England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(HIS HONOUR JUDGE HODGE QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		15th May 2012

Lord Justice Mummery:

1. This is an appeal by the claimant in an action begun on 24 February this year and followed soon after by an application for interim relief. The claimant is Mr Philip Wright and he is represented today by Mr Neil Berragan, who did not appear in the court below. The first defendant to the proceedings is Mr Joseph Pyke. He appeared in person before HHJ Hodge QC, but is represented today by Ms Karen Troy.
2. The second defendant in the proceedings is a company called Acorn Dental Laboratory (Liverpool) Limited, which is a company formed in 2004 in which Mr Wright and Mr Pyke were equal shareholders and were both originally directors. Mr Wright ceased to be a director of Acorn, as I shall call them, in August 2010 when he resigned. Mr Pyke remains a director.
3. I have explained the parties because of the unusual nature of the constitution of the action. The claim by Mr Wright is not a direct claim. It is a derivative claim which he seeks to bring on behalf of Acorn. The proceedings and the interim relief that was claimed by way of injunction are based on alleged breaches of fiduciary duty and alleged misuse of confidential information by Mr Pyke in his capacity as a director of Acorn, in particular in relation to his formation of another company in January 2012, secretly and not discovered by Mr Wright until February 2012. That company is called A1 Aesthetics Limited (and I will call it "A1"). Mr Pyke is the sole shareholder and director of that company.
4. The businesses of Acorn and A1 are the same. They are involved in work produced by laboratory dental technicians, making bridges, crowns, prosthetics and so on. The business was originally conducted by Mr Wright and Mr Pyke through Acorn. It was incorporated as Acorn North West but changed to Acorn Liverpool. It employed seven employees and owned premises from which the business was conducted and built up custom and goodwill.
5. The basic nature of the claim is that Mr Pyke, by secretly forming A1 and conducting the same kind of business through that company, has acted in breach of his fiduciary duties as a director of Acorn and so, although Mr Wright is indirectly damaged by these activities by virtue of his shareholding of the company, it is a derivative claim, because the wrong of breach of fiduciary duty and misuse of confidential information are wrongs done to the company. It is the company to which the director owes fiduciary duties, not other shareholders, and it is the company that would be entitled to the confidential information.
6. The order sought from HHJ Hodge as an interim injunction is quite elaborate and I should read it out because it has undergone some proposed modifications in the course of this hearing. The injunction sought is against Mr Pyke that he would not:

"...until judgment at the end of the trial or further order:

1) use or disclose any confidential business information belonging to Acorn...namely:

(a) client information belonging to [Acorn] identifying the name, address, contact details of the clients and key persons in the client's organisation,

(b) retainer and fee arrangements and prices for services of products agreed between the Company and clients,

(c) know-how and marketing materials belonging to [Acorn] in the form of documents developed by [Acorn] for use in its business including standard terms and conditions of business.

2) directly or indirectly solicit or transact business in competition with the Company from or with any of [Acorn's] customers, clients, agents, suppliers or advisors;

3) cause or encourage any of [Acorn's] clients, agents, suppliers or advisers to cease or restrict or reduce their dealings with [Acorn];

4) directly or indirectly employ or enter into any other business relationship with any of [Acorn's] employees or any person he employs or intends to employ or enter into any other business relationship with such an employee

5) directly or indirectly cause, encourage or assist any of the Company's employees to leave its service;

6) knowingly permit any situation to arise in which you have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of [Acorn]."

7. There are orders sought for disclosure of information of documents on affidavit and then there are guidance notes at the end on the interpretation and effect of the order saying that:

"A Respondent who is an individual who is ordered not to do something must not do it himself or in any other way. He must not do it through others acting on his behalf or on his instructions or with his encouragement."

8. That is the order that was asked of the judge and which he refused to make. In the course of his submissions on the appeal Mr Berragan proposed the addition of a proviso at the end of that series of injunctions to this effect:

"Nothing in this injunction shall prevent Mr Pyke from doing any of these acts on behalf of Acorn."

It will become clear, as I relate the history of events, what the reason is for that proviso.

9. The other fact which I should fill in at this stage is that, following or at about the same time and following Mr Wright's resignation as a director of Acorn, he established another business. In July 2011 he incorporated a company, which is called Acorn Manchester which carried on the same sort of business as Acorn and Mr Pyke and Mr Wright are 50/50 shareholders in that company. Mr Pyke resigned as a director of that company in November 2011, so the position as at the date of Mr Wright's discovery of the new company A1 in February 2012 was this. There was the Liverpool Acorn company in which they had equal shareholdings and both were originally directors, but only Mr Pyke is a director of that. And there is the Manchester Acorn company of which they are both 50/50 shareholders and were both originally directors, but only Mr Wright is a director of that company. The company which Mr Pyke secretly formed in January 2012 is one in which Mr Wright has no shareholding and has of course never been a director.
10. When Mr Wright discovered the existence of the A1 company he made various other enquiries and discovered that what Mr Pyke was doing was diverting business from Acorn to his company, A1. The best evidence of that is in a letter sent by Mr Pyke with A1 Aesthetics Dental Laboratory, at the bottom of the letter which is at page 107 of the bundle. What this letter, which was sent out to clients of Acorn, said was this:

"Due to unforeseen circumstances Acorn Dental Laboratory Liverpool has separated from Acorn Dental Laboratory Manchester.

We [that is referring to A1] are now operating a new laboratory under the name A1 Aesthetics Dental Laboratory at the same address.

Please note that the previous bank account is no longer in operation. All Liverpool invoices are to be paid to; cheques payable to A1 Aesthetics, BACS payments to: [and then an RBS sort code number and an account number is given]

If you have any questions or concerns please do not hesitate to contact [and then the names of Joe or Tracey are given at a telephone number]."

11. Mr Wright says that this is a clear breach of fiduciary duty. Mr Pyke, as a director of Acorn, is telling people that, from the same premises and the same laboratory, the same business was being conducted by A1 and their payments are to be made to them in future. These approaches were made to Acorn's customers and this, Mr Berragan says on behalf of Mr Wright, is an indefensible breach of a director's duties, that is Mr Pyke's duties to Acorn.
12. The application, as I said, was made to the judge soon after the proceedings were commenced. Before I go to his judgment I should mention one further development. There is in the bundle a draft amended claim. We are told that permission has not yet been granted by the court and the application for permission to amend has been stood over to another date to be heard at the same time as an applicant by Mr Wright to continue these proceedings as a derivative action. The proposed amendments are, first of all, to join as a third defendant, A1, that is in addition to Mr Pyke and Acorn, as the company on whose behalf the action has been brought and to add to the details of the claim for breach of fiduciary duty, a claim against A1:

"...as recipient of trust property and the beneficiary of the breach of fiduciary duty and misuse of the Company's [that is Acorn's] confidential information. The claim [I think that must refer back to the derivative claim] is also made for damages for conspiracy and/or unlawful interference with the Company's economic interests."

The claim that is proposed in that amendment was not before the judge.

13. I now turn to what happened before the judge. He explained the nature of the action that was being brought by Mr Wright in a derivative capacity and that it was a claim for breach of fiduciary duty and that he was asked for interim injunctive relief along the lines that I have already read out. He then referred to Mr Wright's evidence and what he said about the formation of the Manchester company with each of them having 50 per cent shareholding and how Mr Pyke had been a director of that down to his resignation. He then came to Mr Wright's complaint, which he put in these terms:

"The complaint by Mr Wright is that at the beginning of February 2012 he happened to visit some of the company's clients [that is Acorn] and in the course of those visits he obtained a copy of a letter dated 1 February 2012 which he understands that Mr Pyke had been hand delivering to clients of the company."

That is the letter which I have read out. He then said that a company search had been made showing that A1 had been incorporated on 10 January 2012 and that Mr Pyke was the director of it and that its registered office is the premises of Acorn.

14. The judge then turned to the relief that was claimed and said that what Mr Wright was seeking was to bring a derivative claim on behalf of Acorn alleging breaches of director's duties, in particular those that are set out in sections 171 to 177 of the Companies Act 2006. Mr Wright had submitted that Mr Pyke was in breach of the duties in seeking to utilise Acorn's confidential information and business contacts to divert business away from Acorn to the new company and he then said this :

"He [that is Mr Wright] through his then counsel Mr Barbara submits there is a serious issue to be tried and I accept that submission. There is a serious issue to be tried."

And that issue was the breaches of fiduciary duty which had been discovered.

15. The judge said he was satisfied that the matter was urgent and said the real issue was the balance of convenience. He then referred to some items of the evidence. First, there was some evidence that Acorn had financial difficulties. There was evidence of mounting debts. There was evidence that Mr Pyke had consulted insolvency practitioners in relation to the possible insolvency of the company. Mr Pyke had responded that Mr Wright had total disregard for him as a business partner and for the staff and Mr Pyke said that he had informed Mr Wright that he no longer wanted to work for him and it was at that point that he explained that, as a director of Acorn Liverpool, he sought advice from accountants and from the insolvency practitioners Begbies Traynor, though there is no evidence that any insolvency process has actually been set in train.
16. Mr Pyke gave more details about the company's financial difficulties and Mr Pyke pointed out what financial difficulties would be inflicted on A1 if Mr Wright was granted an injunction. Mr Pyke said that there would be a huge impact on his company. It would result in people losing their jobs and then he (Mr Pyke) losing his livelihood. He said that, after the damage that Mr Wright had inflicted upon the Acorn Liverpool company, he might have to take steps to have that company wound up, and Mr Pyke repeated his argument that an injunction in the terms that Mr Wright wanted would cause more damage to A1, his staff and himself than would benefit Acorn.
17. The judge then came to state his conclusions. He repeated that he was satisfied there was a serious question to be tried on breach of fiduciary duties owed by Mr Pyke to Acorn. He then considered the balance of convenience and he said this:

"At an early stage in this hearing before I received any submissions, I indicated that having looked at the papers, my provisional view was to question whether it was appropriate for injunctive relief to be sought in the terms claimed by Mr Wright or whether it would be better to allow Mr Pyke through his new company to continue to serve his clients or former clients of Acorn provided that he kept adequate financial records which, as he accepted, he would have to do in any event so as to enable Mr Wright if he was so minded to pursue any claim for damages against him on behalf of Acorn."

18. The judge added that the difficulty was that, despite Mr Wright's protestations that he hoped that the two men could still work together, it seemed to the judge that they had irreconcilably fallen out.
19. The judge referred to the possible insolvency of the company. He referred to the difficulty of Mr Pyke remaining the sole director of the company, because the company was deadlocked and Mr Wright had demonstrated that he had no real interest in Acorn from when he had resigned back in 2010 until the recent turn of events. He acknowledged that in confidential information cases the balance of convenience would normally lie in favour of the restraint of uses of that information and the use of trade connections, but the judge then went on to say that he found it difficult to see what damage Mr Pyke would suffer. He went on to say that Mr Budworth made the point on behalf of Mr Wright it would be difficult to see what damage Mr Pyke would suffer. The judge said that it was the fact that Mr Pyke was carrying on, albeit through a new company, a reputable dental laboratory business for which he is required to keep adequate records. In response to an invitation to the court, he had indicated that he was prepared to undertake to the court to keep proper records of all orders received from or invoices rendered to and all payments received from former customers of Acorn. The judge had explained to him, in giving that undertaking, that, if he failed to observe it, he might be held to be in contempt of court.
20. In his concluding paragraph the judge gave these reasons for refusing to grant an injunction in the face of the undertaking that had been given to the court by Mr Pyke. He said this:

"Given the deadlock within the company given that Mr Pyke is its sole director, given the ill feeling which clearly exists between himself and Mr Wright it seems to me that notwithstanding Mr Wright's own personal preference the balance of convenience lies in favour of allowing Mr Pyke to continue with his new business provided adequate records are maintained which will enable the claimant to establish the extent to which the potential or actual diversion of business from Acorn to the new company. In that I bear in mind also that it is Mr Pyke who has been conducting the business of Acorn's Liverpool office that he is also a 50 per cent shareholder in that company and that he had good reason to think that Mr Wright was not still a shareholder just as he was not still a director of the company. Whilst he said there were serious issues to be tried, Mr Pyke has also raised issues going the other way, although even if established they would not justify a flagrant breach of his fiduciary duties. But nevertheless I am satisfied in the present case weighing everything in the balance that the balance of convenience lies in favour of accepting Mr Pyke's undertakings."

21. The judge made an order which contained the following undertaking by Mr Pyke, an undertaking that he will keep and retain proper accurate and full records of all business transactions, invoices issued to and all payments received from customers or former customers of Acorn Dental Laboratory Liverpool Limited and he then said "No further order on the application " and he reserved the costs.
22. Before I come to the submissions which have been made on this appeal I should make a brief reference to the role of this court on an appeal in a case where an interim injunction has been sought from the court below. I quote from one paragraph of the opinion of Lord Diplock in Hadmor Productions v Hamilton [1983] 1 AC 191 at 220A. Lord Diplock said this :

"Before adverting to the evidence which was before the learned judge and the additional evidence that was before the Court of Appeal, it is, I think, appropriate to remind your Lordships of the limited function of an appellate court in an appeal of this kind. An interlocutory injunction is a discretionary relief and the discretion whether or not to grant it is vested in the High Court judge by whom the application for it is heard. Upon an appeal from the judge's grant or refusal of an interlocutory injunction the function of an appellate court, whether it be the Court of Appeal or your Lordship's House, is not to exercise an independent discretion of its own. It must defer to the judge's exercise of discretion and must not interfere with it merely upon the ground that the members of the appellate court would have exercised the discretion differently. The function of the appellate court is initially one of review only. It may set aside the judge's exercise of his discretion on the ground that it was based on a misunderstanding of the law or of the evidence before him or upon an inference that particular facts existed or did not exist, which, although it was one that might legitimately have been drawn upon the evidence that was before the judge, can be demonstrated to be wrong by further evidence that has become available by the time of the appeal; or upon the ground that there has been a change of circumstances after the judge made his order that would have justified his acceding to an application to vary it. Since reasons given by judges for granting or refusing interlocutory injunctions may sometimes sketchy, there may also be occasional cases where even though no erroneous assumption of law or fact can be identified the judge's decision to grant or refuse the injunction is so aberrant that it must be set aside upon the ground that no reasonable judge regardful of his duty to act judicially could have reached it."

23. On behalf of Mr Wright, Mr Berragan did not suggest that there had been any misunderstanding by the judge about the law. The points that he made are these. He says this was an urgent case. There is no dispute about that. He says this was a case of a flagrant breach of fiduciary duty and misuse of confidential information. There is evidence of the secret incorporation of A1 and the letter which I have read out showing the efforts made by Mr Pyke to divert business away from the company to which he owed fiduciary duties. There was no excuse, he said, or justification for what had been done by Mr Pyke. He submitted that damages would be an inadequate remedy, that it was usual in this kind of case to grant an interlocutory injunction. He referred, in particular, to the authorities that there are on confidential information. He sought to equate the breach of fiduciary duty with the breach of the negative contractual stipulation or covenant not to do something. When someone owes a fiduciary duty, they owe all sorts of duties not to do things, such as personally profit for themselves, put themselves in the position of conflict of interest and duty and so on.
24. He said that that there are suggestions of the possible insolvency of Acorn that were not relevant. No insolvency process had been set in train by Mr Pyke or by anyone else. He said that, although he was not seeking a mandatory injunction, the effect of making the orders asked against Mr Pyke is that he and the employees who are now working for A1 would be put into a position where they could go back or would be persuaded to go back to work in the business that properly belonged to Acorn. He said that it was not acceptable for Mr Pyke to go on conducting the business of A1 because the consequence might be that Acorn would go into liquidation. There would then be no possible proceedings that could be brought by Mr Wright against A1 in order to recover the property and profits that properly belonged to Acorn. There might be difficulties in a liquidator seeking to recover the property and profits of Acorn, because the liquidator would be dependent on being funded for such litigation. If that funding was not available, then the consequence would be that Acorn's property and profits would not be recovered, either for the benefit of creditors of Acorn or for the benefit of Mr Wright as a shareholder. He made the other point in his written submissions that the damages would be difficult to quantify and submitted that the outcome of the refusal of the injunction would produce injustice to Mr Wright.
25. I should also mention that, during the course of the oral arguments, Mr Berragan changed or sought to change the basis for which this case was being argued. As I have already mentioned, before the judge it was submitted on behalf of Mr Wright, and was accepted by the judge, that there was an issue to be tried and that issue related to breach of fiduciary duty and breach of confidence. The way that Mr Berragan put the argument at some point today was that there really was not an issue to be tried. This is an open and shut case. Although his clients had never launched the proceedings for summary judgment, he was suggesting that there really was no defence to what he described as a flagrant breach of fiduciary duty and that therefore the matter should be dealt with not on the basis of balance of convenience at all, but on a case that his client was entitled to judgment for the relief that was being sought by way of damages and proprietary claims alleging that the property of Acorn was held in trust by A1 for Acorn. He said that that really was the just solution.
26. In my view, Mr Berragan is not entitled at this stage in the proceedings to seek to move away from an application for an interim order to a final order. The procedure is different. The whole matter has proceeded up till today on the basis that this really was a question of the balance of convenience as to what were the appropriate interim measures to take in order to hold the position between the parties during the period that inevitably occurs between the start of proceedings and the trial of the proceedings.
27. In my view, Mr Berragan has not demonstrated what Lord Diplock said in Hadmor had to be demonstrated in order to persuade this court to exercise its own discretion. He is asking this court to grant an injunction where the judge refused to grant one. He can only do that on the grounds that Lord Diplock explained. He has not suggested an error of law by the judge. It seems to me impossible for him to suggest that the judge has erred in the way that he has balanced the factors. The judge has said that there would be adequate protection between now and the trial by the keeping of records and some other accounting matters in accordance with the undertaking that Mr Pyke has given to the court.
28. It seems to me quite unrealistic for Mr Berragan to suggest that the injunction, if granted, would have the effect which he hoped it would have, that is that Mr Pyke and the employees now working for A1 would return to Acorn and so, although it was not a mandatory injunction, the effect would be that they went back to Acorn where they belonged. I think that is quite overoptimistic. The employees are working in the same premises. They are now working for A1. The customers and clients who were putting dental business in the way of the supplier company are doing business with A1 and not with Acorn. The real risk is that, if an injunction were granted, the parties would finish up with the worst of both worlds. What would happen is that the employees and Mr Pyke would not return to Acorn, but they would be prevented by the injunction from carrying on the business, which, if Mr Wright is correct in his claims, is being carried on for the benefit of Acorn. That is the basis of the trust claim that is proposed to be made directly against A1 and it is the basis of the fiduciary duty and confidential information claim that is being made against Mr Pyke.
29. In a sentence, it seems to me that what Mr Berragan is proposing on behalf of Mr Wright is this, that the making of an injunction, which will inflict certain definite damage on A1 by stopping it from carrying on business without there being any certainty that such an injunction, would not confer any benefit at all on Acorn directly or on Mr Wright indirectly. One would finish up with Acorn not carrying on any business and insolvency being a possible complication and the injunction stopping A1 from carrying on any business. That cannot be of benefit to anybody, whereas the solution which the judge had come up with of an undertaking from Mr Pyke to keep records means that there is some certainty that there will be adequate information available, if liability is established in order to work out the extent and nature of the liability that Mr Pyke and, if joined, A1 would have towards Acorn and Mr Wright.
30. Mr Berragan also talked about the dangers from his client's point of view of the company going into liquidation. I think this is exaggerated. If these are good claims, they could be pursued by the liquidator in the name of the company, claims for both damages and for the recovery of property. The claims might also be founded not only just in equity but also in the statutory provisions under which the courts can avoid transfers of assets and undertakings which are made with intent to defraud creditors, or which have the effect of depriving a debtor company from having assets with which to meet its liabilities. It seems to me that, if the liquidator had good claims, as Mr Wright says Acorn would, then it would be in Mr Wright's own interests to find funds in which to support an action by the liquidator and, if the liquidator was successful, the property recovered could be used to discharge the debts and, if there is anything left over, that could be used to distribute the surplus among the shareholders.
31. So, for all those reasons and for the reasons which were summarised by Ms Troy in her submissions, I would agree with the judge in his disposition of this case. As Ms Troy pointed out and I have already observed, the main case which is now being advanced by Mr Berragan, that this is really a case for summary judgment, does not fit the procedure that has been followed. It is not the way the case was argued below and it cannot be advanced on appeal. There has been no error of principle by the judge. The judge has come up with a solution in which the balance of convenience, in my view, is more likely to be productive of justice than the grant of the injunction which Mr Wright has been contending for.
32. I should also mention this that towards the end of the hearing I did express the view, which I would repeat, that these parties, instead of continuing to litigate, whether it is about interim relief about entitlement to bring derivative actions or about trial on breach of fiduciary duties and breach of confidence, should really get together in order to dispose of this action. These proceedings and the way in which they have been conducted so far seem to me productive of nothing but expense. There are obvious ways of solving this. There is the Manchester company which Mr Wright is now the only director, but Mr Pyke has a 50 per cent shareholding in. There is the Acorn company of which Mr Pyke is the only director and of which Mr Wright has a 50 per cent shareholding in, and there is the A1 company, which, according to Mr Wright, has wrongfully appropriated assets belonging to Acorn. Subject to adjustments, I would have thought it was in the interests of these parties who cannot get on with one another to buy each other out and come to a more rapid and inexpensive solution than continuing to litigate points of trust law, fiduciary law, company law or whatever in the trial courts, or even on appeal.
33. For all those reasons and with those sentiments I would dismiss this appeal.

Lord Justice Hooper:

34. I agree. I would dismiss this appeal and I would also echo the words of Mummery LJ that this is a case where the parties should sit down and sort it out. The judge was faced with a draft injunction in the widest of possible terms. The effect of the injunction, if granted against the first respondent, Mr Pyke, would have been to prevent him working as a dental technician, at least in circumstances in which he was or might be in competition with Acorn: see in particular paragraph 4.6 of the draft order. Drafted in the way in which it was, in my view the purpose was to punish Mr Pyke for what he had allegedly done. When Mr Berragan submitted that what would in fact happen would be that Mr Pyke would return to work for Acorn, and when it was pointed out to him that the injunction as worded did not permit that, he then drafted the proviso to which Mummery LJ has already referred. With the proviso, the effect would be to force Mr Pyke either to work for Acorn or not to work at all as a dental technician in the circumstances which I have outlined above. The terms of the injunction required, through paragraph 4.4 and having regard to the provisions of the guidance note, Mr Pyke to sack the six employees. They would then be facing a stark choice, either unemployment or work for Acorn, who might well be insolvent and whom on the evidence before the judge appears to be owing some £35,000 in unpaid PAYE.
35. If the purpose of the injunction was to get Acorn working again, then that would only succeed if Mr Pyke returned to work for Acorn, if the employees agreed to work for Acorn, if the customers decided to send Acorn work rather than some other competitor in the field, if the suppliers continued to supply Acorn with dental supplies and other goods and services notwithstanding the risk that it was insolvent and finally if Acorn itself was not in fact insolvent.
36. Putting all those together, it seems very likely that, if the injunction had been granted, it would have resulted in both A1 being destroyed and Acorn not picking up any work from it and, for those additional reasons, I would also dismiss the appeal.

Lord Justice Pitchford:

37. I agree that the appeal should be dismissed for the reasons given by my Lords.

Order: Appeal dismissed