COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (BRISTOL DISTRICT REGISTRY)
(HH JUDGE HAVELOCK-ALLAN QC)
High Court reference 23C02
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE DYSON
SIR MARTIN NOURSE
| NEVILLE (as administrator of Unigreg Ltd) and another
|- and -
|KRIKORIAN and others
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Stephen Davies QC and Mr Paul French (instructed by Stephens & Scown, 25-28 Southernhay East. Exeter, EX1 1RS) for the Respondents to the appeal
Crown Copyright ©
Lord Justice Chadwick :
"341(2) Where an arrangement or transaction is made by a company for a director of the company . . . in contravention of section 330, that director . . . and any other director of the company who authorised the transaction or arrangement . . . is liable –
(a) . . . ; and
(b) (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.."
The underlying facts
"4. A declaration that Avo Krikorian and/or Krikor Krikorian were guilty of misfeasance and breach of duty as directors of Unigreg Limited by causing or allowing it:
4.1 to create and operate their directors' loan accounts through which they caused or allowed Unigreg Limited to loan moneys to them in contravention of section 330 of the 1985 Act;
. . .
6. As against Avo Krikorian:
6.1 A declaration that the sum due to Unigreg Limited on the directors' loan account from Avo Krikorian as at 30 June 2001, namely £227,423 remains outstanding as a debt due to Unigreg Limited.
6.2 An order that Avo Krikorian do pay the sum of £227,423 to Unigreg Limited, together with interest thereon.
. . .
7 As against Krikor Krikorian:
7.1 A declaration that the sum due to Unigreg Limited on the directors' loan account from Krikor Krikorian as at 30 June 2001, namely £2,253,336 remains outstanding as a debt due to Unigreg Limited.
7.2 An order that Krikor Krikorian do pay the sum of £2, 253,336 to Unigreg Limited, together with interest thereon.
. . ."
The application for summary judgment
"13. Mr Wald refers to the fact that the accounts were subject to disclaimers by the auditors. The accounts prepared for the Company were only disclaimed by the auditors in relation to the recoverability of the directors' loans. The auditors, as far as I am aware, at no time criticised the lack of accuracy of the records or the quality and presentation of the accounts as prepared by Mr Rutland on behalf of the Company.
14. At all times, my father and I believed that the loans to us from the company could be repaid, if required, due to the substantial value of the brands in the Company. This would take place either by sale of the shares or assets and make a distribution. . . ."
At paragraph 85 of that witness statement he accepted that he owed the company £2,253,336 – the amount shown due from him on his loan account as at 30 June 2001.
"5. I have read paragraphs 9-20 of my son's seventh witness statement and can confirm the truth of the facts contained therein. I can also confirm that I fully support the arguments that have been made by him in his statement."
At paragraph 12 of his witness statement Avo Krikorian said this:
"12. The Administrator claims that I owe Unigreg £227,423.00 outstanding on my loan accounts. I do not accept that all this money was loaned to me; nevertheless, on advice from my solicitor, I have decided to take a practical view and will not argue against the Administrator's assertion that this money is due. The costs in so doing seem to me to be too great in comparison with any benefit to be obtained."
The hearing on 10 December 2004
"The first matter which is controversial relates to the Applicants' application for a declaration that the First and Second Respondents are both severally and jointly liable to the company for the amount outstanding as at the 30th June 2001 on directors' loan accounts in their favour. There is no dispute that as at that date on the directors' loan accounts which have been established, there was a sum due and owing from the First Respondent to the company of £227,423 and there was due and owing from the Second Respondent, who is the son of the First Respondent, to the company, the sum of £2,253,336. It is now not disputed that those directors' loans were made by the company to the First Respondent and the Second Respondent in breach of section 330 of the Companies Act 1985 and that they were accordingly illegal loan transactions, and that the monies are liable to be repaid. For the amounts outstanding on their respective loan accounts the First and Second Respondent are content that a monetary judgment be entered. The dispute is as to whether each has a liability for the other's loan."
" . . . I am not persuaded, having looked at the evidence filed by the Second Respondent, and the extent to which the First Respondent confirms and endorses it, that I should change the ruling that I have already made."
The evidence which the judge had in mind – as is clear from an earlier passage in the discussion following judgment – is found in paragraphs 13 and 14 of Krikor Krikorian's seventh witness statement and in paragraph 5 of Avo Krikorian's second witness statement. I have already set out those paragraphs. The judge accepted that Avo Krikorian had not, himself, signed off the 1999 accounts; but he went on:
" . . . he was a director and I would read this [paragraph 5 of Avo Krikorian's second witness statement] as him accepting his son's account that they were both at all times aware of the directors' loans and of the way in which the auditors had treated them."
The defence to summary judgment raised before the judge
"14 In paragraph 4.1 of the relief on page 2 of the notice of application . . . the Administrator seeks a declaration that Avo and/or Krikor were guilty of misfeasance and breach of duty as directors of Unigreg Limited by causing or allowing it to operate the Illegal Loans in breach of s.330 of the 1985 Act . . .
. . .
20 . . . it is now understood that the Krikorians admit liability to repay the Illegal Loans on the basis that £227,423 (plus interest) is owed by Avo and £2,253,336 (plus interest) is owed by Krikor. The only issue is whether they are jointly and severally liable for the Illegal Loans. This is an important issue because Krikor asserts that he is impecunious . . .
21 They are jointly and severally liable both under the statute and at common law:-
21.1 By s.341(2)(b) both the receiving director and any director who authorised the loan in contravention of s.330 are jointly and severally liable 'to indemnify the company for any loss and damage resulting from the arrangement or transaction'
21.2 At common law, where more than one director is involved in the same breach of duty, they are jointly and severally liable to the company for the total amount misappropriated . . . The modern statement of the rule derives from Re Carriage Co-operative Supply Association (1884) 27 ChD 322."
Paragraph 21.1 of the note contains, I think, the first reference to section 341(2)(b) of the Companies Act 1985 made in the material upon which the administrator relied in the proceedings.
"3. Further it was misfeasance for the directors (who were Avo and Krikor Krikorian) to cause or permit both loans to arise, and they are each liable to the company to "contribute" for doing so (paragraph 11 of the claim).
4. It follows that while each director will be liable in debt for the loan to himself, each will also be liable to the company to make a "contribution" (ie to pay damages to the extent that the company fails to recover the debt owed by the other).
5. It is Krikor Krikorian's case that he is without the means to repay his loan. The practical consequence is therefore likely to be that Avo Krikorian will be liable to the company to contribute a sum over and above that represented by the debt he himself owes the company."
"Joint and several liability
10. In particular it was indicated expressly for the first time on 6th December 2004 that [the applicants] will advance a case on the basis that [the first and second respondents] are jointly and severally liable for each other's directors' loan account. . . . It is not accepted that this case is made out on the pleadings or advanced in the witness statements or indicated by the relief sought against the named respondents . . . Nor was it advanced in any letter before action. It is not therefore a case that [the respondents] are prepared to meet or, absent amendment, one which is open to [the applicants] to advance. The declarations that are relied upon in support of this allegation . . . accordingly should not be made in relation to this particular issue. A fortiori, having regard to the clear terms of the relief sought in both the Notice of Application and the [summary judgment] application as to the judgment sum sought against [the respondents], this late extension of the claim should not be permitted."
The judge's decision
"Whilst the declaration that is sought, and I quoted from paragraph 4.1, does it seems to me raise a case of joint and several liability even if those words are not used, [counsel for the Krikorians] points out that the subsequent monetary claim advanced was for the amount outstanding on that particular Respondent's loan account, and not for the amount outstanding on the loan accounts of both of the Respondents. There is force in that argument as a technical point of pleading, but in my judgment the Respondents ought not to have been misled by the way in which the claim was put in the application notice, when one reads that an order was also sought that both of them should contribute to the assets of Unigreg in such sums as the court deemed fit in respect of the misfeasance referred to in the previous paragraph of the application notice. That paragraph included reference to the operation of both directors' loan accounts.
Furthermore I do not consider, if there was an ambiguity, that it is one in the end which will cause either of these Respondents prejudice if the point is now allowed to be taken. . . . "
Accordingly, the judge rejected the defence based on what he had described as "a technical point of pleading" and gave effect to the view which he had formed on the substance of the claim.
"The point made on behalf of the Respondents is this: the joint liability that emerges from section 341, subsection 2, or indeed at common law, is premised on the assumption that each director authorised the loans to be made. It is plain from the Judgment in the case of Carriage Co-Operative Supply Association that the basis of the liability in that case of the one director to pay the share contribution of the other four [directors] was because the shares were originally allotted at a meeting to which they all subscribed and at which they were all present. What [counsel] says on behalf of the Respondents is that the Applicants here cannot show that the First Respondent authorised the making of the illegal loans to the Second Respondent, or that the Second Respondent authorised the making of the illegal loans to the First Respondent.
". . . I do not accept, however, that any arguable case can be made out by Mr Avo Krikorian that he was unaware of or did not approve and authorise the making of loans to his son at least until the point when the accounts were signed off to 31st December 1999, because those accounts could only have been signed off if the board had approved them, and at the point when the accounts were seized [signed] in October 2000 Mr Avo Krikorian was still a director. At that stage the amount which his son owed to the company was less than the amount now claimed on this application but it was nevertheless a substantial figure, a sum of £1.692 million. Thereafter it is less plain on the evidence as to whether Mr Avo Krikorian would have known and therefore approved of the increase in the amounts borrowed by the son from the company, either during the period when Mr Avo Krikorian remained a director between December 1999 and July 2001, or subsequently when he had ceased to have any direct involvement in the business. In those circumstances it seems to me that there is a possible defence to joint liability that the First Respondent may have about the increase in the amount that was outstanding from his son after the end of December 1999."
"Application was made for permission to appeal that part of the summary judgment against 1st Respondent which held him jointly liable up to a sum of £1.692 million for illegal loans made by the Company to 2nd Respondent (his son and co-director) on ground that adjournment should have been granted to allow 1st respondent to adduce further evidence. Permission to appeal refused because no real doubt that joint as well as several liability was being alleged by Administrator, and evidence filed by 2nd Respondent, and confirmed by 1st Respondent, indicated that there was no real prospect of 1st Respondent of being able successfully to contend that he was unaware of, and did not approve, 2nd Respondent's unlawful borrowings at least in the period covered by the signed accounts when both Respondents were directors. In my view no real prospect of an appeal succeeding."
The grounds of appeal
"Real prospect of success as to interpretation of Companies Act 1985, s 342(2) and as to whether either the approval by the appellant of the 1999 accounts (the sole reason given by the judge for entering summary judgment against the appellant for his co-director's loan) or the evidence to which the judge refers at page 8 of the transcript (which formed the basis of the judge's refusal of an adjournment) could of itself result in the appellant being jointly and severally liable under the general law for the whole of the loan to his co-director."
She adjourned the application to rely on fresh evidence to be heard with the appeal. That was the application filed on 30 December 2004 to which I referred at the beginning of this judgment. At the time when the application was before her, Avo Krikorian had filed a witness statement (his third witness statement) dated 28 January 2005.
The further evidence
"8. In 1994, my wife Seta died. At that time I was 69 years of age. Although I remained a director of Unigreg Limited and resident in England until August 2000, my increasing age and the devastating sudden loss of my wife from cancer meant that I became much less involved in the business of Unigreg and I ceded the day to day running of the business to my son, and Mr Alan Booth, General Manager and Mr Alan Rutland, Financial Controller, as I describe below. From about 1997, my health began to deteriorate and I became less mobile and able to devote time to Unigreg. Even so, I remained available to be consulted by any of these individuals (especially if something concerned them as a group or individually).
. . .
27. I did not cause, allow or authorise my son's substantial drawings from Unigreg nor was I aware of them prior to February 2001 when I met Mr David Jeffery, the company's UK tax adviser, in Switzerland . . .
28. . . . I was very unhappy about the large drawings that my son had made and expressed this anger to both my son and Mr Booth in or around early 2001 when I met them both in Geneva.
29. Having regard to the accounts exhibited [to Mr Wald's sixth witness statement] the evolution of the amounts owed was as follows:-
|Year ended:||Date of approval: signatory||Balance of loan: AKK||Balance of loan; KAK|
|31/07/95||18/03/96; AKK + KAK||£26,771||Nil|
30. Thus, the last accounts which I signed were for the year ended 31 July 1995 and were signed by me and my son in March 1996. It is clear from the accounts for that year and for the years ended 31 July 1994 and 31 July 1996 that my son had, at each year end, no debts owed to Unigreg. After March 1996 I was not present at any board meeting which considered the accounts . . . (or their draft form) or any accounts which disclosed the monies that were outstanding on my son's loan account. The accounts for the later years were all signed by my son as Managing Director. By the time that the accounts for the year ended 31 July 1997 (sic) were signed in July 1999, I was aged 74 and, having secured the services of Messrs Booth and Rutland, would have relied on them (or indeed, the auditors) to draw my son's substantial borrowings to my attention. None of them did so at any stage or, particularly, in 2000 when, in close succession, the 1998 accounts were signed (some 4 -6 weeks before I moved abroad) and the 1999 accounts (some 6-8 weeks after I had moved to Geneva). Nor do I recall receiving (whether from Unigreg or the auditors) any accounts (including those listed above) after those I had signed in March 1996 that showed my son had run up a director's loan account or one that he had failed to repay such a loan. Nor did I discuss the matter or subject with my son, Messrs Booth or Rutland or the auditors. The first I became aware of his outstanding loan account was in February 2001, as I explain above. I was so shocked to hear of it and angry that I immediately asked my son, Mr Booth and Mr Rutland to sell the company as quickly as possible to pay the debts owed to creditors. . . .
31. Furthermore, I can confirm that I did not sign any cheques or otherwise make or authorise any payments to my son forming part of the loan accounts for which he and I are being pursued. . . .
32. I understand that His Honour Judge Havelock-Alan QC (sic) has stated that paragraph 14 of my son's seventh witness statement and my confirmation in paragraph 5 of the truth of the facts contained therein meant that I understood that I was at least aware of, if not that I approved, the Second Respondent's borrowings 'at all times' and thus liable to the extent ordered by him. The Judge's reading of this aspect of the evidence is incorrect. I have explained the position above. However, when I became aware of my son's loan account, I was not only shocked by its amount but also took action to repay it by insisting on a sale of the brands as explained above, within the company which (as later events have demonstrated) had substantial value. My agreement with my son's evidence should only be understood to the extent that my belief only subsisted after I became aware of the loan in February 2001."
"It was confirmed that all parties to the meeting were in receipt of the financial statements of the company for the 17 month period ended 31 December 1997.
Discussion took place concerning the results for the period and the proposed qualified opinion from the auditors, PricewaterhouseCoopers.
After due consideration it was resolved that the financial statements be approved in the format presented, and that the Managing Director be authorised to sign them on behalf of the directors."
"8. I confirm I have no recollection of this telephone meeting nor can I recall being (and neither do I accept that I was) "In receipt of the financial statements of the company for the seventeen month period ended 31 December 1997". I consider that it is curious that I should be examining accounts in a hotel room, as my usual method of conducting business was to have a face to face meeting with Mr Booth to discuss matters of such importance. I would certainly not discuss accounts with Mr Booth at the end of a telephone line and therefore I believe I probably did not have the accounts, even if the meeting did, in fact take place."
It may be noted that Avo Krikorian does not challenge the authenticity of the minute. Nor, as it seems to me, is there any reason to doubt its accuracy. Given that BDO Stoy Hayward had resigned as auditors on 20 February 1998, that the 1997 accounts were well overdue and that the newly appointed auditors, PricewaterhouseCoopers, were proposing to qualify their audit report, it seems to me impossible to doubt that Mr Booth, formerly a senior employee of Barclays Bank plc, would have sought to ensure that the accounts were approved by the directors. Further, it is pertinent to have in mind that, where minutes have been made of a meeting of directors and entered in books kept for that purpose, section 382(4) of the Companies Act 1985 provides that, until the contrary is proved, "the meeting is deemed duly held and convened, and all proceedings had at the meeting to have been duly had".
"The Bank appreciates the difficulties which the company has had in China and the progress which has been made. Unfortunately, the investment of £1.1m was not funded in a proper manner and has caused the present cash shortage. In addition, the position has been exacerbated by the withdrawal of funds by the directors. Over the past 12 months, loans to directors have increased by £617,000 and now stand at £2,261,000 against Net Tangible Assets of £428,000." [emphasis added]
The reply to that letter – which is addressed to the chairman of the bank, which purports to have been sent by Avo Krikorian and which demands reconsideration of the decision to refuse "as a matter of urgency" - contains this sentence:
". . . The bank is aware of the steps being taken by me personally to re-finance Unigreg Ltd, which will obviously re-dress and tackle the question of the directors loans alluded to in the letter of refusal."
"3. . . . I can confirm that I had no role whatsoever in this correspondence. I neither wrote nor signed these letters nor did I consider them at all until my solicitor sent me Mr Wald's witness statement of 4 May 2005. . . .
4. I have spoken to my son about the correspondence passing between Barclays Bank Plc and Unigreg Limited. He has informed me that he wrote the letters of 1 March 2000, 26 April 2000 and 4 May 2000 to the Chief Executive and Chairman of Barclays Bank Plc and that he had hoped that this would be more advantageous to Unigreg Limited due to my long relationship with Barclays Bank Plc. I played no role in composing or sending those letters. . . . I can also confirm that I was unaware of the meeting on 28 April 2000 between my son and Barclays Bank Plc. I had by then yielded considerable control of the company to my son . . . "
Avo Krikorian accepts that the letters on which the administrator relies were in the material which was before the judge on 10 December 2004 and that he did not, then, disclaim knowledge of those letters. His explanation is that the documents were not sent to him by his solicitor in advance of that hearing. But, it is pertinent to have in mind (i) that in his witness statement of 7 October 2004 – made in support of the application for summary judgment – Mr Wald had referred to those letters (at paragraphs 134 – 136); (ii) that in his witness statement of 29 November 2004 (at paragraphs 37 to 43) Krikor Krikorian notes that Mr Wald's witness statement "illustrates some but not all of the ways that my father and I tried to assist the company" and "records the numerous attempts that were made by my father and I to seek assistance from the bank" and (iii) that in his witness statement of 29 November 2004 (at paragraph 7)Avo Krikorian states that: "I have read paragraphs 31-48 of my son's statement and confirm the truth of the facts contained therein".
The obligations imposed by the Companies Act 1985
The applications filed on 30 December 2004 and 3 April 2006
"(5) In any case, . . . any such other director as is mentioned in subsection (2) is not so liable if he shows that, at the time the arrangement or transaction was entered into, he did not know the relevant circumstances constituting the contravention."
It is important, therefore, both in the context of sub-section (2) and in the context of sub-section (5), to identify the "arrangement or transaction" which is said to be in contravention of section 330 of the Act.
Lord Justice Dyson:
Sir Martin Nourse: