COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEENS BENCH DIVISION
BRISTOL MERCANTILE COURT
(His Hon. Judge Raymond Jack Q.C.)
Strand, London, WC2A 2LL
Thursday 26th April 2001
B e f o r e :
LORD JUSTICE TUCKEY
LADY JUSTICE ARDEN
| ERIC TERENCE DAY
|- and -
|JAMES THOMAS GREGORY COOK
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Iain Hughes Q.C. and Mr Ben Elkington (instructed by Beachcroft Wansbroughs for the Respondent)
Crown Copyright ©
LADY JUSTICE ARDEN:
"(1) (a) the Defendant was retained from time to time by the Plaintiff to act in relation to particular transactions on behalf of companies in which the Plaintiff was interested;(b) the Defendant was so retained in relation to each of the transactions particularised in the Statement of Claim;(c) in relation to each of the said transactions the Defendant owed to the said companies a duty of care in contract and tort to act with the skill and care to be expected of a reasonably competent solicitor;
(2) . . .
(3) If, which is not admitted, the said companies suffered any loss or damage as a result of the transactions particularised in the Statement of Claim, any such loss or damage was suffered by the companies only. The plaintiff is not entitled to claim any such loss."
1. Investments in James Cook Solicitor and Estate Agency
" It recorded that Mr Cook was currently trading on his own account as solicitor and estate agent at Theocsbury House in Tewkesbury. It recorded that Mr Cook had put £40,000 into the business it also acknowledged that Mr Day had paid £40,000 to Mr Cook . . . It provided by clause 1 that Mr Day should cause to be made available such bank loans and overdraft facilities as Mr Cook, Mr Day and Mr Cook's bankers should agree for the funding of premises for Mr Cook other than Tewkesbury. It provided by clause 2 that Mr Day should guarantee those monies and any rents (if a landlord required), and that the bank should look to that guarantee before claiming against Mr Cook. So the intention was that Mr Day should underwrite the funding of the expansion of the business.
The combined effect of clauses 1 and 2 was for Mr Day to guarantee to lenders such sums as he agreed to. The intention and proper construction was in my view that Mr Day would provide a guarantee to a lender on which he would be liable. But the clauses can also be read as providing that, as between Mr Day and Mr Cook, Mr Day would be primarily liable to a lender if he agreed to the loan regardless of whether he had given a guarantee to the lender. Mr Cook was later to take advantage of this ambiguity.
The financing agreement provided that in return for the consultancy services Mr Day should be entitled to invoice Mr Cook for half the profit of the business less the difference between £40,000 and any salary received by Mr Cook from the TL group, salary paid to Mrs Cook and the costs of insurances for the Cook family. The agreement was terminable on twelve weeks' notice by Mr Cook and by twelve months' notice by Mr Day. There were buy out provisions. It was provided that all assets and liabilities of the business should be in the sole name of Mr Cook subject to the guarantee provision". (Core Bundle, pages 34-5).
" I do not think it is putting it in too dramatic terms to say that Mr Cook caused Mr Day to step into the fire so that he (Mr Cook) might step out of it".
16 months to 31 October 1990 - £304,701
Year ended 31 October 1991 - £115,845
Year ended 31 October 1992 - £110,712
As at 31 October 1992 DEAL owed £554,907 to Hill Samuel, £76,875 to TL and £65,807 to Mr Day. Mr Day had given a personal guarantee to Hill Samuel. Hill Samuel brought proceedings against Mr Day on this guarantee but the proceedings were compromised on terms that Mr Day paid £36,000 to Hill Samuel.
2. Investments in computer businesses
"There is nothing unusual about [the cross-guarantees executed or to be executed by the TL group in favour of Lloyds Bank] but they are the type of guarantees that all banks require when there is a facility given to a subsidiary of a parent company. The parent company always guarantees the liabilities of a subsidiary and vice-versa."
Mr Cook then gave Mr Greaves advice about the procedure for obtaining the approval of TCL. Mr Cook then added:
"I am arranging for [TL] to seal an identical guarantee and also identical forms for [TCML] . . .. I am afraid that I will have to tender my apologies to that meeting . . ..
3. Investments in property
The decision of the House of Lords in Johnson v Gore Wood
"1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential, particularly at pages 222-3, Heron International, particularly at pages 261-2, George Fischer, particularly at pages 266 and 270-271, Gerber and Stein v. Blake, particularly at pages 726-729.
2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v. Sheard, at pages 195-6, George Fischer and Gerber.
3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v. Sheard, at pages 195-6, Heron International, particularly at page 262, R.P. Howard, particularly at page 123, Gerber and Stein v. Blake, particularly at page 726. I do not think the observations of Leggatt L.J. in Barings at p. 435B and of the Court of Appeal of New Zealand in Christensen v. Scott at page 280, lines 25-35, can be reconciled with this statement of principle." (page 94E-95A).
"These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)  Ch 204, 223) the loss claimed is "merely a reflection of the loss suffered by the company". In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out any reasonable doubt must be resolved in favour of the claimant."
"The firm's cross-appeal: recoverable heads of damage.
A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to the shareholders. If the company has a cause of action, this represents a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Prudential Assurance Co. Ltd v. Newman Industries Ltd (No.2)  Ch. 204 at p.210. Correspondingly, of course, a company's shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the Company's net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact.
This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none, as in Lee v. Sheard  1Q.B. 192, George Fischer (Great Britain) Ltd v. Multi Construction Ltd.  1 B.C.L.C. 260, and Gerber Garment Technology Inc. v. Lectra Systems Ltd.  R.P.C. 443. Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course, show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant's actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder.
The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, insofar as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, though they have not always been faithfully observed. The position was explained in a well-known passage in Prudential v Newman at p.222: "But what [the shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a loss is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only loss is through the company, in the diminution of the value of the net assets of the company, in which he has (say) a 3 per cent. shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company. A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, of which 99 are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff's shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company."
It is indeed obvious that (on the given facts, where no consequential losses are stated to have arisen) the defendant cannot be made liable for more than £100,000 in total. It is equally obvious, however, that if the damages were recoverable by the shareholder instead of by the company, this would achieve the same extraction of the company's capital to the prejudice of the creditors of the company as the defendant's misappropriation had done.
It has sometimes been suggested (see, for example, George Fischer v. Multi Construction at p.266 g-i) that Prudential v. Newman is authority only for the proposition that a shareholder cannot recover for the company's loss, and is confined to the case where the defendant is not in breach of any duty owed to the shareholder personally. That is not correct. The example of the safe-deposit box makes this clear. It is the whole point of the somewhat strained business of the key. The only reason for this is to demonstrate that the principle apples even where the loss is caused by a wrong actionable at the suit of the shareholder personally.....
The plaintiff sought to distinguish Prudential v Newman by arguing that the defendant was in breach of a duty owed to him personally. But, as I pointed out, that was not the problem. The problem was that the only conduct relied upon as constituting a breach of that duty was the misappropriation of assets belonging to the old companies, so that the only loss suffered by the plaintiff consisted of the diminution in the value of his shareholding which reflected the depletion of the assets of the old companies. The old companies had their own cause of action to recover their loss, and the plaintiff's own loss would be fully remedied by the restitution to the companies of the value of the misappropriated assets. It was not alleged that the plaintiff had been induced or compelled to dispose of his shares in the companies; he still had them. If he were allowed to recover for the diminution in their value, and the companies for the depletion of their assets, there would be double recovery. Moreover, if the action were allowed to proceed and the plaintiff were to recover for the lost value of his shares, the defendant's ability to meet any judgment which the old companies or their liquidators might obtain against him would be impaired to the prejudice of their creditors. The plaintiff would have obtained by the judgment of the court the very same extraction of value from the old companies at the expense of their creditors as the defendant was alleged to have obtained by fraud. ...As Hobhouse L.J. observed in Gerber (at p. 471), if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. By a parity of reasoning, the same applies if the company settles for less than it might have done. Shareholders (and creditors) who are aggrieved by the liquidator's proposals are not without a remedy; they can have recourse to the companies Court, or sue the liquidator for negligence.
But there is more to it than causation. The disallowance of the shareholder's claim in respect of reflective loss is driven by policy considerations. In my opinion, these preclude the shareholder from going behind the settlement of the company's claim. If he were allowed to do so then, if the company's action were brought by its directors, they would be placed in a position where their interest conflicted with their duty; while if it were brought by the liquidator, it would make it difficult for him to settle the action and would effectively take the conduct of the litigation out of his hands. The present case is a fortiori; Mr Johnson cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another.
Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company's funds and which the company would not have sustained itself. . . ."
"to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons." (Principles of Corporate Governance, American Law Institute (1994) para 7.01).
Submissions on this appeal
(1) Appellant's submissions
"In August 1988 TL paid £40,000 to Mr Cook, and in March 1989 £100,000. Initially TL had a straightforward claim in debt to recover the £100,000. Mr Cook was also in breach of duty to TL in requesting it." (Core Bundle page 75).
Mr De Navarro submits that it is significant that the Judge did not say that Mr Cook was in breach of duty to TL in requesting the £40,000. (One possibility is that the second "£100,000" should read "£140,000" and that the Judge failed to spot that error when correcting the transcript. However argument has proceeded on the basis that the Judge failed to deal expressly with the question whether Mr Cook was in breach of duty to TL with respect to the £40,000, and accordingly I proceed on that basis too).
(2) Respondent's submissions
"Let me now seek to bring together these various strands so far as is necessary for the purposes of this case: I am not purporting to give any comprehensive statement of this aspect of the law. The law of England does not impose any general duty of care to avoid negligent misstatements or to avoid causing pure economic loss even if economic damage to the plaintiff was foreseeable. However, such a duty of care will arise if there is a special relationship between the parties. Although the categories of cases in which such special relationships can be held to exist are not closed, as yet only two categories have been identified, viz.(1) where there is a fiduciary relationship and (2) where the defendant has voluntarily answered a question or tenders skilled advice or services in circumstances where he knows or ought to know that an identified plaintiff will rely on his answers or advice. In both these categories the special relationship is created by the defendant voluntarily assuming to act in the matter by involving himself in the plaintiff's affairs or by choosing to speak. If he does so assume to act or speak he is said to have assumed responsibility for carrying through the matter he has entered upon. In the words of Lord Reid in Hedley Byrne ... he has 'accepted a relationship ... which requires him to exercise such care as the circumstances require, 'i.e. although the extent of the duty will vary from category to category, some duty of care arises from the special relationship. Such relationship can arise even though the defendant has acted in the plaintiff's affairs pursuant to a contract with a third party."
(a) the relationship between Mr Day and Mr Cook;
(b) the relationship between Mr Cook and TL and between Mr Day and TL;
(c) whether Mr Cook knew or ought to have known that TL (rather than Mr Day) would advance the sum of £40,000 to him;
(d) whether he knew or ought to have known that TL would rely on his advice;
(e) the nature of the advice; and
(f) whether TL had its own legal adviser.
"If TL and TPL had sued Mr Cook in respect of the rental arrangements for Theocsbury House for breach of his duty as solicitor to the companies making the same allegations as I have considered in relation to Mr Day, they would between them have succeeded. Likewise in respect of chain breaking, 7 Vine Street, Hill Farm and Battledown House. I can see no reason for holding that there was a duty on Mr Cook to advise Mr Day as an individual to take independent advice and not holding that he had a duty likewise to advise TL and, after it was formed, TPL.
The position as to TCL is more difficult because TL was not initially to be a shareholder in TCL. Although TCL's accounts show that by 31 January 1989 TL held 26 shares, the agreement of 3 March 1988 provided for the shares to be taken by Mr Day. Nonetheless TL was inevitably involved as the sole source of finance for TCL. Just as there was a duty to advise Mr Day individually as the controlling shareholder, there was a duty to advise the company. If TL had sued Mr Cook in respect of the arrangements regarding TCL, it would have succeeded.
I can omit TCML. . . ."
Mr Cook's Cross-Appeal with respect to the judgment for £100,000
The position of Mr Cook
LORD JUSTICE TUCKEY:
LORD JUSTICE WARD:
"he was shrewd in the management of a business which he understood. He was naive outside his field. I deduce from what I have read and heard that he was completely trusting of those he thought he should trust. He thought he should trust professional men and perhaps also those with a better education than himself."
He put his trust in his solicitor, Mr Cook. Sad to say his trust was misplaced. Mr Cook behaved not only negligently but also in breach of his fiduciary duty to Mr Day. In a word, he behaved dishonourably. I agree he should be reported to the Office for the Supervision of Solicitors as Arden L.J. has directed. The result for Mr Day of this breach of trust was calamitous. Whereas he could at the end of 1987 have regarded himself to all intents and purposes to be a millionaire, he had lost nearly all his wealth by the time the receivers moved in four years later. It is altogether understandable that he should blame Mr Cook and seek to recover from him the whole of the lost fortune he believes he might have been able to enjoy with better advice and in better times.
"Mr Cook prepared heads of agreement between the four main shareholders which were signed and are dated 20th June 1988. They provided for the signatories to be directors and for Mr Moss to be auditor. There was no provision related to funding."
"I do not think that it is putting it in too dramatic terms to say that Mr Cook caused Mr Day to step into the fire so that he might step out of it."
(p.20) "It is further clear that in the autumn of 1987 he (Mr Cook) was taken with the idea of setting up a combined solicitor and estate agency business. ... He hoped ultimately to have a number of branches. Mr Cook was also interested in developing computer software for use by estate agents and solicitors in property transactions."
(p.21) "Thus I find that in the latter part of 1987 Mr Cook was looking to make a substantial change in his professional life. In short he had quite grandiose ideas for escaping from the rut of a small conveyancing practice. He wanted to terminate his partnership and set up a new business which would combine estate agency with legal practice. ... His ability to organise and run such an operation was untested. He had no direct experience of estate agency or of software companies. But most important, he had only £40,000 by way of capital for any new business. He needed money."
(p.22) "I find that when Mr Cook became aware of Mr Day's intention to purchase Theocsbury House, he discussed with Mr Day his plans which I have already outlined. He suggested he should occupy part of Theocsbury House for the purpose of the estate agency business and solicitors practice. I am satisfied that he included in his plans the software aspect of them: he suggested to Mr Day that Mr Day should support a company to be set up for that purpose which would be run by Mr Greaves. I am satisfied that no joint venture as to the solicitor and estate agency business was agreed between Mr Cook and Mr Day at this stage. Nor had Mr Day ever himself considered using Theocsbury House for an estate agency. There is some documentation as to what occurred in 1987 on the software side. The first documentation is two undated pages of notes made by Mr Cook in two pens. They purport to set out the main points of agreement between Mr Day, Mr Cook and Mr Greaves. ... The main features are:(a) Shareholdings - Mr Greaves 39%. Mr Cook 35%. Mr Day 26%.(b) Salaries - Mr Greaves £25,000 (his salary at General Automation), Mr Cook £25,000, Mr Day Nil.(d) Funding - Mr Day to fund salaries of staff including those of Mr Greaves and Mr Cook and to fund equipment rentals etc. …(e) Mr Day's commitment should be for a minimum of 2 years."(p.25) "An agreement was entered into between Mr Greaves, Mr Cook and Mr Day relating to TCL which is dated 3 March 1988. The interval is unexplained. Its main features were:(a) Shareholdings: (as above).(b) Salaries: (as above). …(h) Mr Day should provide funding for the outgoings of the company ...(m) Mr Cook was to devote a major part of his time to TCL it being acknowledged that some time would be required for him to administer the solicitors practice and estate agency, which was to be kept to a minimum."
"(11) Mr Day shall make funds available for payments of the outgoings of the company including in particular but without prejudice to the generality of the foregoing salaries of Mr Greaves, Mr Cook and such other staff as Mr Greaves, Mr Cook and Mr Day may from time to time agree.
(12) Mr Day shall make sufficient funds available to purchase, hire or rent or alternatively shall provide such computer equipment and development software as Mr Greaves may reasonably request and motor vehicles up to the value of ten thousand pounds (£10,000) and such other salaries and vehicles to such other staff as they may from time to time agree ...
(15) Mr Day undertakes to make funds available for the purposes mentioned in this agreement including the payments of the outgoings mentioned herein for a period of not less than two years from the first day of February 1988 ...
(20) Upon the company making commercially viable profits there shall be paid out of those profits as a first charge on those company profits and the company bank account all sums expended by or on behalf of Mr Day in financing the company ..."
(22) Mr Cook hereby undertakes:-(i) that he will devote the major part of his time to the business of the company it being acknowledged ... that a certain amount of his time will be involved in administering the solicitors practice and estate agency ... it also being acknowledged by Mr Cook that he shall spend the minimum possible amount of time in that business. ...
(24) In this agreement any obligation on the part of Mr Day shall be deemed to have been fulfilled if actually fulfilled by any company in which he has a controlling interest."
(p.27) "The starting point for this was not in dispute: it was that Mr Cook had earned £40,000 from Cook and Hickman and he did not want to receive less when he moved to Tewkesbury. Until his new practice as a solicitor/estate agent in Tewkesbury was established, he was going to need money. This had to come, directly or indirectly, from Mr Day. Contrary to what was stated in the agreement relating to TCL, I do not think that Mr Cook intended to spend most of his time working for TCL and only the minimum time for his practice and estate agency. His primary business was the latter combination: TCL was ancillary, and there was little he could contribute on an every-day basis. I reject his evidence that it was not a sham. I find that it was simply a means of getting him the money he needed from Mr Day. I am satisfied that the probability is that the initiative must have come from Mr Cook both as to the suggestion that he should have a salary of £25,000 and that it should be put through TCL. I think Mr Day agreed to it in a mixture of generosity and naiveté. He did so because he wanted to help Mr Cook succeed in his new solicitor/estate agent venture ... On 1st March Mr Cook began business at Theocsbury House as a solicitor and estate agent."
(p.33) "I find that the probability is that in May 1988 Mr Cook was putting his mind to how he was to expand from Tewkesbury to a spread of agencies in surrounding towns. He would need finance for this and the only source was Mr Day. So he had conceived the idea of bringing Mr Day in on a share of the profits. ... The likelihood is that the proposal was discussed in principle with Mr Day about that time and before he agreed to the Stroud proposal. But the form of the venture was not yet determined."
(p.34) "In July and early August 1988 Mr Cook was engaged in drafting two agreements to be entered into between him and Mr Day. The shorter of the two I can call "the consultancy agreement": I will call the other "the financing agreement" ... The final versions were entered into shortly after 5th August 1988. They were backdated, however to 1 March 1988, the date when Mr Cook commenced his new business.
The consultancy agreement provided for Mr Day to give such advice to the practice of solicitor and estate agency being carried on by Mr Cook as Mr Cook might reasonably request. In return Mr Cook was to receive one half of the profits of the practice after deduction of £40,000 save insofar as Mr Cook received salary from another company in the TL group ...
It (the financing agreement) recorded that Mr Cook was currently trading on his own account as solicitor and estate agent at Theocsbury House in Tewkesbury. It recorded that Mr Cook had put £40,000 into the business. It also acknowledged that Mr Day had paid £40,000 to Mr Cook - to which I will return. It provided by clause 1 that Mr Day should cause to be made available such bank loans and overdraft facilities as Mr Cook, Mr Day and Mr Cook's bankers should agree for the funding of premises for Mr Cook other than Tewkesbury. It provided by clause 2 that Mr Day should guarantee those moneys and any rents (if a landlord required) and that the bank should look to that guarantee before claiming against Mr Cook. So the intention was that Mr Day should underwrite the funding of the expansion of the business."
(p.35) "The combined effect of clauses 1 and 2 was for Mr Day to guarantee to lenders such sums as he agreed to. The intention and proper construction was in my view that Mr Day would provide a guarantee to a lender on which he would be liable. But the clauses can also be read as providing that, as between Mr Day and Mr Cook, Mr Day would be primarily liable to a lender if he had agreed to the loan regardless whether he had given a guarantee to the lender. Mr Cook was later to take advantage of this ambiguity."
(p.36) "On 28th July Mr Cook had written two letters to Griffiths Marshall (his accountants) each enclosing a copy of the then draft of one agreement asking for their advice. ...
The second letter relates to the financing agreement. It refers first to the two sums of £40,000. Mr Day had at this date paid £10,000. Mr Cook wrote: "If the matter is ever queried it will be considered to be an interest free loan". I am satisfied that Mr Cook was concerned here as to the view that the Law Society may take of the association of Mr Day with his business as a solicitor. That was one of the problems listed on the note."
"WHEREAS:(2) Mr Cook and Mr Day have agreed that Mr Day will make funds available to Mr Cook and will guarantee or cause to be guaranteed suitable banking arrangements for Mr Cook to carry on in business at Theocsbury House aforesaid and such other places as Mr Cook and Mr Day shall from time to time agree.NOW THIS AGREEMENT WITNESSETH as follows:-1. Mr Day has paid Mr Cook the sum of forty thousand pounds (£40,000.00) which Mr Cook hereby acknowledges. Mr Day shall cause to be made available such bank loans and overdraft facilities as Mr Cook, Mr Day and Mr Cook's bankers shall agree ...
2. Mr Day shall guarantee or cause to be guaranteed the moneys referred to in clause 1 hereof ... to the intent that in the event of the said loans and overdrafts being called in by the said bank the said bank shall rely upon the said guarantees and any security provided to the said bank in support of such guarantees before making any claim against Mr Cook in respect of the said loans and overdrafts.
3. The sums of £40,000 each paid by Mr Day and Mr Cook shall not bear interest."
(p.38) "I must return briefly to the £40,000 paid by Mr Day through TL to Mr Cook in tranches of £10,000 on 28th July 1988 and £30,000 in early August 1988. I am satisfied that this was paid as part of the arrangements contained in the two agreements backdated to March 1988. I think that it was probably dealt with on the basis of "I have put in £40,000: you should too." I think it unlikely that it was discussed whether or not it was of the nature of a loan. Mr Cook's own letter to Griffiths Marshall shows that he saw a difficulty in treating it as capital advanced to the partnership, and preferred to treat it as a loan. I consider that it should be treated as a loan, but a loan that was not repayable so long as the arrangement set out in the agreements continued: I refer to clause 3 and 6(iii) of the financing agreement.
I have traced through in some detail what occurred in relation to the two agreements backdated to 1 March 1988 because of the light it throws on relations between Mr Cook and Mr Day. As I have said, the agreements did not cause Mr Day any actual loss apart from the £40,000. The agreements show how Mr Cook pursued his own interests in disregard of his duties to his client. This is relevant when one has to consider the other transaction."
(p.39) "In March 1989 £100,000 was paid as a loan by TL to Mr Cook. Mr Cook stated that this was paid to keep the business going pending its sale, as they both realised that the property bubble had burst. ... Mr Day stated that Mr Cook approached him for the loan on the basis that the business had not done as well as expected and that it would come round. He said he was shown projections for the future which showed profits. These are available among the trial papers. I accept Mr Day's evidence."
(p.44) "By reason of the collapse of the residential property market the market for TCL's estate agency software was most unpromising. To provide it with work an agreement was entered into with General Automation dated 8th August 1989 whereby TCL was to develop specified legal programs for General Automation for a monthly fee. In the autumn of 1989 its business was at least largely transferred to TCML. In its second year, that is to 31st January 1990, it made a profit of £61,735 leaving only a small loss to be carried forward. This however included a credit of £205,000 for know-how sold to TCML. £190,217 was owed on bank overdraft. Mr Greaves was transferred to TCML and left in May 1990. TCL appears to have continued to trade in some minor way. There was a loss in the period to 20th March 1991 of £46,454. It was struck off the Register of Companies on 24 November 1992."
(p.47) "I do not think that at the start Mr Cook set out to take deliberate advantage of Mr Day. But he found that he was, as it were, pushing at an open door. For Mr Day liked to be generous, and he wholly trusted Mr Cook. I think that at the very start when Mr Cook first told Mr Day of his plan and suggested he might be his tenant Mr Cook allowed himself to be blind to the position of conflict of interest in which he was placing himself. But from an early stage the position of conflict in which he was placing himself must have been obvious. His desire to put his plan into action and his need for a backer were the cause of his blindness. ... I find that as 1988 progressed his self-interest became the more dominant. In 1989 he was saving himself at the expense of Mr Day."
(p.48) "I have intended to mention all matters of real importance. I should record that there were other matters investigated in the evidence which I have omitted."
(p.50) "It must have been that there were surely investment opportunities around Tewkesbury which offered Mr Day a surer and fairer return on his capital than the scheme for TCL. It must have been that the scheme was unfairly balanced in favour of Mr Cook at Mr Day's expense. I am satisfied that the probability is that Mr Day would have followed such advice."
(p.54) "This brings me to the agreements made in August 1988 but back-dated to 1st March 1988, the payment of £40,000 to Mr Cook at about the time of their making, the payment to Mr Cook of £100,000 in March 1989, the take-over by DEAL of the agencies together with half of Mr Cook's Hill Samuel debt. I have no doubt that any responsible adviser who was shown the two agreements would have advised Mr Day not to sign them and not to invest £40,000 or any other sums in Mr Cook's estate agency business. The two agreements, one to be kept secret, were a warning in themselves against becoming involved with Mr Cook in this venture. Mr Day would have been advised that he was being used by Mr Cook to provide funding potentially without limit for an uncertain return. …I am also satisfied that on receiving such clear advice Mr Day would have followed it."
(p.55) I therefore find that by reason of Mr Cook's admitted (or very largely admitted) breaches of duty Mr Day was caused to make the investments which he did."
(p.63) "In my view these cases establish that a client may be entitled to equitable compensation for loss incurred by reason of the solicitor acting in conflict of interest and so breach of fiduciary duty. Thus compensation is the converse of the right to an account of profits where the transaction is profitable. It is a defence to such claim both that the client was fully informed as to the transaction and that the transaction was fair."
(p.64) "I think that they (the transactions) were unfair:(b) The arrangements for TCL, in particular Mr Day's low shareholding combined with his obligation to finance the company over an uncertain period with the provision of Mr Cook's salary, were unfair.
(h) The advances of £40,000 and £100,000 to Mr Cook were unfair."
(p.65) "It seems to me, however, that the compensation to be provided particularly in an equitable jurisdiction must be fitted to the facts of the case. The situation here is that Mr Cook misused his position as a solicitor to draw his client into a series of transactions which were of potential benefit to himself and unfair to his client, and which have resulted in loss to his client. In these circumstances it does not provide adequate compensation simply to redress the unfairness, leaving the client with losses from a transaction which he would not otherwise have entered into. Fairness requires that in these circumstances the client should recover the whole of his loss. I conclude that this way of putting his case is available to Mr Day and would enable him to recover the measure of compensation which he seeks."
(p.65) "Mr Day's claim aims to restore the financial position which he would have had through his shareholding in TL if he had not entered the transactions of which he complains. In the amended statement of claim, with respect to each transaction which is complained of reference is made to "the plaintiff's loss of value in Theocsbury Ltd."..."
(p.66) "(a) Mr Cook owed a parallel and indistinguishable duty to TL in respect of the transactions complained of as he did to Mr Day. Prior to TL's dissolution or the barring of the claims by limitation, TL had a claim against Mr Cook for such damage as TL suffered. That damage included the loss of its assets, namely the damage now claimed by Mr Day.
(b) In accordance with decisions of the Court of Appeal ... a shareholder cannot claim for a diminution in the value of his shareholding in such circumstances: the claim must be brought, if at all by the company."
(p.74) "In the present case there is no doubt as to the duty owed by Mr Cook as a solicitor to Mr Day in connection with the transactions with which I am concerned. It was well established by the evidence and eventually accepted on Mr Cook's behalf. ... This is in contrast with at least some of the cases in the Court of Appeal considered in Johnson and perhaps with Johnson itself. It is here the duty to the companies which may require scrutiny."
(p.75) "The position as to TCL is more difficult because TL was not initially to be a shareholder in TCL. Although TCL's account show that by 31st January 1989 TL held 26 shares, the agreement of 3 March 1988 provided for the shares to be taken by Mr Day. Nonetheless TL was inevitably involved as the sole source of finance for TCL. Just as there was a duty to advise Mr Day individually as the controlling shareholder, there was a duty to advise the company. If TL had sued Mr Cook in respect of the arrangements regarding TCL, it would have succeeded.
In August 1988 TL paid £40,000 to Mr Cook, and in March 1989 £100,000. Initially TL had a straightforward claim in debt to recover the £100,000. Mr Cook was also in breach of duty to TL in requesting it."
Finally the judge held:-
(p.81) "The outcome is that Mr Day is successful against Mr Cook in respect of £36,000 which he had to pay to Hill Samuel under his guarantee of the indebtedness of DEAL and in respect of £13,851.43 advanced by him to DEAL before 31 October 1990. He is also successful in respect of the £100,000 loan assigned to him by TL's receivers. His major claim to recover the overall reduction in his wealth caused by Mr Cook fails."
As to Mr Day's claim in respect of the £40,000 advanced to Mr Cook's solicitor and estate agency practice.
£40,000 – a personal or a company advance?
"In reliance upon these representations and induced thereby the plaintiff caused Theocsbury Ltd. to make a loan of £40,000 to the defendant."
"(iv) The defendant was not retained to advise the plaintiff in his personal capacity or to advise any company as to the commercial wisdom of entering into a particular transaction.
(vii) Further alternatively, if and insofar as any advice was given by the defendant to the plaintiff as to the merits of entering into a transaction (the same being denied) such advice was given to the plaintiff in the context of the joint venture agreements between the plaintiff and defendant dated 1st March 1988 (2), 3rd March 1988 and 20th June 1988."
"It was agreed between the plaintiff and the defendant prior to the setting up of the solicitor/estate agency business that both of them would invest the sum of £40,000 in the said business. The interests of the plaintiff and the defendant in the said business were governed by the two agreements dated 1st March 1998 …"
"Under the terms of the agreement, TL would lend the defendant the sum of £40,000." My emphasis again.
"Pursuant to the signing of the service agreement, I authorised TL to pay over a cheque of £40,000 in favour of the defendant by instalments of £10,000 immediately and a further £30,000 within 14 days after that. The loan was in the total sum of £40,000 because this was the figure that the defendant indicated that he was short. The defendant also indicated that if anything happened to him, his wife would be aware from the documentation that there was a loan outstanding of £40,000 to TL. This sum was shown as a loan in the balance sheet of his practice prepared by his accountant."
"We both agreed to invest £40,000 in the business and to share the profits on a 50/50 basis."
"Mr Day paid his investment of £40,000 in two tranches. £10,000 was paid by TL on 28th July as per document 4863 in the defendant's discovery. The balance of £30,000 was paid by TL on 4th August 1988. This represented his initial investment of £40,000 as had been agreed between us.
96. It has been suggested that the £40,000 invested by each of us amounted to a loan. This is incorrect - there was no agreement regarding the repayment of the money by the business. The money was an investment in the business. If the business had prospered as anticipated then I am sure that both Mr Day and I would have expected to get our investment back." (In case it is not by now obvious, I have added the emphasis).
(1) Mr Cook had discussed the agreements at least in broad terms with Mr Day who knew that he was to assist with the financing of the business in return for half the profits after Mr Cook's £40,000.
(2) The judge was "satisfied" that the £40,000 was paid "as part of the arrangements contained in the two agreements backdated to 1st March 1988."
(3) The financing agreement acknowledged that Mr Day had paid £40,000 to Mr Cook.
(4) The judge considered that the payment should be treated as a loan.
(5) The agreements did not cause Mr Day any actual loss apart from the £40,000.
(6) In March 1989 £100,000 was paid as a loan by TL to Mr Cook.
(7) The judge was satisfied that when Mr Cook wrote to his accountants on 28th July saying that if the matter was ever queried the money should be considered as an interest free loan, Mr Cook was there concerned as to the view the Law Society might take of the association of Mr Day with his business as a solicitor.
(8) The judge was also in no doubt that any responsible adviser who was shown the two agreements would have advised Mr Day not to sign them and not to invest £40,000 or any other sum in Mr Cook's estate agency business.
(9) The advance of £40,000 was unfair.
(10) The judge found - at p.75 - that in August 1988 TL paid £40,000 to Mr Cook and in March 1989 £100,000. He then, however, went on to draw a distinction between the two amounts and held that TL had a straightforward claim in debt to recover the £100,000, not, it is to be noted, £140,000. He also observed that Mr Cook was in breach of duty to TL in requesting "it" when "it" must refer to the £100,000 and not the £40,000. On that reading of the judgment, the judge was not treating the advance of £40,0000 as a company loan, nor was he finding a breach of duty to the company in respect of that transaction.
The claim for £40,000 and Johnson v Gore Wood
"Mr Cook owed a parallel and indistinguishable duty to TL in respect of the transactions complained of as he did to Mr Day."
"Mr De Navarro: Then we go on to record certain facts, "I have introduced £40,000; Terry proposes to introduce £40,000." Note Terry, not Theocsbury Ltd.
Q. That was how you saw it?
Q. You saw Theocsbury Ltd. as simply being the vehicle, did you not, for the introduction of this money?
Q. It was in truth Mr Day?
A. Mr Day owned 999% almost of Theocsbury Ltd.
Q. When you were giving advice to Mr Day at this time, making suggestions to Mr Day at this time, did you not say to yourself, "I am giving advice to the managing director of Theocsbury Ltd.?"
A. I was dealing with Mr Day.
Q. You said to yourself, "I am giving advice to Mr Day"?
A. Dealing with Mr Day.
Q. Lawyers may subsequently seek to draw these distinctions, but they were not distinctions you were drawing at the time, were they?
A. Not necessarily, no.
Q. … then you say Mr Day has in fact paid you £10,000. So, again, it is Terry, not Theocsbury Ltd., although the cheque was in fact drawn on Theocsbury Ltd.
A. I think that is probably right, yes.
Q. "This has been dealt with by paying it into my personal account and by me giving my own cheque and paying it into the office account here; if the matter is ever queried it can be considered to be an interest free loan."
Q. The agreement was only to be signed when the other £30,000 was paid to be dealt with in the same manner. Then I need not trouble you about the next. There is quite a long bit about what happens if either of you died.
My conclusions on the claim to £40,000.
As to Mr Day's claim for damages arising out of the TCL venture.
"At the beginning of August 1988 I arranged for TL to transfer £25,000 to the credit of the bank account of TCL. The sums which TL had already paid on behalf of this company up to that date (which was in effect all the bills of that company) were appropriated to the accounts of the company as a debt. The company was granted an overdraft facility by Lloyds Bank with whom the account had been set up. I wished this money to be paid into a new account for the company so as to set it up on a proper financial footing. I did it to avoid having to debit TL for debts which were not its responsibility. However it was necessary for TL to borrow money at high rates of interest prevailing at that time."
"As far as I am aware TCL was funded with money from TL and/or Mr Day. I was not specifically aware of the details of the financing of the company nor of any loans from TL to TCL."
(1) He took account of the notes made by Mr Cook on the agreement which recorded that Mr Day was to fund salaries of staff including those of Mr Greaves and Mr Cook and to fund equipment rentals etc. Mr Day's commitment should be for a minimum of two years.
(2) He then referred to the agreement itself. He found at p.27 that the agreement was "simply a means of getting him (Mr Cook) the money he needed from Mr Day."
(3) He held that there were investment opportunities which offered Mr Day a surer and fairer return on his capital than the scheme for TCL.
(4) He also found that the arrangements for TCL, in particular Mr Day's low shareholding combined with his obligation to finance the company over an uncertain period and to provide Mr Cook's salary were unfair.
(5) He held there was a duty to advise the company as well as Mr Day and so Mr Day could not recover his personal losses.
As to the impact of Johnson v Gore Wood.
"Nonetheless TL was inevitably involved as a sole source of finance for TCL. Just as there was a duty to advise Mr Day individually as the controlling shareholder, there was a duty to advise the company."
"Mr Harman sought to rely upon the fact that Mr Stubbs was Geoffrey's solicitor under some sort of general retainer imposing a duty to consider all aspects of his interest whenever he was consulted, but that cannot be. There is no such thing as a general retainer in that sense. The expression "my solicitor" is as meaningless as the expression "my tailor" or "my bookmaker" in establishing any general duty apart from that arising out of a particular matter in which his services are retained. The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do."
(1) As to whether or not that was a personal advance or a company advance.
(2) Whether or not Mr Cook owed TL any duty in respect of that advance.
Mr Day should succeed in his appeal because there are no clear findings.
(1) The judge made no findings as to whether or not he suffered any personal damage through the operation of the funding provisions in the March 3rd Agreement;
(2) The judge's findings of a duty owed by Mr Cook to TL was erroneous in that:-(i) It did not follow that simply because there was a duty to advise Mr Day individually as the controlling shareholder, there must be a similar duty to advise the company.(ii) No sufficient reasons were given for that conclusion and the judge's failure to identify why he found as he did is a reason in itself for allowing the appeal.
"(a) Affirm, set aside or vary any order or judgment made or given by the lower courts;
(b) Refer any claim or issue for determination by the lower court;
(c) Order a new trial or hearing; ..."
"His serious illness must have had its affect on his evidence, though I cannot assess how it may have done so."
(1) Was the £40,000 a personal advance or a company advance?
(2) Was a duty owed to TL in respect of that advance?
(3) Did Johnson v Gore Wood apply?
(4) Was Mr Day under a personal obligation to underwrite TCL, and if so to what extent and for what period did he do so, proper regard being had to the agreement of 3rd March 1988, including Clause 24.
(5) Was a duty owed to TL from the inception of this arrangement and if so how did it arise?
(6) If no duty was originally owed, did a separate duty arise from the giving of the cross guarantee in December? How did that duty arise?
(7) How does Johnson v Gore Wood apply in those circumstances and can Mr Day assert pursuant to Lord Bingham's third proposition that he has suffered a loss "separate and distinct from that suffered by the company".
(8) What is the amount of his loss, if any, measured perhaps by reference to the extent to which Mr Day introduced or caused capital to be introduced, the amount of the overdraft at the time up to which the loss has to be calculated and the amounts of any debts incurred by TCL but underwritten by Mr Day, having due regard to its assets at the time any notional balance sheet is to be drawn.
(9) If Mr Day is entitled to any judgment, is he in addition entitled to compound interest and if so at what rate and over what period?