COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR STUART ISAACS QC
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CARNWATH
LORD JUSTICE MOORE-BICK
| MOHAMMAD JAFARI-FINI
|- and -
|SKILLGLASS LTD & ORS
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A Merrill Communications Company
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Ali Malek QC & John Odgers (instructed by Messrs. Pettman Smith) for the 1st & 3rd Respondents
Andrew Butler (instructed by Messrs. Forsters) for the 2nd Respondent
Hearing dates : Wed 31st January 2006, Thurs 1st & Fri 2nd February, 2007
Crown Copyright ©
The appeal is dismissed. For the reasons given in the judgments of Moore-Bick LJ (para 73-109) and Laws LJ (paras 120-122) the majority uphold the judge's finding of a "Major Default" by PAL, arising from PAL's failure to disclose to Skillglass a bribe paid by the Claimant. Carnwath LJ would have allowed the appeal on that issue, holding that neither the bribe nor PAL's knowledge of it had been established to the required standard of proof (judgment paras 42-52; see also his more detailed analysis in an appendix attached at the end of the judgments). The appeal on the grounds of procedural unfairness is dismissed unanimously, for the reasons given by Carnwath LJ (paras 53-60) and Moore-Bick LJ (paras 64-67). The court also comments on the contractual effect of the October notice of default, assuming no Major Default (paras 112-118).
Lord Justice Carnwath :
"I tell you why: the situation with Resurge, although I was a 17 per cent shareholder, I had no – really – involvement in the running of the company. It was very much Jonathan Rowland and Jamie Constable's deal. They did the deal, and they were very – and I was very conscious of not being involved. They wanted to do their own thing. I was prepared to provide them finance on appropriate terms at the appropriate time but, I mean, if I had of been involved, this sad event would not have happened." (Transcript Day 5 p 74)
i) Mr Ted Webster was an experienced Chartered Surveyor, who became involved as a consultant to the Claimant from the end of 2002. He became a director of PAL in 16th April 2003. He became a director and Chief Executive of Chesterton on 27th June 2003, at the request of the Claimant, immediately following the acquisition. Mr Webster was described by the judge as "an honest and straightforward witness". His evidence was important to the judge's findings both as to the fact of the bribe, and as to PAL's knowledge of it.
ii) Mr Graham Robeson was a close business associate of Mr David Rowland. He became a director of PAL on 27th June 2003 and of Chesterton from 12th December. He was directly involved on behalf of David Rowland in the events leading up to the acquisition.
iii) Mr Anthony Brierley was a Chartered Accountant. At the material times he was a director of both Resurge and Skillglass. He became a director of PAL from 2nd September 2003. His evidence was given in the form of a witness statement, and related principally to the meeting of Skillglass on 27th June, and the potential significance of the alleged bribe.
The legal framework of the acquisition
"The agreements are dated 16th April 2003 and, so far as material, included the following: first, a facility agreement between Skillglass and PAL; second, a debenture granted by PAL to Skillglass; third, a guarantee executed by the Appellant in favour of Skillglass; and, fourth, legal charges over shares and property granted by the Appellant to Skillglass.
Under the terms of the Facility Agreement, Skillglass agreed to make available to PAL a term loan facility to a maximum principal amount of £12.85 million, or thereabouts, for the purpose of purchasing shares in Chesterton and meeting fees and ancillary costs. Draw down under the agreement could take place when the proposed offer for the Chesterton shares had become unconditional. Repayment was to be made in accordance with the following schedule: (1) within 21 days of the first draw down, £1,299,900; (2) within 180 days of the first draw down, £3,700,100 - making in aggregate with the first tranche £5,000,000; (3) within 365 days of the first draw down, such amount as might be required to reduce the amount outstanding under the facility to £4 million; (4) on the second anniversary of the first draw down, the balance then outstanding."
"Clause 23.2 of the Facility Agreement provided for the rights which Skillglass was to have in the event of default by PAL. Put shortly, in the event of default Skillglass would be entitled to serve written notice cancelling any future right to draw under the facility, declaring the whole amount already drawn to be immediately due and repayable, and declaring any security granted by PAL - and in particular the debenture to which I have already referred - to be immediately enforceable. But those rights were subject to the proviso that they could not be exercised prior to the expiry of 220 days from the date of the offer - a period defined as "the Certain Funds Period" - unless the event of default constituted a "Major Default", which was also a defined term."
"Under the debenture granted by PAL to Skillglass, PAL covenanted that it would pay on demand all monies owed by it under the Facility Agreement and secured that obligation by fixed and floating charges over all its property and undertaking. The property subject to the fixed charge in the debenture included shares in Chesterton as and when acquired by PAL under the offer. That security was supported by an obligation on PAL to deposit with Skillglass share certificates and share transfers in respect of the Chesterton shares.
The Appellant's guarantee contained an undertaking by him to pay on demand by Skillglass and to discharge all monies and liabilities due and owing by PAL to Skillglass under the facility letter. That obligation was secured by legal charges in favour of Skillglass over properties owned by the Appellant and over all shares from time to time held by the Appellant in PAL. Again, that security was supported by an obligation on the Appellant to deliver share certificates and executed transfers and to procure that Skillglass was registered as the owner of the shares in PAL."
"Upon the offer being declared unconditional, PAL was entitled to draw down under the facility letter in order to pay for the Chesterton shares which it had acquired. The first draw down was on 11th July 2003. That set the timetable for the first repayment of £1,299,900 to be made on 1st August 2003, and for the second repayment - a tranche of £3,700,100 - to be made on 4th January 2004.
A further consequence of the offer being declared unconditional was that the Appellant, Resurge Limited - the parent company of Skillglass - and Phoenix Holdings Partners LLC - a Delaware limited liability company owned by investment bankers Babcock & Brown ("PHP") - became obliged to take up shares in PAL. Thereafter the Appellant was beneficial owner of some 61 per cent of PAL, subject to the legal charge in favour of Skillglass, PHP was the owner of some 14 per cent and Resurge was the owner of the remaining 25 per cent of the shares in PAL.
The effect was that the Appellant controlled PAL. But clause 21 of the investment agreement, which imposed the obligations to take shares in PAL upon the offer to acquire Chesterton's shares becoming unconditional, provided that, upon default under the Facility Agreement, Skillglass should have the right to assume control of PAL in the place of the Appellant.
… under the debenture, and under the charge' given by the Appellant, Skillglass was entitled to require shares in Chesterton acquired by PAL and shares in PAL for which the Appellant had subscribed to be transferred to it upon the happening of an event of default under the Facility Agreement. Following the PAL offer for Chesterton shares becoming unconditional, it was agreed that the shares charged as security should be registered in the name of Skillglass forthwith; to be held by Skillglass as nominee pending default under the facility letter. Those arrangements are recorded, first, in a nominee declaration dated 27th June 2003 - under which Skillglass undertook to the Appellant that it would hold the Appellant's shares in PAL as nominee or bare trustee to deal with the shares only as the Appellant might direct until such time as the money secured by the Appellant's guarantee became payable - and, secondly, in a nominee declaration dated 10th July 2003 in which Skillglass gave similar undertakings in relation to PAL's shares in Chesterton. From June and July 2003 Skillglass was the registered holder of 61 per cent shares of PAL and PAL's 87 per cent shares in Chesterton."
"PAL duly paid the first tranche of £1,299,900 on 1st August 2003. It did so from monies subscribed under the investment agreement. On 24th October 2003 it made a further advance repayment of £600,000 by way of pre-payment of the second tranche, thereby reducing to £3,100,100 the amount due on 4th January 2004….
Following the acquisition of control of Chesterton, the Appellant was appointed to the board and given the post of Executive Chairman. He arranged for the sale off of Chesterton assets. But it became clear that Chesterton had suffered losses and incurred liabilities which raised doubts as to its solvency; and, in particular, which made it impossible to release funds to PAL under the whitewash provisions in Part V of the Companies Act 1985. Declarations of solvency from auditors and directors - which are essential to any distribution under those provisions - would not be forthcoming. That put the source of funds required to meet the second repayment tranche of £3,100,100 due on 4th January 2004, in doubt.
On 27th October 2003 Skillglass served on PAL a notice asserting that there had been a breach of clause 20.1 of the Facility Agreement and that that breach constituted an event of default under clause 23.1.2 of the Facility Agreement. The notice declared that the moneys advanced under the Facility Agreement had thereby become due and payable and that the securities had become enforceable. …
On 11th December 2003 Skillglass served a further notice on PAL. That notice referred to the October notice and demanded immediate repayment of the monies advanced under the facility letter…
On 23rd December 2003 the Appellant's appointment as Executive Chairman of Chesterton was terminated by resolution of the board of directors of that company. Subsequently, on 16th January 2004, the Chesterton board resolved to remove the Appellant as a director of the company…."
"It is the Claimant's position that David Rowland used his absence in Iran as an opportunity to seize control of Chesterton and PAL for himself, beginning with the December notice of demand, followed by his removal as executive chairman of Chesterton and then as a director of Chesterton. Generally, the Claimant is convinced that he is in effect the victim of, in the Claimant's words, a coup d'état, orchestrated by David Rowland to remove him from Chesterton to enable Mr Rowland to take control himself…."
The judge did not accept this view:
"… whilst the Claimant's feeling is, I am sure, genuine, I am equally sure that his belief that Mr Rowland is the cause of his misfortune is misplaced. I accept Mr Robeson's and Mr Rowland's evidence to the effect that their concern was the protection of their investment and nothing more."
"On the assumption that the notices of October or December 2003 were not valid, the second tranche of monies due under the Facility Agreement had - prima facie at least - to be repaid by 4th January 2004. PAL did not make that payment. On 20th May 2004, following the commencement of this action, Skillglass served notice of default in relation to the failure to pay on 4th January 2004.
The third tranche, to reduce the amount outstanding under the Facility Agreement to £4 million, was due on the first anniversary of the first draw down, which fell in July 2004. That payment was not made. On 17th September 2004 Skillglass served a further notice of default.
The position therefore is this. Some £10.4 million or thereabouts was drawn down under the Facility Agreement. £1,899,100 of that has been repaid - £1,299,100 on 1st August 2003 and £600,000 on 24th October 2003. The balance, which on those figures would be some £8.5 million or thereabouts, together with accrued interest, remains outstanding. Of that sum, £3,100,100 was due for payment under the Facility Agreement on 4th January 2004 and a further £1.5 million or thereabouts was due for payment in July 2004.
PAL is a company whose only asset is its holding of 87 per cent of the shares in Chesterton. Chesterton went into administrative receivership on 7th March 2005. Evidence has been put before us - and there is nothing to suggest to the contrary - that there will be no funds available in the administrative receivership to meet the claims of unsecured creditors. On any objective assessment the shares in Chesterton must be regarded as worthless, or almost worthless."
The derivative claim
"It must be kept in mind that the shares in PAL of which the claimant claims to be the beneficial owner are registered in the name of Skillglass, subject to the nominee declaration. This is not the more familiar case in which the alleged wrongdoers control the company by virtue of shares which they hold in their own right. The complaint in this case is that the alleged wrongdoer, Skillglass, controls PAL by reason of the rights derived from shares beneficially owned by the claimant. The underlying issue in these proceedings is whether Skillglass, by virtue of the security interest over the PAL shares which are registered in its name, is entitled to exercise rights derived from those shares in a way which contravenes the wishes of the claimant as the ultimate beneficial owner."
"The underlying question, as the judge recognised, was whether, by reason of the events of October 2003, - and, perhaps more particularly, December 2003 - control of PAL and with it control of Chesterton had passed in law from Mr Jafari-Fini to Skillglass as secured lender. That depends, first, on the validity of the notices; and, second on whether, if the notices were invalid, the Facility Agreement and the security arrangements ceased to be enforceable by reason of repudiation. If the agreement and the arrangements continued to be enforceable there was no doubt that, by October 2004 at least, there had been a breach. There had been a failure to pay in January and a further failure to pay in July 2004.
Those issues - the validity of the notices and the effect in law on the enforceability of the Facility Agreement and the security arrangements - ought to be tried. But they will be tried in an action by Mr Jafari-Fini against Skillglass, because his liability under his guarantee and his charge depend upon findings on those points. There is no need for PAL to bring a claim in that action…." (para 52-4)
"Those issues will raise the questions for determination whether the notices were valid; and (if not) what the effect, if any, of their invalidity will have been on the enforceability of the facility agreement and the security arrangements." (para 59)
"Major Default" and the alleged bribe
"23.2.1 cancel any unutilised amount of the Facility, whereupon the obligations of the Lender shall be reduced to zero; and/or
23.3.2 declare the Term Loan to be due and payable on demand, whereupon the Loan, together with all interest thereon and other amounts payable under the Banking Documents shall at all times after such declaration be due and payable; and/or
23.2.3 declare that the Security Documents shall have become enforceable."
"PROVIDED THAT, prior to the expiry of the Certain Funds Period, the Lender shall not be permitted to:
(a) take any of the actions referred to in sub-clauses 23.2.1 to 23.2.3 (inclusive) of this clause 23.1; and/or
(b) invoke any right or discretion (for which provision is made in this Agreement) requiring any prepayment or repayment of the Term Loan; and/or
(c) exercise any right of rescission; and/or
(d) refuse to make any Advance,
unless a Major Default has occurred and is continuing which has not been waived in writing by the Lender."
The Borrower shall make full disclosure to the Lender in writing as soon as practicable of all information which comes to the attention of the Borrower and which is material to the decision whether to waive any condition of the Offer… and all other information which has come to its attention which is or was material to any decision whether to waive any condition of the Offer…"
The Borrower for these purposes was PAL, and the Lender Skillglass.
"The Defendants submitted that the Claimant paid Mr Constable a bribe of £150,000 in order to procure the waiver of the 90% acceptance condition, and that this clearly constituted a material matter, of which prompt disclosure in writing ought to have been made by PAL to Skillglass, at least before the initial drawdown by PAL on 9 July 2003…" (para 105)
The issues in the appeal
i) The Bribe Whether the Judge was entitled to find that the Claimant bribed Mr Constable, and in particular whether he applied the correct standard of proof in respect of the bribery allegation.
ii) Imputed knowledge Whether the bribe had "come to the attention" of PAL, so as to bring the Major Default provision into play.
iii) Estoppel by convention - Whether PAL was estopped from disputing the validity of the October Notice.
iv) Repudiation – Whether the Skillglass committed repudiatory breaches of the facility and other agreements.
v) Acceptance/Affirmation – Whether, if so, PAL accepted Skillglass' repudiation, or affirmed the facility agreement by making repayments under it.
vi) Procedure – Whether the Judge gave the Claimant a fair hearing.
vii) Costs – Whether the Judge was wrong to award Skillglass and Resurge the whole of their costs of the action.
In the course of the argument before us Mr Malek indicated that he would not pursue the estoppel (issue (iii)). Issues in respect of costs were deferred until after our judgment on the substantive points.
The Alleged Bribe
i) He adopted the wrong standard of proof;
ii) The conclusion was against the weight of the evidence.
Standard of proof
"In approaching the question whether the Claimant bribed Mr Constable, I have had regard to the statements of the Court of Appeal in Hornal v. Neuberger Products Ltd  1 QB 247. The burden of proof rests upon the Defendants. The standard is the civil standard of the balance of probabilities. However, having regard to the serious nature of the allegation being made, in assessing whether or not the Defendants have discharged the burden resting upon them, the degree of probability must be commensurate to the seriousness of the allegation being made and is therefore a high one." (para 128)
"… the civil standard of proof is flexible in its application and enables proper account to be taken of the seriousness of the allegations to be proved and the consequences of proving them," (per Richards LJ, at para 59)
Thus in civil proceedings, the "presumption of innocence" is not so much a legal rule, as a common sense guide to the assessment of evidence. It is relevant not only where the cause of action requires proof of dishonesty, but, wherever the court is faced with a choice between two rival explanations of any particular incident, one innocent and the other not. Unless it is dealing with known fraudsters, the court should start from a strong presumption that the innocent explanation is more likely to be correct.
Against the weight of the evidence
"But the parties to a cause are nevertheless entitled, as well on question of fact as on questions of law, to demand the decision of the Court of Appeal, and that court cannot excuse itself from the task of weighing conflicting evidence and drawing its own inferences and conclusions, even though it should always bear in mind that it has neither seen nor heard the witnesses, and should make due allowance in this respect."
"… how often have I said to you that, when you have eliminated the impossible, whatever remains, however improbable, must be the truth?"
He gave three reasons why such guidance was inappropriate to the process of fact-finding by a judge at first instance, the first being:
"… the judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. No judge likes to decide cases on burden of proof if he can legitimately avoid having to do so. There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take."
This guidance seems to me pertinent to this case.
Mr Constable's evidence
i) Once it had become apparent that the Defendants were not planning to call either Jonathan Rowland or Mr Constable as witnesses, the Claimant raised the question of issuing witness summonses. He told the judge that the Master had adjourned this question to him. At the end of the first day he told the judge that he had prepared witness summonses against both Mr Jonathan Rowland and Mr Jamie Constable, and that he wanted the Judge to give him permission to issue both summonses. The judge said he would deal with the matter the next morning.
ii) According to the Claimant, he prepared, and passed to the usher to give to the judge, witness summonses for both Mr Rowland and Mr Constable. At the start of the second day, the judge discussed the summons in respect of Jonathan Rowland. It was agreed that he would prepare a statement on topics indicated by the Claimant, and that he would be made available for cross-examination by the Claimant. The Claimant indicated that he was content with that course.
iii) As far as appears from the transcript, there was no further reference to Mr Constable. According to the Claimant the judge handed back both summonses. He says:"I did not say anything in relation to the witness summons against Mr Constable. I was left with the firm impression that the judge was not going to issue the witness summons against him in the light of the position adopted in relation to Mr Jonathan Rowland."
Conduct of the trial
Lord Justice Moore-Bick:
i) whether Skillglass was entitled to serve the notice of default dated 27th October 2003 ("the October notice") or the notice of demand dated 11th December 2003 ("the December demand");
ii) whether Skillglass's actions in serving the October notice and the December demand constituted a breach of the Facility Agreement, the Debenture and the Nominee Declaration;
iii) whether Skillglass's action in enforcing the Facility Agreement and Debenture constituted a breach of the Facility Agreement, the Debenture and the Nominee Declaration;
iv) if so, whether PAL is discharged from liability under the Facility Agreement and the Debenture;
v) if so, whether Mr. Jafari-Fini is in consequence discharged from liability under his guarantee and the security given in support of it;
vi) whether Skillglass was entitled to enforce the claimant's guarantee in accordance with its letter of 11th December 2003;
vii) whether by making that demand and seeking to enforce Mr. Jafari-Fini's guarantee Skillglass committed a breach of the guarantee, of the security given in support of it and of the Nominee declaration dated 27th June 2003;
viii) if so, whether Mr. Jafari-Fini is in consequence discharged from liability under his guarantee and the security given in support of it;
ix) whether Mr. Jafari-Fini is entitled to have his guarantee and its supporting security discharged;
x) whether Mr. Jafari-Fini is entitled to have the shares charged to Skillglass in support of his guarantee transferred to him free of any encumbrance in favour of Skillglass.
The conduct of the proceedings
(i) Was Skillglass entitled to serve the October notice and the December demand?
"23.1.2 Breach of projected forecasts
if the Borrower is in breach of the undertaking set out in clause 20.1 [sc. an obligation to ensure that the profits and operating cashflow did not vary by more than 15% from the financial projections]; or
23.1.3 Breach of other obligations
(a) . . . . . . ; or(b) if [PAL or any of its subsidiaries] fails to comply in any material respect with any of the other provisions of this Agreement . . . . . "
"Upon and at any time after the occurrence of an Event of Default, and for so long as the same is continuing, the Lender may, in its sole discretion by notice in writing to the Borrower:
23.2.1 cancel any unutilised amount of the Facility, whereupon the obligations of the Lender shall be reduced to zero; and/or
23.2.2 declare the Term Loan to be due and payable on demand, whereupon the Loan, together with all interest thereon and other amounts payable under the Banking Documents shall at all times after such declaration be due and payable; and/or
23.2.3 declare that the Security Documents shall have become enforceable.
PROVIDED THAT, prior to the expiry of the Certain Funds Period, the Lender shall not be permitted to:
(a) take any of the actions referred to in sub-clauses 23.2.1 to 23.2.3 (inclusive) of this clause 23.1; . . . .
unless a Major Default has occurred and is continuing which has not been waived in writing by the lender."
". . . . . the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability"
Did PAL know of the bribe?
(a) What did Mr. Webster know?
(b) Is Mr. Webster's knowledge to be imputed to PAL?
"(ii) Principal's duty to investigate or make disclosure
Secondly, there are cases in which the principal has a duty to investigate or to make disclosure. The duty to investigate may arise in many circumstances, ranging from an owner's duty to inquire about the vicious tendencies of his dog (Baldwin v Casella (1872) L.R. 7 Exch. 325 at 326-327) to the duty of a purchaser of land to investigate the title. Or there may be something about a transaction by which the principal is 'put on inquiry'. If the principal employs an agent to discharge such a duty, the knowledge of the agent will be imputed to him. (There is an exception, the scope of which it is unnecessary to discuss, in cases in which the agent commits a fraud against the principal.) Likewise in cases in which the principal is under a duty to make disclosure (for example, to an insurer) he may have to disclose not only facts of which he knows but also material facts of which he could expect to have been told by his agents. So in Gladstone v King (1813) 1 M & S 35, 105 ER 13 a marine insurance policy was avoided because the master of the ship knew that it had suffered damage, even though he had not in fact communicated this information to the owner. Regina Fur Co Ltd v Bossom  2 Lloyd's Rep 466 upon which Mr Beloff strongly relied, also concerned the duty to make disclosure under an insurance policy and therefore falls within the same category."
"But there will be many cases in which . . . . . the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."
and later at page 511G-H he said:
"It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company."
(c) Was the information disclosable?
". . . . . make full disclosure to the Lender in writing as soon as practicable of all information which comes to the attention of the Borrower and which is material to the decision whether to waive any condition of the Offer . . . . . and will disclose to the Lender . . . . . all other information which has cone to its attention which is or was material to any decision whether to waive any condition of the Offer . . . . ."
(d) Was the information already in the possession of Skillglass?
"Seeing that they had received the information from the police, it would be a futile thing to require the motor-cyclist himself to give them the self-same information. The law never compels a person to do that which is useless and unnecessary."
(ii) The effect of an unauthorised notice of default
Lord Justice Laws:
"… this is not one of those cases in which the accounts given by the witnesses can be tested by reference to a body of contemporaneous documents. As a result the judge was forced to rely heavily on his assessment of the witnesses and the inherent plausibility or implausibility of their accounts. In these circumstances considerable weight must be given to the fact that the judge had the great advantage of seeing most of the principal actors give evidence. We have not had that advantage and in my judgment are not well-placed to differ from his assessment of the truthfulness and reliability of Mr. Rowland or any of the other witnesses, particularly in relation to matters that are not reflected in any of the documents."
"The £150,000 Payment was a corrupt payment, which the Claimant agreed to make and made with the intention of influencing Mr Constable in relation to the performance of his duties as a director of Skillglass and/or Resurge and inducing Mr Constable, Mr Jonathan Rowland, Skillglass and/or Resurge to consent to and thereby permit the waiver of the Acceptance Condition…"
The judge summarised the Defendants' case as he understood it:
"The Defendants submitted that the Claimant paid Mr Constable a bribe of £150,000 in order to procure the waiver of the 90% acceptance condition, and that this clearly constituted a material matter, of which prompt disclosure in writing ought to have been made by PAL to Skillglass, at least before the initial drawdown by PAL on 9 July 2004." (para 105)
"… on or about 24 June 2003, the Claimant approached Mr Webster to request a loan… Mr Webster's understanding was the Claimant was short of money which he needed to sustain his majority shareholding in PAL. Mr Webster agreed to lend the Claimant £250,000 on the terms of a loan agreement executed on the evening of 26 June 2003. The loan was for one year and at an exceptionally high rate of interest. It was to be secured amongst other things by a second charge over the Claimant's shares in PAL but no security was ever provided because Skillglass withheld its consent to the second charge." (para 39-40)
Again this account is not in dispute.
i) Who were the intended recipients? Was it a payment to Mr Constable alone, or was Jonathan Rowland also a party?
ii) What was the purpose of the payment? More specifically, was it for the purpose alleged in the pleadings, that is, for the purpose of "inducing Mr Constable, Mr Jonathan Rowland, Skillglass and/or Resurge to consent to and thereby permit the waiver of the Acceptance Condition".
The issues at trial
The Claimant's case
"I should explain what the background to my loaning the £150,000 was. I knew that from the proceeds of the sale of my shares in Chesterton I would be able to subscribe for £1.3m shares, so I needed a further £936,000 to subscribe for the total amount of shares that I could subscribe to under the investment agreement, i.e. 2,236,000 shares. I had made arrangements to borrow the sum of £250,000 from Mr Webster and was expecting £650,000 from another transaction. Unfortunately the £650,000 transaction fell through at the last minute and I was only left with £250,000 loan from Mr Webster to subscribe for this purpose, but Jonathan Rowland and Jamie Constable suggested that as I did not have the full amount, I pay £50,000 for the right to exercise an option to buy these shares in the next 12 months.
Then after completion they asked me what I intended to do with the balance of the monies I had borrowed from Mr Webster, and asked if they could borrow £200,000. I told them no, but they persisted and eventually I agreed to advance £150,000 to them as an interest free loan on the understanding that they would give it back on demand. At their request the cheque was made payable to Three V Corporate Venturing a limited liability partnership formed between Jamie Constable and Jonathan Rowland. My intention was to raise the balance of required monies to pay Resurge under my option agreement for the extra shares…"
This, as I understand it, has been his consistent case throughout.
"I arrived at Claridge's and met the outgoing CEO, Gavin Black and Mr Webster to go through the handover process. Then I noticed Jamie Constable and Jonathan Rowland sitting at another table in the corner waving at me. When I finished with the handover discussions I went to Jamie Constable and Jonathan Rowland and they asked me to sit and have breakfast with them. I said I could not as I had to go over to the solicitors to sign some completion documents.
I was then asked by Jonathan Rowland if I could lend £200,000 to them. He said 'look you don't need the money you borrowed from Ted [Webster] now so let's use it'. I was reluctant but they said that they were working on a very good project and that they would return the monies very soon. Eventually I was persuaded to lend £150,000 to them. When I went to write the cheque for Jonathan Rowland he told me to make it payable to Three V Corporate Venturing." (para 111-112)
"When cross-examined about this part of his evidence, the Claimant said that he could not fully recollect what was the "project" but that it was something to do with motor racing. He did not know why Jonathan Rowland and Mr Constable had decided it was a "very good" project. He did not ask how the monies would be returned or what would be the trigger for repayment. He did not seek interest or any loan documentation. While it was correct that he had only known them for a matter of months, he was dealing with them on a daily basis, he knew that Jonathan Rowland's father was a very wealthy man and he was conscious of the fact that they had agreed to lend PAL very much more and could set-off the monies against sums owed by PAL. He was pestered by Jonathan Rowland into making the loan." (para 112)
The Defendants' case
"(Mr Constable) said that he had done a very silly thing which he had never done before in his life. He said that he had taken a payment from Mr Jafari-Fini, as a result of which he had allowed the deal to go through i.e. Mr Constable clearly confessed to accepting a bribe from Mr Jafari-Fini. The payment that Mr Constable said that he had taken from Mr Jafari-Fini was in the sum of £150,000, and was made on 27th June 2003 (i.e. the date on which PAL's Offer for Chesterton was declared unconditional) and it was paid by cheque."
Mr Rowland said that he told Mr Constable that the money had to be returned to Skillglass. Mr Constable agreed to do so, saying that he could describe it as a "security deposit". In cross-examination, Mr Rowland added that he had told Mr Constable that the Claimant should be "given credit for the interest PAL had been paying in the meantime on the loan"; that he himself was "shocked and disgusted", but –
"He was conscious of the repercussions for Chesterton (and therefore of the risk to the monies invested in PAL) if it came out that the Claimant had made a bribe."
He also "went ballistic" with his son, Jonathan, who however denied any knowledge of the payment (judgment para 117).
"… the Claimant told him one evening in the office that he had made a cash payment to Mr Constable and Jonathan Rowland at Claridges on the morning of 27 June 2003 in return for Skillglass' consent to the offer for Chesterton going unconditional. According to Mr Webster, the Claimant expressed disgust to him that Mr Constable and Jonathan Rowland were hoodwinking David Rowland. Mr Webster was clear from his conversation with the Claimant that the money was a bribe. Unsurprisingly, Mr Webster felt uncomfortable about what he had been told. Somewhat surprisingly, it did not however cross his mind at that time that the payment might have come from his loan made to the Claimant." (para 114)
"Jonathan Rowland is a keen motor-racing driver. David Rowland's evidence was that he was in London in July 2003 when his son mentioned that he was due some racing sponsorship monies from Mr Constable of which he (Jonathan Rowland) did not want his then wife to know because she disapproved of his motor racing activities. David Rowland then told Mr Constable to make the payment to Rowland Capital, which Mr Rowland used as a family management company, and Mr Constable wrote out a cheque dated 17 July 2003 for £75,000 to Rowland Capital drawn on the account of an entity called Three V Corporate Venturing LLP ("Three V"), of which the partners are Mr Constable and a Mr Peter Ward, a close business associate of Mr Constable." (para 115)
"Jonathan Rowland's evidence was that in January 2004 he made a payment of £82,500 from his and his then wife's joint bank account to Three V. His explanation for the payment was that in July 2003 Mr Constable had made available £75,000 to him to sponsor his motor-racing activities. The money had never come into his possession, however. He mentioned to his father that Mr Constable had some of his money but was vague about it because of his father's unsympathetic attitude towards his motor-racing and because he did not want to disclose the existence of the monies to his wife, from whom he was separated. He said that when his father then saw Mr Constable in about mid-July 2003, he got Mr Constable to write a cheque to Rowland Capital for £75,000. He never received the monies because his father withheld them to cover losses he (Jonathan Rowland) had made on various share dealings.
Following the meeting between his father and Mr Constable on 19 January 2004, he was concerned that the £75,000 paid to Rowland Capital was in some way associated with the £150,000 payment received by Three V from the Claimant. He wanted nothing further to do with the money because he regarded it as potentially tainted and so arranged for £82,500 (being £75,000 plus interest) to be repaid to Three V, to be paid on to Skillglass with an equivalent credit to PAL's borrowings." (para 118-9)
"On 21 January 2004, Three V paid £165,000 to Skillglass in part repayment of PAL's borrowings. Mr Constable also wrote on that day on a Three V letterhead to the Claimant confirming that the security deposit held by it against a default on the Claimant's loan had been paid to Skillglass. On 3 February 2004, the Claimant replied stating that he was surprised to receive the letter "now that I have demanded the repayment of my personal loan of £150,000 to your company 'Three V Corporate Venturing LLP'". There was no evidence of any previous demand for repayment of any such loan having been made by the Claimant." (para 120)
The judge's conclusions
"I… accept Mr Rowland's uncontradicted evidence about his meeting with Mr Constable in Guernsey on 19 January 2004. It was a very grave matter for Mr Constable, a professional man, to make the confession to Mr Rowland which he did. It would have been an equally grave matter for Mr Rowland to have made up that evidence. In my judgment, Mr Constable's flight to Guernsey was prompted by the Claimant's comments at the Chesterton board meeting three days previously about the questionable financial dealings of another director. I reject the Claimant's evidence that he did not use those words or words to that effect. I also reject his evidence that he was referring not to the bribe to Mr Constable but to Mr Webster's loan to himself." (para 129(4))
"The Claimant's evidence that the £150,000 payment was a loan is not plausible and I reject it. I find that there was no discussion about a loan at his meeting with Jonathan Rowland and Mr Constable at Claridges on 27 June 2003. It was also not Jonathan Rowland's evidence that the Claimant had been requested to or had made a loan at the meeting with the Claimant and Mr Constable at Claridges on 27 June 2003. Mr Webster's loan to the Claimant was at an exceptionally high rate of interest. It made no sense for the Claimant to lend part of that money on to Mr Constable on an unsecured and interest-free basis, with no certainty about when the money would be repaid and no clear idea even about what the money was being lent for or the viability of the project in question. This is particularly so in circumstances where, based on Mr Alemi's evidence, the Claimant was borrowing other monies at the time. Three V's payment of £165,000 to Skillglass on 21 January 2004 in part repayment of PAL's borrowings is also not consistent with the Claimant having made a loan but is consistent with the disgorgement of a bribe." (para 129(5)).
"There was a considerable incentive for the Claimant to ensure that Skillglass' consent was obtained to the offer going unconditional when it did at an acceptance level below 90%. It was virtually inevitable that the 90% acceptance level was not going to be achieved by 30 June 2003. Without Skillglass's consent to the offer going unconditional at below that level, PAL would have become liable to pay substantial fees, such as the abort fee under the Fees Letter, for which Skillglass held security from the Claimant in the form of cash and Chesterton shares; and the bid costs under clause 14.1.2 of the Investment Agreement. I cannot accept the Claimant's evidence that it was not important for him that the offer should go unconditional." (para 129(7)).
"I accept that there is no evidence that he was connected to Three V but I am sceptical about his evidence that he was unaware of the £150,000 payment made to Mr Constable until he was told about it by his father in January 2004. It is, however, unnecessary to make any findings in this regard, or as to his evidence about what did occur at his meeting at Claridges on 27 June 2003 with the Claimant and Mr Constable or as to whether he was a recipient of the payment along with Mr Constable" (para 130).
i) Mr Constable's confession;
ii) The Claimant's own admissions (to Mr Webster and David Rowland);
iii) The evidence of Jonathan's role;
iv) The implausibility of the Claimant's account;
v) The motives of the "conspirators".
(i) Mr Constable's confession
"Mr Constable was a vital witness; amongst other things, he is the person who the Defendants alleged was bribed and acted on the bribe; he was a director of the Defendant lending company; he is the person who caused 50% of the money he received to be paid to Rowland Capital; he is the person MJF talked to regarding the October Notice; he is the person who was alleged to have "confessed" to Mr D Rowland orally to having accepted a bribe… The trial proceeded without a critical witness. Bearing in mind the standard of proof, and that the burden was on the Respondents, inferences should have been drawn against the Respondents from their failure to call Mr Constable…"
"Mr Constable is not a party to these proceedings and did not give evidence. It is important to emphasise that in making such findings as are necessary for the purposes of this judgment he has had no opportunity to give his version of events. However, his absence as a party and as a witness is not a reason for not making such findings, which will in any case not be binding on him." (para 124)
He made no adverse comment on the Defendants' failure to call Mr Constable. Rather, he described David Rowland's account of Mr Constable's confession as "uncontradicted" (para 129(4)).
"It was a matter of importance to the (Claimant) that he retained his shareholding in Phoenix, and he was anxious that it should not be diluted. (He) confirmed that he would be able to produce the funds due, and made other assurances to Skillgrass (sic), entering into a personal guarantee with Skillgrass on 16th April 2003.
As part of the arrangements between the (Claimant) and Skillgrass, at the same time, the (Claimant) deposited with (Three V) the sum of £150,000. (Three V) received that sum as third party nominee. The arrangement between Skillgrass, (Three V) and (the Claimant) was that that sum would be passed to Skillgrass by (Three V) on notification from Skillgrass of default by (the Claimant) under the terms of the personal guarantee. (Three V) subsequently received notification from Skillgrass of default and accordingly (Three V) paid over the sum of £150,000 to Skillgrass on 21 January 2004…)"
"Mr Constable's evidence in relation to the £150,000 payment was known… (He) was most unlikely to renounce that evidence and accept that he took an interest-free loan from the claimant…" (2nd skeleton para 7)
However, that was only part of the story. Whether or not Mr Constable's statement could be reconciled with the Claimant's account (a point to which I shall return), it was wholly inconsistent with the Defendants' case. Their explanation, apparently, was that, after he had made a clean breast of things to Mr Rowland, he had adopted the fictional "security deposit" explanation in agreement with Mr Rowland, in order to limit the commercial damage. It would still seem surprising that Mr Constable would go to the extent of making a formal statement of truth of that account, if it was wholly fictional.
In any event, this conflict should have been considered by the judge, before placing unqualified reliance on the hearsay evidence of Mr Constable's confession. There was no evidence that it was unreasonable or impracticable to call Mr Constable himself as a witness, other than the obvious inference that his evidence would not have assisted the Defendants. I agree with Mr Beazley that this was a very material factor, which the judge should have taken into account in assessing the weight to be given to the hearsay evidence of his alleged confession.
"The Claimant submitted that if a person pays a bribe, he does not do so by a cheque. That is, however, what happened here. A cash payment may not have been possible but in any event I consider that the Claimant had no particular concern at the time about making the payment by cheque." (para 129(6))
Mr Beazley fairly criticises this comment as assuming what had to be proved. But it also ignores the other side to the payment. Even if the Claimant had no concerns about making a dishonest payment by cheque, what of Mr Constable? A rational accountant, planning to receive a bribe, would surely seek to cover his traces in some way. He would hardly take it in the form of a cheque payable to his own business entity, at least without having prepared some credible accounting explanation. Nor would he then draw attention to it, by writing a cheque for half the amount to the family company of the person he was supposed to be deceiving.
(ii) The Claimants' admissions
The admission to Mr Webster
"THE DEPUTY JUDGE… I think the question you are being asked is whether, in paragraph 35 of your witness statement, you would accept that the payments to which Mr Jafari-Fini was referring were in fact those mentioned in paragraph 30 of your witness statement, which are borne out by some of the documents that Mr Jafari-Fini has just been showing you?
A. What I am absolutely clear about is that there was a conversation at that point where (the Claimant) said he'd gone to Claridge's and he'd paid some money over. And I came away from that conversation, which I did not want to dwell on at the time, with the feeling that that was money that was being paid to two individuals, pursuant to these circumstances – more than that I don't feel comfortable about saying.
THE DEPUTY JUDGE… Your feeling was one of discomfort about that but are you saying that you cannot, hand on heart, say whether Mr Jafari-Fini may or may not have been referring to the payments that you mention in paragraph 30 of your witness statement?
A. Yes, I think that's right. I think – I mean, hand on heart, no…" (Day 4, p. 64)
"Q… My note of your response reads as follows: "I understood it as a bribe because he [you are referring to Mr Jafari-Fini] said that he had paid Jonathan and Jamie and expressed disgust that they were hoodwinking Mr Rowland Senior." Is my note correct?...
A. Yes, I think I… later on I regretted the word bribe because of connotations which perhaps I hadn't intended. But the rest of that's true, yes.
Q. So Mr Jafari-Fini expressed disgust to you that Jonathan Rowland and Jamie Constable were hoodwinking Mr Rowland Senior?
A. Yes." (p 88)
"… we would lend it as an extra £100,000 and it would go round the houses… it was a very clever ruse on the part of Mr Jamie Constable to be able to show a £100,000 profit in Resurge and one of the first things I had to do when I became chairman of Resurge as well, unfortunately, was to write that back again…" (Day 5 p 138-9)
Mr Robeson was told about the extra £50,000, as something which emerged on the day of the acquisition. But there seems to have been no clear evidence as to when or how either of these sums were paid, or as to how Mr Constable intended them to be dealt with in the accounts. If Mr Webster was confused about this, he was not alone.
The admission to Mr Rowland
(iii) The evidence of Jonathan's role
i) The payment was made by the Claimant at Claridge's on 27th June 2003, at a meeting with Jonathan and Mr Constable alone, apparently at their invitation. (They had "waved at" him on his way to the handover discussions, and later asked him to sit with them.) On this point the Claimant's evidence was corroborated by that of Mr Webster, and was accepted by the judge (para 111).
ii) On 17 July 2003 Mr Constable drew a cheque on Three V for £75,000, payable to Rowland Capital. According to the evidence of both David and Jonathan Rowland, the payment was related to Jonathan's motor-racing activities, although it seems to have been diverted by David to offset Jonathan's other losses (para 115, 118). There was no explanation of the source of, or the reason for, Mr Constable's generosity.
iii) Jonathan and Mr Constable were not only close business associates, but also both involved in motor-racing. Jonathan had some difficulty in obtaining cash to support this activity, due to the "disapproval" of his wife and the "unsympathetic attitude" of his father (judgment para 115, 118).
iv) David Rowland was sufficiently suspicious of his son's role to "go ballistic" with him (para 117).
v) After Mr Constable's confession, when he had been told by David Rowland to "disgorge" the money with interest, he used Three V to pay £165,000 to Skillglass, for the credit of PAL. At the same time Jonathan Rowland paid £82,500 to Three V. He did so because he thought that the £75,000 received by him the previous July might be associated with the Claimant's £150,000 payment, and was "potentially tainted" (para 119).
"The Claimant sought to impugn Mr Rowland's evidence by reference amongst other things to the fact that the £150,000 payment is not mentioned in Mr Rowland's witness statement made on 13 October 2004. I accept Mr Rowland's explanation that this because he was later asked by Resurge's lawyers to clarify the position with regard to the £150,000 and not because the allegation was in effect concocted at a late stage and was without substance." (para 129(3))
(iv) The implausibility of the Claimant's account.
"… it was also not Jonathan's Rowland's evidence that the Claimant had been requested to or had made a loan at the meeting… on 27th June 2003." (para 129(5))
(v) The motives of the "conspirators"
The Claimant's motives
"(The Claimant's)… attempt to dissociate the payment from the decision that the offer should go unconditional is wholly artificial. Even if it is the case that Skillglass' consent and PAL's decision were given on 26 June, Skillglass' consent was given in anticipation of the payment which had undoubtedly already been agreed actually being made to Mr Constable." (para 137, emphasis added)
The observation that the bribe had "undoubtedly already been agreed" seems to have been an inference, rather than a reference to any evidence. Indeed, it seems to beg the question which had to be decided. Assuming proof of the payment of a bribe on 27th June, it might be a reasonable inference that there was a prior agreement of some kind, even in the absence of specific evidence. That would not be so, on the other hand, if it was simply a matter of the Claimant being "pestered" by Jonathan into lending some of the money that he himself had received only that morning, following his agreement with Mr Webster the previous evening.
"I do not consider those matters to be relevant to the issue to be decided. First, the issue is whether the bribe is or was material to Skillglass' decision whether or not to consent to the offer going unconditional and not whether the decision resulted from the bribe. … Third, Mr Brierley's evidence shows that the decision at least might have been different if he had been made aware of the bribe at the 27 June 2003 board meeting." (para 139)
This again seems, in my respectful view, an inadequate and question-begging response to the Claimant's argument. Of course, if he had become aware of a "bribe", Mr Brierley would have wished to know more of the circumstances, and to inform the other directors. But this does not explain what motive the Claimant would have had for making a bribe, if the consent was already assured. On that point, as I have already noted, Mr Brierley's evidence if anything supported the Claimant's case. A specific finding by the judge should have been made.
The motives of the recipients