England and Wales Court of Appeal (Civil Division) Decisions

In Plus Group Ltd. & Ors v Pyke [2002] EWCA Civ 370 (21st March, 2002)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
HH Judge Levy QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st March 2002

Lord Justice Brooke:

1. This is an appeal by the claimants against an order of Judge Levy QC in the Central County Court on 9th February 2001 whereby he dismissed their claim against the defendant and directed that judgment be entered against each of them for £115,818, together with interest, on the defendant’s counter-claim.
2. The action arose following the breakdown of the business relationships between Mr Martin Plank and the defendant, who were at all material times the shareholders (on a 50-50 basis) of the first claimants and the sole directors of the four claimant companies, the last three being wholly owned subsidiaries of the first. Mr Pyke was unfortunately incapacitated by a stroke in June 1996, and although he has made a fairly good recovery he did not thereafter participate in directing the affairs of any of the companies. The relationship between the two men became icy from January 1997 onwards. Mr Pyke eventually executed a transfer to Mr Plank of his 50 £1 shares at par. He was then removed as a director of each company in March 1998.
3. In this action the claimants were claiming equitable relief against Mr Pyke in relation to his activities from June 1997, when he set up a new company through which he carried on business with the second claimants’ most important customer, and Mr Pyke was counter-claiming the balance due to him on his director’s loan account, which in turn gave rise to issues relating to certain deductions the claimants alleged had been properly made to the account, and to the identity of the company or companies who were indebted to him.
4. Mr Pyke was born in 1944. He left school at the age of 15 and in due course he started a successful business as a heating engineer. He then moved into shop fitting, and he went on from there to office interiors. He also used to run a building company. In about 1980 he entrusted his financial affairs to Mr Plank. Mr Plank was then about 26. Although he had never qualified as an accountant, he had spent five years with a firm of chartered accountants. When he met Mr Pyke he was trading under the firm name of Plank and Associates. Both men also had some experience in property development on a speculative basis, and in 1980 they formed a partnership called Newland Developments. Seven years later they caused a limited liability company called Portercliffe Estates Ltd to be incorporated, with Mr Pyke and Mr Plank, the only directors and shareholders, each owning an equal half interest. This company took over the business of Newland Developments. Mr Pyke was still continuing to carry on the office interiors business on his own account under the name Interior Plus. In this capacity he developed what he described as an excellent working relationship with Mr David Sheen and Mr Brian Holmes. They were the directors of a company which traded under the name of Constructive Interiors (“Constructive”).
5. In the early 1990s Mr Plank introduced Mr Pyke to a company which ran a joinery business. It was experiencing liquidity problems, and Mr Pyke saw this as an opportunity to acquire a joinery business to enhance his existing business. He made an unsecured loan of £25,000 and became a non-executive director of that company, but unhappily he fell out with the owner of the company, who was running a competing business behind his back. The upshot was that in due course he acquired the assets of that company from its liquidator, and salvaged a small amount of the loan he had made.
6. This sequence of events led to the creation of the group of companies round which this litigation is centred. Although a new company (Joinery Plus Ltd, the third claimants) was formed in July 1993 as the vehicle for what remained of the assets and goodwill of the failed company, Mr Pyke told Mr Plank that he was unable to run a joinery business and also look after his interiors business, and in due course the present company structure emerged. Portercliffe Estates Ltd, which changed its name to In Plus Group Ltd (the first claimants) was to be the holding company of a group of companies carrying on different trades. A new company, called Interior Plus Ltd, was formed in the autumn of 1993 (the second claimants), and in due course it ran Mr Pyke’s former Interior Plus business. A fourth company Joinery Plus Products Ltd (the fourth claimants) was set up to deal with the veneering of products. This company played only a nominal role in what was to follow after Mr Pyke and Mr Plank fell out. The three trading companies carried on between them the business of refurbishing commercial premises and manufacturing and installing specialised joinery.
7. Soon after the second claimants started trading in April 1994, Mr Pyke transferred to its capital reserve account a sum of £200,000 which was standing to his credit in a personal account at the same bank. He did this because he had had experience of a costly financial settlement following his first divorce, and his relations with his second wife, from whom he was living apart, were at that time strained. He did not want a large cash sum accessible in his personal account for this reason, and he therefore agreed to pay it to the second claimants by way of a loan. The second claimants’ first set of accounts, for the year ending 31st March 1995, were signed by Mr Pyke and Mr Plank in January 1996, and they showed this loan, which was subject to certain deductions during the year, as a liability of the second claimants. Both directors also maintained substantial loan accounts with the first claimants.
8. Those accounts were prepared by the group’s financial controller (Ms Hayley Romaine), who had received her training from Messrs Coopers & Lybrand, and they were audited by Messrs Grant Thornton. They showed Mr Pyke’s loan account with the first claimants to be about £146,000 and his loan account with the second claimants to be about £129,000. So far as the latter was concerned, he had withdrawn about £57,000 of the original £200,000 for payments to the Inland Revenue, and there were also withdrawals for personal expenses. Withdrawals of cash sums amounting to £9,800, which became a disputed issue in these proceedings after the 1994-5 accounts were reopened in connection with this litigation, were included by Ms Romaine, and not challenged by the auditors, as legitimate company expenditure.
9. The two directors did not draw any money from the companies by way of salary. Instead, from about June 1995 they had each been drawing £2,500 per month which was debited to their loan accounts with the first claimants. At the end of the financial year which ended on 31st March 1996 the first claimants declared a dividend of £60,000, which led to a credit of £30,000 being posted to each of the loan accounts. The parties’ experts agreed in a joint declaration that the withdrawal of regular sums against a directors’ loan account is a recognised method of delaying the payment of tax. The companies were trading profitably, so that there could be no objection to the declaration of a dividend out of those profits to the two shareholders. These monthly payments continued during the following (1996-7) accounting year until they were unilaterally stopped, so far as Mr Pyke was concerned, after the payment for January 1997 was made. In the company’s books they were recorded in what was called the staff salaries account.
10. The 1994-5 accounts were the last to be audited and then signed by the two directors when they were still working together in harmony. Ms Romaine continued to prepare the company’s books, and in due course Grant Thornton audited the accounts. By the end of the 1995-6 accounting year, Mr Pyke’s loan account with the second claimants had been reduced to about £92,000, mainly due to payments to the Inland Revenue. His loan account with the first claimants, following the crediting of the dividend, stood at about £117,000. Two substantial tax payments, paid on his behalf by the holding company, were the main cause of the reduction (from £146,000) over the year. Mr Plank told the judge that there came a time, which he placed in about 1996, when it was a term of an agreement they had made with a factoring company that the directors could not draw on their loan accounts without that company’s consent.
11. On 6th June 1996 Mr Pyke suffered from a stroke which seriously incapacitated him. He was detained in hospital for nearly a month, and after his discharge on 3rd July he was in no fit state to deal with the companies’ business, although the judge made mention of one meeting, on 11th July, with Mr Brian Holmes, to which Mr Pyke accompanied a member of the company’s staff, at which issues connected with two major outstanding contracts were discussed.
12. During the remainder of 1996 Mr Pyke was in a very poor physical condition. On the plus side the disaster that befell him led to a reconciliation with his second wife. On the minus side he was quite unable to concentrate on work and was in a confused state for much of the time. A recuperative holiday with his wife’s family in Argentina in October, in his wife’s words, “turned out to be a mistake as he was like a zombie the whole trip”.
13. This period must have been very difficult for Mr Plank, as well as for Mr Pyke, because Mr Pyke was the driving force behind the second claimants’ interiors business, and it was he who enjoyed such good relations with that company’s most important customer, Constructive. Be that as it may – and the relevant witnesses described the difficulties in their evidence at the trial – the judge made no specific findings in his judgment about this part of the history. He took up the story in November 1996:

“In November 1996 Mr Plank invited Mr Pyke to lunch at a restaurant called The Chronicles, when Mr Pyke was beginning to recover from the effects of his stroke. At that meeting, for reasons which remain unclear to me even now, Mr Plank suggested Mr Pyke should resign as a director of the subsidiaries, but told him that his income would not be affected. Mr Plank sent him a letter dated 21st November 1996, in which he said that ‘Mr Pyke’s existence on the board would be negative to those who are trying to manage and promote the company they represent’. Why it should be negative to have somebody on the board who was somebody who was a passenger for a time is unclear to me, but that is what Mr Plank wrote.”

14. Mr Plank had set out the reasons for his proposals in some detail in that letter. Shortly before Mr Pyke had his stroke, the man who was managing the fourth claimants had suffered a nervous breakdown. Mr Plank had therefore been endeavouring to run the affairs of all three trading companies as de facto sole director, and he described the problems he faced not only in his first witness statement (at paras 18-19) but also during his evidence at the trial (particularly transcript T3/31). He said that the companies were under tremendous pressures, “banking-wise, staff-wise and contracts-wise”. The local authority was complaining about noise and dust, and the companies’ lease had not very long to run.
15. Against this background, Mr Plank was anxious to secure his and Mr Pyke’s financial interests in the trading subsidiaries by promoting key members of the companies’ staff to the boards. They had recently lost one manager, and Mr Plank said that part of the reason for his departure was the lack of career opportunities. He was very concerned that one or two more of their managers might move on, too, for the same reason. The passage in his letter to which Mr Pyke took such exception was expressed in the following terms. After suggesting that they should take “some relatively simple yet decisive action to safeguard and indeed promote our interest”, Mr Plank continued:

“Your own predicament is to a point a separate issue to the above but has a strong bearing on the effectiveness the changes will bring. Until you are medically fit enough to resume the full responsibilities of a director your existence on the board will be negative to those who are trying to manage and promote the company they represent. You will appreciate that board decisions need to be made by the entire board who are fully aware of all the relevant facts etc; frankly, someone who is not here most of the time cannot claim to be fit enough to make those decisions. In summary, what I propose, until you are fit, able and willing to return to work on a full time basis, is that simultaneously to appointing the senior management to the board of the trading subsidiaries you resign your directorship from each one of them.”

He ended his letter by making it clear that in his continuing capacity as a director of the holding company, Mr Pyke would be able to influence the policy making decisions of the subsidiaries. All he was asking was that Mr Pyke should relinquish his day to day responsibilities.

16. This proposal went down like a lead balloon, so far as Mr Pyke was concerned. In his witness statement he described some minor irritants which had been affecting his relations with Mr Plank before he was invited to the lunch. He had thought this lunch would provide him with the opportunity for being brought up to date with the companies’ affairs. He had been surprised to find the group solicitor, Mr Jenkin, there. He recalled Mr Jenkin trying to stop Mr Plank raising the question of his resignation from the trading subsidiaries, but Mr Plank has been determined to carry on. Mr Pyke said he was wholly opposed to what was proposed.
17. In his witness statement he explained that one of the reasons for his opposition was that it was the key staff of the third claimants, not the second claimants, who were being identified as candidates for promotion. He hoped to return to work, if only on a part-time basis, once he was fit to do so, and he did not want to be squeezed out.
18. During the next two and a half months Mr Pyke tried to deal with the growing crisis in his relations with Mr Plank without the benefit of professional advice. In early December, when Mr Plank was away in the Caribbean with Ms Romaine, Mr Pyke visited the companies’ offices with his father-in-law, and with some difficulty he obtained access to some of the companies’ bank statements. He was surprised to see some regular monthly payments of £500 per month being paid out to a payee called “Portercliffe”.
19. He returned to those offices in early 1997 and was distressed to find that his own office had been moved out of the main company block without any prior discussion with him. Mr Plank denied knowledge of the Portercliffe payments, and Ms Romaine prevaricated when he tried to obtain information from her. The judge found that the Portercliffe payments were eventually identified as payments made to Mr Plank over a long period of time. Mr Plank said they had been made by mistake. These payments were in due course reversed.
20. A letter written by Mr Holmes (of Constructive) to Mr Plank on 7th January 1997 is indicative of the worsening relationships between Constructive and the claimant group of companies during Mr Pyke’s absence from the helm. Mr Holmes said he had considered the second claimants’ “outstanding account details” over the Christmas recess. He summarised his views on the present state of play on four of their contracts, and said he was currently reviewing the position on two more. At the end of a letter which contained a number of complaints about the quality of the second claimants’ work, and/or the inadmissibility of claims for extras in fixed price contracts, he said that the association between their companies was now somewhat tenuous. Until the situation was resolved, it would be inappropriate and unwise for Constructive to award the second claimants any more contracts. A revised statement of account was in the course of preparation.
21. Since the second claimants’ invoices to Constructive (including some that related to very stale matters) were to total about £192,000, it is understandable that Mr Plank was to say that the group was suffering from cash flow problems at this time. In due course he instructed the group solicitors to issue a winding up petition against Constructive, based on this debt. In response, Constructive’s solicitors amplified their clients’ complaints in a letter dated 27th March 1997, to which I refer in paragraphs 35-36 below.
22. During January 1997 Mr Pyke persisted in his efforts to find out the true state of the companies’ accounts. It appears that Mr Auckland of Grant Thornton was then engaged in auditing the 1995-6 accounts, but when Mr Pyke approached him, Mr Auckland told him he would need to obtain Mr Plank’s permission first. Although the judge said that he could not for the life of him see why an auditor should require permission from a co-director before showing the accounts to a director of the companies, it may be that Mr Auckland thought that discretion was the better part of valour in such a potentially explosive situation.
23. However that may be, on 23rd January Mr Auckland sent him copies of the statutory accounts for 1993-4 and 1994-5. He said that the drafts of the 1995-6 accounts were currently with the company for amendment. Ms Romaine was processing the amendments, and Mr Auckland said he hoped he would be able to send Mr Pyke the amended accounts in draft during the next week or so. On the same day Mr Pyke visited the company’s offices and asked Ms Romaine to show him the company’s books. She refused to do so.
24. In response Mr Pyke wrote her what the judge accurately described as “an unfortunate letter which was a foolish step to take”. Instead of seeking advice from a solicitor (a step he was to take a week later) Mr Pyke sought and accepted advice from his stepdaughter. As a consequence he requested Ms Romaine to attend a disciplinary hearing in a week’s time to explain her actions, because he was not satisfied that her behaviour and attitude were in the best interests of the company. He required her to bring with her to the hearing a number of listed items, containing financial information up to the end of 1996. This included bank statements and computerised management accounts. He said that if she was unable to justify her actions and comments at that hearing, he would have no alternative than to initiate a formal disciplinary procedure. On the same day he wrote to Mr Plank expressing the wish that in future they should be the only authorised signatories of cheques and other financial directions, and that Ms Romaine should no longer be so authorised.
25. These letters led to the complete rupture of relations between the two directors. Mr Plank told the judge that the situation was exacerbated by the fact that Ms Romaine had recently had a miscarriage. Ms Romaine and Mr Plank took Mr Pyke’s letter to Mr Evans, who was a partner in Mr Jenkin’s firm. Mr Evans wrote formally to Mr Pyke to the effect that his letter had no legal effect because any disciplinary procedure had to be agreed by all members of the board. He also told him that all the information he had requested of Ms Romaine was available at the company’s office to inspect.
26. Mr Plank wrote to Mr Pyke the same day. He described his demands on Ms Romaine as outrageous, and said that their differences of opinion now appeared to be irrevocable. He expressed doubts about the true state of Mr Pyke’s health and reproved him for not being willing to take some form of productive action:

“Instead, you have adopted an attitude of expecting me to shoulder the entire responsibilities of the group on a full-time basis, whilst you meander through life on full pay.”

27. On the same day Mr Plank spoke to each member of the management staff individually. They all appear to have signed, in Mr Plank’s favour, a letter addressed to the directors, which read:

“Further to recent discussion between myself and Martin Plank the extent of the breakdown in relationships between the two directors have been made known to me.

I understand that it is unlikely that the group will ever again be amicably jointly managed by Martin Plank and John Pyke.

In order to establish the support each director has amongst the management staff I have been asked to indicate which individual I would prefer in future to work with.

I am sorry if my decision causes any concern or grief to the other party but given that I have been asked to choose I would confirm that [Mr Martin Plank] would be my preferred choice.”

The judge recorded, without comment, Mr Plank’s evidence that he hoped he had put no pressure on the staff when he spoke to them. The copy of this letter which is with the court’s papers was signed by Mr Ron Pyke, who is Mr John Pyke’s brother.

28. The working relationships between the two directors, and between Mr Pyke and the four companies of which he was a director, were now at an end, although Mr Pyke remained, in name only, a director of each company for a further 14 months. It is unnecessary to pause very long on a visit he made to the company’s offices on 30th January in the company of his father-in-law and his stepdaughter (who came because she knew how to operate the company’s computers). Suffice it to say that their desire to see up to date management information remained unfulfilled, and each of them received letters from the company’s solicitors threatening them with legal proceedings if another visit of this kind was attempted. Mr Pyke was told that the staff had been instructed to deal only with his personal reasonable requests upon reasonable notice, and not to enter into any involvement with outsiders.
29. Mr Pyke now instructed a local firm of solicitors to act for him, and we have been shown by Mr Vineall, who appeared for Mr Pyke, the whole of the correspondence passing between the parties’ solicitors and accountants until formal notices were issued over a year later relating to the removal of his client as a director of the companies. The judge set out in his judgment some of the salient parts of the correspondence which followed. It is sufficient for present purposes to record that the solicitors Mr Pyke originally instructed, Messrs Barrett & Co, were unable to obtain access to all the financial information to which their client was undoubtedly entitled. In mid-April 1997 they had a meeting with Mr Pyke and his accountant Mr Ringrow, who thereafter pursued similar inquiries on Mr Pyke’s behalf.
30. In the last letter they wrote before Mr Pyke transferred his instructions to another firm (Messrs Richard Kealy & Co), Barrett & Co wrote to Jenkin Evans (on 16th April 1997):

“… It is noted that the last audited accounts are dated 31st March 1996. Our client remains a shareholder and if it should be the case that our client ceases to be a shareholder as part of an overall settlement, then it would seem essential that more up to date information is presented upon which our client and his advisers can make a decision. We are therefore asked to request that an audit for the year ending 31 March 1997 be carried out at the earliest opportunity.

Mr Pyke has also offered to do anything that he can to help resolve the dispute … with Constructive Interiors … If the company thinks that our client can play any useful role in [this matter], would you please let us know at the earliest opportunity.

…

Our client has also requested that regular monthly payments of £2,500 in his favour be recommenced. We suggest that these sums be regarded as on account of an overall settlement and that there is no need, for the time being, to categorise them as salary, dividend, repayment of loan capital etc. Again, would you please take the company’s instructions.”

It should be noted that two months earlier Mr Pyke had refused to agree that Mr Plank should be paid an annual salary of £45,000, backdated to 6th June 1996, pending full disclosure of the companies’ financial position.

31. Mr Ringrow pursued the request for financial information with a similar lack of success. The 1996-6 accounts had now been audited, but Mr Plank unilaterally decided that the 1996-7 accounts should not be audited until the end of September 1997 at the earliest. The judge accepted as accurate Mr Ringrow’s evidence that he was led round in circles as he attempted to pursue his inquiries. Mr Yell did not attempt to dispute the fairness of this finding. On 24th June 1997 Mr Ringrow told Mr Plank, in exasperation,:

“I am not interested in playing games or causing mischief. Your failure to convene a meeting to discuss financial matters had only caused confusion, frustration and irritation. You and the company solicitor have given replies to requests for information which were sometimes less than helpful insomuch as they did not give the full information requested or were ignored in the reply. A meeting would have cleared up any ambiguity and enabled my client to satisfy himself of the true financial position of the group.

I did supply you with a list of points for discussion in my letter of 30 May, to which you have chosen to part reply, part query, part ridicule. I therefore request you to let the past events stay in the past and allow us all to move forward with a common aim to reaching a settlement as speedily as possible.”

After restating the information he needed, Mr Ringrow ended his letter by saying:

“Whilst this list of queries is by no means exhaustive, an early reply would enable my client to get a fuller understanding of the business and enable progress to be made towards a settlement. I reiterate my comments regarding the past and look forward to a helpful reply to all points, I assure you my client is anxious to reach a settlement to the benefit of all.”

32. His expectations were not fulfilled. It is impossible to read the correspondence between the two sides between February and December 1997 without concluding that Mr Plank, for whatever reason, was deliberately prevaricating. A financial settlement, attended by Mr Pyke withdrawing from all interest in all the companies, could have been achieved much earlier if it had suited Mr Plank to desire that result. On 8th July Mr Pyke gave Mr Plank formal notice of his desire to transfer or sell all his shares in the first claimants, and asked the company’s auditors to proceed with the valuation as soon as possible. The valuation was not forthcoming until 9th January 1998, and Mr Pyke’s departure from the boards of each of the claimant companies followed in March.
33. The position between January 1997 and March 1998, therefore, was that although Mr Pyke was one of the two directors of each of the claimant companies, Mr Plank was denying him any role in the management of their affairs. He was obstructing Mr Pyke’s attempts to have access to any relevant financial information about any of the companies for the period which followed his stroke in June 1996. He stopped the monthly payments of £2,500 to Mr Pyke from January 1997, and declined to agree to requests that these payments should be restarted. He moved him out of his office in the company’s main building without any prior notice or consultation of any kind. I have already noted how Mr Pyke held himself out to be willing to assist the companies in their outstanding claim against Constructive. That offer was repeated on 19th September 1997 and 9th February 1998. It was never taken up.
34. It is against this background that I turn to the history relating to the claimants’ complaint that Mr Pyke acted in breach of fiduciary duty in connection with his dealings with Constructive from the summer of 1997 onwards. It will be remembered that he had brought this business into the group through his earlier dealings with Constructive’s directors. Contracts with Constructive represented about 90% of the second claimants’ business.
35. In their solicitors’ letter dated 27th March 1997 (see para 21 above) Constructive had explained why they had a defence and/or set off in relation to virtually the whole of the alleged debt of £192,000 which formed the basis for the second claimants’ winding up petition. After explaining Constructive’s case in relation to each of the disputed items, the solicitors ended their letter by saying, in effect, that one claim of £17,000 was irrecoverable, claims totalling about £76,000 were probably irrecoverable, and the balance of about £96,000 might or might not be payable in due course, and in any event would be subject to contra charges.
36. The problems largely turned round disputes over snagging lists and disputes whether payments for extras were admissible in the context of fixed price contracts. In some cases, it was said, other contractors had had to be employed to do the work the second claimants had failed to do. In others the customers had withheld payment from Constructive until the second claimants as their sub-contractors had returned to finish the job. In his evidence at the trial Mr Holmes (of Constructive) was very critical of Mr Plank, with whom he clearly did not get on. He had found him aggressive and demanding, and whereas Mr Pyke had a firm control of his work force and a reputation for finishing off jobs properly, he said that things went down hill immediately after Mr Pyke had his stroke.
37. On 23rd May 1997 Mr Pyke had a meeting with Constructive’s directors at their offices in Berkeley Square. He was now getting better: in the same month he had bought a van in support of a courier service he was hoping to set up. He did not meet Constructive’s directors again until 21st July 1997, but in the meantime, on 24th June, he caused a company called John Pyke Interiors Ltd to be incorporated. On the same day the claimants’ solicitors complained that Mr Pyke was intending to set up business in competition with them.
38. In this context they said that he had tried to persuade existing employees of the second claimants to work for him in the same area of business. If he succeeded, this would seriously prejudice the claimants’ ability to complete outstanding contracts. They asserted that it would be a breach of his fiduciary duty as a director of the holding company and its subsidiaries if he undertook business in competition with it, and they threatened to seek injunctive relief unless he resigned as a director immediately.
39. The claimants’ solicitors also said that it was believed that Mr Pyke was in direct or indirect contact with Constructive, with whom their clients were involved in litigation. They sought an assurance that he would not discuss any matters at all relating to their clients’ relationship with Constructive, whether in relation to previous contracts or otherwise.
40. In their reply dated 25th June Mr Pyke’s new solicitors made four main points:

i) Such payments as Mr Pyke had received since March 1996 had been debited to his loan account, he had not received remuneration from “the company” for the last 12 months. Mr Plank’s extraordinary reluctance to impart information concerning the companies in the group could only raise suspicions of irregularities on his part.

ii) Mr Pyke wished to earn a living now that he had regained his health. It had been made quite clear to him he was not welcome to do so within the companies of which he was a director and 50% shareholder.

iii) He was seeking to set up a new business venture for himself in order to earn a living, but he had not sought and was not seeking to employ anybody currently working for “the company”. His solicitors said that “the authorities” were quite clear that it was no breach of any fiduciary duty to be involved in a business either or the same kind or in competition with the company of which he was a director.

iv) Mr Pyke had indeed been talking to Constructive about the possibility of future work, but he had not tried to get involved in the current litigation. His solicitors queried, however, how it could be in the companies’ interests to attempt to prevent a director from negotiating a settlement with a view to recovering a fair figure and minimising the costs of litigation.

Their letter ended with a suggestion that there should be a meeting between the parties and their solicitors at the company’s offices as soon as the outstanding financial information was available, “to get to the bottom of what is or is not going on in the companies and to see if a workable way forward could be achieved in the light of that information”.

41. For the sake of completeness I note here that the suggestion that Mr Pyke had been engaged in trying to poach the companies’ employees was not pursued at the trial. He had adduced unchallenged evidence to the effect that an approach had indeed been made to two of the second claimants’ employees in his presence by one of his brothers. Nothing had come of it and he had taken no part in the discussion.
42. Although no meeting took place, it is clear that the parties’ solicitors made determined efforts during the month of July to resolve the long-running dispute without recourse to litigation. During the course of the correspondence the claimants’ solicitors accepted (on 9th July) that if Mr Pyke was able to negotiate a settlement with Constructive this would be to the benefit of all concerned. Mr Plank therefore gave him authority to negotiate “within the parameters of a discount of 20-25% of the sum outstanding”. On 15th July Mr Pyke’s solicitors replied that their client had had some very informal discussions with Constructive about the debt, and that they had indicated that they would be willing to pay £70,000 in full and final settlement. Mr Pyke had some knowledge of the original part of the work which he had priced at about £50,000, but he had no knowledge of the remainder. He warned that Constructive were a “small outfit who could fairly easily fold up in the middle of proceedings and start again under another banner”. His solicitors observed that both sides had a vested interest in getting as much as possible from Constructive, but that this must be tempered with realism.
43. The claimants’ solicitors replied (on 16th July) that the offer of £70,000 (if forthcoming) was regarded as derisory, but that if Mr Pyke was able to procure a more realistic written offer from Constructive, it would be seriously considered. On 23rd July they observed that at present it was presumably proper accounting practice to treat the debt as suspect and make appropriate provisions.
44. After a brief absence on holiday Mr Jenkin returned to this topic on 11th August. The relevant part of his letter reads:

“In the absence of proposals from Constructive Interiors to discharge the debt, or part of it, we do not see how Grant Thornton can properly value the shares in the Group. If the debt is written off in full the shares can have no value. If our client is forced to continue to litigate it must, as a matter of prudence, take a view that it may not succeed in the litigation and should make provisions accordingly. It seems to us that your client is in de facto control of whether our client receives any money, or not. For example, your client’s work force is presently undertaking a contract for Constructive Interiors at the offices of Tenneco in London. This is notwithstanding that he remains a director of Interiors Plus Limited and, to date, Constructive Interiors has been its principal client. As a matter of law any profits generated by your client from working for Constructive Interiors must belong to Interiors Plus and your client is merely a trustee for those monies.

In the circumstances it seems sensible that your client takes an assignment from Interiors Plus Limited of the debt due from Constructive Interiors, in consideration of which the debt will be debited to your client’s loan account, and for your client to reach agreement with Constructive Interiors about its reimbursement to him. Your client is clearly, metaphorically speaking, in bed with Constructive Interiors and this seems to be the only practicable way of resolving the matter without recourse to further lengthy and expensive litigation. Please confirm that you agree on behalf of your client so that we can arrange to discontinue the litigation immediately. This will also enable Grant Thornton to complete the valuation of the shares.”

They ended their letter by seeking an early answer because they were being pressed to proceed with the litigation against Constructive.

45. Because of his solicitor’s absence on holiday Mr Plank had been in direct touch with Mr Pyke’s solicitor, and he wrote to him again the following day (12th August). After referring to the proposal his solicitor had made the previous day, Mr Plank said:

“Frankly, Mr Pyke’s involvement with Constructive, in whatever capacity it may exist, very seriously prejudices this company’s position with its claim. I have repeatedly said that I do not have a problem with accepting Mr Pyke’s wish to recommence in business in a similar capacity to that prior to 1 April 1994; in fact, I wish him well in this venture, to the extent that I do not wish to prejudice his opportunities by flatly refusing to do any deal with Constructive.

Mr Pyke is the only person who can benefit by negotiating a lower sum than this company is actually entitled to and to this end it can only be his decision on how much of the debt to take in cash and how much by way of ‘goodwill’ e.g. further work.

The cash element of the Constructive settlement should easily satisfy your client’s present needs as far as his personal taxation liabilities are concerned.”

46. Mr Pyke’s solicitor responded to the claimants’ solicitors on 15th August to the effect that Mr Pyke would be meeting Constructive the following week to pursue negotiations over their claim. They also said in terms that their client was not dealing or trading with Constructive either directly or indirectly and that he did not intend to do so until matters were satisfactorily resolved. He did not have a work force, and he had not diverted any business from the companies of which he was a director.
47. It appears that Mr Pyke was unable to arrange an early meeting with Constructive’s directors for the purpose of discussing a settlement, and in these circumstances his solicitors suggested to the auditors (on 5th September) that it might be simplest if this outstanding debt was left out of the valuation they were preparing. On the same day Mr Jenkin proposed taking a proof from Mr Pyke in connection with the Constructive claim, but although Mr Pyke’s solicitors suggested when and where this might be done, the idea was never followed up on the claimants’ side.
48. Relationships between the parties deteriorated again in October, and in this context the claimants’ solicitors complained (on 24th October) that they had received no response to the proposal that Constructive’s debt should be assigned to Mr Pyke. This prompted a reply on 30th October. After saying that Mr Pyke had now had the opportunity to consider Constructive’s solicitors’ letter (see paras 35-36 above), his solicitors wrote:

“Mr Pyke has not yet been able to meet with both directors of Constructive but from discussions held with one of them it would appear that the maximum sum that Constructive might pay for an early settlement will be £100,000.

Taking up Mr Plank’s suggestion of the possible assignment of the recoverable debt to Mr Pyke in part settlement of his loan account Mr Pyke has indicated that he would be willing to take an assignment in satisfaction of £100,000 of his loan account with the balance of the debt from Constructive being written off by the Company. This would lead to Mr Pyke’s loan account balance as shown on the unaudited statement as at 31st March 1997 being reduced to £63,789.25.”

49. Following a discussion between the solicitors, the claimants’ solicitors then tried to negotiate a settlement at £100,000 with Constructive’s solicitors. Nothing came of this, and on 10th December Mr Pyke’s solicitors wrote:

“With regard to the Constructive debt Mr Pyke is still willing to take a view on the matter and take an assignment of the claim on the basis of a figure of £100,000 (he actually thinks that he is likely to receive less than this if he pursues the matter). You informed us that you believed the debt had been written down to £45,000 in the draft Accounts and on that basis Mr Pyke would be prepared to agree that ½ of the residual shortfall amounting to £22,000 be set against his Loan Account provided the other ½ is set against Mr Plank’s Loan Account thereby leaving the Balance Sheet unaffected. Mr Pyke is endeavouring to force a discussion with both the Directors of Constructive in the meantime.”

50. The parties’ relationship deteriorated still further when Mr Pyke’s solicitors issued and served a statutory demand on the first claimants, dated 15th December, claiming a sum of £150,000, being part of the outstanding loan owed to him by “the company”. It was only when Grant Thornton produced draft accounts for a period later than March 1996 that Mr Pyke’s advisers realised that the group’s finances were in a dire state. Some further acrimonious correspondence then followed, leading to the institution of the present litigation.
51. There is one further strand to the history that I need to mention. On 14th August 1997 Mr Pyke, acting through his new company, priced some work for Constructive Interiors at Bowater House. Five days later a form was completed which would enable sub-contractors to be employed without deduction of tax in connection with this job, and Mr Pyke’s price was accepted by Constructive on 10th September 1997. There was a dispute, which the judge did not resolve, as to whether the new company started working for Constructive in September or October 1997. At all events it carried out work valued at more than £200,000 for Constructive before 31st March 1998. The claimants’ claim against Constructive was eventually settled for £80,000, inclusive of costs.
52. During the hearing of the appeal Mr Yell prepared a memorandum at our request which gave details of a number of untruths perpetrated by Mr Pyke, either through his solicitors’ letters or in affidavits sworn at an earlier stage of these proceedings. There can be no doubt that on occasion he was willing to tell a false story in order to conceal or minimise the true extent of his dealings with Constructive and its directors between July 1997 and March 1998. Mr Vineall did his best to explain away some of the matters of which Mr Yell made complaint, but he could not nullify the main thrust of that complaint.
53. The importance of this point lies in the fact that Mr Yell relies on it for his criticism of the way the judge approached the evidence of the two protagonists in his judgment. The judge’s findings are contained in the following passage (transcript, pp 33-34):

“I examined Mr Pyke’s evidence with care, particularly having regard to the fact that he admitted in his evidence that he had lied on occasion, but by and large on certain maters I think I can safely accept his evidence.

I have had the opportunity also of seeing Mr Plank in the witness box over a fairly long period when he was cross-examined. He struck me as being a hearty, well experienced accountant and a businessman who knew where his interests lay. I do not think that he was entirely honest with me in parts of his evidence. In my judgment he should have been willing to accept that it was left to him to look after the monies which Mr [Pyke] had loaned to the group. He said that the group had no need of more capital at the time. If a company has a director’s loan available it has very great benefit so far as the consolidated group bank account is concerned, and I have no doubt that Mr Pyke left it to Mr Plank to deal with the monies loaned and indeed to deal with all payments with complete trust.

I accept Mr Plank’s evidence that there was no PAYE type salary paid to the directors. Having heard both their accounts, the inferences which I draw from the evidence I will come to shortly, and I take into account my assessment of both these witnesses when I do so, together with the documents and the reports of the experts.”

54. The judge had the advantage of hearing Mr Plank give evidence for three full days (24th-26th July 2000). He heard Mr Pyke give evidence for more than two days (27th-28th July 2000 and parts of 3rd-4th January 2001). In my judgment, he was entitled to take the view, if he thought fit, that although Mr Pyke had been caught out telling lies in connection with his dealings with Constructive, his evidence could generally be relied on. After all, as Mr Vineall observed, the documents largely spoke for themselves.
55. After setting out the facts at some length, it is convenient to consider the issues on the counter-claim first because they largely turn on questions of fact. The judge dealt with them quite briefly (pages 39-42 of the transcript). His findings (on the matters which are still contentious on this appeal) can be summarised as follows:

i) Mr Pyke advanced £200,000 to Mr Plank for the benefit of capital for the group as a whole, and it was only pure chance that this money was put into Interior Plus Limited. Judgment was therefore entered against all four claimants for the balance due to him on his director’s loan account with the second claimants;

ii) The sum due to Mr Pyke on his counter-claim should not be reduced by £9,800 (for which see para 8 above) in relation to unvouched cash payments in 1994-5;

iii) The sum due to Mr Pyke on his counterclaim should likewise not be reduced by payments totalling £25,000 which were debited to his loan account with the first claimants in 1996-7 because these sums represented salary by way of “anticipated dividends” which were not in the event forthcoming.

56. On the first of these issues the judge took into account the fact that the £200,000 loan (as subsequently reduced) always appeared in the books and accounts of the second claimants (including the 1994-5 accounts which were signed by Mr Pyke). He also reminded himself of an unequivocal answer by Mr Pyke to the effect that he told his wife that he had invested £200,000 in Interior Plus Limited. He said, however, that he had seen a number of documents which strongly suggested that the claimants treated the loan as a loan to all or any of them.
57. In fact, the only document he mentioned was a schedule sent by Mr Plank to Mr Ringrow in June 1997 in response to a request for Mr Pyke’s loan account. The relevant schedule revealed the position on the group’s consolidated accounts. These recorded the total balance on Mr Pyke’s loan accounts as at 1st April 1995 and 31st March 1996. The judge commented that this appeared to be a fair indication that Mr Plank considered the accounts to be consolidated and that the director’s loan account could properly be so called.
58. In my judgment this is not a legitimate conclusion. Whatever might appear in the consolidated group accounts, the answer lay in the individual company accounts, and there can be no doubt that Mr Pyke advanced this money to the second claimants (who were the lineal heirs of his interiors business) and to nobody else. Indeed, the averments in his particulars of claim limited the beneficiaries of the loan to the first and second claimants (although its prayer went wider), and it is not at all easy to understand, for instance, why the third or fourth claimants should bear the burden of this loan which had never featured in their companies’ books or accounts. For similar reasons, I do not consider that the evidence substantiates a finding that the loan was made both to the second claimants and to the first claimants. If Mr Pyke had wished to protect his position when advancing such a large sum of money to a limited liability company, he should have ensured that it was secured by cross-guarantees from other companies in the group in the usual manner. For this reason I would reverse the judge’s finding on that issue, and hold that only the second claimants were liable to Mr Pyke for the unpaid balance of his loan which was standing in their books.
59. The second point we had to decide was concerned with the legitimacy of the deduction of £9,800 from the sums due to Mr Pyke. Mr Yell showed us how when he was trying to remember the reasons for these cash payments Mr Pyke’s evidence changed once he was shown that they could not represent payments for casual labour, as he had at first suggested. The judge contrasted the approach of the two experts on this issue. The claimants’ expert fastened on the absence of adequate documentation for tax purposes and concluded that these payments could not have represented legitimate company expenditure. The defendant’s expert considered that payments on this limited scale could be treated as proper company expenditure if they had been discussed by the directors.
60. The judge preferred the second approach. He took into account Ms Romaine’s professional qualifications. He might have added the fact that Grant Thornton had audited the 1994-5 accounts. He said that given the amount of turnover which was being engendered by the company, these sums were too small to require detailed accounting by one of the two partners in a joint partnership where matters at the material time were all conducted on a friendly basis.
61. This was a point on which the judge’s decision could well have gone the other way. But since he had the opportunity of seeing the parties in the witness-box, and the claimants were seeking to reopen audited accounts relating to a period which ended more than five years before the date of the trial, it appears to me that it would be wrong to disturb the judge’s conclusion on this issue of fact.
62. The final issue on the counterclaim is more straightforward. The judge said that after he had considered all the evidence he had formed the clear judgment that Mr Pyke and Mr Plank were each to receive salary by way of what he called anticipated dividends “with the understanding that as long as those monies were available to be voted by the holding company they would be voted for payment to each of the two directors”. It appears to me that this was a conclusion to which the judge was entitled to come on the evidence before him. Indeed, Mr Plank was in the habit of referring to these payments (or the enhanced payments which he sought after Mr Pyke’s stroke: see para 30 above) as salary. No doubt, the precise status of these payments would not have been formalised until the end of the year when it became clear whether profits would be available by way of dividend, but if no such profits were available (as occurred in the year 1996-7) the judge was entitled to conclude that there was an agreement that these payments should be treated as remuneration and not as withdrawals from the relevant director’s loan account.
63. I turn finally to the issues of law that arise on the claim. The judge began this part of his judgment (transcript pp 36-39) by reminding himself of some of the findings of fact he had made:

i) Mr Pyke had been excluded from the business management of the claimant companies since at least the beginning of 1997;

ii) At the time he was discussing the possibility of work for his new company he was without income (and had been since the end of January 1997) and in need of a job;

iii) The claimants knew at the time of his contracts that he was in touch with Constructive;

iv) Constructive were not prepared to instruct the claimant companies to do any more work for them in view of the great number of complaints they had made about the claimants’ work after Mr Pyke ceased to be in control if it.

64. The judge read into his judgment relevant extracts from two text books as to the nature of a director’s duty of fidelity. He also mentioned the fact that Mr Yell had cited to him many of the cases cited in those books. He concluded this part of his judgment in these terms:

“I am satisfied that having looked at all the authorities which both counsel cited that it is not a breach of fiduciary duty for a director to work for a competing company in circumstances where he has been excluded effectively from the company of which he is a director, where the company from which he takes work had made it known that it will in no way deal with the company from which he has been excluded. It does not seem to me to make any difference to the position that there is a debt due and owing by the company whom he goes to work with [sic] to the company of which he is a director, so long as he does nothing to do any damage to the claim which the company of which he is a director is putting forward.

In my judgment, therefore, the claim of the Claimant that Mr Pyke was in breach of fiduciary duty falls at the first hurdle. There was no such duty upon Mr Pyke in the circumstances which I have to consider. If, however, I was wrong on this in the particular circumstances of the case, in my judgment Mr Pyke cannot be blamed for what he did, given the extreme circumstances in which he was financially at the time of his actions; given the fact that he offered to help the company of which he was a director to recover the monies due; and given the fact that the business which he did was at no time in any way, shape or form going to go to the company of which he was a director.”

65. In developing his arguments on the appeal Mr Yell did not resile from his clients’ contention that Mr Pyke was liable to account to them for all the profits he derived from his successful trading with Constructive, which began while he was still a director of the claimants. He gave rather greater prominence to the additional claim, however, which the judge did not address in his judgment, that Mr Pyke’s breaches of fiduciary duty extended to a failure to ensure that the second claimants recovered the largest sum reasonably available to them from their litigation with Constructive. For this purpose Mr Yell turned a blind eye to the three occasions on which Mr Pyke had made a specific offer to help with this litigation, which was not taken up. Instead, he referred us to a letter written by Constructive’s solicitors to Mr Pyke’s solicitors on 31st July 1998, when battle was well and truly joined between the parties in the present litigation.
66. In that letter Constructive’s solicitor expressed their clients’ willingness to assist Mr Pyke in this litigation on condition that he was prepared to assist Constructive, if necessary, with their litigation. They wrote:

“Since you say that you are aware of our client’s position in that litigation and since it is acknowledged by our clients that the only person who had real knowledge of the contractual works carried out by Interiors Plus Limited was your client, we would hope and expect that your client would be prepared to give a witness statement – with advice from you of course if so required – in which we would expect him to give his honest views as to which claims by Interiors Plus he felt were justified, which were inflated or exaggerated and which were clearly unsustainable. Quite apart from anything else, that would enable our clients to assess their prospects of success at trial and might also have a significant effect on the length of the trial and the costs to be incurred by all parties.”

67. Mr Pyke accepted this offer. On 24th August 1998 his solicitors made it clear that he was prepared to assist wherever possible with Constructive’s litigation, although they suspected that his brother Rod Pyke was the person with the best knowledge of the contracts in question. They referred in this context to Mr Pyke’s stroke, and said that this meant that his knowledge of what had happened to the contracts in question for the month following his seizure was not clear at all. Subject to this caveat, they were instructed to say that he had no concerns about assisting Constructive as far as he possibly could.
68. Mr Yell also relied in this context on an assertion in paragraph 5A(b) of Mr Pyke’s amended defence, served on 30th September 1998, to the effect that Mr Pyke could not assist the second claimant in its claim against Constructive. In paragraph 5D(a) Mr Pyke had referred to a very short meeting he had had with Mr Sheen and Mr Holmes on 23rd January 1998 which had been singularly unproductive. According to his description of the meeting, although Constructive’s directors had started by suggesting that they might pay £40,000 to him and £15,000 to Mr Plank, it had quickly became apparent that they did not intend to pay anything, on the grounds that they did not believe they owed the second claimants anything.
69. In my judgment, this part of the claimants’ claim is hopeless. There was no evidence that Mr Pyke in fact did anything which impeded the second claimants in their pursuit of this litigation. He had expressed himself willing to help them, so far as he could, on three different occasions up to and including February 1998 (see paras 31 and 35 above), and his offer was not taken up. In their pleaded case the claimants did not rely on any of the matters on which Mr Yell now seeks to rely, and I do not consider that they should be allowed to enlarge their statement of case on this appeal.
70. I turn back, therefore, to the contention that Mr Pyke is liable to account as a fiduciary for the profits his new company earned from Constructive from the autumn of 1997 onwards.
71. The governing principles in this type of case are found in what are sometimes called the no conflict rule and the no profit rule. The judgment of Malins V-C in Liquidators of Imperial Credit Association v Coleman (1871) 6 Ch App 558, 563 represents an early statement of the relevant principles. Under the former rule, certain consequences can flow if directors place themselves in a position where their personal interests or duties to other persons are liable to conflict with their duties to the company of which they are directors unless the company gives its informed consent. Under the latter, directors are not permitted to retain secret profits which they make by using information or property or opportunities which belong to their company. Even if their company would not itself have benefited from the opportunity, equity treats the profits which the director, or former director, has made as property which he is under a duty to pay over to the company which he has betrayed by his disloyalty (see Parker v McKenna (1874) 10 Ch App 96, 124-5, applied in Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443). There is a valuable recent analysis of the law in the judgment of Lawrence Collins J in CMS Dolphin Ltd v Simonet (unreported, 23rd May 2001, at paras 84-97).
72. There is no completely rigid rule that a director may not be involved in the business of a company which is in competition with another company of which he was a director. A rather startling illustration of this proposition can be seen in the case of London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165. Lord Mayo was a director and chairman of the board of directors of the first company which was incorporated for the purpose which its name suggests. He never in fact acted as a director, or attended a board meeting, or agreed, either expressly or in the articles of association, not to become a director of any similar company. Four months later the second company was formed for the same purpose. The first company had had some success with a share prospectus advertising Lord Mayo’s name as director and chairman, and it took umbrage when it saw its rival’s prospectus with Lord Mayo’s name at the head of its list of directors.
73. After summarising the facts, and adding that there was no contract, express or implied, obliging Lord Mayo to give his personal services to the plaintiff company and not to another company, Chitty J dismissed the plaintiffs’ application for an injunction. He said that no case had been made out that Lord Mayo was about to disclose to the defendants any information that he had obtained confidentially in his character of chairman, and that an analogy sought to be drawn between the present case and partnership was incomplete.
74. This decision was applied with approval by Lord Blanesburgh in Bell v Lever Brothers Ltd [1932] AC 161, 193-6. He distinguished between contracts in which the director’s own company was concerned and contracts by which the director was bound to some outside party. In relation to the latter class of contract he said that the company had no concern in the director’s profit, and could not make him accountable for it unless it appeared – and this was the essential qualification – that in earning that profit he had made use either of the company’s property or of some confidential information which had come to him as director of the company.
75. I have read in draft the judgment of Sedley LJ, and I need not repeat his description of the unease with which some modern text book writers have viewed the Mashonaland case. It is unnecessary on the present occasion to resolve this controversy, because the facts of the present case are so unusual. As Lord Upjohn observed in Phipps v Boardman [1967] 2 AC 46, 107 the facts and circumstances of each case must be carefully examined to see whether a fiduciary relationship exists in relation to the matter of which complaint is made.
76. In the present case Mr Pyke, who was a sick man following his stroke, had been effectively expelled from the companies of which he was a director more than six months before any of the events occurred of which the claimants now make complaint. Although he had invested a very large sum of money in the first and second claimants on interest free loan accounts, he was not being permitted to withdraw any of it. At the same time he was being denied any remuneration from the companies. When he entered into business with Constructive in the autumn of 1997 he was not using any of the claimants’ property for the purpose of that business. Nor was he making use of any confidential information which had come to him as a director of any of the companies.
77. In these circumstances I consider that the judge was right when he held that Mr Pyke committed no breach of fiduciary duty in trading with Constructive. I do not consider that it is necessary to go any further than this in the present case. I regard as unrealistic Mr Yell’s submission that Mr Pyke should have availed himself of other legal remedies to extricate himself from the unhappy position in which he found himself, rather than do business with Constructive while still (in name only) a director of the claimants.
78. For these reasons I would dismiss the claimants’ appeal on the claim and allow their appeal on the counter-claim to the extent indicated in paragraph 58 above.

Lord Justice Sedley:

79. London & Mashonaland Exploration Co. Ltd. v. New Mashonaland Exploration Co. Ltd., in its solitary briefly reported form [1891] W.N. 165, establishes that there is nothing inherently objectionable in the position of a company director (and chairman) who, without breaching any express restrictive agreement or disclosing any confidential information, becomes engaged, whether personally or as a director of another company, in the same line of business. The extempore judgment of Chitty J. on what appears to have been an interlocutory motion for injunctive relief, was given the imprimatur of the House of Lords by Lord Blanesburgh in Bell v. Lever Brothers [1932] AC 161, 195. The case had not, according to the report, been referred to by counsel on either side in argument; but Lord Blanesburgh, with whom Lord Atkin and Lord Thankerton agreed, explicitly endorsed the principle set out by Chitty J. This, therefore, is the law which binds us. That it can produce outcomes of debatable morality is evident from the speeches in Bell v. Lever Brothers itself. Lord Blanesburgh remarked in conclusion (at 200):

“Nor is it to my mind unjust that, their profit accounted for, the appellants should be left in possession by way of return for their services of sums which, while they may seem bountiful to minds disciplined in a school of progressive austerity, would doubtless, by those engaged in great business, be regarded as no more than adequate to the occasion.”

Lord Atkin on the other hand, though concurring in the result, said (at 229):

“The result is that in the present case servants unfaithful in some of their work retain large compensation which some will think they do not deserve. Nevertheless it is of greater importance that well established principles of contract should be maintained than that a particular hardship should be redressed ...”

80. The problem is obvious if one thinks of how shareholders in X Ltd. or X Plc, or for that matter its creditors, would regard a director who used his boardroom vote, perhaps crucially, in a way which helped a competitor, when the competitor was the director himself or another company of which he was also a director. Whatever the perceived commercial morality of such a situation, I do not consider that it is sanctioned by law. The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached. If Mr Pyke’s solicitors’ view of the law is as widely held as it seems to be, it needs to be revised. They wrote this:

“The authorities are quite clear that it is no breach of any fiduciary duty to be involved with a business either of the same kind or in competition with the company of which he is a director.”

81. Counsel have put before us what three of the leading modern textbooks say about this received view of the law. The authors’ and editors’ views range from the dubious to the sceptical. Gore-Browne on Companies, paragraph 27.17, says:

“The general principle that a director must avoid positions of conflict between his duty and his interest, or between competing duties, has had some impact on the question as to how far a director may involve or identify himself with the interests of “outsiders” in matters in which the company is concerned.”

There follows the proposition derived from the Mashonaland case:

“The mere existence of such outside involvement does not automatically render a director in breach of duty.”

The footnote cites the Mashonaland case and its approval in Bell v. Lever Brothers, but goes on to list a series of cases, ranging from the decision of the House of Lords in Scottish CWS v. Meyer [1959] AC 324 to a number of South African and Australian cases, which cast doubt upon or limit the proposition.

82. Palmer’s Company Law, paragraph 8.534, says:

“The no-conflict rule might also be thought to prohibit a person from being a director of competing companies, but it is unclear whether this is in fact the law. In London and Mashonaland Exploration Co. V. New Mashonaland Corporation Co. Chitty J. refused to restrain a dummy director who had never acted as a director or attended a board meeting of the plaintiff company from acting as director of the competing defendant company. This decision was taken by Lord Blanesburgh LC in Bell v. Lever Bros Ltd,. as authority for a dictum that a director is generally free to be director of a competing company. In Scottish Co-operative Wholesale Society Ltd v. Meyer, however, Lord Denning thought that the directors of the textile company were in breach of duty by continuing their association with the co-operative society when that society set up its own rayon department. This latter view is more in line with the principle applied to employees (including senior managers holding full-time service contracts) and trustees proper.”

83. Gower’s Company Law, 6^th Edition, says at page 622:

“Competing with the company. One of the most obvious examples of a situation which might be expected to give rise to a conflict between a director’s interests and his duties is where he carries on or is associated with a business competing with that of the company. Certainly a fiduciary without the consent of his beneficiaries is normally strictly precluded from competing with them and this is specifically stated in the analogous field of partnership law. Yet, strangely, it is by no means clear on the existing case law that a similar rule applies to directors of a company. Indeed, it is generally stated that it does not, and there appears to be a definite, if inadequately reported, decision that a director cannot be restrained from acting as a director of a rival company. And it has been said that “What he could do for a rival company he could, of course, do for himself.” This view is becoming increasingly difficult to support. It has been held that the duty of fidelity flowing from the relationship of master and servant may preclude the servant from engaging, even in his spare time, in work for a competitor, notwithstanding that the servant’s duty of fidelity imposes lesser obligations than the full duty of good faith owed by a director or other fiduciary agent. How, then, can it be that a director can compete whereas a subordinate employee cannot? Moreover it has been recognised that one who is a director of two rival concerns is walking a tight-rope and at risk if he fails to deal fairly with both.

In arguing that a director who carries on a business which competes with that of his company inevitably places himself in a position where his personal interest will conflict with his duty to the company, it is not being contended that he will necessarily have breached his fiduciary duty; he will not if the company has consented so long as he observes his subjective duty to the company by subordinating his interests to those of the company. Nor is it being suggested that there is anything objectionable in his holding other directorships so long as all the companies have consented if their businesses compete. But in both cases consent is unlikely if he is a full-time executive director or if the extent of the competition is substantial. And even if the consent is given the director is likely to be faced with constant difficulties in avoiding breaches of his subjective duty of good faith to the company or companies concerned. He may be able to subordinate his personal interests to those of a single company but it is less easy to reconcile conflicting duties to more than one company. Nor would a reformed rule be inconsistent with the modern emphasis on a more important role for non-executive directors, who are often executive directors of other companies. Even if executive directors are regarded as a good source of non-executive talent for other companies (which some would question), a reformed rule would simply require executive directors not to become non-executive or competing companies, which they are, in fact, rarely asked to become.”

84. If one bears in mind the high standard of probity which equity demands of fiduciaries, and the reliance which shareholders and creditors are entitled to place upon it, the Mashonaland principle is a very limited one. If, for example, the two Mashonaland Exploration companies had been preparing to tender for the same contract, I doubt whether Lord Mayo’s position would have been tenable, at least in the absence of special arrangements to insulate either company from the conflict of his interests and duties, for I see no reason why the law should assume that any directorship is merely cosmetic. A directorship brings with it not only voting rights and emoluments but responsibilities of stewardship and honesty, and those who cannot discharge them should not become or remain directors.
85. All the foregoing concerns breach of fiduciary duty. From such a breach, appropriate remedies will follow. But both common sense and equity indicate that it is not necessary to wait for a breach giving rise to a remedy before the possibility of intervention arises.
86. In CMS Dolphin Ltd. v. Simonet (23 May 2001, unreported) Lawrence Collins J. (paragraph 84) pointed out the long lineage of the principle that “a fiduciary must not place himself in a position where his duty and his interest may conflict”. The proposition can, I think, be amplified in two respects. First, the fiduciary must not only not place himself in such a position: if, even accidentally, he finds himself in such a position he must regularise or abandon it. Secondly, an objectionable position is not only one in which duty conflicts with interest but one in which duty conflicts with duty or interest with interest. Each is objectionable because it is capable of leading to a breach of fiduciary duty.
87. That the law will take notice of a situation of impending or potential breach, as well as of an actual one, is clear from the decision of Vinelott J. in Movitex Ltd. v. Bulfield [1988] BLCC 104, 119 – 20, and from the decision of Megarry VC in Tito v. Waddell No. 2 [1977] Ch. 106 on which Vinelott J. drew. These decisions show that Mr. Vineall’s criticism of the use by Lawrence Collins J. of the verb “may” in the formulation cited above is misplaced. Without the need of any proven breach, the court will set aside a transaction entered into in the shadow of such a conflict. It will also in an appropriate case restrain entry into such a transaction or restrain the director from involving himself in it. The distinction which Vinelott J. goes on to draw (at 125) between a director’s putting himself into a position of conflict and his being in breach of fiduciary duty is of course legally correct and is relevant to remedies; but it does not mean that a director can cheerfully go to the brink so long as he does not fall over the edge. It means that if he finds himself in a position of conflict he must resolve it openly or extract himself from it.
88. In this light, far from being persuaded by Mr. Vineall that the decision of Mahon J. in Berlei Hestia (NZ) Ltd v. Fernyhough [1980] 2 NZLR 150 should be followed, I consider that it was the unsuccessful argument of Mr. E.W. Thomas (later Thomas J of the New Zealand Court of Appeal), recorded by Mahon J. at 160, which was right. The modern textbooks which I have mentioned support his contention that the Mashonaland case required reconsideration in the light of modern standards and jurisprudence. One might add that there is no indication in the brief report of that case that Chitty J was reminded of a seminal decision drawn upon by Lawrence Collins J. in CMS Dolphin v.Simonet (above). In Keech v. Sandford (1726) Sel. Cas. Ch. T. King 61 Lord Harcourt LC forbade a trustee to take for himself a renewed term under a lease which he held for the benefit of an infant:

“[T]hough I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use.”

In the result the benefit of the lease was assigned by decree to the infant and the trustee, subject to indemnity, made to account for profits. It may be that Chitty J. would still have decided the Mashonaland case as he did on the facts before him, but there has never been any warrant for treating his decision, or therefore its endorsement in the House of Lords, as a licence for directors or other fiduciaries to put themselves or to stay put in situations where their duties and/or interests can come into conflict.

89. In this situation the room in the present case for absolving Mr. Pyke was very limited indeed. While, on authority, Judge Levy was right to hold that “it is not a breach of fiduciary duty for a director to work for a competing company in circumstances where he has been excluded effectively from the company of which he is a director”, I am not prepared, at least on the facts before us here, to accept his further qualification “... where the company from which he takes work has made it known that it will in no way deal with the company from which he has been excluded”.
90. Every decision of this kind, within the principle discussed above, is fact-specific. The judge’s first proposition is critical because it is factually correct and it eliminates the duality of interest or duty which the law seeks to guard against. For reasons given by my Lords, however, it is impossible to divorce the acquisition of Constructive’s work by Mr. Pyke and his new company from the cessation of Constructive’s relationship with the claimants. The judge’s second proposition is therefore factually incorrect. I express no view as to its legal effect had it been factually correct. But when this element is severed, as it therefore has to be, from the judge’s conclusion, the conclusion remains correct within the framework of duty which the law lays down. Quite exceptionally, the defendant’s duty to the claimants had been reduced to vanishing point by the acts (explicable and even justifiable though they may have been) of his sole fellow director and fellow shareholder Mr. Plank. Accepting as I do that the claimants’ relationship with Constructive was consistent with successful poaching on Mr. Pyke’s part, the critical fact is that it was done in a situation in which the dual role which is the necessary predicate of Mr. Yell’s case is absent. The defendant’s role as a director of the claimants was throughout the relevant period entirely nominal, not in the sense in which a non-executive director’s position might (probably wrongly) be called nominal but in the concrete sense that he was entirely excluded from all decision-making and all participation in the claimant company’s affairs. For all the influence he had, he might as well have resigned.
91. For the rest, I agree with the judgments of my Lords. Hard as it may seem, judgment is not a prize for being the more truthful or the less evasive party. “Even truth,” a 17^th-century commentator on the law wrote, “will jostle its adversary in a narrow pass.” The judge’s task is to come as close as he can to deciding – often with precious little help from the witnesses – what the truth is, and to base his judgment on it. That the result is sometimes surprising to an onlooker is no reason for saying that it is wrong, much less perverse.

Lord Justice Jonathan Parker:

92. I agree with the order proposed by Brooke LJ, for the reasons which he has given.
93. I further agree with him that this is not an appropriate case in which to examine the scope and application of what Sedley LJ refers to as the Mashonaland principle. I bear in mind Lord Upjohn’s observation in Phipps v. Boardman [1967] 2 AC at p.123C that:

“…. [r]ules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case”.

94. The unusual circumstances of the instant case, as recounted by Brooke LJ, seem to me to lead inescapably to the conclusion that the claim based on fiduciary duty fails. As Sedley LJ says, for all the influence Mr Pyke had, ha might as well have resigned as a director. Had Mr Pyke formally resigned as a director in late 1996 or early 1997, his resignation would have done no more than reflect what had in practice already happened.
Order: Appeal dismissed as to the claim but allowed as to the counterclaim; order as per agreed minute of order; disposal of costs upon terms as per agreed minute of order if not agreed in the meantime. (Order does not form part of the approved judgment)