England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM OXFORD DISTRICT REGISTRY
HIS HONOUR JUDGE HARRIS QC
6LS90041

		Royal Courts of Justice Strand, London, WC2A 2LL
		23/06/2009

Lady Justice Smith:

Introduction

1. This is an appeal from the order made by HH Judge Charles Harris QC, sitting as a deputy high court judge, in Oxford on 30 April 2008. The judge determined a claim for arrears of salary and pension contributions brought by Sean Daley against his former employer, which was either Environmental Recycling Technologies PLC or Camco Corporation Ltd. The latter was a wholly-owned subsidiary of the former and it was accepted at the start of the hearing before Judge Harris that it mattered not which company was in fact the employer. I shall refer to the employer as Camco. The judge held that Camco owed Mr Daley substantial arrears of pay and directed it to pay him £161,559.14 plus interest of £49,470.84. He also held that Mr Daley was entitled to receive reasonable pension contributions and gave directions for the ascertainment of what would be reasonable. That disposed of the claim and there is no appeal from those findings.
2. In the same proceedings, Camco counterclaimed various sums from Mr Daley, arising out his employment. The judge dismissed all heads of the counterclaim and Camco now appeals the judge's holdings under several of those heads. I granted permission to appeal on consideration of the papers.

Factual background

3. From 1999 until his summary dismissal in July 2006, Mr Daley was employed by Camco as the chief executive officer of the businesses which it owned in Kyrgystan. The main business was a woollen mill called Kasiet in the north of the country. However, there were other smaller businesses and the main office of Camco in Kyrgystan was in Bishkek, the capital city. The affairs of Camco were directed from the UK. Mr Daley was the company's man on the ground.
4. Under his contract of employment, Mr Daley was entitled to a salary of £75,000 per annum (with reasonable pension entitlement), reimbursement of expenses and the provision of free living accommodation. Camco owned some premises in Bishkek, an office and three apartments. Mr Daley lived in one of the three apartments.
5. Camco was never in a position to provide the money necessary to run the Kasiet business or indeed to pay Mr Daley's salary with the result that arrears of pay built up. During 2001, the directors of Camco decided that they would like to sell Kasiet and, in March 2002, Mr Daley negotiated a deal with a Turkish businessman called Oz. He agreed to buy Kasiet and two of the three apartments in Bishkek. Pending completion, he would run the business. He invested £750,000 in Kasiet and sent a manager to run it. When Oz's manager arrived in Kyrgystan in mid-2002, Mr Daley remained with Camco, but working only part-time, managing the smaller business interests. His salary was reduced to £30,000 and he continued to have the use of the apartment rent-free. It was agreed that, when Oz paid for the two apartments, Mr Daley would receive £60,000 from the proceeds in satisfaction of the arrears of pay due to him.
6. In fact, Oz never bought the apartments and the whole deal fell through. Within a short time, Oz had withdrawn his manager. At that stage, Mr Daley resumed responsibility for running Kasiet and his salary was increased back to £75,000. His salary arrears, still outstanding, were compromised by the transfer to him of the premises in which Camco had its premises and the apartment in which he lived.
7. When Mr Daley resumed responsibility for Kasiet, his instructions were to extract Camco by finding another buyer. This took some time, during which period, Camco did not provide the money necessary to run Kasiet (which never appears to have made a profit) or to pay Mr Daley's salary on a regular basis. As a result, Mr Daley sometimes had to use his own resources (or borrowings) to keep the business afloat. In due course, he negotiated a deal with buyers who were referred to at the hearing as 'the Khazaks'. It was a term of the deal that all the business's creditors should be paid off before completion. These debts were quite substantial and some of the creditors were immediately pressing. Camco was still not providing money to satisfy creditors and it was clear that some of the business debts would have to be paid off from the proceeds of sale. Mr Daley borrowed various sums from contacts of his in Bishkek. These were loans to him personally. Mr Daley had done this from time to time during his employment with Camco and Camco was aware of this practice.
8. Eventually, the sale to the Khazaks went through and, in May 2005, the final payment of $270,000 became available to Mr Daley who used it to repay the money he had borrowed and to pay off the few remaining business creditors. Mr Daley then appropriated the remaining money to himself on account of various sums which he alleged were due to him. On 31 May 2006, he sent a reconciliation statement to Camco setting out, as 16 items, the various payments and appropriations he had made which, in total, amounted to slightly more than $270,000. Camco does not appear to have reacted adversely to receipt of that reconciliation statement.
9. On 6 July 2006, Camco dismissed Mr Daley for redundancy. It no longer required his services in Kyrgystan. The letter acknowledged that there was an ongoing dispute as to salary arrears and pension contributions and the letter expressed the hope that this could be settled by mediation. The letter asked him to arrange for the return all the company's records to the UK and to return his laptop and other company assets. No reference was made to any dispute about the reconciliation statement. The letter was faxed to Mr Daley in Kyrgystan on 10 July.
10. However, on 6 July 2006, Mr Daley had been shot and seriously injured. He was flown back to the UK where he was hospitalised for some time. It follows that he never had the chance to comply with the request that he should return the company records to the UK. I should mention that he has made a good recovery from his injury.

The claim and counterclaim.

11. At the hearing, both the claim and the counterclaim were hotly contested with allegations of bad faith and lying made by each side against the other. Camco's main witness was Mr Ken Brooks, a director of both defendant companies and a solicitor. On several important issues, his evidence and that of Mr Daley was in conflict. It is important to record that, although the judge did not accept Mr Daley's evidence in its entirety, he did accept him as essentially truthful and where his evidence conflicted with that Mr Brooks, he preferred Mr Daley. These disputes arose mainly in respect of the agreements as to salary on which the judge accepted Mr Daley. For that reason, no doubt, Camco has not sought to appeal the judge's holdings on the claim.
12. The counterclaim raised for the first time Mr Daley's entitlement to several of the items on the reconciliation statement. Some of the 16 items were not contested at all; others were contested at trial but are not now subject to appeal. I will describe only the items which remain contentious.
13. Items 1 and 2 related to the repayment of loans which Mr Daley claimed he had borrowed to keep the company afloat and had repaid, with interest, out of the $270,000. Items 3 and 4 related to the interest which Mr Daley claimed to have paid on those loans. Mr Abdurazakov (whom I shall call Mr A) was said to have lent Mr Daley the equivalent of $25,000 on 27 May 2005 and a further sum of $18,118.14 on 31 May 2005. Both loans were said to have been paid in the local currency, the Kyrgyz Som. The loans were said to have been for a term of 12 months with interest as set out in a schedule. Second, Mr Bekbolatov (whom I shall call Mr B) was said to have lent Mr Daley $65,920 in July 2005. This loan had been repaid 10 months later with contractual interest. Camco alleged that Mr Daley was lying about these loans and had fraudulently appropriated these sums. The judge believed Mr Daley on these issues and rejected those heads of counterclaim.
14. Item 5 on the schedule related to office rent. Mr Daley had claimed to be entitled to appropriate $56,400 on the basis that he had been the owner of the office premises for the last 47 months, since he had accepted those premises in lieu of salary arrears. He claimed that $1,200 a month was a reasonable rental. Camco did not deny that Mr Daley owned the premises but claimed that he was not entitled to rent because there was no express agreement to that effect. The judge accepted Mr Daley's submission and dismissed that head of counterclaim.
15. Finally, for present purposes, item 6 related to Mr Daley's appropriation of $39,950 as notional rent (of $850 per month for 47 months) for the apartment in which he lived. He had done so on the basis that his contract of employment entitled him to rent-free accommodation. As he had become the owner of the apartment, in lieu of arrears of salary, he was entitled to claim notional rent. The judge accepted this argument and rejected this head of counterclaim.

The appeal to this court

16. Mr Hill-Smith for the appellant, Camco, submitted first that the judge misdirected himself as to the burden of proof on the counterclaim. This should have been fairly and squarely on Mr Daley even though he was the defendant to the counterclaim. That was because he was in a fiduciary position. As such, Mr Daley was under a duty to give a clear and forthright account of his dealings with the $270,000. Although some of the items in the account were accepted, in respect of the contentious ones, Mr Daley's account had been far from clear or forthright. He had failed to disclose many documents which must or at least should have existed and should have been disclosed. The judge had not appreciated that the burden lay on Mr Daley; indeed, he had set out an argument advanced for Mr Daley to the effect that, because Camco was alleging fraud, it should prove the allegations to a high standard. It was not clear whether or not he had accepted that argument. If, as was submitted, the judge had recognised that the burden of proof fell on Mr Daley and that he had failed to give proper disclosure, the judge would not have accepted his evidence in relation to the loans but, instead should have drawn adverse inferences where the evidence was not clear. Had the judge adopted this approach, he would have upheld the counterclaim on the issues of the loans from Mr A and Mr B. I did not understand Mr Hill-Smith to contend that the wrong application of the burden of proof had affected the judge's decision in respect of the rental for the office or apartment, where the primary facts were not in dispute.
17. In response, on the issue of the burden of proof, Mr Neaman for Mr Daley, submitted that the judge had not misdirected himself. It was true that he had submitted that, because Camco had alleged fraud, it should have been pleaded with particulars and proved but, in fact, no particulars of fraud had been provided. It was clear that Camco was not in a position to make positive allegations and hoped to discredit Mr Daley in cross-examination. On the pleadings and in his witness statement, Mr Daley had advanced his explanation for each of the disputed items from the reconciliation statement and had produced all the relevant documentation in his possession. In effect, he had shouldered the burden of proof.
18. In my view, it is clear that Mr Neaman is right in this respect and that the way in which the judge approached the counterclaim was to examine Mr Daley's account as regards the disputed items and to see whether it stood up in the light of Camco's attack. I am quite satisfied that the judge put the burden of proof on Mr Daley.
19. At one stage, Mr Hill-Smith appeared to be submitting that the judge had not applied a high enough standard of proof to Mr Daley. The argument was that, because he was a director, he was in a fiduciary position and should have been required to explain in fine detail and with documentary proof what had happened to the money. There was some dispute as to whether Mr Daley was in a fiduciary position. However, for my part, I am prepared to assume that, even if not a director, as a senior manager (indeed, as the person in charge of Camco's affairs in Kyrgystan) Mr Daley was under a duty which was either fiduciary or quasi-fiduciary. But, as Mr Hill-Smith was eventually to concede, that does not mean that the standard of proof was anything other than the balance of probabilities.
20. I would accept that a person in a fiduciary position would normally be expected to produce cogent evidence (including documentary evidence) to support the explanation for a reconciliation statement such as this. But, if there is an explanation for the absence of some documents, the judge is entitled to reach his conclusion on the evidence available without drawing adverse inferences from that absence. In the present case, Mr Daley had had the documents in his possession and control while he was in Kyrgystan. However, the documents belonged to Camco. When Mr Daley was shot and had to be repatriated, he had not yet returned the company documents to the UK. Camco could have made arrangements for their return. Mr Daley had obtained some documents from Bishkek for the purpose of the litigation; he produced and relied on them. Camco had made no effort before the trial to make a search of its own office in Bishkek. I mention in passing that, before the hearing of this appeal, Camco applied to adduce additional evidence which it had obtained from Kyrgystan, since the trial. That application was not pursued but the fact that it was made demonstrated the lack of any real attempt by Camco to obtain documentary proof before the trial.
21. Accordingly, I reject this first ground of appeal. The judge did not misdirect himself as to the burden of proof; nor did he apply too low a standard of proof.

The loans from Mr A

22. Mr Hill-Smith submitted that Mr Daley had failed to demonstrate that he had genuinely taken out two loans from Mr A in May 2005 and had repaid them the following year. Mr Daley gave evidence that he had borrowed the money to pay pressing business creditors. It will be recalled that, in respect of issues arising under the claim, the judge had found Mr Daley to be an honest witness. Mr A came to England and gave evidence that he had lent this money to Mr Daley and it had been repaid with interest. Some documents were produced. The judge recorded that Mr Hill-Smith had cross-examined both witnesses extensively and appears to have made some progress with Mr A. It appears that there were a number of inconsistencies and some unexplained 'loose ends'. Yet, in his judgment, the judge said towards the end of paragraph 31:

"At the end of this examination (of Mr A), I was left in no doubt (a) that the ways of doing and documenting business and the ways in which debts may be discharged in Kirghistan (sic) are not the ways of England, and (b) that Mr A was a credible and honest witness. I am quite satisfied that he had lent the Claimant the sum stated in the reconciliation account and that he had been paid back with the interest specified."

23. Mr Hill-Smith submitted that this was not good enough. There were a lot of unexplained features and the judge should not have brushed them aside in this way. He referred in particular to Mr Daley's pleaded claim that Camco was told about these loans at the time they were made. Yet his witness statement provided no detail as to this and he was in the UK at the time these loans were supposedly made. Mr Daley relied, for the detail of the circumstances of the making of the loans, on the witness statement of Mr Prijoda, who was a senior employee of Camco or Kasiet or both. Yet Mr Prijoda's statement was not consistent with Mr A's account. There was also some conflict of evidence as to whether receipts were provided. There was uncertainty as to whether the first of the two loans (for 1 million Som or $25,000) was paid to Camco's cashier or was paid direct to the electricity company which was pressing for payment and threatening to discontinue the supply to the mill. Mr Hill-Smith took us painstakingly through the various points he had made in cross-examination. His submission, in short, was that Mr Daley's case was riddled with internal inconsistency and uncertainty. This was not good enough for a man in a senior management position who had a duty to keep proper records and to provide a coherent account.
24. I can understand Mr Hill-Smith's frustration that, having made considerable progress in cross-examination, the judge was nonetheless satisfied with Mr Daley's account. In my judgment, he was quite entitled to be satisfied, notwithstanding the flaws and loose ends in the overall picture. It is quite obvious from the earlier parts of paragraph 31 that the judge had well in mind all the points that Mr Hill-Smith had made in cross-examination. But, at the same time, he was conscious of the fact that these events had taken place in a country where business practices were very different from those in England. Also, he was entitled to refuse to draw adverse inferences against Mr Dlaey from the shortage of documentation. It may be that, if these transactions had taken place in London and the circumstances were such that Mr Daley could have been expected to produce a comprehensive set of documents, the judge might have taken a different view of the cogency of Mr Daley's account. But the judge was conscious of the unusual circumstances. In my view his approach to the evidence cannot be criticised; nor can it be said that there was any lack of evidence to underpin his findings.

The loan from Mr B

25. Mr Hill-Smith made an even more determined attack on the judge's findings in respect of the loan from Mr B. Mr Daley said that he had received the loan from Mr B and had repaid it. Mr B did not attend court to confirm this. The judge was told that he had left Kyrgystan and was flying to the UK via Bahrain and was intending to fit in a business stopover in Cyprus. What went wrong was not known but he did not arrive. A statement of his evidence was put in confirming that he had made the loan and it had been repaid with interest.
26. In cross-examination of Mr Daley on this issue, Mr Hill-Smith once more made some good points. The best appears to have been that Mr Daley had said that he had used this loan to repay eight of Kasiet's creditors. Yet, examination of a schedule of creditors showed that six of the eight had been paid off before the date of Mr B's loan. Mr Daley was unable to explain this and Mr Neaman was driven to describe this factor as 'a curiosity'. The judge plainly considered it. Within paragraph 33 of his judgment he said:

"However, it is apparent to me after listening to five days of evidence about business methods in Kirghistan (sic) that things are not always as they may appear in that part of the world. That unexplained discrepancy, though to an extent suspicious, does not serve to persuade me that the B loan was not made to the claimant for company purposes or that the claimant did not properly discharge it from company funds together with the interest as specified."

27. Mr Hill-Smith reiterated the submissions he had made in respect of the loans from Mr A with, if anything, even greater enthusiasm. He said that the judge should have been sceptical about the non-appearance of Mr B. There was a really strong point to make against Mr Daley about the unexplained discrepancy. The judge could not properly have been satisfied about the genuineness of this loan. He should have rejected Mr Daley's account.
28. I cannot accept that submission for much the same reasons as I gave in respect of the loans from Mr A. The judge had already formed a favourable view of Mr Daley's credibility when it had been put to the test in respect of the disputed evidence on the claim. He was entitled to carry through that favourable view to the issues in the counterclaim, if he thought it right to do so. As for the unexplained discrepancy or 'curiosity', the judge agreed that it raised some suspicion but he was quite entitled to take the view that it did not necessarily undermine the fundamental truth of Mr Daley's claim that he had borrowed the money from Mr B and had repaid it. I would dismiss that ground of appeal.

Interest on the loans

29. I will deal next with the grounds of appeal relating to interest on the loans from Mr A and Mr B. This was a discrete issue separate from the issues about the loans themselves. Mr Hill-Smith's discrete contention was that, assuming that the loans had been made and repaid, Mr Daley had paid more interest than he should have done under the contracts with Mr A and Mr B. The interest rates were set out or annexed to the contracts and a chart or 'ready-reckoner' was provided so that the amount of interest due could be read off by reference to the month in which repayment was made. Mr Hill-Smith contended that Mr Daley had read the wrong amounts from these charts and he invited us to say that the judge was in error in holding that the amounts of interest at items 3 and 4 of the reconciliation statement had been properly paid as Camco's liabilities.
30. Examination of the charts appeared to suggest that there might be something in this point, although the difference between incorrect and the correct sums was small. However, Mr Neaman told us that he had understood that there was no issue at the trial about the amount of interest. The only issues under items 3 and 4 (the interest) was whether the loans at items 1 and 2 had been made and properly repaid as Camco liabilities.
31. Examination of the judgment suggests that Mr Neaman may be right about this. The judgment is silent as to any issue between the parties as to the quantum of interest. We have not been shown any skeleton argument, written submission or transcript of closing submissions to demonstrate that the point was clearly taken. If the point was not clearly taken below, it cannot be taken here. In any case, it is a very small item.

Office rent

32. I turn now to item 5, the office rent. The basic facts were not disputed. Camco owned and occupied the office premises until ownership was transferred to Mr Daley in payment of salary arrears. Camco continued to occupy them thereafter. There was some uncertainty as to the precise date when that transfer had taken effect. Mr Daley's case was that it was July 2002 and there was no evidence to contradict that. There was no dispute that $1,200 per month was a reasonable rent; or at least there was no evidence to contradict Mr Daley's evidence to that effect.
33. From paragraph 35 of the judgment, it would appear that no very great argument was put up by Camco as to why Mr Daley should not have been entitled to claim rent from Camco once he had become the owner of the premises. The judge observed only that Camco had to have an office and Mr Daley had provided it. Mr Brooks had never suggested that Camco should obtain another office. The judge declared that the application of $56,400 for office rental was 'perfectly proper'.
34. On the appeal, Mr Hill-Smith submitted that the judge's approach was wrong and that, rather than asking himself whether the deduction was 'proper' he should have asked whether there was a binding agreement about the office rental, on which Mr Daley could have sued. Only if there was could there be any liability on the company. This point had been taken but the judge had made no finding of any such binding agreement. For there to have been a binding agreement between Mr Daley and the company, Mr Daley would have had to inform the directors of the agreement and the board would have had to give its approval. It did not appear that Mr Daley had done this; indeed he had never made any demand for rent and did not appear even to have told the accountants so that the accounts could reflect the liability.
35. The judge dealt with this point, almost in passing, at paragraph 37 of his judgment. He said:

"I should refer to the fact that in relation to the property transactions a company law point was made and developed by Mr Hill-Smith to the effect that if and in so far as the lease transactions in which the claimant had an interest were not disclosed to the board then they were not binding on the company. The answer to this, in so far as the premise is factually justified, is that transactions would be void and not voidable and the arrangements never were rescinded or voided. See for example the remarks of Lord Goff in Guinness v Saunders [1990] 2 WLR 324 at 338 and 339."

36. I confess that I find this passage somewhat confusing. It would seem that the judge might have juxtaposed the words 'void' and voidable' and meant to say that, if the contract had not been disclosed as it should have been, it was only voidable and had not been avoided. However, for reasons which I will explain, I do not think that this confusion matters and do not propose to discuss the issue further.
37. As Mr Neaman reminded us, at the trial, Mr Daley had produced and relied on a document which purported to be a lease agreement relating to the office premises, dated 1 July 2002. It was between Mr Daley and Camco. It was signed by Miss Helen Hamzina (Camco's office manager) on Camco's behalf. Mr Hill-Smith's case before us was that this lease was not genuine. However, the transcript shows that Miss Hamzina had attended court and had given evidence. Her witness statement had drawn attention to the lease she had signed. She was not cross-examined upon it. It was not suggested to her that the lease was not genuine or that she had not had authority to sign it. Mr Neaman submitted that, in signing this lease agreement as Camco's office manager, Miss Hamzina was acting within the scope of her authority. Therefore Camco had been aware of the lease arrangement from the outset.
38. In an attempt to make good the lack of any attack on Miss Hamzina at trial, Mr Hill-Smith sought to rely on the note of a meeting which took place in England on 4 August 2005 attended by Helen Hamzina, Mr Christopher Livingston-Raper, a director of Camco and Mr Alex Abrey who appears to have been an accountant. In the context of a discussion about the accounting arrangements between Camco and an entity described as EDI, someone (it is not clear who) is recorded as saying that Camco does not pay office rent. On the following page, someone (again it is not clear who) is recorded as saying that Mr Daley had agreed not to charge rent as a contribution to the funding of EDI but that this funding 'was now recorded as returnable loans'. This document was not referred to at the trial. What would have been made of it if it had been is pure speculation and, in my view, Mr Hill-Smith cannot now seek to rely on it to demonstrate an inconsistency between Miss Hamzina's unchallenged evidence in her witness statement and remarks that may or may not be attributable to her in the note of the meeting which were not put to her at trial.
39. Mr Neaman's case before us was that, although the judge had not mentioned this lease agreement in his judgment, he must have had it in mind and must have regarded it as genuine. The evidence was all one way. The company must be taken to have known about the lease all along. Thus the judge's remarks about the company law point were of no importance.
40. I find it unsurprising that the judge dealt with the issue of office rent as briefly as he did. There really did not appear to be anything left for him to decide. If Camco occupied an office which belonged to Mr Daley, one would expect Mr Daley to be entitled to charge rent. The lease agreement suggested that this had been arranged in July 2002. The fact that he had not made any demand for payment of the rent seems neither here nor there against the background of Camco's failure even to pay his salary. I would reject the ground of appeal relating to the office rent.

Flat rental

41. I turn finally to the notional rent which Mr Daley appropriated in respect of the apartment. Once again the basic facts were not disputed. Mr Daley's contract of employment entitled him to rent-free accommodation. The apartment which he occupied was transferred to him as part payment of arrears of salary. He continued to live in it thereafter. There was no evidence to contradict Mr Daley's evidence that $850 per month was a very reasonable rent. The judge observed that, once Mr Daley had taken the flat in lieu of salary arrears, he would have been entitled to let that flat to someone else and to require Camco to provide him with accommodation. I observe that he could equally well have sold that apartment and required Camco to provide accommodation. It seems to me obvious that, if he remained in it, he was entitled to be reimbursed its rental value. If not, he would have been taking a substantial cut in remuneration.
42. Mr Hill-Smith submitted to the judge and to this court that there was no binding agreement between Mr Daley and Camco as to Mr Daley's entitlement to receive rent for the flat in which he was living. He made his 'company law' point in relation to this item as well as to the office rental. The judge's somewhat confusing observations in paragraph 37 which I have quoted above were, I think, intended to answer the point in relation to both the office and the apartment.
43. It seems to me that the company law point has no possible relevance to this issue. It was common ground that Mr Daley was entitled to have accommodation provided for him rent-free as part of his remuneration package. It was common ground that, from about July 2002, Camco was not providing rent free accommodation because Mr Daley was living in his own flat. It follows that Camco was plainly in breach of the terms of Mr Daley's contract of employment in that it was not honouring his remuneration package. I consider that there is no merit in this last point.

Conclusion

44. For the reasons I have given I would dismiss the appeal.

Mr Justice Richards

45. I agree.

Lady Justice Arden

46. I also agree.