemplating a pre-pack administration. Secondly, the advice that Mr Padley actually received was that LFS should remain separate and that neither he nor a party connected to him should be a director or shareholder. There is therefore nothing sinister in the fact that although LFS was his brainchild he accepted that it had to be independent and thought that he had followed the advice he had received. I do not therefore consider that Mr Padley’s story that LFS was owned and controlled by Mr Wood is a lie, that it is consistent with him covering his tracks or that his credibility is thereby affected to the extent that nothing he says can be trusted.

The defendants’ case

[34]There are two major differences of fact between the two sides of the record. First, the defendants say that there was a clear dividing line between the companies until shortly before the administration when Mr Padley was working towards a pre-pack. At that stage, but no earlier, the defendants did contemplate a transfer of the business but that aim was frustrated because they were outbid by CoLG.[35]The claimants rely on correspondence in the summer of 2009 to demonstrate that Mr Padley was preparing the way for his exit from LF. In particular there is an email of 14 July 2009 from Mr Padley to Mr Michael Whyke FCA (a chartered accountant engaged by Mr Padley to advise him) saying that he needed to know the consequences of winding up and starting again. He said, “the more I look at the situation it seems the obvious route but I need to know the effect on me, the team and the business.” Again, in an email to Mr Taylor a week later he said,”36. ‘I have done nothing so far. My accountant is back from hols next week and with your advice she can then structure newco.37. Once that is in place we speak to CoL and the bank. I would like your advice so that everything is done correctly.”38. Mr Taylor replied, “Let me know when you are ready to liquidate, if CoL reject offer.”[36]The claimants look on this sequence of correspondence as significant, showing that LFS was being set up or restructured at a time when Mr Padley knew that LF was going to fail and that it was therefore part of his exit strategy. LFS was incorporated with a similar name with the deliberate intention of passing it off as the same thing as LF. LFS was thus to be the destination for LF’s business.[37]However, this is a leap too far and involves the application of hindsight. It ignores the context which was that at the time Mr Padley was thinking in terms of a pre-pack administration in the event that he did not satisfactorily renegotiate terms with CoLG. He said he wanted to do things correctly. He was receiving advice from professionals, a Fellow of the Institute of Chartered Accountants and a reputable insolvency practitioner.[38]The claimants argue that the allegation of a pre-pack administration is self-serving as depriving LF of its business served to ensure that the price to be paid would be minimised and rival bidders would be discouraged. However, preparing to succeed to an original business in such circumstances is in my judgment different from preparing to compete with it. It is the essence of a pre-pack management buy-out that information has to be derived from the failing company in order to structure such a buy-out.[39]Secondly, and crucially, the defendants say that the PR business never comprised assets belonging to LF because of the structure under which LF operated. Thus the defendants were entitled, they say, to take their clients with them because of the personal nature of the business. The clients chose who they worked with and the consultants got paid by LF on a case by case basis.[40]The business is said to have more of a cooperative than a conventional corporate structure, since each consultant serviced his personal clients under the corporate banner. Thus clients of individual consultants did not become clients who in any sense belonged to LF. The only asset of any value is therefore the personal relationship between an individual consultant and his clients. Although it was acknowledged that there was an advantage to them in trading under the banner of a recognised institution it was said that no PR consultant would introduce their clients to a small company such as LF on the basis that they were committing themselves to service those clients exclusively through such a company.[41]Thus clients were introduced by the consultants, and the clients voluntarily followed the consultants with whom they worked and whom they knew and trusted.[42]Evidence was given by Mr Adam Reynolds for the claimants, that in his experience of the PR industry, “the luxury to choose to stay with individual consultants is not usually one afforded to clients. It is standard practice within our business for individuals to be under restrictive covenants in their contracts of employment preventing them from taking clients with them when they leave or for working with them again for a specified period of time. ...In my experience of the industry, such covenants are usually strictly adhered to because, if they were not, it would be impossible for businesses within our industry to properly function. I am personally restricted, for example, from working with my former clients at Hansard [Hansard Communications, accompany with which the second defendant worked in a joint venture and in which Mr Reynolds worked until January 2012] for a period of 3 years following the sale of my business earlier this year.'”[43]However, there is a marked distinction between the position of Mr Reynolds and that of the defendants in that (as is common ground) there was no such restrictive covenant imposed in the present case. I heard oral evidence from senior representatives of several of LF’s former clients: Mr Clive Sinclair-Poulton of Beowulf, Mr Masoud Alikhani of Berkeley Mineral Resources Plc, Professor Richard Conroy of Conroy Gold and Natural Resources Plc and Karelian Diamond Resources Plc and Mr Jon Pickles of ILX Group Plc. I was told that Mr Graham Devile of Meteor Asset Management Limited and Mr Ray Rasmussen of Dover Capital LLC concurred. I also heard from Mr Simon Clements, a nominated adviser to Suretrack. Mr Alikhani pointed out that Berkeley had never had a contract with LF, but that invoices were sent by LF for work which was not in fact done. In the case of those clients that did have contracts with LF, the contracts were terminated and outstanding fees paid.[44]I have considered the schedule on which the claimants rely to demonstrate that LF’s contracts were “churned” (to use Mr Booth QC’s emotive phrase again) to LFS, but I do not consider that it proves any such thing. I was taken to many invoices rendered by LFS in 2009 but the defendants had a satisfactory explanation for all of them, namely that the services performed by LFS were not PR services and that the dividing line between the two functions was always observed.[45]The witnesses I heard all made it abundantly clear that they regarded continuity of personal contacts as the important factor in their choice of PR consultants. They were adamant, and I accept, that they did not care about the name of the company under which a consultant traded, whether it was LF, LFS, Corporate & Financial or St Swithins. Sometimes invoices were sent directly to the consultants concerned.[46]Moreover the client representatives all confirmed that they were expressly told by Mr Padley, Mr Astley or Mr Middleton about the administration and were also told that LFS was a separate company from LF. The claimants’ allegation is (I quote from the claimants’ counsel’s written closing submissions), that “people were.... misled that LFS was LF". Their problem is that they have been unable to show that any client was so misled or that such a statement would have changed their behaviour in any event.[47]Mr Astley and Mr Middleton accepted that they were trusted by Mr Padley and thus by LF. That is however far from imposing on them the kind of fiduciary duties contended for by the claimants.[48]Some clients remained with LF, such as Platinum Resource and Molly Mines, with which the claimants had a relationship from 2008-9, and some left with other employees, such as Mr Ron Marshman.[49]The claimants’ case is that, were it not for the alleged breaches of duty and conspiracy, the claimants would have had the benefit of the contracts which the consultants had with their clients. However, the value of LF’s business lay in the personal relationships which the PR consultants enjoyed with their clients and those clients were always going to follow the consultant with whom they had the relationship. Accordingly it is most unlikely that LF would in fact have retained those clients in the absence of the consultants.

Fiduciary duties

[50]Extensive misfeasance comprising breach of duty is pleaded against all the individual defendants. Both duties and breaches are pleaded indiscriminately and in very wide terms against them all, notwithstanding their very different relationships with and roles in LF. There is a particular complaint by the defendants that the response to a Part 18 Request for Further Information declines to furnish particulars, averring that, “For the avoidance of doubt, the phrasing at paragraphs 16 and 19 [of the Particulars of Claim is in each occasion intended to refer to the business, affairs and any assets of the Company [LF] in its fullest possible sense and construction."[51]It is also complained that although the claimants stated that they were unable to answer the request on the ground that the relevant matters were solely within the defendants’ knowledge, in fact the information eventually provided in a witness statement of Mr Anstee of May 2012 had been in the claimants’ possession since 2010. It is said that the allegations, which on any basis are serious, have been pleaded in such a way that the claimants could embark on a fishing expedition in cross- examination.[52]In particular there is an allegation that the defendants transferred to LFS fees and debts owed to LF, but that, despite a request for particulars, and despite the fact that LF’s accounts and records are in the possession of the claimants and disclosure has been given, no particulars have ever been furnished.[53]In order to succeed in their claims, the claimants must prove that each of the relevant defendants owed a duty to the claimants of the nature pleaded and that he or she breached it.[54]Mr Padley was indeed a director of LF and thus owed duties both to the company and its shareholders. He was himself the sole shareholder of LF. However, where a company is of doubtful solvency, the interests of the company are those of the creditors rather than those of the shareholders: Colin Gwyer & Associates Limited v. London Wharf (Limehouse) Limited [2003] 2 BCLC 153, 178 at [74] and cases therein cited.[55]The relevant case law on the fiduciary duty of a director is explained by Hamblen J in Andrew Brown and Ors v. Innovator One Plc [2012] EWHC 1321 (Comm) at 1321, citing Bristol & West Building Society v. Mothew [1998] Ch 1, in which Millett LJ said, "... a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence... The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he may not place himself in a position where his duty and interest may conflict; he may not act for his own benefit or for a third party without the informed consent of his principal.”[56]Mr Astley was neither a director nor an employee of LF. At all material times he was an independent contractor. The claimants plead that Mr Astley was a de facto director of LF, as Mr Anstee said, that he was “involved in the running of LF and its decision making". However, the matters relied upon as demonstrating that he undertook the functions of a director are not pleaded with any particularity.[57]The starting point for the question whether a person is a de facto director is the detailed analysis of the authorities undertaken by David Richards J in McKillen v. Barclay and Others [2012] EWHC 521 (Ch), particularly in paragraphs [21]-[31] of his judgment. He draws attention to the distinction between a shadow director, that is a person defined in s. 251 of the Companies Act 2006 (“a person in accordance with whose directions or instructions the directors of the company are accustomed to act”) and a de facto director, that is to say, a person occupying the position of director by whatever name called. As David Richards J pointed out, there may no longer be a rigid distinction between the two categories, but in the present case shadow directorship is not alleged, nor is there any basis for such an allegation. The evidence demonstrated that Mr Padley was not controlled by instructions from anyone. The issue is therefore whether the individual in question had assumed the status and functions of a director so as to make himself responsible as if he were a de jure director.[58]The starting point is the classic decision of Millett J in Re Hydrodam (Corby) Limited [1994] 2 BCLC 180, where he said (at 183), “To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.”[59]Hydrodam is cited in the recent authoritative decision of the Supreme Court in HMRC v. Holland [2010] 1 WLR 2793 in which it was agreed that a single decisive test could not be formulated to determine whether a person was a de facto director; all relevant circumstances must be taken into account. Jacob J’s statement in Secretary of State v. Tjolle [1998] 1 BCLC 333 at 343-344 was cited with approval:
“The court takes into account all the relevant factors. 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 (e.g. 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... 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 in law. ”
[60]In this context the statement of Robert Walker LJ in Re Kaytech International Plc (1999) 2 BCLC 351 was likewise cited with approval where he said (at 423-4), “I do not understand Jacob J... 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. ”[61]In conclusion, Lord Hope said in Holland, (at [39]), “It is possible to obtain some guidance by looking at the purpose of the section. As Millett J said in the Hydrodam case, the liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. As he put it, those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities of the office. So one must look at what the person actually did to see whether he assumed those responsibilities in relation to the subject company.”[62]Lord Collins (at [93]) approved the formulation of Patten J in Fayers Legal Services Limited v. Day (unrep) 11 April 2011, where he said that in order to make a person liable for misfeasance as a de facto director the person must be part of the corporate governing structure, “and the claimants have to prove that he assumed a role in the company sufficient to impose on him a fiduciary duty to the company and to make him responsible for the misuse of its assets.”[63]Mr Astley was an independent contractor providing services to LF by servicing individual clients through a third party company. His clients saw him in that capacity and he was not held out as anything else.[64]Mr Middleton is in the same category as Mr Astley, in that he was an independent contractor providing services to LF through a third party company. The basis for establishing liability on his part is the pleaded assertion that he was an “employee, alternatively a consultant”. However I agree with Mr Higgins that it would be novel jurisprudence to fix a consultant with fiduciary duties since it is the very absence of exclusivity which characterises the consultancy relationship. Although a consultant can of course be a de facto director if the consultancy is a mere label which does not represent the true position (see for example Re Tasbian Limited (No 3) [1992] BCC 358) the present circumstances are very different from those in that case, where a company doctor monitored trading and controlled the company’s bank account.[65]There is no evidence, again other than Mr Anstee’s assertion that he was heavily involved in LF’s affairs, that Mr Middleton was an employee and indeed all the evidence is to the contrary.[66]In essence the claimants are asserting that the conduct of Mr Astley and Middleton was such as to breach a duty and therefore that the duty must have arisen. That is the wrong way round. I do not consider the duties to have been made out which would make Mr Astley or Mr Middleton a de facto director. Further, neither Mr Astley nor Mr Middleton was an employee of LF.[67]Ms Moss was an employee. She was not a consultant and it is not alleged that she was a de facto director. As I have said, she took no part in the trial, and no oral submissions were made on her behalf. However, having heard the evidence, I do not consider that the circumstances of her relationship with LF was such as to justify the imposition of fiduciary duties on her. In other words, I do not think that the scope and nature of her employment was such that it was reasonable to expect that she would subordinate her interests and act solely in the interests of LF: see the analysis in Nottingham University v. Fishel [2000] 1 IRLR 471 esp at 482-484. Ms Moss was the office administrator only.[68]I therefore turn to Mr Padley, who was a de jure director of LF and therefore unarguably owed a director’s duties to the company and, when it became insolvent, to its creditors. However it is stretching matters too far to allege that Mr Padley embarked on a strategy from the summer of 2009 which came to fruition in the events of March 2010. Again, I find that there was a firm distinction between the business of LF and LFS until the administration and that Mr Padley was entitled to take clients with him when he left LF.

Conspiracy

[69]The tort of conspiracy is pleaded in both its forms, conspiracy to injure by lawful means and conspiracy to cause loss by the use of independently unlawful means: see Belmont Finance v. Williams Furniture [1980] 1 All ER 393.[70]The claimants’ case is that Mr Padley and Ms Moss, and latterly Mr Astley and Mr Middleton also, aggrieved at the first claimant’s pressure for payment and decision to enforce its rights, conspired together to harm LF by abstracting its business and assets.[71]The claimants allege that all the elements needed to show lawful means conspiracy (as expounded in Revenue and Customs Commissioners v. Total Network SL [2008] UKHL 19) are made out, and all the elements needed to show unlawful means conspiracy (as expounded in Lonrho plc v. Fayed (No 1) [1992] 1 AC 448) are also made out.[72]However, it is common ground that the tort of conspiracy requires proof of damage to complete the cause of action. A broad conventional allegation that by reason of the stated facts damage has been suffered is inadequate to prove the actual pecuniary loss required in a claim for conspiracy: Lonrho v. Fayed (No 5) [1993] 1 WLR 1489 at 1494 C-D and 1501H.[73]It is clear from the replies to the defendants’ Request for Information that the remedy sought is for accounts by, and enquiries of, the defendants “of such matters”, being, “the assets and business wrongfully abstracted by the defendants”. If granted, this relief would result in an account and enquiry which would entitle the claimants to a wide-ranging examination before a Master of the defendants’ conduct, whereas it is at this trial and on proper pleadings that the tort of conspiracy must be established. It is here and now that the claimants must show that they have suffered loss as a result of the alleged conspiracy.[74]I agree with Mr Higgins that the allegations of conspiracy are not made out. First of all, as is evident from David Richards J’s judgment in McKillen, the particulars of claim must properly plead and particularise the necessary elements.[75]Secondly, under the Agreement of 3 August 2010 the claimants acquired a cause of action including losses that LF might have suffered as a result of conspiracy. It is important to remember that the sufferer is LF, not the claimants as such, and it has to be shown as a matter of causation that loss was suffered by LF.[76]It is hard to see what loss was or could have been suffered as a result of the defendants’ alleged breaches of duty. LF was a company about to go into administration and unable to service its clients. The administrators made no effort to retain the services of the consultants so LF was in no position to take advantage of the business introduced by those consultants. All the evidence was that LF’s clients would not have moved to LF when under the ownership of CoLG but would have followed the consultants they knew to LFS or elsewhere. There were no restrictive covenants preventing them from taking clients with them. It is therefore to be assumed that the price paid by CoLG for LF’s included the full value of LF’s business. LF did not suffer any loss.[77]I find that Mr Astley and Mr Middleton were entitled to leave LF and take their clients with them and to join Mr Padley in his new venture. The fact that they did so when Mr Padley told them that LF was going into administration does not make them part of a conspiracy. Nor did the assistance which Ms Moss gave to Mr Padley make her part of a conspiracy.

Conversion/money had and received

[78]The claimants allege that the defendants’ conduct falls within the test for conversion as set out in White v. Withers LLP [2009] 3 FCR 1122 at [51]. In view of the facts I have found, this claim fails also.

Passing off

[79]The three elements required to establish passing-off are: a reputation or goodwill acquired by the claimant in the goods or business, a deception or representation by the defendant leading to confusion and damage to the claimant: see Reckitt v. Colman Products Limited v. Borden Inc [1990] RPC 341, and Consorzio del Prosciutto Di Parma v. Marks & Spencer Plc [1991] RPC 351.[80]Thus the first issue is whether LF had the requisite goodwill to form the basis of a passing-off claim. Bearing in mind the nature of the business and the manner in which it was conducted I do not consider that it did. I observe in this context that the Joint Administrators’ Report of 14 May 2010 shows that on the sale to CoLPR the value attributed to the goodwill in the allocation of the sale consideration was £1.[81]Secondly, there is no evidence of confusion. All the clients who followed consultants from LF to LFS and gave evidence of fact said that it had been explained to them that LF was in administration.[82]In any event, until the administration, LFS did only non-PR consultancy work and it was formed under that name originally with the consent of LF. LFS was accordingly an existing company formed legitimately under a name which included the words “Lothbury Financial”. Thus LFS shared the goodwill of that name and any change in the ownership of part of the goodwill owned by LF could not affect the goodwill of LFS. There is no misrepresentation simply by continuing to use a name after any connection between the two companies has ceased.[83]I do not find the allegations in relation to the domain names made out. Once the administrators had been appointed and it became apparent that Mr Padley would not be retained Mr Padley, Mr Astley and Mr Middleton determined to work as PR consultants for LFS, in the hope that their clients would follow them. I am satisfied with Mr Padley’s explanation that in those circumstances as the claimants had deliberately let the domain names lapse LFS was entitled to acquire them.[84]The Agreement of 3 August 2010 assigning the administrators’ claims could not deprive LFS of the right to continue to do what it had always done, that is to use itsown corporate title. The continued use of the name is not therefore passing-off: see Habib Bank v. Habib Bank AG Zurich [1982] RPC 1. The claimants can have no claim to the goodwill of LFS through their purchase of LF.[85]It follows that no damage was caused by passing-off.[86]There is no evidence of migration of business in June 2009 (when LFS was set up) to April 2010 at all.

Ultraframe (UK) Limited v. Fielding and Ors [2005] EWHC 1638 (Ch)

[87]In Ultraframe, Lewison J exhaustively considered the principles for ordering an account. At [1588] he summarised the governing principles, as follows:
“i) The fundamental rule is that a fiduciary must not make an unauthorised profit out of his fiduciary position; ii) The fashioning of an account should not be allowed to operate as the unjust enrichment of the claimant; iii) The profits for which an account is ordered must bear a reasonable relationship to the breach of duty proved; iv) It is important to establish exactly what has been acquired; v) Subject to that, the fashioning of the account depends on the facts. In some cases it will be appropriate to order an account limited in time; or limited to profits derived from particular assets or particular customers; or to order an account of all the profits of a business subject to all just allowances for the fiduciary’s skill, labour and assumption of business risk. In some cases it may be appropriate to order the making of a payment representing the capital value of the advantage in question, either in place of or in addition to an account of profits.”
[88]He had however previously made the point (at [1583], citing the High Court of Australia in Warman v. Dwyer (1994) 128 ALR 201, that “...it was of the first importance ‘to ascertain precisely what it was that was acquired in consequence of the fiduciary’s breach of duty.’ Having considered the facts, and in particular the likelihood that the agency contract would have been terminated anyway, the court ordered an account of profits for a period of two years; less an appropriate allowance for expenses, skill, expertise, effort and resources contributed by the defendants.”[89]In the present case it is not at all clear what it is alleged was acquired in consequence of the breaches of duty alleged, other than “the business and contracts” of LF. Again, if an account were granted, the result would be an enquiry before the Master entitling the claimants to a wide-ranging examination of the defendants’ conduct and its causative effects, whereas it is for the claimants to establish precisely those matters at this hearing.[90]I have sympathy with the defendants’ reliance on Lewison J’s statement at [1580] of his judgment, “It seems to me, therefore, that one of the grounds on which an account may be withheld is that the taking of an account would be a disproportionate response to the gain that appears to have been made, or to the nature of that which has been misused.”[91]There seems little doubt that LFS used the premises of LF, its stationery and contract precedents and forms for its business, but those are precisely the kinds of matter which would make an account in this case a disproportionate response. However, in my judgment the claimants do not get that far in any event as they have not properly pleaded the gain or profit that they say has been made.[92]The claimants say that it is too late to take pleading points at trial and it does not lie in the defendants’ mouths to complain about matters of detail in circumstances where they have sought to conceal their own fraud. However the allegations of fraud are serious ones and I do not find that they have been made out.

Conclusion

[93]In conclusion therefore, I find that the claim fails.