Stockman Interhold SA v Arricano Real Estate Plc [2017] EWHC 2909 (Comm)

“Further, please be informed that on 25 July 2014, Stockman transferred all its shares in Assofit to Althor Property Investments Limited (copies of its constitution documents are attached as Appendix 2 hereto), a company fully owned by Stockman. Such transfer was properly authorised by the Board of Directors of Assofit (copy of the Resolution of the Board of Directors is attached as Appendix 3 hereto. In reply to the request mentioned in your aforementioned letter of 6th August 2014, we hereby confirm that such transfer took place in full compliance with applicable laws and regulations, including without limitation Article 34 of the Articles of Association of Assofit.

“I did intend and do consider it permissible applying the wording of paragraph 166 that I should be able to make further orders concerning the choice of escrow agent and the terms of the escrow arrangement. The purpose of the reservation in paragraph 166(d) was to ensure that my decision in my Second Award that Stockman should transfer its Assofit shares to Arricano was not frustrated by the Parties being unable to agree an escrow agent or escrow terms. Accordingly, I do consider that I do have jurisdiction and authority to consider Arricano’s alternative relief.”

“(1) Deposition of the Call Option Price by Arricano. “(1) Deposition of the Call Option Price by Arricano. 1. In order to retain the right to purchase the shares, by 1 January 2015, Arricano must provide evidence that it has deposited USD 51,397,260.27 (the “Call Option Price”) with an independent third party. 2. The Call Option Price shall be transferred to Stockman as soon as: i. Stockman has complied with sections (2) and (3) below; ii. Arricano’s damages claim, if any, has been finally determined by the Sole Arbitrator (section (5) below) to the satisfaction of Arricano; and iii. Stockman has transferred, or procured the transfer of, all the shares that it or its subsidiaries of any entities under its control hold in Assofit (whether directly or indirectly) to Arricano pursuant to paragraph 166(b) of the Second Award. 3. Arricano shall have no right to call for the return of the Call Option Price in the absence of a direction from the Sole Arbitrator prior to 30 June 2015, except in compliance with Section (4) paragraph 9 and Section (5) paragraph 12 below. The Sole Arbitrator shall have the right to extend this deadline at his sole discretion. 4. Arricano further confirms that it will consent to the necessary variations of the Cypriot orders to enable Stockman to transfer its shares in Assofit to Arricano. 5. Stockman and Arricano should endeavour to conclude an escrow agreement in order to facilitate the implementation of the terms of this Order.”

“For the reasons set out above, the Arbitral Tribunal hereby makes the following Award: (a) Declares that the Arbitral Tribunal: (i) does have jurisdiction and authority under paragraph 166(c) of its Second Award to make further orders and awards concerning the terms on which the Option Price is to be deposited with an independent third party; and (ii) that such orders and awards may include allowing Arricano a reasonable opportunity to examine the attributes of the Call Option Shares before the Call Option Price is released from escrow.” (a) Declares that the Arbitral Tribunal: (i) does have jurisdiction and authority under paragraph 166(c) of its Second Award to make further orders and awards concerning the terms on which the Option Price is to be deposited with an independent third party; and (ii) that such orders and awards may include allowing Arricano a reasonable opportunity to examine the attributes of the Call Option Shares before the Call Option Price is released from escrow.”

“18. As explained in Mr Tymochko’s witness statement, the negotiations with Renaissance and Emergex took place under enormous time pressure mostly between 24 and 30 December 2014. Mr Tymochko led the negotiations with Renaissance. The content of these negotiations is evidenced by the email correspondence at Exhibit C42. This consists of all the emails passing between Mr Tymochko and Renaissance for the purpose of arranging this part of the financing. In summary, Mr Tymochko managed to agree with Mr Roman Pivovar of Roden Capital Limited (“Roden”) that Renaissance would put up USD30.4 million for the benefit of Arricano for the purpose of financing the acquisition of Stockman’s shares in Assofit. The parties agreed that the money would be held by Silverioco Limited (“Silverioco”), a wholly owned subsidiary of Renaissance, and deposited on several bank accounts with Hellenic Bank in Cyprus, some in EUR and some in USD. The parties further agreed that the money would be released to Stockman upon (1) registration of the transfer of Stockman’s shares in Assofit to Arricano; (2) Arricano and Renaissance having had a reasonable opportunity to examine the attributes of Stockman’s shares in Assofit to ensure that they would generally and substantially be in the condition as of the date when the Call Option became exercisable in 2010; and (3) Renaissance, Arricano and Stockman agreeing an appropriate form of escrow agreement. Arricano undertook to pay Roden USD500,000 for arranging the USD30.4 million financing and another USD 500,000 if the deal went ahead. In exchange, Renaissance undertook to provide Arricano with a letter confirming that the USD30.4 million had been deposited on behalf of Arricano on Silverioco’s bank accounts with Hellenic Bank. 19. As also explained in Mr Tymochko’s witness statement, the negotiations with Emergex resulted in Emergex agreeing to deposit USD 21,050,000 on a bank account with J&T Banka for the benefit of Arricano for the purpose of financing the acquisition of Stockman’s shares in Assofit (50%+1 share). The details of the transaction were recorded in two parallel agreements, the Agreement on Intermediary and Financial Services dated 10 December 2014 between DRGN and Arricano dated 10 December 2014 (“the DRGN-Arricano Agreement”) (Exhibit C43) and the Agreement on Intermediary Services between DRGN and Emergex dated 26 December 2014 (the “DRGN-Emergex Agreement”)(Exhibit C44). 20 . Under the DRGN-Arricano Agreement, DRGN confirmed that it would guarantee the amount of USD21 million until 31 January 2015 and would transfer USD21 million to Emergex by 31 December 2014. In exchange, Arricano agreed to pay DRGN a service provider fee of USD500,000. DRGN further undertook to instruct Emergex to (1) issue a confirmation letter regarding the deposit of the USD21 million and to submit this letter together with the relevant bank statement to Arricano and (2) pay to Stockman the purchase price (not exceeding the amount actually transferred by DRGN to Emergex) for Stockman’s shares in Assofit as specified in a notice to be sent by Arricano and accepted by DRGN “the Payment Notice”). Clause 2.7 of the DRGN-Arricano Agreement made clear that the Payment Notice could only be accepted by DRGN if (1) Arricano and DRGN had a reasonable opportunity to examine the attributes of Stockman’s shares in Assofit to ensure that they would generally and substantially be in the condition as of the date when the Call Option became exercisable in 2010; and (2) DRGN, Arricano and Stockman could agree an appropriate form of escrow agreement. 21. Under the DRGN-Emergex Agreement, DRGN confirmed that it was willing to collect a guarantee amount of up to USD52 million to secure the acquisition of Stockman’s Assofit shares and that this guarantee amount may be paid to Emergex’s account (in one or in a number of instalments) at any time within 3 month. (sic) Emergex agreed to pay to Stockman the purchase price (not exceeding the amount actually pre-paid by DRGN to Emergex) for Stockman’s Assofit shares if and when requested to do so by DRGN. In exchange for this money, DRGN agreed to pay Emergex USD5,000. 22. As set out in the letters from Renaissance and Emergex dated 30 December 2014, the deposits will be released to Stockman subject to them agreeing with Arricano and Stockman an appropriate form of escrow arrangement. It has therefore always been intended for the unilateral deposits made by Arricano by 31 December 2014 to be provisional only and for them to be replaced with an agreement between the independent third parties and Arricano and Stockman as soon as possible…. [There then followed two paragraphs dealing with the question of the independence of the third parties.] … 25. According to paragraph 166(c) of the Second Award, Arricano was required to deposit “the Option Price with an independent third party, by 1 January 2015, on terms that it shall be released to Stockman upon registration of the transfer of Stockman’s (or its subsidiaries’ or other relevant entities’) shares in Assofit to Arricano.” 26. Accordingly, all that the Second Award required Arricano to do by 1 January 2015 was to deposit the Option Price with an independent third party. The manner in which the money was deposited had to enable it to be released to Stockman upon registration of the share transfer. This central importance of the deposit of the Call Option Price was confirmed by the Sole Arbitrator at the hearing on 26 November 2014 where he stated that Arricano had to “put up or shut up” by the Call Option deadline. By transferring the equivalent of at least USD 51,450,000 to Renaissance and Emergex by 31 December 2014 Emergex complied with this requirement.”

“14….As explained in the second witness statement of Mr Tymochko dated 25 February 2015, Arricano had to agree to pay a further USD 250,000 to extend its agreement with DRGN until 1 March 2015 (see Exhibit C45). For a further fee, a further extension until 16 March 2015 could be agreed if necessary. These are substantial costs which Arricano had to incur, and continues to incur pending resolution of the parties’ dispute, as a result of Stockman preventing Arricano from obtaining financing from ordinary sources…. The DRGN-Arricano Agreement 24. As confirmed by Mr Tymochko in his second witness statement, the DRGN-Arricano Agreement has been extended until 1 March 2015. A further extension until 16 March 2015 could be agreed if necessary.”

“89. Third, Stockman contended that a portion of the funds appear to be held to the benefit of Arricano only for a limited time. I agree that the terms of the deposit of USD 21.05m with Emergex at J&T Banka a.s are confusing. I understood from Herbert Smith Freehill’s letter dated 31 December 2014 that USD 20.05m had been deposited for an unlimited period of time or at least for a sufficient period to allow the attributes of the Option Shares to be examined pursuant to any further orders that I might make. However, Volodmyr Tymochko in his second witness statement seems to say that a further extension until 16 March 2015 of the financing provided by DRGN “could be agreed if necessary”

“3. As you are aware from the documents that have been disclosed in the arbitration, Arricano is incurring very substantial financing costs in order to keep the Option Price on deposit with Emergex and Renaissance/Silverioco. Those costs are adding to Arricano’s existing financial difficulties, which have been caused (at least in part) by Stockman’s misappropriation of the assets of the parties’ joint venture, including Arricano’s share of the profits generated by Sky Mall. Moreover, those costs have been greatly increased (and will continue to increase) by the delay in resolving this arbitration, which delay is the direct result of Stockman’s conduct in misappropriating Assofit’s assets. Given that it is likely to be some time before the Option Price is required to be released from the escrow account, Arricano proposes that it be permitted to withdraw the sums currently deposited with Emergex and Renaissance/Silverioco, and that the escrow agreement provide for Arricano to fund the escrow account in full within 60 days of the Damages Award…[sc an Award in which the arbitrator determines Arricano’s damages claim.]”

“Then I guess no need to ask me ;) ok”

“1. The previous arrangements concerning the deposit remain in place. 2. Arricano has concluded a further agreement with DRGN Limited, by which DRGN has agreed to make the funds advanced by it available until 1 September 2015. DRGN and Emergex had also entered into an Addendum to the Agreement on Intermediary Services, extending the term of that agreement. The effective date of both agreements, (copies of both of what are attached) is 1 June 2015. 3. As previously noted, Arricano’s arrangements with Renaissance are not time limited.”

“In particular, the Defendant knew that at the time of the Fifth Award the full Option Price had not been maintained in the relevant accounts but both gave the impression to the Arbitrator that the full Option price was maintained and failed to disclose that this was not in fact the case. The Defendant’s fraudulent conduct caused the Claimant substantial injustice in that it had an important influence on the Fifth Award and/or because the result would probably have been different if the fraud had not taken place.”

“31 I referred in paragraph 11 above to what I call the “paragraph 168 point”

“I reserve jurisdiction to hear a claim by [the Defendant] for damages in lieu of specific performance arising from the purported transfer of [the Claimant's] shares in Assofit to Althor Property Investments Limited and any subsequent transfer.”

“In my judgment the extent of the remission in this case has to be interpreted by reference to the order in the light of the background to that order. That background includes not only the judgment of Mr. Justice Tuckey but also of course the circumstances in which the order came to be made, as I have mentioned by agreement and without argument, and also in the light of the issues upon quantum which were raised before Mr. Justice Tuckey by the charterers’ notice of originating motion. It is clear, and it has been frankly accepted before me, that the issue now in question, that concerning the bringing into credit of the expenses which would have been incurred by the owners if the voyage to Turkey had been performed, had not been before the arbitrator at the time of his First Award, was not raised in the notice of originating motion, had not been before Mr. Justice Gatehouse at the time that he gave leave to appeal, and had not been raised or mentioned before Mr. Justice Tuckey upon the hearing of that appeal. Moreover, it is clear from the terms of the notice of originating motion that the request for remission, which it will be recalled arose by reason of the arbitrator’s misunderstanding as to the width of the matters before him, was that he had "failed to deal with all of the issues before him". It seems to me that, prima facie, a limited remission to an arbitrator will be a remission for the arbitrator to reconsider matters on the issues pleaded or otherwise (even informally) before him at the original hearing. Otherwise a remission arising out of matters before an arbitrator could be made the ground and opportunity for a party to entirely change the scope of an arbitration. It does not seem to me to matter for these purposes that an arbitrator may of course originally (i.e. on the original reference of a dispute to him), have had jurisdiction to allow in his discretion a broadening of the issues pleaded before him by way of amendment. Once, however, an arbitrator has made his award, he is functus officio, and his jurisdiction is revived only to the extent of the Court’s remission. I do not think that, prima facie, it should be thought likely that in remitting a matter to an arbitrator the Court does intend to remit to him matters which had not been pleaded nor were otherwise informally before him previously, but which could only be raised before him by way of amendment. A remission is not like an original reference. An original reference is a reference of a given dispute in general, and the arbitrator has jurisdiction in general to allow any amendment which falls within the general scope of the dispute referred. When, however, a Court remits an award to an arbitrator, it is not remitting a whole dispute, unless upon the terms of the order it expressly does so. It generally remits something narrower, and where it does so against the background of an arbitration which has already been defined by pleadings and argument before an arbitrator, it is some one or more of the issues as so defined within the scope of the reference that in general must be considered to be the subject matter of the remission. I think that this is reflected in the decision of the Court of Appeal in The Vimeira. If the Court had not expressly given to the arbitrators upon remission jurisdiction to entertain an amendment in respect of the tightness or insufficiency of the turning circle, the arbitrators would not have had jurisdiction to do so. That, it seems to me, follows from the fact that the arbitrators there did not have jurisdiction to entertain an amendment in respect of the presence of concrete blocks. It was not that there was any express disavowal in the order in The Vimeira as to jurisdiction in respect of an amendment relating to the concrete blocks; nor do I think that the express reference to jurisdiction in respect of an amendment relating to the insufficiency of the turning circle was there regarded as an implied disavowal of any further amendment. Rather it was that the question of liability in that case was remitted upon the issues that were before the arbitrators in the case, save there was an express extension in respect of the permission of an application to amend relating to the insufficiency of the turning circle. If it were otherwise there would be no limit to the jurisdiction of an arbitrator upon a matter remitted to him, save in his discretion by means of his refusal of any amendment relating to that matter. For these reasons I hold, in my judgment, that the arbitrator did not have jurisdiction to entertain the new issue relating to the hypothetical expenses upon the voyage to Turkey.”

“10 Section 11 of the Arbitration Act empowers the Court to “remit the matters referred, or any of them, to the reconsideration of the arbitrators or umpire.”

“Whether or not expenses incurred by the Respondent were in fact ‘unrecoverable’, as claimed by the appellant in its Points of Defence, or reimbursable as contended by the Respondents, should have been determined by the arbitrators. The arbitrators were required to demonstrate in their award that they accepted that the expenses were ‘unrecoverable’, or alternatively payable by the Appellant. At its lowest, the arbitrators should have demonstrated that they considered the issue of ‘unrecoverable expenses' as contended for by the Appellant.”

“When … a Court remits an award to an arbitrator, it is not remitting a whole dispute, unless upon the terms of the order it expressly does so. It generally remits something narrower, and where it does so against the background of an arbitration which has already been defined by pleadings and argument before an arbitrator, it is some one or more of the issues as so defined within the scope of the reference that in general must be considered to be the subject matter of the remission.”… … 17 These considerations apply generally to the construction of judicial orders. But there are particular reasons for giving effect to them in the context of the judicial supervision of arbitration proceedings. An arbitration award is prima facie conclusive. The Court has only limited powers of intervention. It exercises them on well- established grounds such as (to take the case arising here) the arbitrators' failure to deal with some matter falling within the submission. The reopening by the arbitrators of findings which there were no grounds for remitting and which they had already conclusively decided would therefore have been contrary to the scheme of the Arbitration Act . The terms of the order may of course in some cases be such that it must be concluded that the Court did exceed the proper limits of its functions. But it should not readily be assumed to have done so, especially when its reasons show that it has not.”

“73 Loss of right to object. (1)If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection— (a)that the tribunal lacks substantive jurisdiction, (b)that the proceedings have been improperly conducted, (c)that there has been a failure to comply with the arbitration agreement or with any provision of this Part, or (d)that there has been any other irregularity affecting the tribunal or the proceedings, he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection. (2)Where the arbitral tribunal rules that it has substantive jurisdiction and a party to arbitral proceedings who could have questioned that ruling— (a)by any available arbitral process of appeal or review, or (b)by challenging the award, does not do so, or does not do so within the time allowed by the arbitration agreement or any provision of this Part, he may not object later to the tribunal’s substantive jurisdiction on any ground which was the subject of that ruling.”

“31 Objection to substantive jurisdiction of tribunal. (1)An objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction. A party is not precluded from raising such an objection by the fact that he has appointed or participated in the appointment of an arbitrator. (2)Any objection during the course of the arbitral proceedings that the arbitral tribunal is exceeding its substantive jurisdiction must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised. (3)The arbitral tribunal may admit an objection later than the time specified in subsection (1) or (2) if it considers the delay justified.”

“68Challenging the award: serious irregularity. (1)A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3). (2)Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant—… … (g)the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy;”

“If the result would most likely have been the same despite the irregularity there is no basis for overturning an award. However, in determining whether there has been substantial injustice, the court is not required to attempt to determine for itself exactly what result the arbitrator would have come to but for the alleged irregularity, as this process would in effect amount to a rehearing of the arbitration. Instead, if the court is satisfied that the applicant had not been deprived of his opportunity to present his case properly, and that he would have acted in the same way with or without the alleged irregularity, then the award will be upheld. By contrast, if it is realistically possible that the arbitrator could have reached the opposite conclusion had he acted properly in that the argument was better than hopeless, there is potentially substantial injustice. The accepted test now seems to be that there is substantial injustice if it can be shown that the irregularity in the procedure caused the arbitrators to reach a conclusion which, but for the irregularity, they might not have reached, as long as the alternative was reasonably arguable.”

“The phrase 'directing mind and will' comes of course from the celebrated speech of Viscount Haldane L.C. in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] A.C. 705, 713. But their Lordships think that there has been some misunderstanding of the true principle upon which that case was decided. It may be helpful to start by stating the nature of the problem in a case like this and then come back to Lennard's case later. Any proposition about a company necessarily involves a reference to a set of rules. A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called 'the rules of attribution.' The company's primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as 'for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company' or 'the decisions of the board in managing the company's business shall be the decisions of the company.' There are also primary rules of attribution which are not expressly stated in the articles but implied by company law, such as 'the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company:' see Multinational Gas and Petrochemical Co. v. Multinational Gas and Petrochemical Services Ltd. [1983] Ch. 258. These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company. and having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort. It is worth pausing at this stage to make what may seem an obvious point. Any statement about what a company has or has not done, or can or cannot do, is necessarily a reference to the rules of attribution (primary and general) as they apply to that company. Judges sometimes say that a company 'as such' cannot do anything; it must act by servants or agents. This may seem an unexceptionable, even banal remark. and of course the meaning is usually perfectly clear. But a reference to a company 'as such' might suggest that there is something out there called the company of which one can meaningfully say that it can or cannot do something. There is in fact no such thing as the company as such, no ding an sich, only the applicable rules. To say that a company cannot do something means only that there is no one whose doing of that act would, under the applicable rules of attribution, count as an act of the company. The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person 'himself,' as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company? One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”

“First, was it within the scope of the duty of the officer to give notice to the other company of the information he had got; and, secondly, was it within the scope of his duty, as the officer of the company sought to be affected by notice, to receive such notice? It seems to me that that is not at all the case here. The case is very much more like the one which both Mr. Bramwell Davis and Mr. Jenkins had to admit was an exception to the general rule that they sought to lay down, for they admitted that if Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr. Wills was guilty of irregularity—a breach of duty in respect of these transactions—the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company.”

“The judge correctly analysed the various capacities in which Mr Ferdman was involved in the transaction between DLH and the Canadians. First, he acted as a broker, introducing the Canadians to DLH in return for a five per cent commission. In this capacity he was not acting as agent for DLH but as an independent contractor performing a service for a fee. Secondly, he was authorised agent of DLH to sign the agreement with Yulara. Thirdly, he was at all material times a director and chairman of the board of DLH. There are two ways in which Mr Ferdman's knowledge can be attributed to DLH. The first is that as agent of DLH his knowledge can be imputed to the company. The second is that for this purpose he was DLH and his knowledge was its knowledge.”

“87 There are three situations in which the question of attribution may arise. First, a third party may sue the company for a wrong such as fraud which involves a mental element. Secondly, the company may sue either its directors for the breach of duty involved in causing it to commit that fraud, or third parties acting in concert with them, or (as in the present case) both. Third, the company may sue a third party who was not involved in the directors' breach of duty for an indemnity against its consequences. 88 In the first situation, the illegality defence does not arise. The company has no claim which could be barred, but is responding to a claim by the third party. It will be vicariously liable for any act within the course of the relevant agent's employment, and in the great majority of cases no question will arise of attributing the wrong, as opposed to the liability, to the company. Where the law requires as a condition of liability that that the company should be personally culpable, as Lord Nicholls appears to have assumed it did in Royal Brunei Airlines , the sole function of attribution is to fix the company with the state of mind of certain classes of its agents for the purpose of making it liable. The same is true in cases like McNicholas , involving statutory civil penalties for quasicriminal acts. It is also true of cases like El Ajou where the relevant act (receipt of the money) was unquestionably done by the company but the law required as a condition of liability that it should have been done with knowledge of some matter. This will commonly be the case with proprietary claims, where vicarious liability is irrelevant. 89 A claim by a company against its directors, on the other hand, is the paradigm case for the application of the breach of duty exception. An agent owes fiduciary duties to his principal, which in the case of a director are statutory. It would be a remarkable paradox if the mere breach of those duties by doing an illegal act adverse to the company's interest was enough to make the duty unenforceable at the suit of the company to whom it is owed. The reason why it is wrong is that the theory which identifies the state of mind of the company with that of its controlling directors cannot apply when the issue is whether those directors are liable to the company. The duty of which they are in breach exists for the protection of the company against the directors. The nature of the issue is therefore itself such as to prevent identification. In that situation it is in reality the dishonest directors who are relying on their own dishonesty to found a defence. The company's culpability is wholly derived from them, which is the very matter of which complaint is made.” (2) Lords Walker and Hodge said as follows: “204 It is helpful in the civil sphere, to consider the attribution of knowledge to a company in three different contexts, namely (i) when a third party is pursuing a claim against the company arising from the misconduct of a director, employee or agent, (ii) when the company is pursuing a claim against a director or an employee for breach of duty or breach of contract, and (iii) when the company is pursuing a claim against a third party. 205 In the first case, where a third party makes a claim against the company, the rules of agency will normally suffice to attribute to the company not only the act of the director or employee but also his or her state of mind, where relevant. In this context, the company is like the absent human owner of a business who leaves it to his managers to run the business, while he spends his days on the grouse moors (to borrow Staughton LJ's colourful metaphor in PCW Syndicates v PCWReinsurers [1996] 1 WLR 1136 , 1142). Where the rules of agency do not achieve that result, but the terms of a statute or contract are construed as imposing a direct liability which requires such attribution, the court can invoke the concept of the directing mind and will as a special rule of attribution. Thus where the company incurs direct liability as a result of a wrongful act or omission of another (as in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd and McNicholas Construction Co Ltd v Customs and Excise Comrs) it is deemed a wrongdoer because of those acts or omissions. If it is only vicariously liable for its employee's tort, it is responsible for the act of the other without itself being deemed a wrongdoer and without the employee's state of mind being attributed to it. 206 In the second case, where the company pursues a claim against a director or employee for breach of duty, it would defeat the company's claim and negate the director's or employee's duty to the company if the act or the state of mind of the latter were to be attributed to the company and the company were thereby to be estopped from founding on the wrong. It would also run counter to sections 171 to 177 of the 2006 Act, which sets out the director's duties, for the act and state of mind of the defendant to be attributed to the company. This is so whether or not the company is insolvent. A company can be attributed with knowledge of a breach of duty when, acting within its powers and in accordance with section 239 of the 2006 Act, its members pass a resolution to ratify the conduct of the director. But, as this court discussed in Prest vPrest [2013] 2 AC 415 , para 41, shareholders of a solvent company do not have a free hand to treat a company's assets as their own. Further, as we have discussed, actual or impending insolvency will require the directors to consider the interests of the company's creditors when exercising their powers. This might prevent them from seeking such ratification. Similarly, where a company ratifies a breach of duty by an agent or employee, it must be attributed with the relevant knowledge. But otherwise, as the courts have recognised since at least Gluckstein v Barnes [1900] AC 240 , it is absurd to attribute knowledge to the company and so defeat its claim. 207 In the third case, where the company claims against a third party, whether or not there is attribution of the director's or employee's act or state of mind depends on the nature of the claim. For example, if the company were claiming under an insurance policy, the knowledge of the board or a director or employee or agent could readily be attributed to the company in accordance with the normal rules of agency if there had been a failure to disclose a material fact. But if the claim by the company, for example for conspiracy, dishonest assistance or knowing receipt, arose from the involvement of a third party as an accessory to a breach of fiduciary duty by a director, there is no good policy reason to attribute to the company the act or the state of mind of the director who was in breach of his fiduciary duty. If the company chose not to sue the director who was in breach of his duty, the third party defendant could seek a contribution from him or her under the Civil Liability(Contribution) Act 1978 . We have set out above why we consider that the defence of illegality is not available to a company's directors or their associates who are involved in a conspiracy against the company or otherwise act as accessories to the directors' breach of duty. Equally, there is no basis for attributing knowledge of such behaviour to the company to found an estoppel. 208 In the present case Patten LJ rightly stated that attribution of the conduct of an agent so as to create liability on the part of the company depends very much on the context in which the issue arises. He said that as between the company and the defrauded third party, the company should be treated as a perpetrator of the fraud; but that in the different context of a claim between the company and the directors, the defaulting directors should not be able to rely on their own breach of duty to defeat the operation of the provisions of the Companies Act2006 in cases where those provisions were intended to protect the company: paras 34, 35. 209 We agree. Accordingly, if, contrary to our view, the doctrine of illegality were insensitive to context and to competing aspects of public policy, the rules of attribution would achieve the same result and preserve Bilta's claim.”