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 HIGH COURT
CHANCERY DIVISION
(MR K GARNETT QC
Sitting as a Deputy Judge of the High Court)

		Royal Courts of Justice Strand London, WC2
		24 November 2004

1. LORD JUSTICE CARNWATH: This is an appeal from the decision of Mr Garnett QC, sitting as a Deputy High Court Judge, given on 9 May 2004 which was, in turn, an appeal and cross-appeal from the judgment of Master Price dated 28 October 2003.
2. The background can be stated shortly for reasons which will soon become apparent. I am content to adopt Mr Garnett's summary -

"2 ..... Many years ago in 1965 a Mr Derek Barnes settled £250,000 on certain discretionary trusts. The way in which those trusts were established was that two companies, namely the first claimant, Thane Investments Limited, and the second claimant, Denbrae Limited, were established, which held the trust funds. Those companies were for the most part owned by the trustees established under the discretionary trusts.

3 The first defendant, Mr Tomlinson, had for many years been a director of these companies and a trustee. In early 1997 certain changes were put in place. One of the existing trustees and directors, a Mr Bretherton, who was a solicitor, wanted to retire. In order to facilitate that, another trustee and director was appointed in relation to both companies, a Mr Giles Knopp. His expertise was in property investment. I am told that he was brought into the companies because it was Mr Tomlinson's idea that the companies should invest some of their assets in properties.

4 On 5 February 1997, service agreements were entered into between each of the two companies, on the one hand, and each of Mr Tomlinson and Mr Knopp on the other. The contracts provided for remuneration and other perks to those two individuals. The remuneration provided for in the case of Mr Tomlinson's contract was £50,000 a year, together with other benefits. The benefits and remuneration for Mr Knopp were on a lesser scale. Those service agreements were agreed to by the companies at a board meeting at which the only two directors of the company were present, namely Mr Tomlinson and Mr Knopp, although each, as I understand it, abstained when it came to consideration of their own contract."

3. The issues which were live before the judge were, so far as we are concerned, three. The first was a claim that the service agreement between Mr Tomlinson and the companies was void or voidable because it had not been approved by the company in general meeting. The second was a claim that Mr Tomlinson was liable to make good to the company money which had been paid to his fellow director Mr Knopp, under an agreement which was void or voidable for the same reason. The third issue was the counterclaim by Mr Tomlinson for a quantum meruit, on the basis that the agreements were void. A number of other issues arose in the case, but those are the three material to the matters which have been before this court. The judge decided those issues against Mr Tomlinson, who appeals to this court, appearing, as he did before the judge, in person.
4. That has put something of a burden on Mr Blackett-Ord, as counsel appearing on behalf of the company. I am grateful to him for discharging that burden in assisting the court with some last minute legal research. It seems to have been assumed before the judge that the relevant Articles of the company required directors' remuneration to be approved by the company in general meeting, as is often the case, and that this had the effect that any remuneration under a service agreement would be subject to the same limitation, so that if the remuneration provisions of the service agreement were not approved by the company in general meeting the service agreement would be void or voidable.
5. It was pointed out to Mr Blackett-Ord this morning that this proposition did not seem self-evident to the court. He has taken the lunch adjournment to review the matter, and at 2 o'clock he conceded, fairly and properly, that there was a significant distinction between remuneration of a director as such and the provisions of a service agreement. Certainly he conceded that that point was one on which he was not entitled to summary judgment.
6. In those circumstances it would be wrong for me to say anything more about the precise significance of the distinction or how it applies in this case. Nor do I say anything about the precise status of the service agreement on the facts of this case when they come to be investigated. It is clear that the basis on which the judge and the master gave summary judgment on this aspect is mistaken, as Mr Blackett-Ord now concedes. So the appeal will have to be allowed on that matter.
7. Before leaving the case, I should comment briefly on the other points. The claim against Mr Tomlinson to pay not only the sums which he had received but also the sums which had been paid to his now bankrupt fellow director, Mr Knopp, depends on his fiduciary duty as a director. The judge commented that he had been "troubled" as to whether that claim would be affected by the objective state of mind of Mr Tomlinson, but he said:

"In the end ..... it seems to me Mr Blackett-Ord is right and that Mr Tomlinson must also be liable in respect of those sums."

Unfortunately he did not give any more detailed reasoning to support that conclusion. Again it appeared to this court that the matter was not self-evident.

8. Mr Blackett-Ord has helpfully referred us to Section 322A of the Companies Act 1985 which deals with the liability of directors. Certainly that appears to provide some powerful support for the contention that the director may be liable even though he has no knowledge of the invalidity. I propose to say no more other than that, when this matter comes before the High Court again, it will be necessary to look at the applicable law in a little more detail than seems to have been done before Mr Garnett.
9. That particular point brings in another aspect, which was not looked at before the judge. That is the power of the court to relieve a director from the consequences of negligence. This comes under Section 727 of the Companies Act. There is some authority on the limitations of that section, not least in the case of Guinness plc v Saunders [1992] AC 363, in which a narrow view was taken (although it is perhaps not easy to see to what extent that narrow view was dependent on the particular facts of that case). In any event, as I think Mr Blackett-Ord would concede, Section 727 is certainly something which would need to be looked at in this case if Mr Tomlinson seeks to rely on it, particularly in relation to the claim against him in respect of the moneys paid to his fellow director. Of course, the applicability of Section 727 will depend very much on the view the judge takes of the overall merits of the case which were not gone into in any detail before us.
10. As to the counterclaim, the judge took the view that this should not affect the question of judgment on the main claims because insufficient detail had been supplied by Mr Tomlinson. Again I do not propose to say anything more about this since, if the claim has to go back for trial, it will be open to Mr Tomlinson to advance the counterclaim which has not been struck out. He no doubt will take note of the importance which the judge attached to his claim being properly particularised.
11. For those reasons I would allow the appeal and remit the whole matter for trial before the High Court.
12. LORD JUSTICE SEDLEY: I agree.
13. LORD JUSTICE WARD: I agree. I add only that I, too, am grateful to Mr Blackett-Ord for honourably discharging a difficult duty of representing his client and fairly conceding points when there is a litigant in person against him. The court is ever grateful.
14. The appeal is allowed and the matter remitted back to the Chancery Division.

Order: Appeal allowed with the costs here and below to be assessed, no interim payments.