England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
(Mr Leighton Williams)

		Royal Courts of Justice Strand London WC2
		Thursday 26th July 2001

Thursday 26th July 2001

1. LORD JUSTICE CHADWICK: This is an adjourned application for permission to appeal against an order made on 20th July 2001 by the Honourable John Leighton Williams QC, sitting as a Deputy Judge of the High Court in the Queen's Bench Division, in proceedings brought by Tracs Engineering Ltd against Mr Roderick (Roddy) Sampson and Ms Linda Wilson and PWME Ltd. The application has been listed before us, with appeal to follow if permission to appeal is granted.
2. Tracs Engineering Ltd was incorporated in 1999 for the purpose of undertaking railway engineering and maintenance works. Its shareholders are Mr Michael (Mike) Bobeckyj, and the two individual defendants, Mr Sampson and Ms Wilson. Mr Bobeckyj holds 60% of the shares in Tracs and the remaining 40% are held equally by Mr Sampson and Ms Wilson. Each of the shareholders holds office as a director. Mr Sampson was described as Managing Director, Ms Wilson as Finance Director. It is said - although this is in dispute - that Mr Bobeckyj was appointed Chairman.
3. For reasons which it is unnecessary to explore in this judgment but which appear, in general terms, to have arisen from the funding arrangements for Tracs, the relationship between Mr Bobeckyj, on the one hand, and Mr Sampson and Ms Wilson, on the other hand, broke down in the year 2000. Miss Sampson and Ms Wilson decided to form a new company - the third defendant, PWME Ltd. That company was incorporated on 10th October 2000. Mr Sampson and Ms Wilson are the directors of that company and Ms Wilson is registered as holding all its shares. Initially PWME operated out of the offices occupied by Tracs at Lenham near Maidstone in Kent; although subsequently it seems to have negotiated a separate tenancy part of those premises.
4. In April or May 2001 PWME tendered for, and obtained, a subcontract for works to be carried out in connection with a temporary railhead at Beechbrook Farm, Ashford. The railhead forms part of much larger works required for the construction of the Channel Tunnel rail link. The main contractor - at least in the context of the subcontract - is AMEC Spie Rail Systems Ltd. The subcontract was awarded on 30th May 2001. For convenience, I will refer to it as the 'Beechbrook Farm Contract'. I shall need to return to its provisions in more detail later in this judgment; but at this stage it is pertinent to note that the works were to commence on 4th June 2001 and to be completed within thirteen weeks. If that timetable is maintained, the works will be complete by the end of the first week of September.
5. On 11th May 2001 Mr Bobeckyj called an Annual General Meeting of Tracs (its first since incorporation) for 11th June 2001. The agenda for that meeting contained proposals for the appointment of two new directors, Mr John Reid and Mr Martin Steele. In preparation for the meeting, Ms Wilson, as she had been asked to do, prepared a finance report in respect of Tracs. It paints a grim picture. She wrote:

"The overall finances of the Company [Tracs] give cause for grave concern. This is due to a number of factors, primarily the lack of investment the Company has suffered since its inception. Other reasons include a really black Summer we experienced with average weekly losses totalling some £20,000 per week, and the current reluctance of our factoring company to forward any funds. This has resulted in a number of creditors remaining unpaid."

6. There then follow figures, including an item for "major creditors outstanding" of £480,000. Of that sum £300,000 is due to the Revenue in respect of unpaid PAYE. Ms Wilson's conclusion was:

"The operational Directors feel that the situation cannot be allowed to remain unresolved, as they are unable to manage the Company effectively due to the constraints and obstacles placed on them by the Non-operational Director.

In order for them to continue trading they have had to sign personal guarantees against the debt, lease and other essentials directly as the result of the failure of the major shareholder to provide adequate funding. They feel that the only courses of action that remain open are:

1. To wind the Company up and divide any cash and assets that are attained in accordance with the shareholding

Or if this is not agreeable, in order to protect their guarantees.

2. To place the Company in voluntary liquidation where liquidators will manage the winding up of the Company on behalf of the Directors."

7. In that context the operational directors are Mr Sampson and Ms Wilson, and the non-operational director was Mr Bobeckyj. In short, the complaint was that Mr Bobeckyj had not procured or provided the funding which Tracs required in connection with its operations and which, as alleged, he was to arrange.
8. The Annual General Meeting took place on 11th June 2001. Mr Reid and Mr Steele were, I think, appointed directors, no doubt on the votes of Mr Bobeckyj. The meeting brought matters to a head.
9. On 13th June 2001 Mr Bobeckyj, purporting to act for and on behalf of Tracs, wrote to Mr Sampson and Miss Wilson in these terms:

"It has come to my attention that during the course of your employment with Tracs (Engineering) Ltd ("the Company") you have set up and are acting as a director of a Company called PWME Ltd. Without my prior authorisation, you appear to have diverted funds of £169,000, which was due to be paid to the Company, to PWME. You have also hidden the fact that you have been undertaking work on behalf of PWME in competition with the Company during the course of your employment.

Your actions are clearly a fundamental breach of your duty of good faith towards the Company as an employee and, particularly, of your fiduciary duty to the Company as a director. I am therefore left with no alternative other than to inform you that you are dismissed an employee of the Company with immediate effect, without notice or any compensation in lieu of notice. Payment of your salary and provision of any benefits will cease with effect from today."

10. The letter continues in the last paragraph:

"I must also put you on notice that the Company will take steps to recover any of its funds that you have misappropriated during the course of your employment, which will be deemed to be held by you on behalf of the Company on trust. In addition, any profits that you have made or continue to make through PWME resulting from your breach of your fiduciary duties as a director will also be deemed to be held on trust by you on behalf of the Company. The Company will regard any attempts that you make to contact its clients with a view to soliciting their business in competition with the Company as evidence of your breach of fiduciary duty."

11. Both sides consulted solicitors. On 14th June 2001 those acting for PWME (and I assume also Mr Sampson and Ms Wilson), namely Messrs Travell Horner & Partners, wrote to the solicitors instructed by Mr Bobeckyj on behalf of Tracs, Messrs Reed Smith Warner Cranstone, a letter which contained the following paragraphs:

"Yesterday morning (the 13th June) Mr Michael Bobeckyj and Mr Martin Steele of TRACS entered the business premises of PWME, required Ms Wilson (a principal of PWME) to leave and proceeded to change the locks so our Client is unable to access its property including its files, computers and other expensive office equipment. PWME has vital need of these files and property in order to maintain its business with its customers and to meet its payroll obligations to its staff.

2. Since the above incident Mr Bobeckyj has also refused to allow Ms Wilson to retrieve PWME files in her office at TRACS. TRACS has thereby unlawfully trespassed and converted or wrongfully interfered with PWME's property without any basis at law whatever. In a telephone conversation between Mr Travell and your own Mr Fallon, we noted that TRACS did not deny taking our Client's property in this way. TRACS offered no justification; but indicated that it would not return the property which it was 'investigating'.

3. TRACS has entered into a campaign of misrepresentation of the dispute between TRACS and PWME involving serious and unfounded allegations of fraud on the part of PWME's principals and untrue assertions that TRACS owes or controls PWME. These statements have been directed to, inter alia, PWME's staff and customers. TRACS appears to have made use of the above PWME property and information which it has unlawfully taken for the purpose of these contracts."

12. Various undertakings were sought from Tracs in relation to that conduct alleged.
13. On the same day, 14th June, Tracs made application to the High Court for a freezing injunction order in respect of the assets of Mr Sampson, Ms Wilson and PWME. The application was supported by an affidavit sworn by Mr Paul Fallon of Reed Smith Warner Cranstone. The affidavit asserts that there is strong evidence to suggest impropriety and misconduct by the defendants. Paragraph 28 is in these terms:

"The Third Defendant is South African and has family in South Africa. I am told and believe by Mr Bobeckyj that there is a strong chance that the Third Defendant will leave the Country."

14. In the circumstances that the third defendant is identified in that affidavit as 'PWME Ltd', it is surprising that a solicitor came to swear it in that form.
15. Ms Wilson made a witness statement in response to that application. That is dated 15th June. On 18th June 2001 the application came before Hallett J. It does not appear from Schedule A to the order which she made on that day that she had Ms Wilson's witness statement before her but the defendants were represented by counsel. She made a freezing injunction to restrain dealings by all three defendants with their assets up to a limit of £629,000. She was invited to appoint a receiver of all the assets of each of the defendants. That would have been a draconian order to make in the circumstances and, wisely, if I may say so, she declined to make it.
16. Tracs tried again. Mr Fallon made a second affidavit, sworn on 21st June 2001, in support of an application to appoint a receiver over PWME "so as to protect the value of the contract". Paragraphs 10, 11 and 12 of that affidavit sworn on 20th June are in these terms, so far as material:

"It is not intended that the Receiver will take over the day-to-day management of the Contract. Merely that her appointment will distance the First and Second Defendant (and indeed the Claimant to the extent that is necessary to alleviate AMEC's concerns) from the works. The day-to-day management of the project is presently being handled in any event by Mr Michael Pollock (an employee of the Claimant) and I understand that he is more than capable of ensuring its smooth operation without reference to the First and Second Defendants. In that light there will not be a great deal for the Receiver to do save to hold the ring between the parties and to steward the finances of PWME which, given they are already the subject of a freezing order, cannot be to the detriment of any of the Defendants."

17. He then refers to the proposed receiver - a licensed insolvency practitioner and a partner in the well-known firm of accountants Mazars Neville Russell - and, perhaps on the basis of his expectation that there will not be a great deal for the receiver to do, he records that, in her view, the likely budget for the receivership will not exceed £50,000, on the assumption that the underlying action is resolved in twelve months - that is to say, that the interim receivership will come to an end, not on the performance of the contract, but on the termination of the issues at a trial.
18. The assertion that the project was being handled by Mr Michael Pollock, was challenged in the witness statement made by Mr Sampson on 21st June. He said this at paragraphs 3, 4 and 5:

"I am aware that it is alleged that the successful running of the contract at Beechbrook Farm does not depend upon the personal attendance of myself or Ms Wilson at site and that the contract can be run by Mr Pollock.

This is quite incorrect. Mr Pollock is employed by PWME as Depot Manager and he does not run the project. I am the Project Manager and I have to attend on site on a daily basis. I am the person with the necessary expertise and I must attend the regular meetings with AMEC-SPIE and the main contractors and deal with all the issues relating to production. Mr Pollock does not run the project in any supervisory capacity.

Ms Wilson is also required on site on a regular basis as contract administrator. AMEC-SPIE have provided us with an office so that we can deal with all the necessary paperwork on site. I categorically assert that the project could not be run without us. We have the expertise and AMEC-SPIE would be very seriously concerned if we did not so attend."

19. He then goes on to say, at paragraph 7, that AMEC Spie are entirely satisfied with the conduct of the contract at Beechbrook Farm. He refers to a letter written by Mr Bedford, the Commercial Manager of AMEC Spie, to Ms Wilson confirming their satisfaction of the progress of the contract. He states as his belief that the appointment of a receiver would imperil the contract or destroy it because in that situation AMEC Spie would immediately consider an alternative subcontractor, having regard to the risks of a receiver-operated company. Mr Sampson produces a letter of 20th June from Mr Bedford, the Commercial Manager, which confirms his views. Mr Bedford said this on 20th June:

"The works currently being undertaken by PWME are being progressed in a professional and competent manner with outputs achieved as programmed."

20. But Mr Bedford went on:

"Should your existing management and resources be changed without our permission, and subsequently should it become apparent that this had had an adverse effect on your subcontract works, we will not hesitate to advise you that we will supplement your resources to maintain our programme requirements, and any additional costs arising will be sought from the company."

21. The fact that AMEC Spie appears satisfied with the progress of the contract in a professional and competent manner but would be concerned if existing management and resources be changed is important as an indication of a view which AMEC Spie might well take if the existing management and resources - which, in context, must be a reference to Mr Sampson and Ms Wilson - were not retained.
22. The matter came back before Hallett J on 21st June. She adjourned the application to appoint a receiver generally with liberty to restore. The view which she took on that occasion appears from paragraph 3 of a witness statement made by Mr Dennis Travell, a partner in Travell Horner & Partners, on 9th July 2001. He says this:

"The question of the appointment of a Receiver came before Madam Justice Hallett on 22nd June 2001 who refused the Claimants' application for a Receivership Order and Indicated that not enough attempt had been made to reach an agreement about an interim solution. Although I was not present in Court I understand from Mr Alexander Stewart [counsel on that occasion] and my colleague Mr Latham that both the Claimant and the Defendants gave assurances to the Court that such attempts would be made."

23. Mr Travell then sets out his attempts to pursue discussions which, as he says, were frustrated by the failure of Mr Fallon to respond and which came to nothing.
24. Tracs restored the application for the appointment of a receiver for further hearing. That application eventually came before Crane J on 10th July 2001.
25. There had in the meantime been hearings before Leveson J on 26th June 2001 and before Nelson J on 3rd July 2001, which had led to a variation of the terms of the freezing order imposed by Hallett J. The variation, which was made by consent, permitted the transfer of monies from PWME's account to an account in joint names of solicitors.
26. Mr Sampson made a further witness statement (his second) on 28th June in the context of PWME's application for the relief which it secured from Nelson J, but he took the opportunity in that witness statement to set out in more detail some of the background to the operation of the Beechbrook Farm Contract. He said this, at paragraph 5C:

"The initial approach from AMEC-SPIE, in April 2001 was made directly to me by telephone by Mr David Taylor, Deputy Construction Manager, who has been a personal friend and a colleague over the last six years. I refer to a true copy of a letter written by Mr Taylor dated 26th June at page 4 confirming the relationship. He initially sought a price for the works at Beechbrook Farm as a benchmark for the negotiations he was currently having with another company, namely Grant Rail. I spent the weekend preparing a submission and had further discussions with Mr Taylor the following week. Our price was obviously of interest as a meeting was urgently called to discuss our methodology and our rates and resources. Mr Taylor and Mr J. LeMartret, Construction Manager of AMEC-SPIE attended this meeting along with me and Ms Wilson of PWME Ltd. We struck an instant rapport with Mr LeMartret and within ten days we were appointed as the preferred subcontractor for Beechbrook Farm. ... Mr Taylor's assistant, Mr David Bush has also been a friend and colleague for fifteen years and he also endorsed the appointment of PWME. AMEC owns 49% of AMEC-SPIE with the Senior Management being supplied by SPIE. Accordingly AMEC-SPIE are not wholly owned by AMEC as has been contended by Mr Fallon. Mr LeMartret has only recently come to England to manage the construction element of the CTRL 570 contract [the Channel Tunnel link] and had no knowledge of either TRACS or PWME prior to our initial meeting. In other words PWME discovered, bid for, made presentation for and obtained the Beechbrook Farm project while Ms Wilson and I were by coincidence Directors of TRACS. This fact had nothing to do with PWME obtaining the contract. In any event TRACS were not financially in a position to operate a contract such as this."

27. A letter of 26th June from Mr Taylor of AMEC Spie supports that account. I will read it. He writes "to whom it may concern". He confirms:

"I approached Mr R.Sampson with the purpose of obtaining an alternative quotation to that provided by another contractor.

My approach to Mr Sampson was due to my previous professional and personal dealings over the last six years.

In that time I have come to respect Mr Sampson's knowledge and expertise of Railway Renewals Works and was confident of his capability to provide a competitive and properly resourced quotation.

I was also confident that all works undertaken under the direction of Mr Sampson would be in full cognizance of all safe working practices."

28. As I have said, the restored application for the appointment of a receiver came before Crane J on 10th July. In support of that application Mr Martin Steele, who had been appointed a director of Tracs at the Annual General Meeting on 11th June, swore an affidavit on 9th July. At paragraphs 55-57 of that affidavit he deposes in these terms:

"In accordance with the Order of Hallett J dated 21st June 2001 TRACS' the Claimant's application to appoint a receiver was adjourned generally with liberty to restore. Hallett J suggested that the parties should make further attempts to try to come to an agreement of how to run the company without the appointment of a receiver. Meetings were held on 25th June 2001 and 2nd July 2001 at Reed Smith's offices in London. However, we have been unable to progress the matter further and in my view the best way of ensuring the continued existence of both companies is through the appointment of a receiver.

I have had regular discussion with Mr Bobeckyj in relation to this matter. Because of the matters listed below it is presently our intention to place TRACS into liquidation if a receiver is not appointed.

TRACS has had to pay the staff at the Beechbrook site. TRACS is also having to bear the associated expenditure relating to their cars, telephone, the plant they use et cetera. TRACS have paid both their own employees and those said to be so employed by PWME. In order to recover that expenditure TRACS would have to issue an invoice to PWME. Given the present situation, there is little point in issuing the invoice as it would not be paid. The situation would be very different if a Receiver was appointed for PWME. They are able to bill AMEC-SPIE for the work that has been carried out."

29. He goes on in paragraph 60 to say this:

"I am told by Mr Bobeckyj that he has been informed by the acting Managing Director of TRACS [John Reid] that TRACS will not get any new work given the on-going problem with the directors of PWME. Rumours are spreading that the Directors of PWME have injunctions against those presently involved with TRACS and rumours have been circulated that the fraud squad are involved and are investigating TRACS. I believe that the presence of a Receiver, to take control of PWME will calm the situation."

30. He exhibited to that affidavit a fax from Mr Sampson to Mr Taylor of AMEC Spie dated 30th April 2001. That fax, on 'PWME' headed paper, is in these terms:

"Please find attached Company profile for PWME. I have included the resources of both companies who have the same Directors and managements team and are seemlessly joined."

31. The company profile, which is attached to that letter contains these paragraphs:

"PWME has been established to supply the Main Rail Contractors with a reliable, trained and experienced resource specialising in the maintenance and renewal of the Permanent Way.

...

Through our Sister Company TRACS Engineering Ltd we have been working for the past two years establishing a reputation for delivery on time, every time. In this period we have carried out £5M of track maintenance and renewal work from installation of IBJ's to 500m of complete renewal. Our Turnover projections for 2001/2002 are £6.5M.

...

Attached is an organagram showing the structure of PWME/TRACS and how they fit together to supply a one-stop shop for client needs."

(There is nothing in the papers supplied to this Court which I can identify as an organagram.)

32. Mr Sampson responded to that affidavit by witness statement (his third) made on 10th July 2001. It is fair to note that he had very little time to prepare that response. At paragraph 9 he addressed the suggestion that Tracs would be placed in liquidation if no receiver were appointed over the Beechbrook Farm Contract, and he said this at paragraph 9:

"... I find it difficult to see how the appointment of a receiver would help TRACS. As I stated before, the mark-up on the AMEC/SPIE project is 9% and the net profit is around 3%. In other words on a project worth £652,000, the anticipated mark-up is around £53,800 and the profit is around £18,000. The contract price and the level of mark-up are shown in the Resources Schedule attached to the contract dated 30 May 2001 between PWME and AMEC/SPIE."

33. Crane J declined to appoint a receiver on 10th July. He gave directions that Tracs should file evidence by the close of business on the following day regarding (a) whether the court can and should give directions to an appointed receiver and (b) what guidelines Tracs proposed for the operation of PWME if a receiver were appointed. He directed that that application should be listed for further half-day hearing at the end of the following week. The judge's directions, if I may say so, appear to reflect an understandable concern as to just what it was that a receiver would do if appointed in this case. Crane J made a further order on 11th July 2001, which sets out undertakings given by each party over until the hearing of the receivership application.
34. In response to the judge's directions on 10th July, Mr Brown, a partner in Reed Smith Warner Cranstone, made a witness statement on 11th July. Apart from setting out a number of authorities on the power of the court to appoint a receiver - which, so far as I am aware, is not in doubt - the witness statement is of little or no assistance in spelling out what it is that a receiver is expected to do, in practice, in this case. Mr Brown refers back to paragraphs 9 to 11 of the second affidavit of Mr Fallon sworn on 21st June 2001, which I have already read. Those paragraphs contain the proposal that the receiver will not take over the day-to-day management of the contract. The day-to-day management is to be handled by Mr Pollock. The purpose of the appointment is - as it is put by Mr Fallon - to distance Mr Sampson and Ms Wilson from the works. He does not meet the point made by Mr Sampson in his affidavit of 21st June that he, Mr Sampson and Ms Wilson, are in fact the persons on whom AMEC Spie depends and requires to be in charge. Mr Brown's witness statement of 11th July, as it seems to me, fails to meet the concerns which were troubling Crane J the previous day.
35. Mr Sampson made a further witness statement (his fourth) on 13th July 2001. He did so in order to meet allegations made by Mr Martin Steele, which, as I have said, Mr Sampson had not had sufficient time to address in his third affidavit of 10th July; but he does not take the opportunity of explaining the circumstances in which he referred in his letter to Mr Taylor of 30th April to the fact that PWME and Tracs were "seemlessly joined"; other than to suggest, as he does in paragraph 11, that it seemed to make sense to stress the links between Tracs and PWME and that the two companies were obviously better off working in conjunction with each other. At paragraphs 35 and 36 he says this:

"Further, the costs of a receiver would appear to be disproportionate. Even if the Claimant succeeds at trial, its entitlement will be to an account of the profits that the Defendants have made as a result of breach of fiduciary duty. However, as I stated before, although the turnover involved in the AMEC/SPIE project is some £652,000, the level of mark-up is 9% and the net profit is only around 3%. In other words, the anticipated mark-up is around £53,800 and the profit is only some £18,000. The contract price and the level of mark-up are shown in the Resources Schedule attached to the contract dated 30 May 2001 between PWME and AMEC/SPIE. It cannot be right to incur receivership costs of £50,000 in order to protect an asset of £18,000 - particularly as neither PWME nor the Claimant is able to fund the Receiver for the difference between these two figures.

The reality is that only Ms Wilson and I can run this contract. Indeed, Mr Fallon accepts that the receiver will not be involved on a day-to-day basis. Accordingly, her role is likely to be limited to receiving payments made under the contract. I genuinely believe that the Claimant does not need that protection. It already has the protection of the freezing order which has the effect that the Defendants would risk being in contempt of court if they attempted to deal with PWME's assets other than in the normal course of business. Further financial protection was offered to the Claimant in our solicitors' letter of 3 July 2001 and also in the form of undertakings given to the Court by the Defendant on Wednesday 11 July."

36. I return now to the provisions of Beechbrook Farm Contract. It is important to keep in mind that, for practical purposes, the Beechbrook Farm Contract is the only asset of PWME in relation to which the appointment of a receiver is sought. It is exhibited as "RWS/3" to Mr Sampson's third witness statement. The contract is based upon PWME's submission of 29th April 2001, which itself is annexed to and forms part of the contract. The submission includes an estimated price breakdown in the form of a spread sheet. That sets out, day by day, week by week and in detail, the daily costs of labour and equipment and the daily schedule of work to be done for the period commencing 4th June 2001 and running through to the end of the week commencing 3rd September. Total costs are shown at £598,860. To that is added an item for overhead profits in the sum of £53,897.40. As Mr Sampson explained, that represents a mark-up of 9% on total cost. The aggregate of total costs, taking those figures together, is £652,767.40. That is described in the contract as "target cost".
37. The contract provides, under a paragraph headed "pain/gain", that if the contract works are completed for less than 90% of the target cost PWME will retain 50% of the saving; if completed for between 90 and 100% of the target cost, PWME will retain 25% of the saving; and if the target cost is exceeded, PWME will recover only its net cost, exclusive of the fee, in respect of the overspend.
38. The obligation of PWME under the contract is to provide labour and plant for installation of the works. The works are defined by reference to drawings, but may be described loosely as the installation of 14,800 metres of jointed track, consisting of wooden base-plated sleepers on a minimum of 200 mm of ballast, with UIC rail provided in 18, 16 and 14 metre lengths. There are to be 60 half-connections, one diamond crossing and eighteen buffer stops. The main contractor (AMEC Spie) is to provide the ballast and is to undertake the necessary tamping. The payment terms are 30 days of receipt of invoice with supporting documentation, but with a 5% retention. My understanding is that invoices are rendered fortnightly. They will include the sums actually expended or charged by PWME in providing labour and plant and the 9% mark-up. The labour costs will be paid by PWME whether the work is done by workmen directly employed by PWME or - as I suspect is not uncommon in this field - employed on subcontract. The hire cost of the plant - that is to say dozers, telehandlers and other machines for moving ballast, sleepers and rails - will also be paid by PWME. Part of the expertise required, no doubt, is in managing the cashflow so that what is received by PWME from AMEC Spie matches what PWME has to pay out in labour and plant hire charges.
39. That was the state of the evidence when the matter came before the Deputy Judge on 18th July. He made the order for the appointment of a receiver to take possession of, collect and get in the property of PWME with powers substantially in the terms of Schedule 1 to the Insolvency Act 1986; that is to say the powers of an administrator or an administrative receiver appointed under that Act. But, whatever else the court may have been doing under section 37 of the Supreme Court Act 1981, it was not appointing an administrator or an administrative receiver.
40. The defendants immediately applied for permission to appeal and a stay of execution. That application came before me on very short notice late on Friday, 20th July 2001. For reasons set out in a judgment which I delivered that evening, I stood the application for permission to appeal over until today and stayed the order appointing a receiver in the meantime. I imposed financial reporting conditions on PWME over the intervening period of six days.
41. The reasons which led the Deputy Judge to appoint a receiver are set out in a judgment of which we now have an unapproved transcript. After setting out the background to the dispute, the judge said this, at page 8B-G:

"The continuance of that contract is in the interests of both parties. From the claimants' point of view it may bring in monies whereby their alleged losses to date may be recouped and whereby they may profit in the future. From the defendants' point of view the failure of the contract could well result in the third defendants having to go into liquidation, and the first and second defendants being called upon to meet guarantees they have given to the bank for as security for a £100,000 loan made to fund the third defendants.

Mr Brown, for the claimants, tells me that the situation now is that the claimants simply do not trust the defendants. Recently the claimants have given undertakings to the defendants, the terms of which are not before me but were given after the defendants had issued an application for an injunction. Mr Brown has put before me a bundle of recent correspondence in which the claimants allege the first defendant has been seeking to take custom from Tracs.

Is it then just and convenient that a receiver should be appointed in these circumstances?"

42. The judge observed that Tracs' case was that they simply did not trust Mr Sampson and Ms Wilson. He referred to a further letter from Mr Bedford of AMEC Spie, which had been obtained and put in over the adjournment between 18th and 20th July. The letter was in these terms:

"The progression of our track-laying operations at Beechbrook Farm are to programme, and in accordance with PWME's subcontract prices, is of paramount importance to AMEC Spie. Essential resources are already having to be supplemented by AMEC Spie in order to maintain the timely progression of the works as a direct result of Tracs withdrawing labour supposedly contracted to themselves. AMEC Spie would reserve their position with regard to determining the contract pending an examination of any terms resulting from a court decision to appoint a receiver, and again depending upon the contract being completed to progress and within the agreed subcontract prices. AMEC Spie have advised PWME that any additional costs incurred by AMEC Spie as a result of this current dispute between PWME and Tracs will be sought from PWME. We trust that our comments clarify our position and that we must restate that the completion of our works to programme and within budget are the driving forces of any position that we accept, subject to the approval of AMEC Spie's board and our client."

43. The judge observed that the case for breach of fiduciary duty appeared to him to be a very strong one and that he could well understand that Tracs felt unable to trust the defendants in the light of what it, Tracs, believed had happened. He went on at page 13D to say this:

"Is there a good cause for the appointment of a receiver? I have concluded that there is. Without a receiver the claimants are at the mercy of the defendants in how they progress the contract if they continue to be able to do so. Freezing orders give some protection over existing assets, but not over the continuing success of a contract in which the claimants consider and assert they have rights. Further, it is apparent that Tracs is at present withdrawing support from the third defendants. With a receiver in place then cooperation may result, since it is in the interests of both that the contract continues."

44. The question whether or not to appoint a receiver under section 37 of the Supreme Court Act 1981 is essentially a matter of discretion. This Court should not interfere with the judge's exercise of that discretion unless satisfied that he has erred in principle, taken into account matters which he should not have taken into account, left out of account matters which he should have taken into account or that his decision is plainly wrong.
45. In my view this is a case in which this Court should interfere. It seems to me that the Deputy Judge failed to distinguish between two distinct questions. First, what are the prospects that Tracs will succeed in its claim that the business of PWME, which, on the material at present available, consists solely of the completion of the Beechbrook Farm Contract, is an asset to which it is entitled beneficially; and, second, what is required by way of interim remedy in order to ensure that, if Tracs does succeed in its claim to be beneficially entitled to that asset, the asset is available to meet that claim?
46. On the first question the judge reached a strong view in favour of Tracs. He may well be proved correct. Nevertheless, it is important to keep in mind the danger of reaching conclusions on untested evidence. The position may look different after a trial. But the apparent strength, or otherwise, of Tracs' claim to the benefit of the Beechbrook Farm Contract is of little or no relevance to the second question: whether the asset will be available to meet the claim if the claim succeeds. There are, I think, two elements in that second question: first, whether the contract will be completed on schedule and within budget, so that a profit will be generated; and, second, whether the fruits of the contract, in the sense of the profit generated, will be properly accounted for and secured - that is to say will not be dissipated by the defendants.
47. As to the first of those elements, the first concern is whether AMEC Spie will exercise whatever rights it has to determine the Beechbrook Farm Contract if a receiver is appointed. It is not intended as a criticism if I say that Mr Bedford's recent letter suggests that AMEC Spie wishes to reserve its position on that point until it sees what order the court actually makes; in what terms a receiver, if any, is appointed; and, further, what the receiver actually does in practice. The second concern is whether successful completion of the contract depends on the continued involvement of Mr Sampson and Ms Wilson.
48. I find it impossible to read the substantial documentation in this case - as I have - without reaching the conclusion that the progress of the contract to successful completion does depend on the continued involvement of Mr Sampson and Ms Wilson on a day-to-day and hands-on basis. The contract has now run for seven of its thirteen weeks. There are six weeks to go. It appears from the schedule to the contract to which I have referred that the last four of those weeks are to be devoted to snagging. The works themselves, other than snagging, should be substantially complete within a couple of weeks from today. It seems to me that to make a change in the day-to-day management of this contract at this stage would be a recipe for chaos or disaster. Experience suggests that construction contracts almost invariably give rise to disputes in their closing stages, frequently in relation to snagging. There are obvious advantages in continuity and obvious disadvantages if new managers are brought in who have no knowledge of the history of the operation of the contract. It seems to me almost inevitable that, unless directed otherwise, a receiver, if appointed, would take the view that the only sensible course would be to continue the employment of Mr Sampson and Ms Wilson in connection with this contract, at least until such time as the receiver found it impossible to work with them as a result of lack of cooperation. I can see no basis, on the present material, to suggest that, if the court were asked to do so, it would direct the receiver not to employ Mr Sampson and Ms Wilson. The judge did not take that course.
49. The position, therefore, is that the appointment of a receiver is unlikely achieve the clean break which Tracs asserts that it wishes to achieve. The probability is that, if the contract is to be performed to successful completion, it will be because Mr Sampson and Ms Wilson continue to be involved in it. To put the point another way: if the appointment of a receiver has the effect that Mr Sampson and Ms Wilson continue to be involved, the contract will probably be completed successfully. If it does not have that effect, then there is a serious risk, in my view, that the contract will founder; or at least it will not yield the profit of which it is capable. It should be kept in mind that Mr Sampson and Ms Wilson have every incentive to make a success of this contract, if only because they hold 40% of the shares in Tracs. More important to them, I suspect, is the effect that a failed contract will have on their own reputations as contract managers.
50. The question, then, is what interim remedy is required in order to ensure that the fruits of the contract are properly accounted for and secured. It is a feature of this contract that, as I have indicated, the financial management is largely a matter of managing cashflow. Proper invoices must be submitted to AMEC Spie. Cash which comes in from AMEC Spie must be disbursed in paying labour costs and plant hire charges. What is left goes to overheads and profit. No doubt those functions could be performed by a receiver; although I doubt whether, in practice, they would be performed by the receiver personally. She will employ staff to perform those functions. But why should the expense of employing accountancy staff in the City of London be incurred if those functions can be done satisfactorily by PWME's own accountancy staff; in particular by Ms Wilson in her role as Financial Director?
51. What is required, as it seems to me, is, first, some safeguard in place which ensures that monies received from AMEC Spie are not dissipated, or diverted for improper purposes; and, secondly, that the cashflow can be monitored so that it can be seen that what comes into PWME goes out to the proper recipients. Those safeguards were put in place by the judges' orders to which I have referred (which imposed freezing injunctions) and, on a temporary basis, by the order which I made on 20th July for monitoring on a 24-hour basis. It has not been suggested that those provisions are not working satisfactorily; or that they could not continue to work satisfactorily, at least until the conclusion of the contract. When the contract has been completed and there is no more cash in-flow from AMEC Spie the appropriate safeguards may have to be looked at again. But none of that requires the disruption of appointing a receiver, with all the connotations of insolvency which that is likely to have, however unjustified; nor the expense of some £50,000 on a contract which, at best, seems capable of generating a profit equal to no more than half that figure.
52. What these parties require, if I may say so, is a mediator, not a receiver. They require some form of dispute resolution beyond what this litigation will provide if Mr Sampson and Ms Wilson are to be able to continue to deploy their expertise in the future.
53. For those reasons, which I have stated at somewhat greater length that I would have sought to do if this judgment had been reserved, I would grant permission to appeal and would allow the appeal; discharging the order for the receiver but continuing the provisions for monitoring to which I have referred.
54. LORD JUSTICE PETER GIBSON: Although we are differing from the judge exercising the discretion vested in him, for the reasons given by my Lord, I too am satisfied that the judge, in making an order appointing a receiver, granted an inappropriate and disproportionate remedy. I would concur in the orders which my Lord has proposed.
ORDER: Application allowed; appeal, which followed on immediately afterwards, allowed; Tracs to pay the successful defendants' costs incurred in respect of the application for the appointment of a receiver - ie the costs here in front of Chadwick LJ, and in the court below; an interim payment of £10,000 within 14 days.