England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Mr Justice McCombe)

		Royal Courts of Justice Strand London WC2 Monday, 29th April 2002

Monday, 29th April 2002

1. LORD JUSTICE PETER GIBSON: I will ask May LJ to give the first judgment.
2. LORD JUSTICE MAY: This is a renewed application, made by Mr Levy on behalf of Hill Publishing Ltd, for permission to appeal against the judgment and order of McCombe J given on 11th February this year. Permission to appeal was refused on paper by my Lord, Peter Gibson LJ, on 28th March.
3. The facts are complicated but concern the sale by the claimant, Mr Macdonald and his wife, of their shares in a company called EFM Publishing Ltd to the first defendant, Mr Polaine, who had an arrangement for the sale on of those shares to Hill, the second defendant, and who subsequently sold his shares as well so that Hill acquired the entire shares in the company.
4. The essence of Mr and Mrs Macdonald's claim, which was in deceit and breach of fiduciary duties, in conspiracy against Mr Polaine and in conspiracy to deceive, or for dishonest assistance against Hill, was that information which they were given in October 1998 was untrue, and known by both the defendants to be untrue, and intended by them to be relied on by the Macdonalds.
5. In November 1998 Mr Polaine sold all the EFM shares to Hill and, as I say, the Macdonalds claim that in completing the first sale they relied on these representations.
6. EFM was a publishing company. It was incorporated in January 1996 at the instigation of Mr Macdonald and Mr Polaine for the purposes of producing and publishing a magazine for circulation among European fund managers. Mr Macdonald and Mr Polaine each held 40% of the issued share capital, Mrs Macdonald held 10% and Miss Toller held the final 10%. The magazine was a potentially successful product, but towards the end of the period leading up to September/October 1998 the company was beginning to experience cash flow problems; and there was some suggestion that this downturn was attributable to deteriorating relations between Mr Macdonald and Mr Polaine. This resulted in the relationship of trust and confidence between them breaking down and so it became apparent that one would have to buy out the other, or that the business would have to be sold to an outsider, or perhaps that the company might have to be liquidated.
7. On 8th September 1998 Mr Polaine's solicitors wrote to Mr Macdonald, stating that the relationship of trust and confidence had broken down, and offered to acquire Mr and Mrs Macdonald's 50% holding. Mr Macdonald, through their solicitor, in turn put forward a counter-proposal to purchase Mr Polaine's shares. By a fax dated 10th September 1998, Child & Child, the solicitors then acting on behalf of Mr Polaine, indicated that he was not prepared to sell his shareholding. He stated that in view of the break down in relationship he was left with no alternative but to petition for the winding up of the company. Following this a meeting took place on 11th September between the parties and their solicitors. At that meeting Mr Polaine increased his offer for the Macdonalds' shares to £120,000. Following that, through the rest of September and October, up until 13th October, the parties negotiated the terms upon which the shares should be sold. In the meantime, however, and (as the judge found) unbeknown to Mr Macdonald, and indeed unbeknown to Mr Polaine's solicitors, Mr Polaine was having discussions with Mr Cooke, of the second defendants. It was indeed as early as 1st August that he, Mr Polaine, wrote including a statement that for the previous six months he had been preparing the position and that for the last two issues of the magasine he had actually been winding EFM down by reducing the selling time.
8. Paragraph 22 of the judge's judgment gives details of negotiations between Mr Polaine and Mr Cook and Hill during August 1998. Summarising paragraph 22, it concerned a lunch in the last 10 days of August 1998 when a proposal was discussed for the initial consideration for the purchase of the shares in EFM of £600,000 - £300,000 in cash and £300,000 in shares in Hill's holding company, Columbus - and, in addition to that, the proposal was for deferred consideration by way of a two-year earn-out beginning in March 1999 with a maximum of £1.4 million.
9. The negotiations came to a head so far as the proceedings were concerned on 8th October 1998. There were three faxed exchanges of correspondence on that day, two of which are central to the judge's finding. The first came from Mr Smith of Child & Child, Mr Polaine's solicitor, and was addressed to Mr Conroy, the solicitor acting for the Macdonalds. It stated as follows:

"As requested, I confirm that, at our meeting on 11th September, my client stated that he was not in discussion or negotiation with any third party in relation to any acquisition of any interest in the company. He informed you (and I confirmed) that the proposal to acquire your client's shareholdings in the company were driven solely by a desire to secure your client's departure with a view to avoid the winding-up which would otherwise follow. My client accepts that your clients will act in reliance on that representation."

10. This faxed letter was seen by the solicitor acting on behalf of the second defendant, who realised that it was untrue and who wrote a memorandum to the effect that it was not even true on 11th September. The memorandum goes on to say that her clients (I take it) wanted to come clean. So it was that a second fax in this series, actually the third of the day, was sent by Mr Smith of Child & Child to Mr Conroy acting on behalf of the Macdonalds. It included this paragraph:

"I have discussed with my client your unease at my client's reluctance to disclose information in relation to any negotiations which might recently have taken place in relation to the sale of any interest in the company. He does not wish to be criticised for lack of candour in this respect and has authorised me to inform you that the funds for the purchase of your clients' share-holding are being provided by Hill Publishing Limited into whose name the shares will be transferred. My client is in discussion with that company in relation to a proposed sale of his shareholdings but those discussions are at an early stage and may not come to fruition. The parties have agreed a deadline of 31st December and if nothing has been agreed by then the shares will revert to Mr Polaine."

11. The following day a part document was sent to those representing the claimants indicating that the second defendants were providing £130,000 as funding for the purchase of the Macdonalds' shares; and on 13th October a document came into being, signed by Mr Polaine and addressed to the Macdonalds, in which he says:

"I hereby confirm that all material facts have been disclosed and that any information previously given would remain accurate if repeated at completion."

12. So the transaction for the sale and purchase of the Macdonalds' shares went through. Quite shortly after that, Mr Polaine sold all, or all the remaining, shares in the company to the second defendant; and the agreement, indeed, was that they would acquire EFM for an initial consideration of £600,000, with a further £1.4 million depending on certain profit targets being achieved. That was announced in the press and the Macdonalds brought the proceedings.
13. The judge considered the evidence very carefully and at great length. I have only summarised the highlights of the facts as they matured during the summer and early autumn of 1998. He found, comprehensively, that Mr Polaine was deceitful. He quoted a passage from Mr Polaine's evidence in which he admitted, or for practical purposes admitted, that he had deliberately concealed matters that were important to him for the purpose of acquiring their shares. He also found against the second defendants, and in doing so he addressed two questions. At paragraph 107 of his judgment he said:

"The primary claim is one of conspiracy, but coupled with the claim in respect of allegedly dishonest assistance in a breach of fiduciary duty."

14. He considered, in essence, whether the second defendants were a party to the deceit practised by Mr Polaine on the Macdonalds, and he found that they were. He found, essentially on the basis that the second defendants were a party to what he refers to as the semi-corrective third fax of 8th October, that that fax was untrue, in particular because the discussions between Mr Polaine and the second defendants were not at an early stage when that was written. He found that the second defendants knew that, and he reached the conclusion in paragraph 114:

"In my view, the role played by Hill amounted to a combination by them with Mr Polaine for Mr Polaine to make and to leave uncorrected misrepresentations known by them both to be false and thereby to injure the Macdonalds. That to my mind is a conspiracy to commit the tort of deceit."

15. There was a second basis upon which he found against the second defendants. That was in relation to their participating in an examination of the records of the EFM company, which was said to be in breach of Mr Polaine's fiduciary duty to the company. For reasons which I think Mr Levy accepts, that second basis only arises for consideration now if the second defendants are able successfully to mount a challenge against the first basis upon which the judge found that they were liable.
16. In reaching his conclusion in relation to that, the judge said in paragraph 111:

"In my view, Hill did share Mr Polaine's objective. I believe that in the end that is made clear by the passages from Mr Cooke's report of 5 November 1998 to his board. His evidence to the contrary is, in my view, not credible. Mr Cooke knew Mr Polaine's objective from the receipt of the letter of 1 August 1998 onwards and he too wanted the Macdonalds out of EFM as soon as possible as his `timetable' document indicated."

17. The report to his Board of 5th November included the following:

"The partnership between GP [Mr Polaine] and HM [Mr Macdonald] soured over the last two years as HM began to contribute less and less in terms of sales and yet increasingly treated the company as a vehicle for funding his life style. It is significant that despite excessive withdrawals by the two directors, the magazine still turned in a profit of £132K in 1997. During 1998 GP has positively tried to put a brake on growth - for example by shortening the sales deadlines - in a bid to worsen the health of the company and persuade HM to quit on a low exit price. This together with general lack of financial controls has produced an overdraft over the agreed limits of £60K with Midland Bank, concomitant low profits. HPL will need to inject up to £75K over the next two months to stabilise the situation."

18. There are a number of proposed grounds of appeal. I take them in the order in which they appear in the Notice of Appeal. Mr Levy has dealt with them in a different order in his long and very careful skeleton argument.
19. The first ground of appeal is under the heading "estoppel". This estoppel argument was a late amendment - not criticised, at any rate in this court, for being late - arising from manuscript notes which Mr Conroy wrote on his copy of the third fax of 8th October 1998. It indicates, it is submitted, that Mr Conroy and his clients, the Macdonalds, did not wish further to probe the basis upon which Mr Polaine was negotiating with the second defendants because Hill might get cold feet. But instead, the case is, they decided to complete the sale of the shares and reserve the possibility of bringing claims later.
20. It is submitted that the judge was wrong not to find that it was unconscionable of the claimants to bring the action against the first and second defendants in these circumstances and/or that they were estopped from doing so. The essential case was that Mr Macdonald knew that a sale of his shares to the second defendant was under discussion and that he intentionally refrained from finding out more than he did. He chose not to ask the first defendant the price that was being discussed for fear that the second defendant would withdraw from the proposed transaction. He completed the sale of his own shares without seeking to acquire that knowledge and with the conscious intention of bringing proceedings afterwards if it turned out that the price was greater than he was to receive.
21. Mr Levy has made extensive submissions on this topic. However, the judge comprehensively rejected the factual basis of the submissions. This appears first in paragraph 64 of the judgment, where the judge discusses the matter and concludes the paragraph with these findings:

"They [that is at the Macdonalds] were ignorant of those matters. It is not a case where they entered into the sale transactions fully aware of everything and resolved upon suing upon a declaration which they knew to be materially untrue. I do not accept that there was any such strategy of the nature contended for by the defendants."

22. Then in paragraph 106, when he is specifically discussing the submissions relating to estoppel, the judge said that he had already stated that he did not find that the claimants formed any such strategy as alleged and that he saw nothing unconscionable in the Macdonalds' conduct. In his view there was nothing in the suggested estoppel defence. This conclusion was based entirely on findings of fact which, in my judgment, the judge was entitled to reach for reasons which on reading the judgment I find persuasive. I do not consider that there is anything in this proposed ground of appeal.
23. The second ground of appeal challenges the judge's central findings of fact. Again Mr Levy has made very detailed submissions and says, as he did before us this morning, that a careful analysis of the facts is necessary. He challenges the judge's finding that the second defendants were a party to the representations made by the first defendant on 10th and 11th September. He submits that the judge was wrong to find that the representations in the third fax of 8th October 1998 that the negotiation was at an early stage were false and were made with intent to deceive. He submits there can be two views as to the meaning of the phrase "at an early stage". He relies on the claimants' solicitors' view given in evidence of the meaning, where he said that it could mean anything to anyone. He explains in some detail the stage that the negotiations between Mr Polaine and the second defendants had reached. Solicitors had not been instructed, due diligence had not been completed and much remained to be done. The matter could have remained in the air, although in fact it did not, until 31st December 1998. He submits that the judge was wrong to find that the second defendants had conspired with the first defendants to deceive the Macdonalds by producing, or being a party to, the third fax of 8th October 1998, the semi-corrective fax. The second defendants were concerned to put the record straight and to correct the second fax of that date, which was plainly false. Mr Levy submits that the judge was wrong to find the third fax provided an incomplete picture which purported to be complete. He submits that the fax did not purport to be complete. He submits that the judge was wrong to hold that the claimants relied on the fax as being complete, and that judge was wrong to find, as he implicitly did, that the copy funding agreement sent on 9th October gave, and was intended to give, an incomplete picture of the negotiations. He submits that the evidence did not support a contention that Mr Macdonald relied on any representation by the second defendant that the inspection of EFM's record was no part of any alleged conspiracy, nor did it cause any damage. As to the declaration of 13th October, he submits that the evidence was at best inclusive and not such as to justify a finding adverse to the second defendant, especially where that involved an allegation of fraud. Finally, he submits that the judge was wrong to fail to hold that the first defendant and the Macdonalds knew that 13th October declaration did not apply to any material aspect of the proposed transaction between them.
24. In my judgment the first central question was whether the third fax of 8th October constituted an intentional misrepresentation in which the second defendant joined. On the evidence, I consider that the judge was clearly entitled to hold that the second defendant joined in this fax and in the sending of it. It was they, or their solicitor, who took steps to correct, so far as there was a correction, the plainly false second fax. In my judgment, the judge was fully entitled to conclude on the evidence that the statement in the third fax that the discussions between the first defendant and the second defendant were at an earlier stage was a misrepresentation and that not only the first defendant but also the second defendant, who were of course well aware of the negotiations, knew that was not true. I would reject Mr Levy's submission to the contrary. The judge was also, I think, entitled to hold, as I consider that he did, that the sending on the following day of details of the funding arrangements for the £130,000 did not give the full picture. The impression given was that the first and second defendants had got no further than that the second defendant would fund the purchase price of the Macdonalds' shares. In truth they had gone substantially further, and that was indicated, for instance, by the findings in paragraph 22 of the judge's judgment to which I have already referred. The second defendant necessarily knew all this. Mr Cooke had been at the lunch in August and things had progressed since then; and he knew that the statement that the discussions were at an early stage was not true. That, in my judgment, justifies paragraph 114 of the judge's judgment - his finding on the first ground on which the case was put - to which I have already referred. Accordingly, in my judgment, the challenge to the basic and necessary facts which the judge found has, I think, no real prospect of success upon a full examination in this court.
25. The next ground of appeal raises a point of law, but the point of law does not need to arise if (as I think) the first way in which the judge held the second defendants liable is upheld.
26. The brief point of law concerns the question whether, if there is a conspiracy, not to do an unlawful act, but to do a lawful act by unlawful means, the unlawful means have to be actionable at the suit of the claimant. There is authority in a judgment of Mance J, as he then was, to the effect that it does not. Mr Levy has made a submission based upon cases in the House of Lords, including what Lord Diplock said in Lohnro v Shell, to the effect that that is wrong. Interesting though that might have been, as Mr Levy accepts, the point of law only arises if the claimants have to resort, and resort only, to the second way in which the claim against the second defendants was put, that is to say that they participated in Mr Polaine's breach of fiduciary duty to the company in permitting them to inspect the books and papers of the company during October. Mr Levy says, in any event, that that was simply a legitimate part of a due diligence operation. But, as I say, the whole question does not arise in the circumstances that the first way in which the claim is put is upheld.
27. The final ground of appeal concerns damages. The judge awarded the Macdonalds a sum rather in excess of £100,000 as damages against both defendants. Mr Levy submits that there was no evidence as to valuation sufficient to sustain any such finding. He points out that the value of 100% of the shares of this company was, or might well be, quite different from the value of 50%. What the judge actually did was to extrapolate from the price which Mr Polaine was paid for the whole of the shares (£600,000), and to make a discounted calculation of half of that to reach his figure for the value of the Macdonalds' shares. Mr Levy submits that the judge's discount of 35% came from nowhere and did not make sense. The £300,000 may have been appropriate where Mr Polaine was selling both himself and the title, but the sale price for Mr Macdonald's shares alone would have had the benefit of neither of those. Mr Levy submits that the judge's finding was arbitrary and wrong and should not be upheld.
28. I have paused about this submission; but in the end I have come to the clear conclusion that this was a case where the judge, having heard a great deal of evidence (which included the price that was eventually paid for the shares in this company) was entitled, and indeed I think obliged at the end of the trial, to do his best to make an award of damages on the evidence which he had. Of course, it would in theory have been possible to have a great deal of expert valuation evidence on this subject. But in the end I am not persuaded that there was no material on which the judge could work. Nor am I persuaded that the second defendants have any real prospect of dislodging the judge's finding of fact as to the value of this company.
29. In these circumstances, in my judgment, the grounds of appeal, each of them, have no real prospect of success, and I would dismiss this application for permission to appeal.
30. LORD JUSTICE PETER GIBSON: I agree.
Order: Application dismissed.