McTear & Anor v Engelhard & Ors [2014] EWHC 1056 (Ch)

[2014] EWHC 1056 (Ch)Case No HC12C00705
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 10/4/2014
Before
RICHARD SPEARMAN Q.C.(sitting as a Deputy Judge of the Chancery Division)
Between
(1) ANDREW IAN MCTEARClaimants(2) CHRISTOPHER KENNETH WILLIAMSClaimant(1) MICHAEL CONRAD ENGELHARDDefendants(2) MARIA ELIZABETH RISBYDefendant(3) ANNA MARIE ENGELHARDDefendant(4) SYLVIA PATRICIA ENGELHARDDefendant(5) NATASHA RISBYDefendant(6) ANNA MARIE ENGELHARD AS THE PERSONAL REPRESENTATIVE OF PAUL SIEGFRIED ENGELHARD (DECEASED)Defendant(7) ENGELHARD HOLDINGS LIMITEDDefendant
Simon Davenport QC and Richard Samuel (instructed by Isadore Goldman, Lawrence House, 5 St Andrew’s Hill, Norwich) for ClaimantsJonathan Lopian (instructed by Hansells Solicitors) for DefendantsHearing Hearing dates: 5, 6, 7, 10 March 2014
JUDGMENTRICHARD SPEARMAN Q.C.:Introduction
[1]This trial concerns inter-company transactions between two companies in a group of companies, all of which were owned and controlled by members of the same family. The Claimants contend that the transactions give rise to a debt owed by the holding company to one of the subsidiaries, and to claims against the directors of the subsidiary for breaches of the duties that they owed to the subsidiary (and to its creditors). The Defendants contend the contrary, and that the Claimants are estopped from bringing these claims in any event. These claims form part of what was initially a wider dispute.[2]A number of applications were dealt with at the beginning of the trial. They are the subject of a separate judgment, which I handed down on 14 March 2014: McTear & Anr v Engelhard & Ors [2014] EWHC 722 (Ch). In sum, I dismissed the Defendants’ applications for extensions of time or for relief from sanctions in respect of the late service of both their trial witness statements and a list of additional documents, I refused to allow them to rely on one of those statements on the additional ground that it contained expert evidence for which they had not sought permission, and I refused them permission to re-amend their Defence. I also granted some of the relief sought by the Claimants in their cross-application, but I refused to strike out the Amended Defence.[3]In the result, the trial proceeded without any witnesses being called by the Defendants.[4]However, both sides had previously provided standard disclosure by lists. In addition, both sides had filed witness statements in connection with aspects of the case that were not before me at the trial. Although I was not provided with copies of these materials, it is my understanding that the exhibits to these witness statements are voluminous, and that they include a number of documents that had not been disclosed by either side. My rulings did not have the effect of excluding any documents that had previously been disclosed or these materials, so they were available for purposes of cross-examination.

The parties and the issues

[5]I set out these matters in my previous judgment. I repeat that part of my previous judgment, with a number of factual and textual modifications, for ease of reference.[6]The Claimants are the former joint administrators of Broadland Wineries Limited (“BWL”) and the former supervisors of a Company Voluntary Arrangement (“CVA”) that BWL entered into. BWL operated a winery that produced fruit and fortified British-made wines, carried out contract bottling and bag-in-box filling, and produced and bottled semi-sparkling wine. BWL went into administration on 10 March 2006 and came out of administration on 1 February 2007. BWL entered into the CVA on 18 October 2006 and the CVA came to an end on 20 November 2011. By a Deed of Assignment dated 20 September 2011, BWL’s claims in these proceedings were assigned to the Claimants, and they hold them on trust for BWL’s creditors.[7]Although BWL was sold to a third party on 20 November 2011, at all times material to this claim BWL was one of a number of companies that were owned or controlled by members of the same family. In this regard:(i) The Seventh Defendant (“EHL”) was the holding company in the group. EHL was incorporated on 26 June 1984 and is recorded at Companies House as providing Head Office services. EHL had no separate trading activity. EHL held 90% of the shares in BWL. EHL held the remaining 10% of those shares jointly with Paul Engelhard, a businessman who died on 2 December 2006, and who was chairman and managing director of EHL until his death.(ii) Paul Engelhard was married to Anna Engelhard, who has been joined as the Third Defendant in her own right and as the Sixth Defendant in her capacity as his personal representative.(iii) The First Defendant, Michael Engelhard, and the Second Defendant, Maria Risby, are the son and daughter of Paul and Anna Engelhard.(iv) Maria Risby was BWL’s company secretary, and she was also a director of EHL, but she is not relevant to the claims that are presently before me.(v) The Fourth Defendant, Sylvia Engelhard, is the former wife of Michael Engelhard.(vi) The Fifth Defendant, Natasha Risby, is the daughter of Maria Risby, but she is not relevant to the claims that are presently before me.(vii) EHL’s directors and shareholders were Paul and Anna Engelhard (who held 312,000 shares jointly), their son Michael Engelhard (who held 144,000 shares) and (as set out above) Maria Risby (who also held 144,000 shares).(viii) BWL’s directors were Paul and Anna Engelhard, Michael Engelhard (who was managing director from 1991), and Sylvia Engelhard (“the Directors”).[8]The Claimants were represented by Simon Davenport QC and Richard Samuel. EHL and the Directors were represented by Jonathan Lopian. I am grateful to all counsel for their clear and helpful written and oral submissions.[9]It is common ground that EHL did not generate any trading income. Whether and to what extent EHL provided management and head office services (“the Services”) to BWL, and, if it did so, the value of the Services are issues in the proceedings.[10]There is also an issue as to the extent to which the decision to make payments to EHL or to incur charges in respect of the Services placed the Directors in breach of duties that it is accepted that they owed to BWL, in light of BWL’s financial predicament in the period before BWL went into administration. In this regard:(i) It is common ground that the Directors’ fiduciary duties to BWL, pleaded at paragraph 5 of the Particulars of Claim and admitted by paragraph 13 of the Amended Defence, comprised: (a) a primary obligation of loyalty, (b) a duty to act honestly and in good faith in the best interests of BWL, (c) a duty not to put themselves in (or allow themselves to remain in) a position where their personal interests conflicted with their duties to BWL; and (d) a duty to report their own wrongdoing or the wrongdoing of others to BWL.(ii) It is also common ground (flowing from paragraph 27 of the Particulars of Claim, which is admitted by paragraph 37 of the Amended Defence) that (a) the Directors’ obligations in relation to the management charges extended to giving consideration in any given year as to whether or not it was in the best interests of BWL to commit itself to the incurrence of such management charges and whether it was receiving value for such management charges and (b) during the 2005/2006 financial year BWL’s financial fortunes deteriorated significantly.(iii) It is denied, however, that the Directors were guilty of breach of their fiduciary duties or of negligence, whether by applying a pro rata charge for the Services down to 10 March 2006 to the inter-company account between BWL and EHL, or by causing or permitting that charge to be made when (it is alleged) (a) there was no such value for an ailing company, (b) it was a standard and routine fee, (c) no service of an equivalent value was provided, and (d) it preferred EHL over other creditors of BWL as a whole: see paragraphs 26 and 28 of the Particulars of Claim, and paragraphs 36 and 38 of the Amended Defence.[11]Some of the claims have been settled. The remaining claims revolve around payments in the total sum of £412,739.17 that were made by BWL to EHL between the start of BWL’s financial year on 1 April 2005 and the date when BWL went into administration on 10 March 2006.[12]The Claimants contend that those payments comprised loans from BWL to EHL, and that those loans fell due upon demand, that was made at latest by service of the claim in the present proceedings. Accordingly, they claim £412,739.17 from EHL as a debt due from EHL to BWL. Among other things, in support of this claim they rely upon:(i) the way in which these payments, and that total sum, were recorded in BWL’s inter-company account with EHL;(ii) the fact that they are not aware of any documents evidencing any agreement to treat these payments in any other way, and no such documents have been disclosed by the Defendants;(iii) the facts that not only are these payments in irregular amounts but also that EHL raised no contemporary invoices in respect of any of these payments; and(iv) the fact that, prior to BWL’s insolvency, what happened is that EHL raised a charge at the end of the financial year end on 31 March for the sum of £450,000 plus VAT for the supply of the services, together with their contention that the Directors could not validly have met to approve such a charge after 31 March 2006 because by then BWL was in administration.[13]The Claimants further contend that, if BWL truly owed EHL monies, EHL should and would have proved in BWL’s administration for the sums due from BWL to EHL.[14]Instead, on 27 April 2006, the then Financial Controller both of BWL and of EHL, Richard Coleridge, sent an email to Mr McKay of the Claimants. According to the Claimants, this gave notice of an intention to make adjustments to BWL’s statement of affairs. The Claimants contend that, on the one hand, the statement of affairs was the responsibility of the Directors, but that, on the other hand, the Directors had no right to change the financial position shown in the books and records of BWL as at the date of the Claimants’ appointment as administrators. One of those adjustments was “Accrue Management Fee £424,109.58 to 10/3/2006 (DR P&L a/c / CR I/Co Engelhard Holdings)”. Mr Coleridge later made that adjustment to the SAGE inter-company account D-D176, and attributed to it the date of 28 February 2006. The effect of this was to enable EHL to recoup £412,739.17, and, as the Claimants contend, to prefer EHL over BWL’s other creditors, instead of treating EHL pari passu with them. The Claimants contend that this was done on the instructions of Michael Engelhard.[15]As against the Directors, the Claimants contend that the adjustment of £424,109.58 on 27 April 2006 was(1) a sham transaction or accounting entry,(2) a breach of the fiduciary duties that the Directors owed to BWL,(3) a breach of the duties of care that the Directors owed to BWL, and(4) an improper exercise of a management function after administration without the consent of BWL’s administrators contrary to paragraph 64(1) of Schedule B1 to the Insolvency Act 1986. The Claimants further contend that(5) by continuing to incur the charges and make the payments in question the Directors were in breach of the same duties, for the reasons summarised in paragraph 10 above. On these grounds, damages in the sum of £412,739.17 are claimed from the Directors.[16]These claims are pleaded in paragraphs 21 to 29 of the Particulars of Claim, and are the subject of paragraphs 8 to 13 of the prayer for relief in that statement of case.[17]Initially, these claims were answered by the pleas contained in paragraphs 33 to 39 of the Defence. On 7 November 2013, the Defendants served “Voluntary Particulars” of that Defence. Following protests from the Claimants’ solicitors, the contents of those “Voluntary Particulars” were inserted into an Amended Defence as a new paragraph 36A. By an Order of Master Bowles made on 24 January 2014, the Defendants were granted permission to serve an Amended Defence in that form.[18]The substance of the defences with which I am concerned, as originally pleaded, is as follows:(i) the inter-company account did not record and never had recorded a debt owed by EHL to BWL, but instead it recorded monies that had been paid by BWL to EHL on account of the accruing management charge for the Services (including payments that EHL made for and on behalf of BWL, and, according to paragraph 36A(b) of the Amended Defence, embracing “directors’ salaries and related expenses, insurances, staff welfare payments (such as health insurance), payments for use of the property (offices, reception area, car parking)”);(ii) that accruing charge was payable monthly at the rate of £37,500 per month, and this was reflected in BWL’s management accounts, which every month recorded, as part of BWL’s running costs, the sum of £37,500 (that is to say, one twelfth of the charge for the full year in the agreed amount of £450,000 (excluding VAT));(iii) as at 10 March 2006, the accrued pro-rated management charge from 1 April 2005 down to that day was £424,109.58, which sum should have been posted to BWL’s profit and loss account, thereby extinguishing any notional cash balance of £412,739.17;(iv) the adjustment that was the subject of the email from Mr Coleridge dated 27 April 2006 was simply an exercise in tidying up the accounts by posting the sum of £424,109.58 to BWL’s profit and loss account, where it should have been in the first place;(v) the Directors did not breach their duties to BWL (or at all) and no sums are recoverable from them for breach of fiduciary duty or negligent mismanagement; and(vi) it was in the best interests of BWL to commit itself to incurring the material charges for the Services, and BWL received good value for those charges.[19]The text that was inserted into the Amended Defence as a new paragraph 36A pursuant to the Order of Master Bowles made on 24 January 2014 gave particulars of the matters summarised at (i)-(iv) above. That text also made reference to two Schedules, that were attached marked “A” and “B”, and that contained breakdowns of the sums of £412,739.17 and £424,109.58.[20]There is also a plea of estoppel, contained in paragraphs 5 and 6 of the Amended Defence. In paragraph 5 of the Amended Defence it is said that the remainder of that pleading is pleaded “without prejudice” to these assertions. In sum, it is pleaded that, at all material times, the Claimants on the one hand and the Engelhard family, EHL and another Engelhard family company called Engelhard Farms Limited (“EFL”) on the other hand acted on the assumption that the account balances complained of in the Particulars of Claim were correct. Accordingly, it is said that “the Claimants are estopped from asserting that the balances on the SAGE account are other than a correct statement of the true account as between BWL and/or the Claimants on the one hand, and the Defendants on the other, since it would be unjust and/or unconscionable to allow the Claimants to go back on the above assumption”.

The witnesses

[21]The Claimants served witness statements for trial of the First Claimant (“Mr McTear”), the Second Claimant (“Mr Williams”), and Christopher McKay (“Mr McKay”). Mr McKay explained in evidence that, in 2006, he was an associate and the manager in charge of the BWL case, although he has since become a partner in the Claimants’ firm of McTear, Williams & Wood. All three are licensed insolvency practitioners. Mr McTear has specialised in business recovery and turnaround since he qualified in 1988.[22]Because Mr Lopian wanted to cross-examine all of them, they were each called at the trial. Mr Davenport submitted that each of these witnesses was entirely truthful, and that each did his best to assist the court. I did not understand Mr Lopian to submit the contrary. In any event, I accept Mr Davenport’s submission.

The background

[23]About a year prior to its administration, BWL was struggling with a debt of £800,000 owed to HMRC. By the time of the administration, BWL owed about £3.2m in excise duty. BWL had the benefit of a confidential invoice discounting facility. As a result of this indebtedness, the provider of that facility first reduced it to a point where only essential funds were made available to BWL, and ultimately appointed its own investigating accountant in February 2006.[24]The Claimants’ involvement began on 28 February 2006, when the Directors consulted Mr Williams. The Claimants took the view that, with some reorganisation, BWL could be returned to profitability, and that might be achieved through a CVA. However, there was insufficient time to put forward a CVA without the benefit of the moratorium that an administration would provide. Accordingly, in their Joint Statement to creditors dated 2 May 2006, the Claimants proposed the following exit route from administration: “It seems likely that there will be a significant dividend to unsecured creditors either by way of [BWL] being saved and entering a CVA; or by the sale of the business and assets and the subsequent liquidation of [BWL] to pay a dividend”.[25]On 21 September 2006, the Claimants put forward a proposal to creditors for a CVA. Section 11 of that proposal is entitled “Prior transactions” and included the following:(i) “We are aware of possible transactions that could result in claims arising out of the provisions of Section 238 (transactions at an undervalue), Section 239 (preferences) …”(ii) “… the Directors have not yet submitted a final statement of affairs partly because they have been taking advice concerning transactions between the Directors and associated companies and we understand that the Directors believe that no sums are due from them or associated companies. The new Directors together with the joint supervisor will review this”.[26]Appendix 2 to that proposal includes a summary of key changes in BWL’s business model. This shows how an estimated loss of £400,000 for the year ended 31 March 2006 could be converted into a forecast profit of £330,000 for the following year. One of the key changes showed a saving of £337,000 in the management charge (although there is also an entry in respect of additional management team costs of £150,000). The narrative explains:
“The saving in the management charge is a result of changing the company ownership and board. These have been replaced by a new management team”
. I heard no evidence as to whether these forecasts were met, but Mr Davenport argued that they supported the conclusion that EHL’s management charges had been excessive.[27]These proposals were accepted, and BWL carried on trading, entered into a CVA, and, in due course, was acquired by a third party. Meanwhile, unsecured creditors have received dividends amounting over time to about 42p in the £. As at 9 November 2006, according to a summary of liabilities and a list of creditors each bearing that date and each signed by Michael Engelhard, there were over 300 creditors, with total claims of over £6.8m. HMRC had the largest single claim, of over £3.5m, and the claims of the trade and expense creditors varied in size between two and six figures and amounted in total to just under £2.2m. BWL’s estimated total deficiency was then just over £3.1m.[28]It emerged in the evidence, and in particular in the cross-examination of Mr McTear, that the Claimants needed the ongoing co-operation of the Directors to put these proposals into effect, and to achieve the best outcome for the creditors of BWL. At the same time, as Mr McTear explained in evidence:
“We thought that if we locked horns with Michael Engelhard he might withdraw co-operation and the purposes of the administration might not be achieved”
. For that reason, although the Claimants had concerns from an early stage about the charges for the Services made by EHL, and about the adjustment referred to in Mr Coleridge’s email dated 27 April 2006, they did not raise them with the Directors while BWL remained subject to the CVA.[29]As it transpired, the CVA did not come to an end until 20 November 2011. Thereafter, the Claim Form was issued on 24 February 2012, and it was served, together with the Particulars of Claim, on 18 June 2012. A few days earlier, on 14 June 2012, lengthy letters before action had been sent to each of the Defendants, including details of the bases of claim that are now relied upon before me. The letters stated that the Claimants had no wish to be unreasonable “and will agree sufficiently generous extensions of time for you to consider your position and respond”. The Claimants later consented to a number of extensions for service of the Defence, and in the meantime provided copies of documents sought by the Defendants. The Defence was served on 6 November 2012.

The evidence

[30]In his witness statement, Mr McTear explains the basis of the Claimants’ claims. In addition to what is summarised in paragraph 12 above, he makes the following points:(i) Although paragraph 36A(d) of the Amended Defence pleads that “In or shortly before 2000, an agreement was reached between HMRC and BWL that £450,000 per annum would be accepted by HMRC as a legitimate trading expense of BWL, billed by EHL to BWL, and charged at £37,500 per month”, there is no evidence of this agreement in the books and records of BWL, and nor is there any evidence that the Services were charged at £37,500 per month.(ii) According to the books and records of BWL, EHL raised invoices for management charges in the sum of £450,000 (plus VAT) for the financial years ended 31 March 2004 and 31 March 2005, but at the date that BWL went into administration BWL’s double entry accounting records do not show that any management charge was levied in the financial year ending 31 March 2006.(iii) The annual invoices for the management charge do not record exactly what services were provided by EHL.(iv) Not only is there is no evidence of any agreement between BWL and EHL in respect of the provision of the Services, but also there are no board minutes or other records showing that the Directors either considered the management charge from year to year or made declarations as to their interest in the payment of the management charge by BWL to EHL. In this regard, paragraph 22 of the Particulars of Claim alleges that “The practice of BWL was to consider and approve the management charges due to EHL in the board meeting after the end of the accounting year in which the management charges were allegedly incurred”. This allegation is denied by paragraph 34 of the Amended Defence, and it was put to Mr McTear in cross-examination, and he accepted, that the Claimants could not make good that there were any such board meetings. However, the Defendants do not plead any other case as to when and how the board of directors of BWL considered and approved the management charge from year to year. In the result, the Defendants’ pleaded case seems to be that this was never done. As set out below, that is borne out by the documents.(v) The contents of the nominal ledger account marked D176 and entitled “Inter Co. Engelhard Holdings” were posted to the balance sheet of BWL as an asset as opposed to being posted to the Profit and Loss account as an expense of BWL. Accordingly, the accounting treatment of the management charges by BWL does not accord with those charges being a liability of BWL to EHL.(vi) Although paragraph 34 of the Amended Defence pleads that the management charges were due and payable in the amount of £37,500 per month, and that this sum was included in BWL’s monthly management accounts, there is no correlation between the sums that were paid by BWL and the contents of these management accounts. Specifically: (a) individual payments ranged from £200 to £46,000, (b) BWL paid £67,000 in total in August 2005 and £33,500 in September 2005, (c) between 1 June 2005 and 22 July 2005, BWL paid EHL the total sum of £253,100, (d) these payments were followed by a payment from EHL to BWL of £175,000 on 26 July 2006 (on which date BWL’s bank account with Lloyds TSB was overdrawn in the sum of £648,203.51), and (e) an analysis of the bank statements shows that BWL’s payments to EHL were made shortly after receipt of funds from BWL’s invoice financing facility.(vii) The Directors were under a duty to ensure that the Services provided by EHL were value for money and in the best interests of BWL. As the Directors had an interest in EHL, their approach “should be treated with some scepticism”.(viii) The Directors have not provided any explanation in the Amended Defence (nor, I would add, elsewhere in the documents disclosed in these proceedings) as to why the management charge continued to be incurred (without change) having regard to BWL’s liabilities in respect of excise duty and possible insolvency.[31]I was not shown any documents that contradict any of Mr McTear’s claims that matters are not evidenced by BWL’s papers and records. Further, other points that he makes are supported by various documents to which I was referred. These documents comprise:(i) An invoice dated 31 March 2003 from EHL to BWL for £450,000 plus VAT for “Cost of Management Charges for the year 1st April 2002 to 31st March 2003”. There is also a Credit Note for £50,000 plus VAT in respect of a “correction to annual Group Management Fees for the year ended 31st March 2003”, although neither side submitted that anything turned on this.(ii) Bank statements relating to BWL’s account with Lloyds TSB, which show that payments were made by BWL to EHL as set out in the inter-company nominal ledger account marked D176 and as Mr McTear describes in his evidence.(iii) The inter-company nominal ledger account D176 relating to “Inter Co. Engelhard Holdings”. This shows that on 27 April 2006, but with an attributed date of 28 February 2006, the sum of £424,109.58 was set off against the balance then shown as owing by EHL to BWL, in respect of “Man Chg to 10/03”. It also shows that two other transactions were carried out on 27 April 2006, but with attributed dates of 28 February 2006, resulting in payments by BWL to EHL in the total sum of £38,500. Finally, it shows the closing balance of £27,129.59 (that was due to BWL) was subject to “Tfr to Admin”. The difference between £38,500 and £27,129.59 is £11,370.41, which equals the difference between the sum of £424,109.58 and the claim for £412,739.17.(iv) Management accounts of BWL for the months of May 2005 to October 2005 which show management charges of £37,500 within the trading profit and loss statement and accumulating on a “year to date” basis at that monthly rate.(v) These management accounts, or some of them, also include balance sheets as at the last day of the month. These balance sheets include figures under “Current Assets” for “Amounts due from group” (that are shown as £176,254 as at 31May 2005 and £273,816 as at 31July 2005) and under “Creditors due within one year” for “Amounts due to group” (shown as £0 in both of those months).(vi) It is hard to reconcile these figures with charges for the Services being incurred at the rate of £37,500 per month. In particular, if BWL truly had an obligation to pay EHL for the Services in the total sum of £450,000 (plus VAT) that was accruing as the year progressed, and even if BWL made payments in respect of that obligation not at that rate but instead as and when EHL had need of funds, figures other than “£0” might be expected under “Amounts due to group”. For example, if £176,254 was due to BWL from the group as at 31 May 2005, but BWL had an obligation to pay £450,000 (plus VAT) to EHL that was accruing as the year to 31 March 2006 progressed, it is not obvious why the difference between those two figures should not be reflected in “Amounts due to group”. If sums paid by BWL to EHL gave rise to indebtedness on the part of EHL in respect of each sum at the time when payment was made, and BWL had no accruing obligation as the year progressed, the figures make more sense.(vii) The audited financial statements of EHL for the years ending 31 March 2005 and 31 March 2006. These include a note concerning “Related party transactions”. The note to the financial statement for the year ended 31 March 2005 states:
“During the year the company traded with [BWL], a company in which P.S. Engelhard, M.C. Engelhard and A.M. Engelhard are directors … The company provided management services to [BWL and EFL] and all transactions were conducted on an arm’s length basis and were as follows: [BWL] £450,000 (2004 £450,000)”
. The note to the financial statement for the year ended 31 March 2006 is in identical terms, save that it states that the level of the management charge was £424,110 instead of £450,000. I shall return below to the Defendants’ claim that this wording either establishes or supports their case that the charges for the Services were agreed at “arm’s length”. (viii) The detailed profit and loss accounts contained in those financial statements provides a breakdown of how the above sums were spent. In particular, directors’ salaries accounted for £302,499 (about 67%) of EHL’s turnover of £450,500 for the year ended 31 March 2005, and for £278,889 (about 65%) of EHL’s turnover of £427,658 for the year ended 31 March 2006.[32]After the Claimants were appointed, they continued to employ Mr Coleridge. As Mr McTear explained in evidence, Mr Coleridge’s main job for the Claimants was to bring BWL’s trade creditors’ records up to date. Another function of Mr Coleridge was to assist the Directors to prepare BWL’s statement of affairs. Mr McTear, Mr Williams and Mr McKay were all clear in their evidence that the preparation and contents of the statement of affairs were the responsibility of the Directors, and not of the Claimants.[33]This accords with the contents of the following contemporary documents: (i) On 27 April 2006, Tony Harrison, a Senior Administrator at McTear Williams & Wood, sent an email to Mr Coleridge, stating:
“Please find attached a statement of affairs produced directly from your trial balance sent yesterday … I understand that you were to put further entries through, but as we need to finalise our report to creditors we cannot wait any longer. If we do not hear from you by return we will have to include these as our final submission. Please bear in mind that although the statement has been drawn by us it is the director’s (sic) statement and as such they are responsible for it”. (ii) On 18 May 2006, Mr Williams wrote to Michael Engelhard: “As far as the management charges are concerned, you as directors need to decide what management charges are appropriate and apply those up to the date of administration, ie, as you say, 10 March 2006”
. In answer to questions put in cross-examination, Mr Williams said with regard to this part of this letter:
“This was to do with the preparation of the statement of affairs. It was nothing to do with matters going forward, and it was of no concern to me”. (iii) On 11 July 2006, Mr McTear wrote to Michael Engelhard: “Whilst assistance in the preparation of the company’s statement of affairs has been given by McTear Williams & Wood, the contents of such statement of affairs are entirely the director’s responsibility and that it is on information and estimates given by the directors that the statement of affairs has been compiled. To the best of your knowledge and belief the statement of affairs contains a true account of the company’s assets and liabilities”. (iv) On 1 September 2006, Michael Engelhard sent an email to Mr Williams stating “Unfortunately, as there are still some unresolved queries, I am unable to provide a signed and sworn Statement of Affairs until the middle of next week”, to which Mr Williams replied by email of the same date: “We will have to send the report in the post by Wednesday (6 Sep). It is not the end of the world if we don’t have it … better if we do. It is more important that you get the directors/intercompany accounts etc right in your own mind …”
[34]The issue of EHL’s charge for the Services was raised in correspondence with Mr Williams, initially in an exchange of emails between Mr Williams and Maria Risby on 7 April 2006, and then in Michael Engelhard’s letter to Mr Williams of 20 April 2006:
“… we have not yet resolved a number of issues … The management charges to the Holding Company up to and including the date of administration, i.e. 10th March 2006, should be paid on a pro rata basis”
. Thereafter, Mr Williams and Michael Engelhard had meetings.[35]In light of this history, although Mr McTear, Mr Williams and Mr McKay were called to give evidence in that order, it is convenient to consider first the evidence of Mr Williams.[36]In his witness statement, Mr Williams accepts that, as set out in Michael Engelhard’s witness statement dated 3 May 2013 served in connection with an application for summary judgment on a different aspect of these proceedings, he met Michael Engelhard on 25 April 2006 and 27 April 2006, and that the issue of the management charges was discussed at the second of those meetings. Mr Williams does not accept, however, that he agreed that the Claimants would pay the management charges on a pro-rata basis, or that these charges would be set off as against the sums owed by EHL, or that he arranged for these offsets to be recorded in BWL’s accounts, or that BWL’s accounts should be amended so as to record that the payments of these charges had been made in full and set off against the debts due from EHL to BWL, or that debts owed to BWL could be credited as against debts due from BWL. Mr Williams makes the points that the issue of the management charges was a matter solely for the Directors, and that at the time he and Mr McTear had not made any decision as to the alleged debt due to EHL. Mr Williams also refers to the contents of his letter of 18 May 2006, quoted above, and says that he would not have written in the terms that he did if he had made any such agreement.[37]Mr Williams’ account was not shaken in cross-examination. He pointed out that his letter of 18 May 2006 stated (accurately as he contended) that Michael Engelhard’s letter of 20 April 2006 had been “discussed briefly at our brief meeting the other day”. Mr Williams said that he did not recall the specific discussion, but that he was concerned with the administration going forward, and that he did not have much interest in the historic management charges, and did not concern himself with how those charges were made up. He said that the statement of affairs set out matters as the Directors believed them to be, that he made no judgment on that, and that when putting forward a statement of affairs the Claimants could only base it on the information that they had. Mr Williams did not think that he had said to Michael Engelhard “If I’m not happy [with the statement of affairs] I’ll let you know”, and believed that instead he would have said “You do what you like”.[38]Although he could not recall the details, Mr Williams accepted that he must have known that the management charge had been introduced into the statement of affairs, such that BWL was saying that it was owed a reduced debt by EHL. Although the Claimants knew that there was an issue over that charge, this did not cause him any concern, for two main reasons. First, it was better to be cautious vis-à-vis creditors, and better to understate the assets of BWL than to overstate them. Second, the debt would be collected in the future.[39]Mr Williams was asked a number of questions to the effect that he had looked into, considered, and evaluated the historic charges made by EHL for the services. He denied that this was so. Mr Williams accepted that neither he nor, to his knowledge, anyone else on behalf of the Claimants had raised any dispute with the Directors concerning the management charge. He said: “It’s EHL’s call as to whether to put in a proof of debt. EHL has taken its advice, and decided whether to put in a proof or not”.[40]Mr Williams was asked about BWL’s management accounts. He said that he thought that he would have looked at recent management accounts to assess whether continued trading by BWL would be profitable. Mr Williams accepted that the management accounts showed that management charges in the sum of £37,500 had been applied to the trading profit and loss statement in those accounts. For example, the net profit of £13,249 shown in respect of May 2005 had been reached after applying a charge of that amount. Mr Williams also agreed that the purpose of management accounts is to provide as accurate an appraisal as possible to the directors of the financial position of a company on a month by month basis. He said, however, that such accounts are often not very accurate, and thus fail to do this. He explained that he was interested in fact and hindsight.[41]It was put to Mr Williams that just because the management charge was not shown on BWL’s double-entry book-keeping that did not mean that the charge was not accruing. Mr Williams disagreed with this. He said: “I don’t think it is accruing, if it’s not building up on the balance sheet and the accruals. This is not a full double-entry book-keeping”.[42]Mr Williams confirmed that, in accordance with the CVA documents, the rules on set-off in relation to a liquidation applied with regard to BWL. However, he disputed that there was any justification for setting off charges for the Services against any indebtedness of EHL to BWL. Mr Williams accepted that the second sentence of paragraph 15 of his witness statement is not entirely clear or helpful. He explained that his position is that there is nothing that he is aware of that shows that any management charge has been raised: he was, and is, not aware either of accruing charges or of any invoice being raised or of any agreement (on the part of BWL) to any form of management charge.[43]Mr Williams was asked questions about the first part of paragraph 11 of his witness statement, and why he said that the books and records of BWL were not complete. But he was not challenged about the part of that paragraph in which he states that the Claimants had no control over Mr Coleridge’s input into the statement of affairs, and that they did not “give Mr Coleridge instructions to amend the books and records of BWL to take into account hitherto unrecorded payments to [EHL] in respect of management charges”.[44]Finally, in answer to questions concerning paragraph 20 of his witness statement, Mr Williams explained that this was dealing with the time when the Claimants began making distributions to creditors. He said that it was his position that no management charge had been levied, and that to the extent that he was aware that a management charge had been put in to BWL’s statement of affairs the Claimants had not formed a view on its validity.[45]I have set out parts of Mr McTear’s evidence above. The cross-examination of Mr McTear covered much of the same ground as was covered with Mr Williams, and Mr McTear’s answers were to the like effect as those of Mr Williams. They included that: (i) The Claimants did not see that the management charge had any validity, and that was the primary issue so far as they were concerned:
“I say the payments were loans. They were shown in the inter-company account as an asset of BWL … As far as I’m concerned, two things can give rise to a management charge: an invoice; or an entry in the double entry books of account”
. This was not affected by the fact that management charges were shown in the management accounts, or by anything that the auditors did after the commencement of the administration. (ii) Whether the charge for the Services was value for money was a secondary issue. (iii) The Claimants were sceptical about the management charge for two main reasons. First, because the Directors “owed allegiance” to both BWL (whose interest lay in minimising the charge) and EHL (whose interest lay in maximising it). Second, because at the time that monies were being paid (including, through the medium of EHL, in respect of salaries for the Directors), BWL was insolvent and levying any type of charge in those circumstances “[Has] got to be justified in relation to the financial position of [BWL] and its ability to meet that charge”. (iv) The Claimants “parked” the issue of the management charge because they took the view that it could wait:
“The co-operation of the directors was essential to achieve the statutory purpose of the administration. There were numerous more important issues which deserved out attention”. (v) He accepted that EHL provided some services, he understood that “the directors were paid out of EHL’s accounts”, and he knew that EHL had made no claim in the CVA. However, he also said that (a) when the issue of the management charge was first raised it was raised in connection with the statement of affairs, which was not the Claimants’ document and which they wanted to have finalised, (b) the entry in respect of the management charge was made once and “that was that”, and (c) creditors of BWL were entitled to put in claims and have them adjudicated upon, it was up to Michael Engelhard to decide whether or not to put in a claim in the CVA, and “It was not for me to tell him to do it or not to do it”. (vi) Mr Coleridge’s email of 27 April 2006 was headed “Statement of Affairs”
. This email and other correspondence after the Claimants were appointed was sent in connection with completion of the statement of affairs, which involved the Directors putting in what they considered was appropriate to show the true financial position of BWL. However, after that appointment, the Directors had no right to make adjustments to BWL’s double entry books of account, or to change the financial position of BWL, without the Claimants’ consent.[46]The cross-examination of Mr McKay was largely concerned with the Claimants’ involvement in the preparation of the statement of affairs. Mr McKay was asked, in particular, about email exchanges on and after 27 April 2006 (including Mr Coleridge’s email of 27 April 2006) and about the creation of various BWL balance sheet extracts from trial balances. Quite early in his cross-examination, Mr McKay confirmed the accuracy of the following paragraph in Mr McTear’s witness statement: “The statement of affairs is produced by reference to the accounts and financial information of BWL, and its purpose is for the directors to set out the true position of the company as they see it. The statement of affairs and its contents are entirely for the directors to produce. [Neither] I nor [Mr Williams] [nor] McTear Williams & Wood’s staff advised on the contents of the statement of affairs”.[47]Later, Mr McKay explained that matters progressed as follows:(i) the material BWL balance sheets were first produced by the Claimants using information obtained from Mr Coleridge;(ii) the draft balance sheets were then sent by the Claimants to Mr Coleridge;(iii) Mr Coleridge would then make any changes that the Directors wanted;(iv) finally, the above steps having been carried out using an Excel spreadsheet the contents of which were capable of being changed by Mr Coleridge, the Claimants used their IPS system to convert that end product into a statement of affairs.[48]Quite apart from the fact that Mr McKay struck me as a patently honest and helpful witness, this account is supported by the contemporary emails (although they are not as easy to interpret as they might be, partly due to uncertainties as to the extent to which it can be ascertained from the copies included in the trial bundles whether they were sent with attachments, and partly because some of them appear to bear dates at which they were re-printed, presumably for purposes of the present litigation). For example:(i) Mr Harrison (the assistant manager who was working with Mr McKay on the BWL matter) sent an email in the terms quoted in paragraph 33(i) above.(ii) Later on 27 April 2006, and after he had sent his email referred to above, Mr Coleridge sent Mr McKay another email concerning adjustments to the statement of affairs, including: “Now Loans = 94000 – 16500 – 22000 = £55000”.(iii) An email from Mr McKay to Mr Harrison of uncertain original date but bearing the date 19 January 2012 in the copy included in the trial bundles, has an attachment described as: “TB converted to S o A TH 26 4 06.xls”.(iv) On 18 and 19 May 2006 Mr Coleridge sent Mr McKay emails stating “Amended Statement of Affairs” and “Slightly Updated version” respectively.

Claimants’ submissions

[49]I have set out the Claimants’ pleaded case above, as well as a number of their arguments that arise from the evidence.[50]In addition to making a number of points concerning the facts, which I have incorporated into the narrative above, Mr Davenport’s closing submissions included the following:(i) The Directors’ breaches of duty were complete at the time that monies were paid away to EHL.(ii) The monies should never have been paid away when BWL was not paying, and was in no position to pay, other debts, and not least VAT. It was the failure to pay those other debts that caused the provider of the confidential invoice discounting facility to act as it did, and, in effect, resulted in BWL being starved of money.(iii) By causing or permitting the payments that were made by BWL to EHL, the Directors were paying themselves. This was wrong and unpardonable.(iv) If my understanding is correct: (a) these submissions were based on the premise that the monies constituted loans from BWL to EHL, which BWL might never get back, but (b) they also apply if, contrary to that premise and as alleged by the Defendants, the payments were made in respect of an accruing obligation to pay for the Services, in light of the points summarised in paragraphs 86 to 90 below.[51]I was referred to a number of authorities in support of these and other submissions.[52]In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd & Ors [2010] EWHC 1614 (Ch) [2010] EWHC 1614 (Ch), [2011] 1 BCLC 202, [2011] WTLR 839, Lewison J said at [25]-[27]:
“25. Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc[2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: In re Lands Allotment Co [1894] 1 Ch 616, 631; Re Duckwari plc [1999] Ch 253, 262. 26. 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 an unauthorised profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal: Bristol and West BS v Mothew[1998] Ch 1, 18. In accordance with the first facet of the obligation of loyalty it is a breach of fiduciary duty for directors of a company to exercise their powers of management and control otherwise than in good faith and in a way which they believe is in the best interests of the company: Item Software (UK) Ltd v Fassihi [2005] ICR 450. In accordance with the second and third facets, if a director of a company makes an unauthorised profit by the use of his position as a director, he is liable to account for that profit to the company, whether or not he acted in good faith: Regal (Hastings) Ltd v Gulliver[1967] 2 AC 134, 144. The precise implications of this proposition are the subject of intense debate; so I will return to it. 27. If a trustee commits a breach of trust, the beneficiary's remedy against him is a personal one. The basic rule, as stated by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns[1996] AC 421, 434 (omitting citation of authority) is: "that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed".” "that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed".”
[53]The decision of Lewison J was upheld on appeal (see Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453), and the Court of Appeal did not cast doubt on the accuracy of these passages. Indeed, they are substantially replicated at [34]-[36] and [40] of the judgment of Lord Neuberger, MR.[54]The passage from Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 to which Lewison J referred is to be found in the speech of Lord Russell of Killowen at 144-145:
“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”
[55]So far as concerns the Directors’ duty of care, Mr Davenport relied on Re D’Jan of London Ltd [1993] BCC 646, in which Hoffmann LJ said at 648 that the duty of care owed by a director at common law is accurately stated in section 214(4) of the Insolvency Act 1986, and is the conduct of:
“… a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.”
[56]Mr Davenport also referred me to Re Westlowe Storage and Distribution Ltd [2000] BCC 851, a decision of Hart J, as a robust example of a case in which a director of Company A was held liable for misfeasance (i.e. negligence) although(a) he considered that informal arrangements which in fact were to the advantage of Company B and disadvantaged Company A were of mutual benefit to both companies and(b) he acted in good faith.[57]So far as concerns paragraph 64 of Schedule B1 to the Insolvency Act 1986, this provides that neither a company in administration nor an officer of such a company may exercise a “management power” without the consent of the administrator. A “management power” is defined as “a power which could be exercised so as to interfere with the exercise of the administrator’s powers”. In short, what is prohibited is the exercise of a power which interferes with the exercise of the administrators’ powers: see Stephen, Petitioner [2012] BCC 537, Lord Glennie at [4].[58]On the topic of sham transactions, Mr Davenport relied on Snook v London and West Riding Investments Ltd [1967] 2 QB 786, Diplock LJ at 802 (omitting citation of authority):
“if [sham] has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”
[59]With regard to estoppel, Mr Davenport referred to the summary of the law that is contained in Phipson, Law of Evidence, 18th edn, at 132-141. In particular, he relied upon: (i) The following citation from Spencer Bower, Estoppel by Representation, 4th edn, para VIII.2.1:
“[An estoppel by convention] is founded … on an agreed statement of facts or law, the truth of which has been assumed, by convention of the parties, as the basis of their relationship. Where the parties have so acted in their relationship upon the agreed assumption that the given state of facts or law is to be accepted between them as true, then it would be unfair on one for the other to resile from the agreed assumption, then he will be entitled to relief against the other according to whether the estoppel is as to a matter of fact, or promissory, and/or proprietary.” (ii) The following statement in para 5-27 (omitting references to footnotes): “Several cases have considered what will satisfy this requirement [of “an agreed assumption”]. It now seems clear that a concluded agreement is not necessary. On the other hand, a mere common assumption is insufficient; the party estopped must have said or done something which had the effect of communicating to the other that he held the assumption in question, and reinforced the other's belief in that assumption. Thus, [in Wilson v Truelove [2003] EWHC 750 (Ch), [2003] 2 EGLR 63, [2003] WTLR 609] no estoppel by convention arose as a result of a common mistake as to the legal effect of one of the terms of an option, namely that it was exercisable indefinitely, when in fact, by virtue of the Perpetuities and Accumulations Act 1964 s.9(2), it was exercisable for only 21 years. It was held that: “the parties did not jointly proceed on the basis of a shared common assumption. They did no more than both enter into an agreement in circumstances in which they individually misunderstood the legal effect of one of its terms. They did not thereafter proceed jointly on the basis of that misunderstanding: things were done or not done individually, in particular by [the grantees of the option], on the basis of their own misunderstanding, and not on the basis of any encouragement, still less representations, on the part of the [grantors of the option].”
This decision has specifically confirmed the suggestions made in earlier editions of this work that estoppel by convention is distinct from estoppel by representation, because for an estoppel by convention the party bound has to communicate that he is assuming that a particular fact is true, rather than representing that the fact is true.” “the parties did not jointly proceed on the basis of a shared common assumption. They did no more than both enter into an agreement in circumstances in which they individually misunderstood the legal effect of one of its terms. They did not thereafter proceed jointly on the basis of that misunderstanding: things were done or not done individually, in particular by [the grantees of the option], on the basis of their own misunderstanding, and not on the basis of any encouragement, still less representations, on the part of the [grantors of the option].” (iii) The five conditions, set out in para 5-29, that are needed to give rise to an estoppel by representation (omitting references to footnotes):
“First, there must be a representation of fact; a mere statement of intention or promise de futuro is insufficient (this is in stark contrast to the equitable doctrine of promissory estoppel, whereby a promisor can be estopped from acting inconsistently with a promise not to enforce an existing legal obligation). A representation of law cannot give rise to an estoppel by representation. This first requirement is the one which causes most difficulties in practice and it will be considered separately later on. Secondly, the representation must be precise and unambiguous. An estoppel will arise on a document if, on its construction as a whole, it is capable of being reasonably understood in a particular sense by the person to whom it is addressed. A person cannot, however, seek the protection of an estoppel based on a statement which was induced by his own misrepresentation or concealment. Thirdly, there must have been an intention, or some conduct giving rise to a reasonable presumption of an intention, that the other party was to act in reliance on the truthfulness of the representation. Fourthly, the party relying on the representation must have acted on it to his own detriment. Fifthly, the misstatement must have been the proximate cause of the detrimentor, perhaps more strictly, of the action which caused the detriment. This requirement may be able to be restated in the form of a proposition that the representee must have relied on the truth of the representation; however, it may instead be the case that, once the representation has been proved, there is a presumption of reliance.”

Defendants’ submissions

[60]I have discussed the Defendants’ pleaded case above, and I have also referred to a number of the arguments that they advance in answer to the claims against them.[61]So far as the facts are concerned, Mr Lopian re-iterated in his closing submissions the contents of paragraphs 12-15 and 27-30 of his Skeleton Argument to the effect that, in essence:(a) the Services were provided,(b) if they had not been provided by EHL, they would have had to have been provided by BWL, and billed and booked within BWL rather than within EHL,(c) the way in which the group had operated for years was that central costs were paid out of EHL, every year EHL would make charges to BWL comprising (or, perhaps, including) a re-charge to BWL for monies expended on behalf of BWL, and it is incorrect to view the payments made by BWL to EHL as loans,(d) although the £450,000 was not entered on BWL’s SAGE system until EHL raised an invoice, which was on 31 March each year, BWL never paid EHL a lump sum of £450,000 plus VAT, but instead made payments on account as the year went along,(e) this is reflected in BWL’s management accounts, and(f) EHL’s accounts were audited every year, and contain the statements about arm’s length transactions discussed above.[62]In answer to the reliance that the Claimants place on the way in which the payments amounting in total to £412,739.17 were recorded in BWL’s inter-company account with EHL, Mr Lopian argued in his Skeleton Argument that there was an agreement pursuant to which BWL agreed to the obligations that the Defendants contend that BWL incurred:(i) At paragraph 27 he wrote: “The inter-company nominal ledger was not a record of sums loaned by BWL to EHL, but rather a record of the amounts transferred by BWL to EHL in order to enable EHL to discharge BWL’s central administration costs as and when they arose, and in return for which EHL had always levied a management charge in the fixed sum of £450,000. This fixed sum was always recorded on the nominal ledger as at the last day of the financial year. There was never any lump sum payment of £450,000 by BWL to EHL. This is because the monies that BWL paid to EHL during the course of the year were, and had always been, paid on account of the accruing management charge. There was, at least, a course of conduct by which it could be implied that BWL agreed to pay the management charge as it went along in order to provide EHL with the necessary funds to meet BWL’s costs. As stated above, the accruing management charge was always recorded in BWL’s monthly management accounts, which formed part of [BWL’s] accounting records”.(ii) At paragraph 47 he wrote: “The management charge, in the fixed amount of £450,000, had applied for many years and by a course of conduct it was an implied term of the agreement for the provision of management services by EHL that it would recharge this sum to BWL. As such, the management charge accrued during the course of the year and was never considered and then applied after the end of the financial year as alleged by Mr McTear and Mr Williams”.[63]In his closing submissions, Mr Lopian added to these arguments by referring to paragraph 33(a) of the Amended Defence. As to that:(i) First, this paragraph of the Amended Defence denies that EHL was indebted to BWL in the sum of £412,739.17 as at the date of the Claimants’ appointment.(ii) Second, this paragraph pleads (emphasis added): “[This figure] merely represented how much of the agreed annual management charge of £450,000 for the year ending 31 March 2006 had actually been paid by BWL to EHL as at 28 February 2006 on account of an agreed annual management charge of £450,00 payable monthly at the rate of £37,400 (sic)”.(iii) Third, this paragraph pleads that further particulars are set out in paragraph 36A of the Amended Defence. That in turn pleads at paragraph 36A(d) that: “In or shortly before 2000, an agreement was reached between HMRC and BWL that £450,000 per annum would be accepted by HMRC as a legitimate trading expense of BWL, billed by EHL to BWL, and charged at £37,500 per month”.(iv) Paragraph 36A contains no other mention of any agreement.(v) Mr Lopian submitted that an express contract is pleaded in paragraph 33(a).(vi) When I asked him about the details of that express contract, he accepted that there is no document which bears it out, but he submitted that it was made years ago, orally, between the same individuals acting as directors for both BWL and EHL.[64]In his closing arguments, Mr Lopian submitted in the further alternative that EHL was entitled to payment on a quantum meruit for the provision of the Services to BWL.[65]Mr Lopian also submitted that, if the payments in the total sum of £412,739.17 were not paid on account, there was nevertheless an accruing liability on the part of BWL to EHL, such that, by 10 March 2006, BWL owed EHL either £424,109.53 or such sum as was payable on a quantum meruit for the value of the Services provided down to that date, for which BWL and EHL had agreed a value of £450,000 in respect of a full year.[66]Mr Lopian further submitted, in light of the fact that the CVA incorporates the provisions of the rules relating to liquidation set-off, and because set-off operates by law, and contrary to my rulings referred to in paragraph 2 above, that(a) there was no need for the Defendants to plead set-off, and(b) he was entitled to argue that set-off applies on the existing state of the pleadings and without obtaining permission to re-amend. I have already rejected that argument in giving my earlier rulings, and I say no more about it.[67]On the question of whether EHL had a right to payment for the Services down to 10 March 2006, in particular because there had been no total failure of consideration, and irrespective of whether the year ending on 31 March 2006 had come to an end, and regardless of whether EHL had raised an invoice, Mr Lopian relied on Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574. Lord Goff said at 588:
“In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due … the fact that the contract has been brought to an end [before performance is complete] does not prevent [the promisor] from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground”
. Mr Lopian also referred me to Lord Lloyd’s speech at 597 and 599-600, which contains passages that are to the like effect.[68]On estoppel, Mr Lopian pointed out that, although the Claimants knew how the management charges were being treated by the Defendants in the documents which the Claimants saw between May and September 2006, it had been conceded by the Claimants that they had given no intimation of their concerns to the Defendants prior to 2012. He submitted that it was because nothing was said by the Claimants that EHL had made no claim in the CVA. If EHL had made a claim, it would have had to be considered properly. Either it would have been allowed, or EHL could have challenged its disallowance. In the meantime, dividends have been paid to the creditors of BWL to the extent set out above.[69]Mr Lopian submitted that this gave rise to an estoppel. He described this as an estoppel by representation, although he formulated the factors that he relied upon by reference to the judgment of Rimer J in Re Millwall Football Club and Athletic Co (1985) plc (in administration) [1998] 2 BCLC 27 at 7, which concerned estoppel by convention:(i) The Claimants, as administrators of BWL, and EHL proceeded on the basis that EHL was not a creditor of BWL.(ii) By their conduct – by being silent – the Claimants represented to EHL that they agreed to the inclusion of EHL’s management charge, and that EHL was a debtor and not a creditor of BWL.(iii) EHL relied on this in not putting in any proof of debt in the CVA.(iv) EHL had suffered detriment in that it had foregone the above dividends.[70]The material passage from the judgment of Rimer J ends by saying, by reference to other decided cases:
“the common assumption need not be of fact, but may be of law; that it must have been acted upon; and that the court will give effect to it only if it would be unconscionable not to do so”
. Mr Lopian referred to paragraphs 1065-1081 in Halsbury’s Laws of England, 4th edn Reissue, volume 16(2), for statements of the law concerning both estoppel by convention and estoppel by representation. In particular, according to paragraph 1076, for the purposes of estoppel by representation, the representation may arise by words or conduct, and “conduct” may include silence or inaction. I have had regard to the contents of all those paragraphs. I do not consider that they state the law in terms which differ materially from the statements relied upon by Mr Davenport.[71]As to paragraph 64 of Schedule B1 to the Insolvency Act 1986, Mr Lopian submitted that there had been, and could be, no contravention of these provisions in circumstances where the intention behind making the adjustments in issue had been to produce a correct trial balance, from which in turn there could be produced an accurate statement of affairs as Michael Engelhard saw it, which is what Michael Engelhard had been asked to prepare.[72]Similarly, Mr Lopian submitted that there could be no breach of fiduciary duty arising either from the payments that had been made or from the making of those adjustments. The monies had not been “paid away”, and the entries in the books and records of BWL were entirely proper. There was no evidence to support the suggestion that BWL obtained no, or insufficient, value for the charge of £424,109.53. On the one hand, Mr McTear had accepted that the Claimants had never investigated the value of the Services at any stage, and he did not even know that BWL’s directors had been paid out of the management charge. On the other hand, there were audited accounts for EHL for a number of years (in which the management charges are recorded, and as transactions agreed at arm’s length). There could be no liability if, as Mr Lopian submitted, there had been no loss to BWL.[73]Finally, Mr Lopian submitted that the Claimants had made no attempt to establish breach by each of the Directors. The Directors are not jointly and severally liable, but, on the contrary, causation has to be shown, and the loss caused by each has to be proved.[74]In support of these submissions, Mr Lopian cited the decision of the Court of Appeal in Re Simmon Box (Diamonds) Ltd [2002] BCC 82 and the decision of Park J in Re Continental Assurance Co [2001] BPIR 733 at [382]-[391].

Discussion

[75]In my judgment, the Amended Defence contains no proper pleading of either(a) an express contract, or(b) an implied contract, or(c) a case based on a quantum meruit. I consider that the references to “the agreed annual management charge” and “an agreed management charge” in paragraph 33(a) of the Amended Defence are too slender a foundation to support a conclusion that any of these alternative cases has been pleaded.[76]I also consider that, read together with the particulars of that paragraph that are given in paragraph 36A of the Amended Defence, these references appear to relate to what was agreed between BWL and HMRC. In my judgment, that does not amount to pleading an agreement between BWL and EHL, but instead sets out an allegation as to what HMRC was willing to treat as legitimate for tax purposes. I observe in passing that, as Mr McTear’s evidence points out, there is also no document that supports that allegation.[77]In particular, so far as concerns a defence based on a quantum meruit:(i) It seems clear that EHL did provide something of value to BWL in respect of the Services. Among other things, by letter dated 20 May 2006, Mr Williams expressed a willingness to pay £5,000 to EHL in respect of certain items (mentioned in Michael Engelhard’s letter to Mr Williams dated 27 April 2006), that appear likely to have comprised part of the management charges. In addition, while the Claimants’ proposals for turning BWL around suggested that the management charges could be greatly reduced, they were not reduced to nothing.(ii) At the same time, it appears on the face of BWL’s nominal ledgers marked J101, J074, J110, J412, and J413, that BWL made or may have made payments other than to EHL in respect of directors’ remuneration, staff welfare, rent, and maintenance on buildings and a yard/car park. The extent to which EHL could also properly raise charges for such matters in light of what is shown or suggested by the entries on those ledgers is unclear, and was not explored in evidence.(iii) I do not consider that it would be appropriate to take the sum of £450,000 as the basis of an award on a quantum meruit. There is no satisfactory evidential foundation for saying that this reflected the value of the Services provided to BWL in the 2005/2006 financial year (whether with or without a suitable profit element for EHL, whatever that might be), and still less for saying that the value of the Services provided down to 10 March 2006 was equal to £424,109.53.(iv) In saying that, I take into account Mr Lopian’s submission that EHL’s expenses were greater every year than its income from the management charge. However, that would not enable me to find that £450,000 in the 2005/2006 financial year, or £424,109.53 down to 10 March 2006, was what BWL should have paid EHL.(v) I did not understand the case on quantum meruit to be advanced on any basis other than by reference to the figure of £450,000. But even if that is wrong, the Defendants have not pleaded, nor adduced documentary or other evidence, nor even put in cross-examination, anything which would enable me to arrive at a quantum meruit figure for the Services that EHL provided other than by reference to that sum – for example, by upholding the charges that were made by EHL for all or any of “directors’ salaries and related expenses, insurances, staff welfare payments (such as health insurance), [and] payments for use of the property”.[78]Even if any of these cases is taken to be pleaded, there is no document which supports it. In my judgment, this is remarkable. Where an agreement or arrangement is made by the same individuals acting on both sides, and perhaps especially where they are members of the same family acting in their capacities as directors on behalf of two different companies, it may understandably be said that there is a heightened need for there to be some formal, written record, and that this might reasonably be expected. The contrary view, put forward by Mr Lopian, is that it is unrealistic to expect any such formality. Even if the latter view is right, however, I consider that it would be extraordinary for there to be no document of any kind evidencing the agreement or arrangement, especially where it endures for years and it involves sums of the magnitude in issue in this case.[79]In Warren v Mendy [1989] 1 WLR 853 an individual who was both a boxing manager and a boxing promoter made an agreement on behalf of one of the boxers he managed to fight on one of his own promotions. The agreement was expressed to be between the individual as promoter of the one part and the boxer of the other part. It was signed twice by the individual, once as promoter and once as the boxer’s authorised manager. A standard Clause relating to the boxer’s entitlement to participate in income generated from the exploitation of television rights had been entirely deleted. The Court of Appeal said that the agreement was “to say the least, an unusual document”, and suggested that the British Boxing Board of Control might well wish to consider revising the regulations which permitted a manager to act also as a promoter “in such a way that the relationship can, if it is thought to be desirable, continue to exist, but only with stringent safeguards to protect the boxer”. In the present case, the absence of any written record of agreement not only casts doubts on whether the agreement was made but also means that the terms of what is alleged to have been agreed between BWL and EHL cannot be subjected to scrutiny. In addition, there is no material that establishes or even suggests that stringent, or indeed any, safeguards were put in place by anyone to protect the interests of BWL.[80]In these circumstances, it is unsurprising that the Claimants rely upon the way in which the payments amounting in total to £412,739.17 were recorded (as an asset of BWL) in the inter-company ledger account marked D176, and contend that the correct way of viewing these payments is in keeping with their accounting treatment by BWL. In my judgment, there is nothing pleaded in the Amended Defence, reflected in the documents which have been disclosed, or contained in Mr Lopian’s submissions to outweigh that.[81]Viewed prosaically, if the Defendants chose to conduct the financial and corporate affairs of BWL and EHL without creating any record of the rights and liabilities that they now contend to have come into existence as a result of the Directors, in substance, agreeing matters among themselves, and if they instead caused or permitted the creation of books and records which paint a different picture, they cannot readily complain if the Claimants in an administration and the court at a trial take the accounting records at face value.[82]In Roger Bullivant Ltd v Ellis [1987] ICR 464, [1987] FSR 172 a departing employee took with him documents belonging to his employer or confidential information extracted from such documents, and those materials were used by him (and others) in a rival business to contact customers. Nourse LJ said that “Having made deliberate and unlawful use of the plaintiffs’ property, he cannot complain if he finds that the eye of the law is unable to distinguish between those whom he could, had he chose, have contacted lawfully and those whom he could not”. This does not mean that even where a defendant has stolen documents containing confidential information and has used those documents in soliciting orders, there is an irrebuttable presumption that any business resulting from the orders derives from the wrongful use of the confidential information. On the contrary, whether any particular business has been obtained in this manner is a question of fact in each case: see Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840. The difficulty for the Defendants in the present case, which is in my judgment entirely of their own making, is that due to the way they chose to conduct their business affairs, and in light of(a) their pleaded case,(b) the documents available at trial, and(c) the questions put to the Claimants in cross-examination, it is not possible to distinguish between charges which might have been agreed for BWL’s benefit and payments which may have been made in respect of such charges, and charges and payments which do not satisfy those criteria.[83]In my judgment, the entries made in BWL’s management accounts do not support the making of a binding agreement, and indeed highlight another difficulty in the Defendants’ case, namely the lack of certainty as to what obligations BWL is alleged to have had:(i) The thrust of Mr Lopian’s Skeleton Argument is that BWL was obliged to make such payments as were needed from time to time to put EHL in funds to meet BWL’s costs, up to a total of £450,000 (presumably plus VAT) each year, and, presumably, with an obligation on the part of BWL to make up at the end of the financial year any shortfall between the sums already paid and that total sum.(ii) The thrust of the above parts of the Amended Defence is that BWL was obliged to pay £37,500 per month to EHL (although BWL did not in fact do this).(iii) The thrust of paragraph 36A(e) of the Amended Defence appears to be a mixture of the two: “In other words, [the sum paid by BWL to EHL up to 10 March 2006] was not a debt owed. It was money paid for services and by way of recharge for monies paid out by EHL”.[84]Other parts of the Amended Defence suggest that the payments were not in fact truly made in respect of any legal obligations (accruing or otherwise) that BWL had to EHL:(i) First, as set out above, the Defendants’ pleaded case is that £450,000 was what would be accepted by HMRC as a legitimate trading expense of BWL. If such an agreement was made with HMRC, it does not follow that inter-company legal liabilities were not in contemplation or that such liabilities were not incurred. However, it suggests that the extent to which that happened would not regulate the inter-company accounting between BWL and EHL. It suggests that this agreement, rather than any accruing legal liability, is what dictated this figure.(ii) Second, paragraphs 34 and 38 of the Amended Defence plead that:
“The practice of BWL had been for some years to pay the amount of £450,000 in annual management charges to EHL” and “the fee of £450,000 had been charged for some years”
. These pleas also suggest that payments were made on a conventional basis, and not in light of accruing legal liabilities. They support the Claimants’ pleaded case that the £450,000 “was a standard and routine fee”.[85]If, contrary to the above, either the Defendants’ pleaded case or the documents or both provide a basis on which it would be right to conclude on the balance of probabilities that the entries in the nominal ledger marked D176 amounting to £412,739.17 reflect payments made by BWL in discharge of binding obligations to EHL to which the Directors had committed BWL, in my judgment the Defendants nevertheless face formidable difficulties in justifying those payments in all the circumstances of this case. Some of these difficulties have already been touched on in paragraphs 79 and 82 above.[86]It is difficult – Mr Davenport submitted impossible – to see how the Directors would have been capable of discharging their admitted duties to BWL by negotiating and agreeing the level of payments to EHL, when(a) they were acting on behalf of both BWL and EHL, and(b) there was a conflict or potential conflict between their duty to BWL and their interests as directors of EHL (who personally received the lion’s share of what was paid).[87]I am certainly unable to accept that any such agreement could properly be described as being negotiated or agreed on an “arm’s length” basis, and, accordingly, to attach weight to the claims in EHL’s audited accounts that EHL’s provision of the Services to BWL and “all transactions” between (among others) EHL and BWL were conducted on that basis.[88]Moreover, even if it is assumed that the practice adopted by BWL and EHL (as they contend, with the blessing of HMRC) was not open to objection in previous years, the position was different in the 2005/2006 financial year when BWL’s fortunes declined.[89]It forms no part of the Defendants’ case, whether pleaded or borne out by the documents, and I certainly do not accept, that the Directors considered at any time in respect of that financial year(a) whether and to what extent it was appropriate and in the best interests of BWL to commit itself to incurring a liability to pay management charges to EHL,(b) whether and to what extent BWL was receiving value for money for such charges,(c) whether they had placed themselves in a position where their duties to BWL and their own interests were or might be in conflict, and, if so, the steps that they should take to resolve that difficulty, and(d) whether EHL might be preferred over other creditors.[90]Further, three of the Directors were also directors of EHL. Accordingly, not only was EHL not dealing with BWL at arm’s length, but also it cannot be said that the directors of EHL, whose knowledge is to be attributed to EHL, did not know that this was the case.[91]In all the circumstances, I have come to the clear conclusion that the claim against EHL, and the allegations of breach of fiduciary duty and of the duty of care, are made out.[92]In sum, although I have not gone over every point that was argued, and although I have placed emphasis in the preceding paragraphs on the points that I regard as having most significance, I prefer the Claimants’ arguments to those of the Defendants.[93]Moreover, in my judgment this applies in respect of each of the Directors. Although Michael Engelhard was the person who corresponded with the Claimants, there is no suggestion in the Amended Defence, or in any of the documents to which I have been referred, that any of the Directors was more or less involved than the others in the acts or omissions which I have summarised in paragraph 89 above. It is true that, alone among the Directors, Sylvia Engelhard was not also a director of EHL. However, that is not sufficient to relieve her of liability for these breaches. The only difference between her and the other Directors is that they had an actual or potential conflict of interests, whereas while she did not have any such conflict she knew or ought to have known that they did.[94]In my judgment, the claim based on paragraph 64 of Schedule B1 to the Insolvency Act 1986 is also made out, and against each of the Directors, for the same reasons. The adjustment of £424,109.85 that was made on 27 April 2006, but attributed in the SAGE inter-company account D176 to 28 February 2006, was an improper exercise of a management power without the consent of the Claimants which interfered with the exercise of their powers. It was improper because it sought to achieve or further the outcome that EHL retained the benefit of the £412,739.17 when it had no right to do so.[95]The Claimants did not at any time consent, or do or say anything which could reasonably have been interpreted as indicating that they consented, to this adjustment in that account. In the correspondence and in the meeting that took place on 27 April 2006 the Claimants were not addressing that adjustment but were instead addressing the subject of the statement of affairs, which they made clear was the responsibility of the Directors.[96]Further, although Michael Engelhard alone corresponded with the Claimants, all the Directors had responsibility for the statement of affairs. The case that was argued before me was that from their perspective the making of this adjustment and the preparation of the statement of affairs were, in effect, two sides of the same coin. That case was presented on behalf of all the Directors. There is nothing in the Amended Defence or in any of the documents to which I was referred to suggest that only one or some of the Directors knew of and had an involvement in the “tidying up” of the accounts of BWL.[97]Subject only to the issue of estoppel, those findings are sufficient to dispose of these claims, and it is unnecessary for me to decide whether the adjustment of £424,109.58 that was made on 27 April 2006 was a sham transaction or accounting entry, and I prefer not to do so. In my judgment, it follows from the findings made above that the adjustment that was made was intended, and intended by all the Directors, to give to the Claimants the appearance of creating between BWL and EHL legal rights and obligations which were different from the actual legal rights and obligations of BWL and EHL. However, although this may be reading the words of Diplock LJ too literally, I have some difficulty in concluding that the Directors had a common intention that the adjustment was not to create the legal rights and obligations that it gives the appearance of creating.[98]Turning finally to the issue of estoppel, it seems to me that what is pleaded in the Amended Defence is estoppel by convention, whereas what Mr Lopian relied on in his Skeleton Argument and, I believe, his closing submissions is estoppel by representation.[99]At all events, in my judgment the plea of estoppel fails for the following reasons:(i) There was no agreed assumption, nor even a common assumption, that, as alleged in the Amended Defence, the balance on the SAGE inter-company account that was produced following the adjustment of 27 April 2006 was a correct statement of the true account as between BWL (and/or the Claimants) and EHL.(ii) On the contrary, the Claimants never made any such assumption.(iii) It follows from that, and is correct in any event, that the Claimants did not say or do anything which had the effect of communicating to all or any of the Engelhard family, EHL and EFL (which is not a party to the present proceedings, and which has not suffered the alleged detriment that was identified by Mr Lopian) that the Claimants held the assumption in question, and which reinforced any belief in that assumption which the Engelhard family, EHL and EFL may have had.(iv) Accordingly, there is no assumption from which it would be unfair on the Engelhard family, EHL and EFL for the Claimants to be allowed to resile.(v) Nor, if there was an agreed or even a common assumption, do I consider that it would be unconscionable for the court not to give effect to it. In this regard, and doing the best I can to give full credit for the value of the Services that were provided in the 2005/2006 financial year, in my judgment it is more probable than not that the payments which BWL ought to have agreed to make were more of the order of the greatly reduced management charges contained in the forecasts prepared by the Claimants and included in Appendix 2 to the CVA proposal of 21 September 2006. If EHL had made a claim in the CVA, and it had been accepted to that extent, EHL would have received far less than £412,739.17 in dividends. Yet, if my understanding is correct, if effect was to be given to the claimed estoppel, EHL would retain £412,739.17, and be preferred over other creditors. It is true that, if there had been an agreed assumption, and if the court did not now give effect to it, that would leave EHL disadvantaged to the extent that EHL has lost the prospect of seeking and obtaining those dividends. However, I do not consider that is unconscionable, where it is not possible to place a value on the loss of that prospect (in light of the Defendants’ pleaded case, the documents, and the Directors’ breaches of duty), and where the alternative is as I have described.(vi) The Claimants did not make any representation, whether by not objecting to the adjustment proposed by Mr Coleridge in his email of 27 April 2006, or by remaining silent during the time that the statement of affairs was being prepared and until the present proceedings were notified to the Defendants, or at all (a) that they agreed to the inclusion of EHL’s management charge in the inter-company nominal ledger account marked D176 relating to “Inter Co. Engelhard Holdings” and/or (b) that they agreed that EHL was a debtor and not a creditor of BWL. That email was headed “Statement of Affairs”. The material correspondence, and the meeting on 27 April 2006, concerned that topic, which the Claimants also made clear was a matter for the Directors, and not an agreement to that account being adjusted or an acceptance of the accuracy of what the Claimants were being told concerning the state of indebtedness as between BWL and EHL. On the contrary, the Claimants’ proposal dated 21 September 2006 contained an express, and general, reservation of the position, as set out in paragraph 25 above.(vii) Accordingly, what the Claimants said and did, and any silence on their part, related to the preparation of BWL’s statement of affairs, which was, and which they made clear that they considered to be, the responsibility of the Directors.(viii) At the very least, any representation that was made was neither precise nor unambiguous. Any other outcome would be surprising where, as both Mr Williams and Mr McTear explained, and as I have accepted to be true, they had concerns over the alleged debt due to EHL and had made no decision about it.(ix) Moreover, it is implicit in Mr Lopian’s Skeleton Argument, and was spelled out in his closing submissions, that the representation that is asserted against the Claimants is one that is said to have been made to EHL. That accords with the claims that EHL was induced by the representation not to prove in the CVA and that EHL accordingly suffered detriment. However, the Claimants’ dealings were not with EHL, but were instead with Mr Coleridge (who was helping them and, also, assisting the Directors with BWL’s statement of affairs) and with Michael Engelhard (who they were dealing with in his capacity as a director of BWL).(x) For the reasons explained in their evidence, there was no intention on the part of the Claimants, nor any conduct that could have given rise to a reasonable presumption of an intention on their part, that EHL was to act in reliance on the truthfulness of the representation that the Defendants claim to have been made.(xi) Accordingly, whether the representation was the proximate cause of EHL’s decision not to put in any proof of debt in the CVA and whether EHL suffered detriment by acting on the representation do not arise. However, these matters are neither pleaded nor borne out by any documents to which I was referred. Further, it was significantly more advantageous to EHL, and to those Directors who were also directors of EHL, to attempt to recoup £412,739.17 by making the adjustment that was made on 27 April 2006 to the SAGE inter-company account D176 than to put in a proof of debt for £424,109.58 in the CVA. In my judgment, therefore, it was probably for this reason, rather than because of reliance on any representation by the Claimants, that the decision was made to go down the route of making the adjustment rather than putting in a proof of debt in the CVA. Moreover, the detriment which EHL suffered by not putting in a proof of debt is not £412,739.17 but is instead probably a far smaller sum: see point (v) above.(xii) Finally, it appears from paragraph 1080 in Halsbury’s Laws of England, 4th edn Reissue, volume 16(2), that it is not entirely clear that unconscionability has no place in common law estoppel by representation, and if and to the extent that it may be of relevance then point (v) above applies in this context as well.

Conclusion

[100]For these reasons, there must be judgment for the Claimants on these claims. I invite Counsel to agree a form of Order if they can, but I will hear Counsel on the appropriate form of Order and on issues such as costs and permission to appeal if that is required.

Cited in 1 later judgment