Richards & Anor v IP Solutions Group Ltd [2016] EWHC 1835 (QB)

Case No HQ15X04419

[2016] EWHC 1835 (QB)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

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

Date 22/07/2016

Before

MRS JUSTICE MAY DBE

Between

(1) Paul RichardsClaimants

I P Solutions Group LtdDefendant

Mr Richard Leiper (instructed by Clyde & Co) for Claimants

Mr Chris Quinn (instructed by DMH Stallard) for Defendant

Hearing Hearing dates: 1 July, 4 – 7 July 2016

Judgment

Mrs Justice May DBE:

Introduction

[1]On 29 July 2015 the Claimants (respectively “PR” and “KP”) were summarily dismissed from their service with the Defendant (“the Company”). At the time of their dismissal PR was the CEO and KP the Sales Director; each held a 30% shareholding. Just under 9 months later, on 18 January 2016, the Company required the Claimants to transfer their remaining shareholding for the nominal sum of £1, under the “Bad Leaver” provisions of the Company’s Articles of Association.

[2]In these proceedings PR and KP challenge the legitimacy of those two events and seek relief, including a declaration that their dismissal was wrongful, damages and a further declaration that they continue to hold their shares in the Company.

Background and outline of events

[3]In 2001 the Claimants founded a business called IP Solutions (IPS). IPS was and is a unified communications provider, integrating a range of communication technologies under one umbrella solution delivered via a hosted cloud platform. The business prospered. By 2014 IPS had won a number of industry awards, employed 20 people and had an annual revenue of some £8million.

Investment – Project Spur

[4]In 2014 the Claimants decided to take their business to market, where it received considerable interest. After examining the various options open to them (e.g. outright sale to a trade buyer or part-sale with investment for further development) they entered negotiations with a private equity house, Livingbridge (“LB”). The deal became known as Project Spur. In broad terms LB was to provide investment and to become equal shareholder, with each of the Claimants, in a holding company which would acquire the shares in IPS. The deal concluded on 3 December 2014 when the Claimants sold their shares in IPS to the Company for just under £2million each, at the same time acquiring a 30% shareholding.

[5]A key component of Project Spur was the financial forecasting model constructed during negotiations and adopted as a performance tool for the purposes of the investment. The use of such models is commonplace in private equity investments, enabling the investor to track the progress of its investment and to set expectations for the value of the target business. For the purposes of the investment in this case, the model was constructed using the services of a specialist consultancy, Oakley Ltd (“Oakley”), who worked together with the Claimants and with an in-house analyst at LB, Mo Aneese (“Mr Aneese”). The Claimants provided and warranted existing sales figures and expected growth targets, around which the model was built by Oakley in conjunction with Mr Aneese. The model underwent several iterations over the course of the negotiations with the final version being incorporated into the agreement and known as “Spur 57”. Crucially, the Spur 57 model included a test for determining whether or not a management bonus would be payable in any quarter-year, as to which see further below.

[6]Upon the investment and transfer of their shares in IPS, the Claimants were appointed directors and became employees of the Company under a service agreement. A fellow founder, Andrew Lindsell (“ALind”), who had held a lesser shareholding in IPS also transferred his shares to the Company and he too became a director and employee. LB was represented on the Board by one of its senior investment managers, Paul Morris (PM”), appointed as the non-executive investor director. A further LB employee, Amy Yateman-Smith (“AYS”), was involved in overseeing the business on behalf of LB together with PM. AYS attended Board meetings but was not appointed as a director until the meeting on 29 July 2015 at which the Claimants were dismissed.

[7]The post of Finance Director at the Company was filled initially by Rory Webster (“RW”). RW’s appointment was temporary, lasting until the end of February 2015. A new Finance Director, Niall Daly (“ND”), started with the Company on 1 April 2015. An independent non-executive Chairman, Andrew Lockwood (“AL”), was located and introduced by LB and appointed to the Board with effect from 30 April 2015.

[8]The investment deal generated a voluminous quantity of contractual documentation, the vast majority of which remained unexamined by counsel before me. However certain provisions of two documents in particular were relevant to the issues which I had to decide, being the Company Articles of Association and the Service Agreements for each of PR and KP.

Company Articles of Association

[9]The Company Articles of Association agreed at the time of the investment contained specific provisions for the transfer of shares upon the event of any shareholder “leaving” the Company. Of particular relevance in this case are the following definitions and articles:

“ “Bad Leaver” means: (a) a person who ceases to be an Employee: (i) where the person terminated his contract of employment with his employing company other than in circumstances constituting him a Good Leaver (provided that sub clause (i) shall not apply to Paul Richards and/or Keith Purves and/or Andrew Lindsell); (ii) in circumstances where he is dismissed, or his employing company was entitled to dismiss him, for a reason justifying summary dismissal (other than where such circumstances would otherwise constitute a Good Leaver event); or (iii) ceases to be an Employee for whatever reason and who, whether before or after he ceases to be an Employee, was or is in breach of clause 9.1 of the Investment Agreement (undertakings by the Managers); or (b) a person who remains as an Employee but becomes entitled by reasons of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company, and who was or is whilst an Employee in breach of clause 9.1 of the Investment Agreement (Undertakings by the Managers). “Good Leaver” means: (a) a person (other than a Bad Leaver) who ceases to be an Employee where such cessation occurs for one of the following reasons: (i) that person’s death; or (ii) illness or disablement of that person giving rise to permanent incapacity to continue in employment; or (iii) the termination of that person’s employment by his employing company: (A) in circumstances that are determined by an Employment Tribunal or Court to be or amount to wrongful dismissal (and for the avoidance of doubt, this shall exclude any finding of unfair dismissal); or (B) for reasons of redundancy; or (iv) that person terminating his contract of employment with his employing company in circumstances where he has reached the age of 65 and is retiring; or (b) a person who ceases to be an Employee where the Board with Investor Consent resolves that such person is to be treated as a Good Leaver in the circumstances where such person would not, but for this provision, be a Good Leaver; or (c) an Employee (other than a Bad Leaver) who remains an employee but becomes entitled by reason of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company; together with, in each case, any other person who becomes a Leaver as a consequence thereof “Leaver” means: (a) any Employee who is a shareholder who ceases to be an Employee for whatever reason; (b) any person who becomes entitled to any shares: (i) on the death of a Shareholder (if an individual); (ii) on the receivership, administrative receivership, administration, liquidation or other arrangement for the winding up (whether solvent or insolvent) of a shareholder (if a company); or (iii) on the exercise of an option after ceasing to be an Employee; (c) any Shareholder holding Shares as a nominee for any person who ceases to be an Employee; (d) any Employee who remains an Employee but becomes entitled by reason of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company; … 17.3 Transfers in respect of Leavers Within the period commencing on the relevant Leaving Date and expiring at midnight on the date falling 9 months after such date, the Investors may direct the Company by an Investor Direction immediately to serve a written notice on a Leaver notifying him that he is, with immediate effect, deemed to have served one or more Transfer Notices in respect of such number and class of his Leaver’s Shares as is specified in the Investor Direction (the “Sale Shares”). 18. TRANSFER ARRANGEMENTS 18.1 In the event that a Shareholder is deemed to have served a Transfer Notice, the provisions of Article 19 shall apply to the Sale Shares and such Shareholder shall be obliged to transfer its shares in accordance with this Article 18 (the “Sale Price”). … 18.3 Save as otherwise set out in these Articles the Sale Price shall be: 18.3.1 in the case of a Good Leaver, the Market Value; 18.3.2 in the case of a Bad Leaver, £1 in aggregate for all the Sale Shares…” (a) a person who ceases to be an Employee: (i) where the person terminated his contract of employment with his employing company other than in circumstances constituting him a Good Leaver (provided that sub clause (i) shall not apply to Paul Richards and/or Keith Purves and/or Andrew Lindsell); (ii) in circumstances where he is dismissed, or his employing company was entitled to dismiss him, for a reason justifying summary dismissal (other than where such circumstances would otherwise constitute a Good Leaver event); or (iii) ceases to be an Employee for whatever reason and who, whether before or after he ceases to be an Employee, was or is in breach of clause 9.1 of the Investment Agreement (undertakings by the Managers); or (b) a person who remains as an Employee but becomes entitled by reasons of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company, and who was or is whilst an Employee in breach of clause 9.1 of the Investment Agreement (Undertakings by the Managers). “Good Leaver” means: (a) a person (other than a Bad Leaver) who ceases to be an Employee where such cessation occurs for one of the following reasons: (i) that person’s death; or (ii) illness or disablement of that person giving rise to permanent incapacity to continue in employment; or (iii) the termination of that person’s employment by his employing company: (A) in circumstances that are determined by an Employment Tribunal or Court to be or amount to wrongful dismissal (and for the avoidance of doubt, this shall exclude any finding of unfair dismissal); or (B) for reasons of redundancy; or (iv) that person terminating his contract of employment with his employing company in circumstances where he has reached the age of 65 and is retiring; or (A) in circumstances that are determined by an Employment Tribunal or Court to be or amount to wrongful dismissal (and for the avoidance of doubt, this shall exclude any finding of unfair dismissal); or (B) for reasons of redundancy; or (a) any Employee who is a shareholder who ceases to be an Employee for whatever reason; (b) any person who becomes entitled to any shares: (i) on the death of a Shareholder (if an individual); (ii) on the receivership, administrative receivership, administration, liquidation or other arrangement for the winding up (whether solvent or insolvent) of a shareholder (if a company); or (iii) on the exercise of an option after ceasing to be an Employee; (c) any Shareholder holding Shares as a nominee for any person who ceases to be an Employee; (d) any Employee who remains an Employee but becomes entitled by reason of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company; 18.1 In the event that a Shareholder is deemed to have served a Transfer Notice, the provisions of Article 19 shall apply to the Sale Shares and such Shareholder shall be obliged to transfer its shares in accordance with this Article 18 (the “Sale Price”). 18.3 Save as otherwise set out in these Articles the Sale Price shall be: 18.3.1 in the case of a Good Leaver, the Market Value; 18.3.2 in the case of a Bad Leaver, £1 in aggregate for all the Sale Shares…”

The Claimants’ Service Agreements

[10]The Claimants were each employed by the Company under identical service agreements which included the following provisions:

“3. DUTIES OF THE EXECUTIVE 3.1 The Executive shall faithfully and diligently discharge such duties as are normally required of a person holding the post occupied by the Executive from time to time including, without limitation, the duties set out in Part 10 Companies Act 2006 to the extent in force from time to time, and such other duties as are from time to time assigned or delegated to him by the Board, in a professional and competent manner and in a willing co-operation with others. … 3.4 The Executive may be required without being entitled to further remuneration to hold office as a director of the Company and/or of any other Group Company and to undertake such duties as the Board may direct for any other Group Company by way of partial or complete and temporary or permanent secondment to it. 3.5 The Executive shall during the Employment obey all lawful and reasonable instructions of the Board and use his reasonable endeavours to promote and further the interest of the Company and the Group and shall except during holidays and periods of absence due to ill health devote his full working time and attention to the performance of his duties. 3.6 The Executive shall keep the Board properly and fully informed (in writing if so required by the Board) of his conduct of all business on behalf of, and any actual, potential or maturing business opportunity enjoyed by, the Company and any other Group Company and (in writing if so requested) all information, advice and explanations as it may reasonably require in connection with matters relating to his employment or directorship under this Agreement) and shall give the Board all such information as to the affairs of the Company and the Group as it shall require. 3.7 The Executive shall at all times comply with the codes, policies, procedures and rules of the Company and any other Group Company (including but not limited to the Company’s anti-corruption and bribery policy) and or any association or professional body to which the Company and any other Group Company and/or the Executive may from time to time belong. … 6. REMUNERATION AND BENEFITS 6.1 Salary During the Employment the Executive shall be entitled to a salary of £200,000 per annum… 6.2 Bonus 6.2.1 The Executive shall be eligible to receive a bonus of £32,750 in respect of each Bonus Period, subject to: 6.2.1.1 no interest that is due to be paid by the Company on any of the Loan Stock in issue during the relevant Bonus Period being outstanding at the end of such Bonus Period; and 6.2.1.2 the Group generating Surplus Cash during the relevant Bonus Period as follows: Bonus Period Surplus Cash (£) 1st Bonus Period 100,000 2nd Bonus Period 200,000 3rd Bonus Period 300,000 4th Bonus Period 400,000 6.2.2 Not later than 14 days after the Group management accounts for the relevant Bonus Period are approved by the Board and the Finance Director has certified in writing that the Surplus Cash is not less than the amount stated against the relevant Bonus Period in the table at clause 6.2.1.2 above, the Company shall notify the Executive of his bonus entitlement relating to that Bonus Period and the bonus shall be paid to the Executive as part of the next monthly payroll. 6.2.3 Where the Executive ceases to be an employee part way through a relevant Bonus Period, he shall be entitled to a pro-rata amount of the bonus that would otherwise have been paid to him, calculated as the proportion of the relevant Bonus Period represented by the number of days during that relevant Bonus Period on which he was an employee provided that, where he is paid in lieu of notice, he shall be deemed to have worked the full amount of his notice period for these purposes. Such bonus payment shall be made to the Executive in the same way as if he was still an employee. 6.2.4 The payment of a bonus to the Executive in respect of any one Bonus Period does not guarantee payment of a bonus in any subsequent Bonus Period. 6.2.5 The first bonus payable to the Executive shall be in respect of the Bonus Period ended 28 February 2015. …. During the Employment the Executive shall be entitled to a salary of £200,000 per annum… and …. 7. EXPENSES 7.1 The Company shall subject to clause 7.2 repay to the Executive all travelling, hotel, entertainment and incidental expenses reasonably and properly incurred by him in the performance of his duties. 7.2 The Executive shall comply with the Company’s rules and procedures in force from time to time as to the vouching and payment of expenses. … 14. TERMINATION OF AND SUSPENSION FROM EMPLOYMENT 14.1 Without prejudice to clause 14.2, the parties shall be entitled to terminate this agreement by giving notice in accordance with clause 2.2. 14.2 Notwithstanding clause 14.1, the Company may by written notice to the Executive forthwith terminate the Employment without being under any obligation to pay further remuneration or provide further benefits to the Executive or pay in lieu of notice but without prejudice to the other rights of the Company if any of the following events shall occur: 14.2.1 the Executive shall be guilty of any material or persistent breach of this Agreement and, where capable of remedy, has been given notice such breach but has failed to remedy such breach; 14.2.2 the Executive shall commit a material breach of a material statutory duty; 14.2.3 the Executive shall be guilty of gross misconduct in the course of his employment or other conduct which in the reasonable opinion of the Board affects prejudicially the interests of the Company or the Group whether or not such misconduct or other conduct occurs in the course or in the context of the Employment; … 14.2.10 commits any other act justifying summary termination at common law; …” …”

and

[11]As appears from the contractual provisions set out above, the Claimants’ remuneration consisted in each case of a base salary of £200,000, with a bonus of £100,000 payable in quarterly instalments. PR and KP were eligible to be paid this bonus only upon the business generating a certain level of “Surplus Cash” in the quarter. “Surplus Cash” was defined as: “The net amount of cash generated by the Group as prepared under FRS1, after payment of any bonuses to be made by the Company to its employees (including directors) for any Bonus Period, as calculated in accordance with the formula behind row 47 of [the Spur 57 model]” (my emphasis) The correct operation of the Spur 57 model was thus critical not only in setting expectations for performance and growth of the Company, but also in establishing whether or not there was sufficient free cash within the business to permit a bonus to be paid in any quarterly period.

Events leading to payment of the Q1 bonus

[12]The first quarter following the investment fell in the period December 2014 to February 2015 (“Q1”). Towards the end of February 2015 RW produced a finance report to be included in the Board Pack for the Board Meeting due to take place on 26 February 2015. The table of accounts drawn up by RW and included in the report showed a projected cash surplus in Q1 of £112,000 leaving, as the report put it, “headroom” against the eligibility test for the payment of the quarter’s bonuses.

[13]On 24 March 2015 PR called PM. The call went through to voicemail whereupon PR left this message:

“Just giving you a call about the quarterly bonus to check the formula for working it out. I know originally it was £100k and then it got changed so it goes through PAYE. So it was to be grossed up. So just need to let Omair [Hashim, the financial controller at the Company] know what it was so if you would let me know that would be great. Give me a call or drop me a text.”

PM responded the same day by email:

“Just got your message. I attach the spreadsheet used by PWC when we considered how the business should be paid. As you see this is done via payroll with the appropriate deductions. Assuming 45% income tax the annual gross payment would be circa £131k”

Assuming 45% income tax the annual gross payment would be circa £131k”

[14]Later that day PR forwarded this email to Omair Hashim (“OH”), the Company financial controller and bookkeeper, copied to KP and ALind, asking OH to put the amount of the bonuses, grossed up to allow for tax, through the March payroll. That was done and the bonuses were paid.

[15]At the Board Meeting on 30 April 2015 ND was asked to prepare a cash flow extract to be attached to the minutes recording the payment of the Q1 bonuses. There followed a protracted period during which ND’s work on the model generated a number of different results. However, by 9 June 2015 ND’s calculations, albeit that he was continuing to make adjustments to the figures, confirmed that the bonus test run in accordance with the Spur 57 forecasting model had not, after all, been met for Q1.

[16]In the meantime, PM and LB were becoming concerned at the performance of the business against the Spur 57 model predictions. The revenue targets which the model had forecast at the time of the sale were not being met. It had become necessary to embark on a re-forecasting exercise. Internal emails within LB reveal that there was dissatisfaction with the founder directors, particularly PR. The new non-executive chairman, AL, met with some resistance from PR and KP to his interventions in, and suggestions for, the management of the business. PR and KP, on the other hand, saw encouraging sales figures developing in the business, with a growing book of new customers, and were increasingly concerned that the application of the Spur 57 model appeared to be denying them a reward for their efforts in the form of a bonus.

[17]There was a meeting between PM, PR and KP on 15 June 2015 to discuss the bonus issue, amongst other matters. PM resisted any change to the existing bonus arrangement. However PR and KP’s dissatisfaction with the bonus position remained and PR continued to press for a resolution. ND’s recalculations continued to show that Q1 was a confirmed fail against the contractual test; the Spur 57 model predictions for the remaining quarters were at that stage still a work in progress.

[18]On 1 July 2015 the first Remuneration Committee meeting (“the Rem Co meeting”) took place. It will be necessary to discuss the detail of that meeting at greater length later in this judgment, at this point it is enough simply to say that there were robust differences of view, with PM insisting upon no change to the terms of PR and KP’s service agreements relating to their eligibility for any bonus payment. There is a factual dispute about whether PR and KP had by this time made any offers regarding repayment or off-setting of their Q1 bonuses, to which I shall revert in due course.

[19]PR in particular continued to view the surplus cash/bonus issue as a matter needing resolution; throughout June and July he regularly pressed for further discussion concerning the operation of the Spur 57 model. Within LB, however, plans were being progressed to remove PR, and later also KP, from the business.

Dismissal – 29 July 2015

[20]PM, AYS and AL planned ahead for the dismissal. The 29 July Board Meeting was convened at a venue away from the Company’s offices, on the pretext of going out to dinner afterwards. At the start of the meeting AYS was appointed a director whereupon AL moved to dismiss PR and KP with immediate effect. The motions were carried by a majority of 3:2, ALind voting in each case with his founder colleagues in favour of their retention. Following the vote PR and KP were each presented with a letter of dismissal, their company phones and IT equipment were taken from them and they were not allowed back into the company offices. There is a recording of part of the proceedings at that Board Meeting as ALind, upon realising what was happening, proceeded to record events on his mobile phone. The transcript reveals the shock and disbelief on the part of PR and KP in their reaction to events. It was clearly a bolt out of the blue for each of them.

[21]The dismissal letters were written in identical terms, signed by AL, and read as follows:

“I am writing to inform you that [the Company] is terminating your employment summarily with immediate effect on the grounds of serious breaches by you of your duties as an employee and a director. In summary, the reasons for this are [there was then set out particulars of complaints relating to the receipt and retention of bonus monies in March and behaviour characterised as “defiance, evasiveness and the promotion of your own interests ahead of the Company’s interests or those of other shareholders or employees”, before continuing] … The Company cannot permit directors to breach their duties in this way and will not permit you or any other person to treat the Company’s funds as their own to do with as they wish. Your employment is being terminated immediately without notice, payment in lieu of notice, or compensation. … The Company reserves its right against you generally and in particular in relation to: 1. Commencing proceedings against you to recover the Sum Due, plus interest and costs; 2. Reporting your conduct to the relevant authorities under the Company Directors Disqualification Act 1986; and 3. Reporting your misappropriation of Company funds to the police”

The Company reserves its right against you generally and in particular in relation to:

[22]The epilogue to this abrupt dismissal came some months later. By letter dated 18 January 2016, solicitors acting for the Company wrote to each of PR and KP notifying them that their 30% shareholding was to be transferred to the Company for £1 under the “Bad Leaver” provisions of their service agreements.

[23]Proceedings were issued on 23 October 2015. Amended Particulars of Claim dated 4 March 2016 were served following the above notification of share transfer.

The issues

[24]The List of Issues prepared for trial was lengthy. By the time of closing argument, however, the matters for determination had distilled into two main questions:(1) Were the Claimants wrongfully dismissed? In other words, was the Company entitled summarily to dismiss each Claimant on 29 July 2015?

(2) If the Company was entitled summarily to dismiss the Claimants (or either of them), was the Bad Leaver provision a penalty and therefore of no effect?

Issue (1): Was the dismissal wrongful?

[25]Mr Quinn, for the Company, submitted that the Company was entitled to dismiss the Claimants for gross misconduct and/or breach of their duties as directors and/or breach of the implied duties of trust and confidence owed by employees. The breaches in each case, he said, were to be found in the following actions of the Claimants:(1) Their receipt, and then retention, of the sum of £32,750 in March 2015, being the Q1 bonus payment to which they were not entitled; and/or

(2) Making threats to favour their own short-term interest in obtaining a bonus over the longer-term interests of the Company and its shareholders; and/or

(3) Claiming expenses for items of personal, rather than business, expenditure.

The origin of the duties owed to the Company by the Claimants

[26]The duties of the Claimants, and the right of the Company summarily to dismiss them are to be found at clauses 3 and 14 respectively of their Service Agreements, set out above.

[27]The duties under the Companies Act 2006 referred to at clause 3.1 of the Service Agreement and relied upon by the Company are to be found at Part 10, paras 170-176, the following being the particular provisions drawn to my attention and relied upon by Mr Quinn:

“170 Scope and nature of general duties (1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company. (2) A person who ceases to be a director continues to be subject— (a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and (b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director. To that extent those duties apply to a former director as to a director, subject to any necessary adaptations. (3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director. (4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties. (5) The general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles so apply. 171 Duty to act within powers A director of a company must— (a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred. 172 Duty to promote the success of the company (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others … (f) the need to act fairly as between members of the company. … 175 Duty to avoid conflicts of interest (1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. (2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity). (3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company. (4) This duty is not infringed— (a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or (b) if the matter has been authorised by the directors. (5) Authorisation may be given by the directors— (a) where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or (b) where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution. (6) The authorisation is effective only if— (a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and (b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted. (7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.”

A director of a company must—

[28]Mr Quinn also drew my attention to the ordinary duty of trust and confidence implied into all contracts of employment (the classic exposition of which is set out by the House of Lords in Malik v. BCCI

[1998] AC 20

[29]Although I was referred to each of the various different duties owed by the Claimants to the Company as employees and directors, as I understood it Mr Quinn’s argument came into focus around the statutory duties owed by directors under the Companies Act, set out above. The reason for this became clear as Mr Quinn developed that argument in closing: his case was that the director’s duties imposed, in effect, a strict liability on the Claimants under clause 14.2.2 of the service agreement.

Meaning and effect of clause 14.2.2

[30]Mr Quinn submitted that the Claimants’ actions constituted a breach or breaches of their duties as directors under the Companies Act 2006 (which themselves mirror long-standing case-law as to the nature of fiduciary duties owed by directors, discussed for instance in the well-known authority Regal Hastings v Gulliver [1967] 2 A.C. 134). He argued that the breaches fell to be considered under clause 14.2.2 of the Claimants’ service agreement as “material breaches of a material statutory duty”. Mr Quinn argued that the reference to “material” in clause 14.2.2 was to be understood simply as “relevant”. His position was that a relevant breach of a relevant statutory duty was all that was required to give the Company the option of summary termination of the employment contract, with all the consequences (under e.g. the Bad Leaver provision in the Company’s Articles) that followed such termination. It followed that there was no place for considerations of intention, bona fides, or context, or for any of the surrounding circumstances to be examined save only as necessary for the determination of whether or not there had been a breach. If there had, he argued, then the Company was entitled summarily to dismiss, without more.

[31]Mr Leiper in response drew attention to the difference between duties accompanying an appointment as director, and terms of employment. The two are distinct, he submitted: the statutory and well-known common law duties on a director are strict and afford maximum protection to a company, as is right. The Service Agreement, however, regulated the terms of the Claimants’ employment with the Company. Employment and directorship are distinct roles. It was not right, argued Mr Leiper, and not what the parties can have intended, that the director’s duties should be enforced in their full rigour against the Claimants in their capacity as employees in a way that would entitle the Company to dismiss them forthwith and to take their shareholding for £1.

[32]With this in mind, Mr Leiper made two points on construction. His first was to argue that clause 14.2.2 does not cover breach of director’s statutory duties under the Companies Act 2006. He submitted that since director’s duties under that Act are specifically incorporated as terms of the Service Agreement under clause 3.1, breaches of those duties are to be treated as breaches of terms of the contract for the purposes of clause 14.2. Clause 14 provided a complete code, he suggested, for events which would give rise to summary dismissal with each sub-clause covering separate and distinct activities giving rise to breach. If certain actions were covered by one sub-clause therefore, they were excluded from another. As directors’ duties under the Companies Act 2006 had been specifically incorporated as terms of the agreement they could only be covered by clause 14.2.1 and not by clause 14.2.2. Mr Leiper further submitted that under clause 14.2.1 “material” is to be contrasted with “persistent”, which must, he suggested, relate to minor breaches. In clause 14.2.1, therefore, material connotes a significant, as opposed to a minor, breach. Under clause 14.2.1, the Company could only exercise the right to immediate termination in respect of a remediable breach once the executive had been notified of the breach and given an opportunity to correct it.

[33]Mr Leiper’s second point was that, even if clause 14.2.2 did cover a breach of directors’ duties under the Companies Act, what might otherwise be the strict effect of the clause is mitigated by use of the word “material”. He submitted that, on its proper construction, use of the word “material” was intended to qualify the breach, requiring it to be significant before the right to dismiss was engaged. The word “material” in clause 14.2.2, Mr Leiper argued, bears the same meaning as it does in the previous clause 14.2.1. Requiring that a breach be material in the sense of significant necessarily engages an analysis of context and circumstances for the purposes of deciding whether the breach is sufficiently serious as to warrant immediate termination. The effect, Mr Leiper suggested, is to bring to bear the same objective assessment to the circumstances of a breach of a director’s duty as that involved in considering whether a particular act or series of acts amounts to gross misconduct.

[34]What constitutes gross misconduct by an employee will vary according to the nature of the employment and the circumstances under which the particular behaviour is said to have occurred. The test is unhelpfully, but necessarily, circular: gross misconduct is behaviour which is such as to so wholly undermine the relationship of trust and confidence between employer and employee that it justifies the employer in treating the contract as repudiated.

[35]In Williams v. Leeds United Football Club

[2015] IRLR 383

Lewis J summarised the approach as follows (at para 53): “In general terms in assessing the seriousness of any breach, it is necessary to consider all the relevant circumstances including the nature of the contract and the relationship it creates, the nature of the contractual term that has been breached, the nature and degree of the breach and consequences of the breach… In the context of contracts of employment, relevant circumstances include ‘the nature of the business and the position held by the employee’: see Jupiter General Insurance Co Ltd v. Shroff

[1937] 3 All ER 67

per Lord Maugham. The opinion of the Privy Council in that case recognises that immediate dismissal is, as Lord Maugham expressed it, a ‘strong measure’ and there needs to be careful consideration of the evidence to determine whether the conduct is such as to amount to a repudiatory breach entitling the employer to dismiss the employee without notice”.

[36]So far as Mr Leiper’s first point is concerned, I do not read clauses14.2.1 and

14.2.2 as mutually exclusive in the way for which he contends; in my view it is likely that the parties intended any breach of an employee’s director’s duties under the Companies Act to be considered and treated separately and to omit from that consideration any requirement that a director be notified and given an opportunity to correct a breach before the entitlement to dismiss would be engaged: a requirement for prior notification would be inconsistent, it seems to me, with the nature of the fiduciary responsibilities assumed by directors, which incorporate a necessary “self-policing” element.

[37]I do, however, accept Mr Leiper’s second point. Summary termination of employment is recognised as an exceptional step to take (see the observations of Lord Maugham in the Jupiter General case, above). If the parties had intended to create the strict liability leading to immediate dismissal for which Mr Quinn contended then there would have been no purpose to the inclusion of the word “material” in clause 14.2.2. Indeed Mr Quinn was obliged to submit that the word was otiose. In my view Mr Leiper is right in saying that the word “material” was intended by the parties to qualify the nature of the breach of statutory duty which could give rise to summary termination of the employment relationship. I also agree that “material” in this context must mean the same as in clause 14.2.1, i.e. significant.

[38]With that construction of clause 14.2.2 in mind, I turn to consider whether the breaches relied upon by Mr Quinn were significant. Ground (1) - obtaining and retaining the Q1 bonus Obtaining the bonus in March

Ground (1) - obtaining and retaining the Q1 bonus

[39]Mr Quinn’s case is that the actions of PR and KP in obtaining payment to themselves of the Q1 bonus was gross misconduct, being a breach of clause 6.2 of the Service Agreement in that(a) there was no proper certification of the surplus cash test being passed in March when the payment was authorised and

(b) the proper procedures as to certification of accounts and Board approval had not been followed. For the same reasons, he argued, the procuring of payment was a breach of the Claimant’s duty as directors not to exploit company property.

[40]Mr Leiper in response submitted that there is a difference between eligibility to be paid the bonus, dealt with by clause 6.2.1, and the mechanism for delivery of the bonus, addressed by clause 6.2.2. Use of the phrase “shall be paid” in clause 6.2.2 indicated that, if the Claimants were eligible to be paid the bonus under 6.2.1, the obligation was then on the Company to see that it was paid. Clause 6.2.2 did not, he argued, create a set of further requirements to be satisfied by the Claimants before they were entitled to payment, it simply set out the means by which the payment which they were eligible to receive would be paid. I accept Mr Leiper’s construction: on this basis authorising and taking the money was not a breach of any duty arising under clause 6.2.2. I do not accept, in this regard, Mr Quinn’s suggestion that the wording of clause 3.7 was apt to create obligations under clause 6.2.2.

[41]On behalf of the Claimants Mr Leiper accepted that the eventual conclusion emerging from the application of the Spur 57 model to the figures, when correctly entered, was that the bonus test for Q1 showed a fail. The result of this was that his clients obtained, albeit unwittingly, Company funds which they were not eligible to take, a state of affairs which rendered them in strict breach of their duties as directors of the Company and giving rise to an obligation as directors to account. The issue for me, consistent with my finding above as to the meaning of clause 14.2.2, is whether that breach was significant.

[42]On an objective assessment of all the evidence I have come to the conclusion that obtaining the Q1 bonus monies in March 2015 was not a significant breach of the Claimant’s statutory duties as directors. These are my reasons:(1) So far as KP is concerned, he had no part in authorising the payment. Save for his email to PR on 24 March 2015 asking whether the bonuses were going to be paid in March he did nothing to procure the payment.

(2) The Spur 57 forecasting model was complex. The evidence was that it was a large spreadsheet running over 12 tabs “or thereabouts”. It could not be easily understood or run by persons without accounting experience. ND accepted in his evidence that he had told PR on 4 June 2015 that “you need to be a qualified accountant to understand how the calculations all worked given that it was derived from a complex financial model with the references to FRS1 and so forth”. The Finance Director was accordingly the person best placed to consider the model and to arrive at conclusions having entered the appropriate figures from the Company’s results for the period.

(3) In February 2015 the then Finance Director, RW, produced a finance report as part of the Board Pack dated 26 February 2015 for the February Board Meeting. The report set out the Company’s results to-date and concluded, inter alia, that “this will leave £112k headroom for the covenant test on bonuses at the end of February excluding the £100k loans paid in by directors”. This was just a forecast at that time, 2 days before the end of the quarter, but there was every reason to believe that the test would be met as the two outstanding amounts to be entered at the month’s end were known and certain. PM in his evidence accepted that he understood RW to be referring to the bonus test applying the Spur 57 model and that on the basis of what RW had said he expected the Q1 results to show a pass for that test.

(4) RW left at the end of February 2015 and there was then no Finance Director in place until 1 April 2015. The March Board Pack recorded “cash position end of Feb is in line with forecast”. There was no Board Meeting in March; PR was away as his wife was having a baby. In view of what was recorded in the Board Pack as to the cash position, there was no reason at that time to doubt that RW’s forecast was right and that the eligibility condition for payment of the bonus set out in clause 6.2.1 was therefore met.

(5) Three of the (then) four Board members knew of the payments before they were made, having been copied in to the email from PR to OH (see above) directing that they be put through the March payroll. I fully accept that this is not at all the same thing as a properly constituted Board meeting minuting formal Board approval however it is a further indication, in my view, of the openness and transparency of the instruction to pay, which is the opposite of behaviour that is secret or underhand.

(6) I accept PR’s evidence that he believed PM was also aware of the bonus payments being made having (i) received the report from RW included in the March Board papers and (ii) responded to PR’s enquiry about how much should be put through the payroll in the way he did (see above). I also accept PM’s evidence that he understood this exchange very differently. There was clearly a misunderstanding on both sides, the important point for these purposes is that, when he gave the instruction to OH, PR believed that all Board members were aware that the Q1 bonuses were being paid.

(7) The evidence at trial, from both PM and AL, was that if the final application of the bonus test for Q1 done by ND after his appointment in April had shown a pass then the approval of payment would have been a technicality. In other words, no one cared very much about the mechanics of the payment under clause 6.2.2, only as to verifying eligibility under clause 6.2.1. Moreover the purpose of the investment and the ensuing involvement of LB in management was to move the business beyond the 3-director, small business structure and management under which it had previously operated. New management and governance systems had been introduced; internal documents within LB indicated that PR and KP were considered to be inexperienced in this respect and were expected to require direction and support in order to “grow” into their new roles. A degree of education was expected. In his evidence PM accepted that this was the case.

(8) As it happened, when ND first ran the Spur 57 model following his appointment in April 2015 it showed a bonus test-pass for Q1 and expected passes for all the remaining quarters in 2015. ND set out these results in a Powerpoint slide and sent it round on 15 May 2015 in advance of the May Board meeting. It was only after Mr Aneese at LB queried various figures which had or had not properly been included in the spreadsheets that ND ran the model again at which time the results changed. The cash figures for all the quarters continued to change upon re-running the model thereafter, albeit that Q1 always showed a fail against the bonus test.

[43]I should add that, in case I am wrong in my approach to clause 6.2.2 and it did create obligations on the part of the Claimants before taking the bonus, such that they were also in breach in this respect, then I would not have found that the breach of clause 6.2.2, in the context in which it occurred, was sufficient to engage the summary termination provisions. I bear in mind particularly in this respect the matters at (7) above.

[44]There remains the matter of whether the Claimants committed a material breach of the Service Agreement in retaining the bonus monies at all times up to their dismissal on 29 July and it is to that issue which I next turn.

Retention of Q1 bonus monies up to 29 July 2015

[45]Mr Quinn submits that the failure by the Claimants to repay the Q1 bonus at any time prior to dismissal was a continuing breach of their directors’ duties. It is not in dispute that directors are obliged to account for any unauthorised profit that they receive (see e.g. Murad v. Al-Saraj

[2005] EWCA Civ 959

) and that the Claimants were or became subject to that obligation in relation to the Q1 bonus monies in this case. Again, Mr Leiper accepted that in retaining the bonus his clients were in strict breach of their directors’ duty to account; as before, he submitted that the breach was not material/significant for the purposes of clause 14.2.2 of the Service Agreement.

Proposals to offset – factual dispute

[46]Determination of the issue as to whether the breach was significant necessitates my resolving, first, important matters of fact in dispute between the parties concerning proposals which the Claimants say they made to off-set the Q1 bonus monies against the next bonus which became due to them in a future quarter. PR and KP’s evidence was that PR made such an offset proposal to ND at a meeting on 8 June 2015 and mentioned it again to AL at a meeting on 16 June, before making the offer once more to ND just prior to the Board Meeting on 29 July 2015 (being the meeting at which the Claimants were dismissed).

[47]ND in his evidence accepted that an offer to offset was made to him on 29 July 2015, but he denied hearing any offer on 8 June. I found ND a palpably honest and credible witness having, as Mr Quinn graphically put it, “no skin in the game”. Unlike the other Defence witnesses, ND was no longer involved with the Company, having left when his contract came to an end in March 2016. Mr Leiper suggested that the way in which ND couched his denial – that he had not “heard” any off-set proposal – left open the possibility that an offer had in fact been made; however ND was clear in cross-examination that if an offset proposal had been made he would have noted it and remembered it. I accepted his evidence.

[48]Accepting ND’s evidence inevitably means that I cannot accept PR and KP’s account of making an offer to ND on 8 June. Mr Quinn urged me, if I rejected their evidence on this point, similarly to reject all their evidence where it conflicted with that of other Defence witnesses. I am not prepared to make that leap. I bear in mind that, as is natural, the Claimants may have come to believe that they did do something that they now believe they would have done. I do not, therefore, regard them as having been intentionally dishonest in giving their evidence on this point, nor do I think that the fact that I have not believed this part of their evidence necessarily means that I must also disbelieve them when there is a conflict with other witnesses on other occasions.

[49]Which brings me to the Claimants’ evidence that they made an offer to AL on 16 June 2015 to “contra” the Q1 bonus. The meeting between PR, KP and AL at Home House on 16 June followed a meeting the previous day between PM and PR/KP at which the issue of bonuses had been raised and discussed, along with other matters of concern such as the value which the Claimants believed the Company was deriving from AL’s input. There was by this time a degree of reserve between the founder directors and the new non-exec chairman. By contrast AL and PM were speaking together regularly as well as exchanging emails; on 8 June PR sent an email to AL in which he said “I am keen to ensure that Paul and Keith come forward with a suggestion and speak to me directly rather than Niall brokering a solution”. Both PR and KP gave evidence that the meeting at Home House had started with AL saying that PM expected them to come to him with a solution regarding the Q1 bonus they had already taken, in response to which PR told AL that it would be “contra-ed” or off-set against the next bonus to become due. AL denied that they responded with any mention of an offset against future bonuses. Mr Leiper suggested to AL in cross-examination that he may simply have allowed the offset suggestion to pass him by, in effect not registering it, knowing that PM wanted the Claimants to approach him directly. AL did not accept this, he said that as Chairman he was looking to resolve difficulties and that if any suggestion of offset had been made he would have been glad to take it to PM as a way out of what was clearly becoming an issue between the founder directors and the investor. Mr Quinn invited me to prefer AL’s evidence, pointing out that the term “contra” had not appeared in either of the Claimant’s witness statements; moreover when he had asked PR how AL had responded to the suggestion he had said he was unable to remember, which Mr Quinn suggested was simply incredible.

The evidence of the LB witnesses and AL

[50]It is appropriate, at this point, to set out the conclusions I reached as to the evidence given by the LB witnesses and AL. I did not conclude that any of these witnesses were deliberately telling untruths in their witness statements or in their evidence at trial, however I did arrive at the view that these Defence witnesses had heard and interpreted communications and responses made at the time through the filter of the position that they had adopted in relation to the Claimants. The same filter applied to their subsequent recollection of events. Certainly by mid-June 2015, and probably as early as April, LB had resolved to remove the founder directors from the Company. PM and AYS consulted lawyers in May and continued to consult them regularly up to the dismissal in July. An email from AYS to her manager on 18 May 2015 referred to “build[ing] the exit case on the incumbent [PR]”. I make it clear that I did not see any evidence of a deliberate “bear trap” laid for the Claimants, still less any agreement between persons to misrepresent events for the purposes of setting up their dismissal. It is the case, nonetheless, that an individual’s perception of events may be channelled by a pre-conceived view as to where those events may be leading, or even by a desire that they should go in that direction. In that context the eye may more readily see, and the ear may more readily hear, that which it wishes or expects to see or hear.

[51]In my view that is what happened here: once the removal of one or more of the founder directors was on the agenda PM, AYS and, in the end AL also, perceived events through that lens, unconsciously becoming increasingly ready to see and interpret statements and actions in an adverse light. Mr Leiper in closing identified passages in the Defence evidence which he characterised as deliberate exaggeration or hyperbole, I saw these rather as examples of a view unconsciously coloured by a destination which was to involve removal of one or both founding directors. Thus:(a) In the dismissal letters and in PR’s and AL’s witness statements the point was made that PR and KP had repeatedly been asked in the April Board meeting to produce the surplus cash calculation leading to payment of the Q1 bonus but had failed to do so. Yet the minutes of that meeting do not support such an accusation: the minutes note a request being made of ND (not PR or KP) to produce a calculation in order that Board approval for the bonuses could be properly recorded and supported. The Particulars of Claim, signed by PM, alleged that he asked both PR and KP at the April and the May board meetings to produce such a calculation, but in evidence PM accepted that PR had not been present at the May meeting and that he “did not specifically” ask KP for any calculation.

(b) In his witness statement PM’s evidence was that the omission by PR to copy him into the email to OH asking him to put the bonuses through the payroll had been “deliberately underhand” (para. 68 of his witness statement), yet when I pressed him in evidence to say whether he regarded the actions of PR or KP as dishonest in any way he expressly disavowed any such intention.

(c) A further example of an email that simply did not bear the interpretation put on it by PM in his witness statement is the one dated 6 March 2015 from PR to OH concerning repayments of directors loans which PR and KP had made to the Company at the time of the investment. PM’s evidence at para 69 of his witness statement, referring to this email, was:

“… not only did [PR and KP] intend to pay themselves the Q1 bonus come what may, but they were clearly giving themselves priority over other liabilities of the Company”

. This seemed to me to be an extraordinary mis-reading of the clear purport of the email, which was simply asking OH to consider the cash position before re-paying either PR or KP the monies that they were owed as director’s loans. In cross-examination PM allowed that he could “see that interpretation”. There were a number of other instances in the witness statements of PM and AL where documents referred to simply did not bear the interpretation put on them, or where assertions of behaviour were, on examination, obliged to be modified: - the email from KP to PR dated 24 March 2015, dealt with at para 71 of PM’s witness statement did not bear the interpretation he sought to put on it; - in cross-examination PM accepted that the Claimants had not “told” him that they “would derail the agreed business plan to ensure they did not miss the bonus again”, contrary to his assertion at para.123 of his witness statement; - PM’s assertion at para.150 of his statement that KP had “demanded that both of them be allowed to attend the [Rem Co] meeting and we agreed” was not borne out by the documents which show that AL had suggested that both men attend. - AL’s evidence at para 60 of his witness statement that the Claimants’ reaction to being told of the Q1 bonus test-fail was “an aggressive backlash consisting of accusations against other people, threats not to carry out the agreed investment plan and constant demand for more money...” could be explained only by isolating and focusing on one paragraph in a long email from PR dated 2 June 2015. Taken as a whole, that email did not bear the interpretation which AL had placed upon it as set out in his witness statement.

[52]I return to the meeting at Home House on 16 June 2015. In the unguarded moments of shock and dismay recorded by ALind during the dismissal on 29 July one of the Claimants (wrongly attributed to AL in the transcript) is heard to say “We’ve already said that if we passed Q3 we wouldn’t take Q1. I’ve already agreed that”. Then, a short time later KP said “we told you Andy…that it would be paid back”, a statement which AL denied at the time.

[53]I reached the conclusion that it is more likely than not that PR and KP did respond to AL’s comment made at the beginning of their meeting at Home House suggesting that they meet PM by saying that they would offset the Q1 bonus monies against a future bonus. I think it probable that AL simply did not register that this had been said at the time. His evidence at trial was that as the independent chair he was anxious to resolve differences within the Board; I think it likely that AL was focussed on getting PR and KP to sit down with PM, rather than taking the lead himself, such that the offset suggestion made by PR/KP simply passed him by. I bear in mind also that PM had by this time taken steps to see that AL was acquainted with LB’s (removal) plans for the founder directors: PM reported to AYS by email on 5 June that he had been “explicit” with AL in order to get him “onside”, which can only have referred to LB’s plans for a change in management at the Company. At the same time relations between AL and the Claimants had not been altogether easy: KP in particular did not value the contributions of the new Board Chair – the email to PR on 9 June 2015 “He is talking to us like C…TS” conveyed the robustly unfavourable view of AL taken by KP, which PR appeared to share. The opening rift in understanding could only have promoted an unconscious failure on the part of AL to register as significant something which PR and/or KP had said.

Was the failure to repay prior to 29 July a significant breach?

[54]It is against that view of the evidence that I must decide whether the Claimant’s failure to repay the bonus was in the circumstances a “material” breach entitling the Company to dismiss them forthwith on 29 July.

[55]I have reached the conclusion that the failure to repay the Q1 bonus monies prior to 29 July was not so significant as to engage the right to terminate their employment under clause 14.2.2:(1) The Q1 bonus had been taken at a time when everyone believed that the bonus test had been or would be met (see above). Thereafter, when he started as Finance Director, ND ran the model many times and with different input figures, steered by Mr Aneese and AYS at LB. These re-runs on each occasion generated different results for the four quarters in 2015, albeit that, after 3 June 2015, the re-runs always showed Q1 as a bonus test-fail. Thus on 3 June ND was reporting 1 pass and 3 fails, later the same day he said he could “get the model to 2 passes and 2 fails”. On 5 June he reported 2 passes and 2 fails to the Claimants “on the latest version of the bonus test data”. Yet on 10 June ND circulated a board paper showing 3 fails and 1 pass. PR said in his evidence that he and KP had accepted by 22 June that Q1 was a fail, but it was still not clear what the position was for the remaining quarters, nor did the Claimants have a full understanding as to what figures were or were not to be included in the various spreadsheets of the Spur 57 model. There were still large items (such as £97,000 of deal costs) which had a considerable impact on the calculations to be factored in or out by ND in running the model.

(2) Thus it was not until 29 July 2015 that, as ND accepted in his evidence, the Claimants were fully clear on all aspects of the bonus calculation. Their response to ND having explained the position fully to them prior to the Board Meeting was to say to him that they would offset the Q1 bonus against the Q3 bonus which was expected to be a test-pass.

(3) In accordance with my finding above, the Claimants had already mentioned to AL that they would off-set the Q1 bonus against one which might become due in a future quarter.

(4) These events fall to be viewed against the backdrop of concerns expressed by the Claimants regarding the application of the Spur 57 model and the results which it was generating. It is of note, in this regard, that LB also had reservations about the accuracy of the model, concerns which they did not admit to or share with the Claimants at the time: in an internal email to PM and AYS on 2 June 2015, Mr Aneese, who had assisted in the preparation of the Spur 57 model and then steered ND in his later application of it, wrote: “As you may recall [the cash-test bonus formula] took total change in cash after financing not before financing even though the model and the cash test didn’t allow any completion cash/cash from the structure for opening…I didn’t think about completion cash as a factor for the bonus test when we did it… In reality if Paul and Keith dig their heels in … it will only strengthen the case of not working in the best interests of the business”

(5) Finally, it was quite plain to me that neither PR nor KP at any time intended to keep monies belonging to the Company which they were not entitled to have. The single piece of evidence which may have shown PR and KP in a bad light in this respect concerned a comment which AL said they made following the Rem Co meeting on 1 July to the effect that they had “got away with it”, referring to PM not having asked them to repay the Q1 bonus. However, AL’s evidence as to who said what to whom varied as between the contemporaneous account given to PM and recorded in an internal LB minute at the time and his witness statement prepared a year later. PR and KP denied having said anything triumphant about keeping the bonus and I accept their evidence. I did not by any means draw the conclusion from this that AL had fabricated something so damaging about his (then) colleagues; I think it likely that he misheard or misinterpreted a different comment made in the wake of what had on any view been a very difficult meeting.

[56]For these reasons I have decided that no part of the Claimant’s behaviour in obtaining and/or retaining the Q1 bonus gave rise to an entitlement on the part of the Company to dismiss them forthwith.

Ground (2) - threats to act contrary to the interests of the Company

[57]The second ground relied upon by Mr Quinn as justifying summary dismissal centred on threats said to have been made by the Claimants to act in their own short term interests rather than in the long-term interests of the Company and its shareholders. By the time of closing arguments, Mr Quinn’s case as to these threats had focussed upon what was said at the Rem Co meeting on 1 July 2015. Mr Quinn also referred to two subsequent examples of what he said were actions by the Claimants to make good those threats, namely(i) the revocation of the appointment of BDO as auditors and

(ii) the decision not to appoint sales consultants, Larato Ltd (“Larato”).

[58]I start with a brief chronology of events leading up to the Rem Co meeting:(i) The Q1 bonus calculation was being reviewed by ND throughout the relevant period, see above.

(ii) From as early as April LB had been considering a CEO change. It seems that there was a difference of view within LB as to whether the 21 April investment committee meeting had decided to remove PR, with AYS’ manager Adam Holloway believing that it had been decided and that the change should be made swiftly “I think they should get him out now”. PM’s evidence was that he took legal advice on this early in May.

(iii) On 15 May there was an internal exchange between AYS and Adam Holloway in which AYS reported that LB’s solicitor Blair Adams “is helping us think through potential levers (for both a consensual and non-consensual process) whilst we come to a decision either way and we have stated the pipelining process in earnest”, and then in a later response “…the pipelining and Blair’s work are about setting us up to drive a change ie to help us answer the how and when as opposed to if”.

(iv) Towards the end of May PM and AL discussed the results generated by ND’s re-runs of the Spur 57 model and on 28 May PM emailed AL “Niall should circulate the final accurate position to the guys and then I want to see how they react”. AL responded “sounds like a plan”.

(v) On 8 June, following ND’s latest run of the Spur 57 model, as approved by Mr Aneese, PM emailed AL “I am keen to ensure that Paul and Keith come forward with a suggestion and speak to me directly rather than Niall brokering a solution”. PM in his evidence said that he intended the matter of the Q1 bonus to be a “test” of the investor’s trust and confidence in the Claimants; he was not going to propose a solution to the Q1 bonus issue, and did not want either ND or AL to do so either. AYS’ email to PM on 9 June – “sounds like I am missing the fun” – was a further indication that LB’s position vis a vis the Claimants had hardened. Asked about this email in her evidence AYS said that use of the word “fun” had been ironic and that it indicated how seriously they were by now taking the bonus issue.

(vi) Unaware of their investment partner’s developing intentions regarding their future at the Company, PR and KP were becoming increasingly concerned that the Spur 57 model as applied was not generating the regular bonus which they had anticipated it would at the time of the deal. PR as CEO pressed for the model to be discussed and re-visited. An example of his view being put forward at the time was his email to PM on 10 June:

“I believe it is fundamentally wrong, myself and Keith were of the understanding that we had to make £100k cash to achieve a bonus”

. At the meeting on 15 June PM made it clear that LB was not prepared to re-visit the model and on 16 June PM and AYS met with LB’s solicitor again. On 20 June PR asked PM for a further meeting to discuss the Spur 57 model and in particular its impact on directors’ bonuses. (vii) At this time AL produced a new model to replace the sales growth targets originally proposed by KP and incorporated into the Spur 57 model. KP’s reaction was that the sales growth being proposed by AL’s model was unachievable:

“… if we keep talking about this model we won’t be anywhere at the end of 2017! I really don’t understand how our FD’s figures are so different to our Chairmans which if proven to be correct require some urgent recruiting which will [be] massively distracting when we are focused on getting the current team up to speed and also reduce EBIT again affecting Directors bonus.”

AL reported to PM on 20 June in an email that he had “had a bit of a set to with [PR and KP] this week over plans.” To which PM responded “I have reached the stage where I have lost patience with their approach of not taking responsibility or indeed acting like employees rather than board directors and shareholders”. (viii) On 23 June, AL reported to PM and AYS that “Paul is spoiling for a fight on the bonuses and targets. He is also sticking to his 8/10/12 model” AL attached his own remodel, asking PM and AYS to “keep confidential your knowledge of it from any of the management team”. Mr Leiper drew a telling contrast, here, between the reception by PM of AL’s suggestions for a re-model and the approach he was taking to PR/KP’s requests for the Spur 57 model to be revisited. In his evidence AL accepted that his communication with PM had not been open and trusting vis a vis the Claimants. PM’s evidence was that by this time he had in his own mind resolved to dismiss both PR and KP. (ix) On 30 June 2015, the day before the Rem Co meeting, PM and AYS met again with LB’s solicitor.

[59]This, then, was the immediate backdrop to the Rem Co meeting on 1 July 2015. LB had for some time been discussing and taking legal advice on replacing the two founder directors. Positions within the Board of the Company had hardened, with the executive founder members and the non-executive investor member having very different viewpoints on the utility of the Spur 57 model. The rift that had developed between LB and AL on the one hand and PR/KP on the other was opening up.

The Rem Co meeting

[60]There are minutes of the Rem Co meeting, but I found myself unable to rely wholly upon their accuracy or as a fully comprehensive record of what took place. The minutes were prepared by AYS who attended the meeting and took notes for the purpose. Unfortunately, her notes have now been mislaid. Her evidence as to how this happened was not entirely consistent with what had been asserted by solicitors in correspondence, however the result is the same, the notes are not available. My difficulty in relying upon the minutes which AYS prepared arises in this way: the minutes were not sent round in draft until nearly 4 weeks after the meeting, on 28 July, the day before the Claimants were to be, and in the event were, summarily dismissed on the 29 July. The delay in circulating the minutes was clearly planned: on 16 July AL sent this email to PM “I am deliberately using my holiday... to delay the issue of the board minutes until I get back. It will give us the chance to ensure all our points are covered with little chance PR and KP will bother to read” In his evidence AL accepted that this was a further instance of a failure of trust and openness towards the Claimants. That AL, as an experienced chair of several company boards, felt it appropriate to engage in such tactics against two co-directors and shareholders, who between them held 60% ownership of the Company, was regrettable.

[61]Thus PR and KP were deprived of the opportunity to see and to comment upon the minutes whilst matters were still fresh. A year later, at trial, inevitably they were unable to recall much of the detail of what was said at that meeting, save to deny that they made any threats but only wished to emphasise points they were seeking to get across regarding the bonus calculation under the Spur 57 forecasting model. Thus where the minutes record “threats” to harm the longer term interests of the business, PR and KP’s evidence was that these were no more than examples used to illustrate how the operation of the Spur 57 model bonus test could work against the best interests of the Company. KP accepted, for instance, referring to the fact that seeking short term sales with an immediate up-front payment would ensure short-term return to directors through the bonus, but he denied saying that he would do that rather than targeting contracts of more long-term value to the Company. In their evidence PR and KP repeatedly stressed that they each held a 30% shareholding and had, therefore, as great an interest as LB in increasing the value of the Company so as to maximise the eventual sale price. I accept PR and KP’s evidence in this respect, along with their explanations of what were recorded as “threats” in the minutes and in AL’s record of the meeting. I also accept, although this was not recorded in the minutes, KP’s evidence that he said words to the effect of “There is no more bonus due this year” when ND’s report was tabled showing a bonus test-pass only in Q4, thereby conveying the Claimants’ expectation that the Q1 bonus already taken would be off-set and cancelled out.

[62]I was entirely satisfied, having heard the evidence, that the Claimants did not at the Rem Co meeting commit acts of gross misconduct and/or breaches of their directors’ duties justifying their immediate dismissal. There was clearly a very robust and often heated discussion about the Spur 57 model, with which the Claimants were by then thoroughly disenchanted. There was a very divisive difference of opinion as to the utility of the model and whether a continued reliance on it was in the best interests of the Company. If there was hostility then it was by no means all one way: at the end of the meeting when KP asked to meet with Mr Aneese to understand how and why the model was not generating the results they had expected, PM accused KP:

“your business has gone to ratshit!”

BDO and Larato

[63]Subsequent matters surrounding the (non) appointment of BDO and Larato were relied upon by Mr Quinn as examples of deferring expenditure decisions for short-term gain at the expense of the Company, accordingly it is to these matters that I next turn. BDO

[64]At the Board meeting on 30 April 2015, the Company made a conditional decision to appoint BDO as auditors in place of the existing accountants, Elliotts Shah. Subsequently, on 3 July following Mr Hashim’s resignation as financial controller, PR emailed his fellow members of the board expressing concern about getting in new accountants at the same time as replacing the key bookkeeper role. PR proposed appointing Elliot Shah for that year’s audit rather than BDO. AL responded initially rejecting the proposal, however KP’s response was to agree to PR’s suggestion, on the basis that it “is a sensible one to cause minimal disruption for our business and the least distraction for the management team over the holiday period”. An email from AL later on 3 July recognised the need to move swiftly given the time constraints and agreed to the appointment of Elliotts Shah.

[65]In my judgment the suggestion by PR to revisit the appointment of BDO was an ordinary proposal for the management of the business, made for good reasons and, in the event, adopted. There was no evidence at all that the suggestion was made for any ulterior purpose to do with cost or bonus.

Larato

[66]Larato were sales consultants approached by the Company in May 2015 to offer coaching to its sales force. Larato pressed PR for a decision on its coaching proposal, which PR referred to KP for his comment. In response KP sent an email dated 27 July 2015 saying:

“I don’t think we should do it until we get our bonus cleared and there’s so few people in the. Sale [sic] team it’s a lot of money. Would [sic] rather spend it on ad hock [sic] marketing”

. In cross-examination it was put to KP that this showed him rejecting expenditure on something of value to the Company in order to preserve his bonus. KP denied it saying that the proposal had made no sense to him as there were only 4 people in the sales team; as an example of his readiness to incur expenditure on behalf of the Company KP pointed out that he had at that time committed more than £60,000 to lead generation for sales. When I asked PM what had happened with Larato after the Claimants’ dismissal he told me that Larato’s proposal had not been taken up as coaching of the Company’s remaining sales-force was done in-house by the new sales director.

[67]I am not satisfied that KP’s email response concerning the Larato proposal demonstrated a willingness to damage the Company’s interests for short term gain. The reference to bonus in his email is easily explained by the fact that he and PR continued to be very concerned about the operation of the Spur 57 model on directors’ bonuses, a matter which they had tabled for further discussion at the Board meeting due to be held in two day’s time on 29 July.

[68]I conclude that the Claimants did not threaten to damage the Company’s long-term interests, nor did they act to do so.

Ground (3) - Expenses

[69]The final matter relied upon by the Company concerned expenses claimed by PR and KP. This was not a ground cited at the time of the dismissal but arose from matters discovered subsequently. It is not disputed that, on the authority of Boston Deep Sea Fishing & Ice Company v. Ansell

[1888] 39 Ch D 339

, the Company is entitled to seek to rely on matters discovered after the dismissal.

[70]The way in which the expenses claims came to light was this: following PR and KP’s dismissal on 29 July 2015 forensic accountants Deloittes were instructed by LB to examine the Claimants’ expenses claims for the period 3 December 2014 to 29 July 2015. Deloittes’ work uncovered claims made by PR and KP for items of personal expenditure. There was a schedule and a counter-schedule in the material produced for trial detailing expenses paid and outstanding as well as claims by the Claimants in respect of monies owed to them, such as a return of corporation tax in the sum of £40,000 claimed by PR. Neither schedule was examined in any detail with the witnesses at trial.

[71]The Claimants do not dispute that Deloittes’ work has established that they have had expenses paid by the Company to which they were not entitled. PR accepted in his statement that he had inadvertently put in claims for about £1000 in non-business expenses; against that, he said, were amounts due to him for expenses claimed but unpaid together with accrued holiday amounting to £9,390.48. He was not challenged on these figures. KP’s evidence, similarly uncontested, was that he accepted having inadvertently over-claimed £185.80, against which were amounts owed of £14,467.70.

[72]So far as the annual cost of gym membership for PR and KP and the inclusion of family members’ mobile phones on Company contracts were concerned, each said that this was simply a continuation of what had happened for many years prior to the investment. They had not appreciated, they said, that the arrangement would not simply continue as before. Neither of them had read the “employee handbook” setting out what claims could properly be made. KP added that so far as the mobile phone was concerned, it would have cost more to cancel the contract for his daughter’s phone, at £25pcm, than to let it proceed to expiry.

[73]PR also obtained reimbursement of the cost of installing faster broadband at his home, but maintained that this was a necessary expense incurred as the CEO of a communications business where much of his work was done from home.

[74]Mr Quinn relied upon the Claimants’ evidence in relation to expenses as a further breach of directors’ duties not to exploit company property and to render an account. He drew my attention in this respect to the case of CMS Dolphin v Simonet

[2001] 1 BCLC 704

[75]Mr Leiper, whilst accepting that the duty to account arose in circumstances where personal expenditure had been paid by the Company, relied once more on the qualification in clause 14.2.2 conveyed by use of the word “material”. He accepted that, as with the Q1 bonus, his clients, having taken monies in respect of which further examination demonstrated that they were not entitled, were technically in breach of the duty to account; he argued, however, that in the circumstances which prevailed the breach was not significant.

[76]I agree. In the absence of any bad faith or dishonesty on the part of the Claimants in connection with the amounts claimed, as to which there was no evidence whatsoever, I do not believe that the expenses claims which they made/failed to repay amounted to a material breach of their directors’ duties justifying summary dismissal pursuant to clause 14.2.2, or as gross misconduct under clause 14.2.3.

Claimants actions taken together

[77]No argument was specifically addressed to me as to whether the Claimants’ actions taken together would be sufficient to engage one or more sub-clauses of clause 14 where the breaches of duty taken individually could not. For the avoidance of any doubt I make it clear that in my view, even taking all matters together, there was insufficient to justify summary dismissal, whether under clause 14 of the service agreement or at common law.

Wrongful dismissal -Conclusion

[78]It is apparent that relations between the non-executive chairman and investor director on the one hand and the founder directors on the other had by July 2015 reached a very low ebb. The Board was divided and the two sides were at loggerheads. A resolution of some kind was clearly going to have to be reached. When I put this to Mr Quinn he asked me to consider why matters had arrived at such a pass, inviting me to attribute the breakdown in the relationship solely to the Claimants’ defaults. I was unable to reach such a one-sided view of events. There appears to me to have been an unfortunate obduracy on both sides. I have not had to decide whether or how the differences within the Board could have been resolved; the issue for me at this trial has been to determine whether the Company was entitled to dismiss the Claimants without notice at the Board meeting on 29 July 2015. For the reasons given above I have decided that it was not.

Issue (2): Penalty

[79]Given my finding on the primary issue of the lawfulness of summary dismissal, it is not necessary for me to decide whether the “Bad Leaver” provisions constituted a penalty. However out of deference to the argument, I propose to set out briefly the tentative conclusions I would have reached on this issue.

[80]Mr Leiper referred me to the recent decision of the Supreme Court in the case of Cavendish Square Holding BV v. Makdessi

[2015] 3 WLR 1373

. The short facts of that case were that Mr Makdessi had sold part of his advertising and marketing business to Cavendish for a sum which included a substantial goodwill element. The sale agreement contained a non-compete clause, breach of which entitled Cavendish to purchase Mr Makdessi’s remaining shares for a price which excluded goodwill. Mr Makdessi argued that the clause was a penalty and consequently unenforceable. He was unsuccessful at first instance before Burton J but his judgment was overturned on appeal whereupon the case went to the Supreme Court. The Supreme Court unanimously reinstated Burton J’s decision.

[81]Mr Leiper (who appeared for Cavendish in the Supreme Court) took me through the Supreme Court judgments in Makdessi for the purposes of teasing out the reasoning of the justices. There was unanimity in the decision that the particular clause was not a penalty. Mr Leiper sought to argue, however, that the routes taken by the individual justices in arriving at that result had implications for the proper outcome in this case. The key, Mr Leiper submitted, was in the distinction between a primary and a secondary obligation. As to this, the joint opinion of Lords Neuberger and Sumption (with whom Lord Carnwath agreed) was as follows (at para 83):

“83. …More fundamentally, a contractual provision conferring an option to acquire shares, not by way of compensation for a breach of contract but for distinct commercial reasons, belongs as it seems to us among the parties’ primary obligations, even if the occasion for its operation is a breach of contract. This may be tested by asking how the penalty rule could be applied to it without making a new contract for the parties. The Court of Appeal simply treated clause 5.6 as unenforceable, and declared that Mr Makdessi was not obliged to sell his shares whether at the specified price or at all. That cannot be right, since the severance of the shareholding connection was in itself entirely legitimate, and indeed commercially sensible. If the option to acquire the retained shares is to stand, the price formula cannot be excised without substituting something else. Yet there is no juridical basis on which a different pricing formula can be imposed. There is no fall-back position at common law, as there is in the case of a damages clause.”

[82]Lord Hodge, by contrast, decided that the clause in question was a secondary obligation (a view with which Lord Toulson and Lord Clarke both agreed). His reasoning is to be found at paras 280-281 of the decision:

“280. There is again a strong argument, which Lord Neuberger PSC and Lord Sumption JSC favour, that clause 5.6 is a primary obligation to which the rule against penalties does not apply. But if all such clauses were treated as primary obligations, there would be considerable scope for abuse. I construe the clause as a secondary obligation, which is designed to deter (a) the sellers from breaching their clause 11.2 obligations and (b) a seller who is an employee from misconduct which damages the interests of the group and leads to summary dismissal (viz the Schedule 12 definition of “defaulting shareholder”). 281. Clause 5.6 ... is not a provision which fixes the damages payable for a breach of contract. It seeks to regulate the terms on which a defaulting shareholder severs his connection with the company. It falls to be construed in the context of the agreement as a whole, in which Cavendish agreed to pay a price for the shares which it purchased on the basis that the sellers remained involved in the company for transitional periods and complied with the clause 11.2 duties for at least two years after they had exercised their put options under clause 15 or had otherwise ceased to hold shares in the company. I think that Mr Makdessi was correct in accepting that, if a seller acted in breach of clause 11.2 by competing with the company in any of the ways listed in that clause, Cavendish would act reasonably in seeking to remove him from any involvement in the company, including by the compulsory transfer of his shareholding. On the departure of the defaulting shareholder, the company would lose both his work on its behalf and also his valuable personal connections, it was readily foreseeable at the time of contacting that the departure on default of either of the sellers would cause significant damage to the company’s good will and thus materially reduce its value”

[83]Mr Leiper argued that if the “Bad Leaver” provision in this case is properly to be regarded as a secondary obligation then the penalty rule is engaged and applies. In contrast to the clause in Makdessi, which provided for a reduced, yet still substantial, payment, the clause here provides for payment of just £1. Mr Leiper submitted that such a negligible amount must fall foul of the penalty rule, if it is engaged.

[84]The issue, which clearly calls for fuller argument over more time than was available at this trial, is an interesting and complex one. It turns on the construction of the particular provision in the context of the agreement or agreements as a whole. There was very little time to address context in the argument before me. I note, however, that the transfer provision in the Makdessi case appears to have been part of a single agreement which included provisions dealing with Mr Makdessi’s continuing obligations as a seller. By contrast, in this case the consequences of being a “Leaver” upon transfer of shareholding and price payable are located in a separate document, being the Articles of Association of the Company adopted by special resolution at the time of the investment. The occasion for the Company obtaining an option to purchase the shares of a “Leaver” arises in a range of situations dealt with under those articles only one of which, in relation to a “Bad Leaver”, arises upon a breach of the employment contract justifying summary dismissal. The provision conferring the option to give an Investor Direction for transfer under Article 17.3 arises upon “Leaving” simpliciter. The “Transfer Arrangements” arising on different routes of departure are then addressed at Article 18, where the transfer prices applicable to the various different categories of “Leaver” are set out.

[85]The arrangement for “Leavers” as provided for under the Articles of Association thus appears to me to be more akin to a primary obligation agreed between parties for distinct commercial reasons to do with a shareholder leaving the Company. On this basis the price of £1 payable for the aggregate shareholding of a person who is a “Bad Leaver” is simply the agreed price on transfer. Moreover, even if the transfer and pricing provisions in the Articles were to be construed as secondary obligations consequent upon breach of the employment contract, I would have found, as Lord Hodge did in the Makdessi case, that there was nothing unconscionable in an arrangement arrived at between parties dealing at arms-length with the benefit of extensive expert advice. Had it been necessary, therefore, I would have found that the Transfer provisions relating to a “Bad Leaver” were enforceable.

Orders consequential upon my decision

[86]It follows from my decision that the Claimants are entitled to a declaration that they were wrongfully dismissed from their employment. The question of what other relief – damages and/or further declarations – the Claimants may be entitled to as a result of my decision is a matter upon which I will hear further representations in due course, if the parties cannot reach agreement in the meantime. Likewise in relation to the appropriate costs orders.