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
MRS JUSTICE ASPLIN
2015 EWHC 393 (CH)

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/06/2016

Lord Justice Tomlinson :

1. This interlocutory appeal concerns the duty of full and frank disclosure which rests upon applicants applying without notice for the grant of freezing orders and property preservation and search orders. The nature of this salutary duty is well-known as is its extent and the likely consequence of a failure to observe it. This appeal raises no issue of principle but simply calls into question a judge's essentially factual assessment that there had in this case been no such failure.
2. The dispute underlying this appeal is a falling-out between brothers, due to be resolved in the Chancery Division in a 23 day trial currently being heard by Morgan J. The issues debated on this appeal, which we heard and dismissed on Tuesday, 24 May 2016, fall within a very small compass. It is difficult to resist the conclusion that the bringing of the appeal, ultimately of benefit only to the lawyers instructed to conduct it, who did so with great skill, had more to do with amour propre than with the realities and the requirements of the litigation. Such is often sadly the case when friends and relatives fall out.
3. The Claimant/Respondent Interactive Technology Corporation Ltd, hereinafter "ITC", is owned in equal shares by three brothers, Jonathan, Warren and Stuart Ferster. ITC claims that, in 2005, it began trading as the operator of online gaming websites. Although all three brothers are directors, the business was from the start managed by Jonathan, who is the First and principal Defendant and the principal Appellant. Since 2007 Warren and Stuart have played no active role in the running of the business.
4. In the course of time it appeared to Warren and Stuart that ITC was funding for Jonathan a more lavish lifestyle than that which they enjoyed. By September 2014 they were prompted to enquire into the business of ITC. It is their case that they discovered that ITC had been systematically defrauded by Jonathan. In particular it is said by Warren and Stuart that:

i) Jonathan had established a web of companies, both in England and overseas, namely the Second to Fourteenth Defendants, which he claims to own to the exclusion of ITC or his brothers;

ii) One such company is the Second Defendant, World Online Software NV, hereinafter "WOS", incorporated in Curacao. This company held the gaming licence on trust for the benefit of the business conducted by ITC;

iii) By an Asset Purchase Agreement signed in May 2013 but backdated to January 2012, Jonathan secretly purported to cause ITC to transfer substantially all of its principal assets to WOS, and purported to cause ITC to enter into a Supply of Services Agreement to facilitate the future operation by WOS of the business previously owned by ITC.

5. It is common ground that in order to give effect to this last transaction Jonathan fabricated a board minute of ITC purporting to record a meeting at which all three directors had been present and had approved the transaction. It is accepted that no such board meeting took place and that Warren and Stuart were ignorant of the contractual arrangements hereinbefore described. It is also seemingly Jonathan's case that, as the controller of WOS, he could simply cause WOS to terminate the sales and marketing arrangements with ITC, resulting in ITC having no substantive business and no source of income, with Jonathan, as the claimed beneficial owner of WOS, remaining as the ultimate beneficiary of the valuable gaming business.
6. The contention of ITC in this litigation is that these transactions were effected by Jonathan without any authority and in manifest and dishonest breach of his fiduciary duties owed to ITC and that they are accordingly void and of no effect.
7. It is also said by Warren and Stuart that since 2009 Jonathan has caused ITC to pay to himself about £3.8 million by way of unauthorised remuneration. That is sought to be recovered in this litigation.
8. The Third to Fourteenth Defendants are companies that conducted no business of their own but acted as conduits or depositories for funds generated by the online gaming business of ITC or to hold other assets, such as licences, used in that business.
9. On 22 September 2014, shortly after Warren and Stuart had confronted Jonathan with his alleged wrongdoing, about £1.25 million was transferred from ITC to the Seventh Defendant, a company of which Jonathan is the sole beneficial owner. Warren and Stuart say that this was done in order to place the funds beyond the control of ITC and thus, indirectly, themselves.
10. The current trial before Morgan J will determine not only ITC's claims against Jonathan and the other defendants but also Jonathan's petition under section 994 of the Companies Act 2006 alleging unfair prejudice against Stuart and Warren. The case is therefore both a claim by a company to recover its property and/or compensation from an errant director and from those who have received that property and a shareholders' dispute.
11. On 21 November 2014 ITC applied without notice to Birss J in the Chancery Division for a freezing and property preservation order and for a search and seizure order against the Defendants. Jonathan was of course the principal target of these orders and it was at his home that the search and seizure order was executed on 24 November 2014, and also at ITC's offices.
12. On the return date in February 2015 Asplin J had to consider various matters including whether and to what extent the orders should be continued. One relatively small part of the argument before her was concerned with the question whether the orders should be set aside on the ground of material non-disclosure by ITC in obtaining them. The judge concluded that there had been no material non-disclosure before Birss J. It is against that conclusion that the Defendants appeal on three distinct grounds, permission on that limited basis having been granted by the single Lord Justice.

Ground 1

13. Before Birss J ITC relied, inter alia, upon an affirmation made by Sydney Fulda, a partner in its solicitors, DAC Beachcroft LLP. Paragraph 35 of that affirmation read:

"35. As a result of the above, I consider that if the Respondents were put on notice of this application the First Respondent would realise the potentially severe impact the ultimate claim may have against him (and the other Respondents he controls) and would take steps to dissipate assets of the Company and, indeed, his own assets. I believe that unless the Search Order is given some effective sanction, there is a serious risk that the First Respondent would take immediate steps to ensure that anything that was incriminating or unfavourable to him or the other Respondents would be concealed or destroyed."

ITC also relied upon an affirmation made by Warren Ferster which recorded that he had read Sydney Fulda's affirmation in draft. It is alleged by the Defendants that ITC failed to reveal to the court that Jonathan's brothers did not believe that there was any risk of destruction of documents, as Warren would in due course inform Jonathan on 13 January 2015.

14. On 13 January 2015 there took place a board meeting of ITC attended by all three brothers and by Catherine Emanuel, an Associate at Herbert Smith Freehills LLP, the Defendants' solicitors and by Victoria Bates, an Associate at DAC Beachcroft LLP working under the supervision of Mr Fulda. The meeting was recorded. Perhaps unsurprisingly it was acrimonious. Police officers had accompanied the supervising solicitor when executing the search and seizure order. Jonathan considered that, apart from anything else, his brothers' actions had damaged and were continuing to damage the business. Jonathan also maintained that there had been no need "to go behind his back" for a search or freezing order. He maintained that he had been providing information as requested both before and after the meeting of 22 September 2014 which had precipitated the removal of £1.25 million from ITC.
15. One of the topics which arose in heated discussion at the board meeting was Jonathan's assertion that, in the previous year, ITC had lost or had failed to receive US$3 million as a result of a failure by payment processers properly to account for money. Payment processers are payment intermediaries used in the on-line gaming industry. It was in this context that there took place the following exchange, as recorded in the transcript of the meeting:

"WF You told lies. There's no money in the company. We lost 3 million dollars last year you told us. The company lost, got knocked for.

JF I've never!!

WF Yes, yes, yes.

JF Payment processers do occasionally knock us.

WF 3 million dollars?

JF I'm not sure which year that's . . .

WF You said it was last October. Straight after you put those crooks into prison.

SF Warren, I am sure he can provide evidence for these payment processers going.

JF Hold on, what documents did you think I was destroying?

WF We didn't think you were destroying anything. We never thought you would destroy any documents.

JF So why did you go for a freezing order.

SF Because you were drip feeding the information. You weren't providing the information required.

WF All you were getting is bank statements, one statement every week. You never supplied any information Jonathan."

16. The Defendants say that in the light of the "admission" by Warren that neither he nor his brother thought that Jonathan would destroy any documents Warren's affirmation, which impliedly approved Mr Fulda's affirmation, contained an implied positive misrepresentation about his belief concerning the risk of destruction of documentary material which must have been deliberate and which should without more lead to the setting aside of the search and seizure order. They rely upon the approach adopted by Flaux J in Congentra AG v Sixteen Thirteen Marine S.A. [2008] 2 CLC 51 at paragraph 62 to the effect that:

"62. . . . even if there has been material non-disclosure, the Court has a discretion whether or not to discharge an order obtained ex parte and whether or not to grant fresh injunctive relief. Discharge of the order is not automatic on any non-disclosure being established of any fact known to the applicant which is found by the Court to have been material, although it would only be in exceptional circumstances that a Court would not discharge an order where there had been deliberate non-disclosure or misrepresentation."

At the very least, say the Defendants, Asplin J should have considered whether, in the exercise of her discretion, considered anew in the light of this revelation, it was appropriate either to discharge the order or to grant fresh relief, bearing in mind that by the time the matter came before her execution of the order was incomplete, with numerous outstanding disputes about the categories of material which had been seized.

17. Warren Ferster makes two principal points in relation to this allegation of misrepresentation. First, he says that his response to Jonathan's question at the meeting was in the context of the "loss" to payment processers. He had no belief that Jonathan had ever had any documentary evidence of such a loss, and it was in that context that he said what he did. So far as concerned the US$3 million lost to payment processers there was, thought Warren, nothing which Jonathan could have destroyed. Thus this was a highly context-specific remark, not a statement of general application. Secondly, Warren points out that Jonathan has a high degree of computer literacy and that he was managing an on-line business which it is likely is principally documented electronically rather than on paper. He had not anticipated Jonathan being "somebody so primitive as to destroy odd bits of paper" but he was highly concerned at the ease and skill with which Jonathan could have deleted materials in electronic form.
18. Before the judge and before us this explanation was attacked as artificial. As to the first part of the explanation, it made no sense, it was suggested, to think that Jonathan would in any event be destroying documents which evidenced the lost payments since preservation and disclosure of them would assist him in making good his allegation. In any event, the context of the remark was wider than alleged by Warren. His statement should be taken at face value. The distinction between physical documents and electronic documents was artificial and should not have been accepted by the judge. It was also suggested that if in truth the concern of Warren and Stuart was as to the possible destruction of electronic documents, they should not have applied for and obtained an order which permitted the search for and seizure of hard copy documents. Indeed the point went further. Warren and Stuart should have disclosed, it was suggested, their belief that Jonathan would not destroy physical documents and should have explained why, in the light of that, they nonetheless maintained a well-grounded fear of deletion of electronic documents.
19. The judge accepted Warren's explanation and considered that what he had said at the meeting on 13 January 2015 did not undermine his evidence overall and the inferences which could be drawn as to the fear of destruction or deletion of material by Jonathan.
20. The argument presented by the Defendants is effectively, if not overtly, that Warren's explanation is dishonest and that neither he nor his brother harboured genuine concern that Jonathan would destroy or delete documentary or electronic material. The Defendants did not however apply to be permitted to cross-examine Warren upon his second affirmation dated 9 February 2015 in which his explanation was given. Rather, Asplin J was invited to reject that explanation as artificial. The untested evidence of Warren was not, in my view, inherently implausible and the judge could not have dismissed it as dishonest. In my judgment the judge was entitled to accept his explanation and her decision in that regard in any event falls well within the bounds of reasonable decision-making. Warren's statement was made in a specific context in a heated meeting. It does not detract from or undermine his concern that his brother Jonathan might destroy relevant evidence, albeit the relevant evidence was likely to be found principally in electronic rather than hard copy form. I do not think that it behoved Warren to tell Birss J that he did not anticipate his brother being somebody so primitive as to destroy odd bits of paper – had the judge been told that, his reaction would I expect have been along the lines "thank you for telling me that but I will include hard copy documents within the purview of the order just in case". The gravamen of the belief of Warren and Stuart was that their brother Jonathan might destroy relevant evidence. The Defendants have sought to place upon Warren's answer at the January meeting a weight which it will not bear.

Ground 2

21. Ground 2 is that ITC failed to highlight the significance of Mr Berg's statement at the meeting on 22 September 2014 that income derived from the on-line gaming business had been put through ITC. Mr Berg, a partner in Alexander & Co, was ITC's auditor. A transcript of a meeting of 22 September 2014 held at Alexander & Co's offices attended by all three brothers was in the evidence placed before Birss J but this particular statement was not highlighted or drawn to his attention. The thrust of the Defendants' case here is that the circumstance that all of the income of the business had been paid to ITC tends to undermine any suggestion of dishonest behaviour, and in turn tells against any risk of destruction of documents or dissipation of assets. The Defendants remind us of Asplin J's conclusion at paragraph 33 of her judgment:

"33. Before turning to the other requirements for granting a freezing order and the basis for a search and preservation order, I should add that had it been necessary I would have concluded that on the evidence before me, which was also before Birss J, that there is and was a good arguable case in relation to breach of fiduciary duty by Jonathan by the dishonest and unauthorised transfer of the company's business and assets to WOS, the second defendant, and the appropriation of business opportunities and as to unauthorised remuneration and expenses. My reasoning will be apparent from the matters to which I will refer below."

The Defendants suggest that it is relevant to that conclusion that ITC's auditor had himself stated that the income of the business had all been paid to it and, even if the accuracy of the statement was contentious, it needed to be drawn to the attention of Birss J that this was what ITC's auditor had said.

22. The judge's overall conclusion at paragraph 97 of her judgment was that there had been no material non-disclosure, although she also concluded at paragraphs 107 and 108 that there was no clear evidence that 100% of the net profits were redirected to ITC, by which she meant that the statement of Mr Berg in any event related only to net income after deduction of expenses.
23. I agree with Mr Alan Gourgey QC that what Mr Berg had said is not material to the fraud alleged, which was essentially of the unauthorised diversion of business to WOS in a manner which, if successful, entailed that if and in so far as payments in respect of the business were being made to ITC, they were made at the discretion of Jonathan who could cause WOS to terminate the sales and marketing arrangements with ITC at any time, resulting in ITC having no substantive business and no source of income. If it be the case that the income of WOS continued, after the transfer of assets, to be paid to ITC, that does not detract from the fraudulent nature of the unauthorised transfer and the arrangements which ensued. Furthermore it must be remembered that the monetary claim in respect of which the freezing order was sought was the unauthorised remuneration of £3.8 million paid by ITC to Jonathan, not any sum for which WOS failed to account to ITC. Properly understood therefore Mr Berg's statement even if correct did not detract from the essentially fraudulent nature of what was alleged nor did it bear upon either the risk of dissipation of assets or the risk of destruction of documents evidencing the transactions between the Defendant companies and between Jonathan and the Defendant companies. I understand the submission that it is not the action of a fraudster to perpetuate the income of the allegedly defrauded company, but it misses the point that the fraud alleged is the transfer of the business, the diversion of business opportunities and the unauthorised remuneration. Again the reaction of Birss J to being told of what Mr Berg had said would have been, I imagine, along the lines "thank you for pointing that out but it does not detract from the picture of dishonesty painted by the evidence as a whole".

Ground 3

24. This ground is conceded by Mr Andrew Thompson QC for the Defendants to be something of a makeweight. It is that:

"ITC submitted that there had not been cooperation as regards disclosure of documents by the corporate defendants, when there had been such full cooperation in other respects and Jonathan's brothers accepted that they had no right to the books and accounts of the corporate defendants as stated in the letter of 28 October 2014."

The reference to the letter of 28 October 2014 is to a letter from DAC Beachcroft to Jonathan which included the following paragraph:

"As directors of the Company, our clients have no direct interest in the books and records that strictly belong to World Online Software NV. However, our clients are entitled to access to all information and documentation belonging to the Company which might relate to World Online Software NV (such as, for example, that which is relevant to Issues 2 to 4 above). In any event, this should involve a significant amount of material in its own right."

Issues 2 to 4 were:

"2. The unauthorised transfer by you [Jonathan] of the Company's assets to a company known as World Online Software NV, a company which we understand is controlled by you;

3. The terms of the Company's trading with World Online Software NV;

4. The granting of the gaming licence by the Company to World Online Software NV."

25. Again this letter was in evidence before Birss J but was not highlighted or specifically drawn to his attention. The context of the letter was a complaint that the corporate defendants were not providing documentation as requested.
26. The judge referred to this letter at paragraph 81 of her judgment but she did not deal head-on with the argument that it should have been drawn to the attention of Birss J. In my judgment there is nothing in this argument. This is one letter in a stream of correspondence stretching from September to November 2014. There was ample evidence of delay and prevarication in providing documentation which ITC was entitled to see, it being said that the corporate defendants other than WOS held bank accounts on behalf of ITC. It was said by Jonathan that these companies held bank accounts on behalf of WOS. What the judge did say was this:

"115. I now back turn to the search and preservation orders. In this regard I take into account the very serious nature of such an order. Nevertheless, in my judgment there is a very strong prima facie case against the defendants arising from the facts and matters to which I have already referred. Further, despite the dialogue which occurred from September to November 2014, I reject Mr Freedman's submission that the order was wholly disproportionate and unnecessary and that in fact an order for delivery up should have been made on notice. I have come to this conclusion as a result of the refusal to supply any documentation in relation to the corporate defendants despite Jonathan's case that the business was being run by WOS, the second defendant, and that all monies were channelled through a variety of other corporate defendants, which is clear from the letter of 27 October 2014 to which I have referred. I also consider that there was and is a real risk of destruction of evidence which can be inferred from the same matters to which I have referred under the heading of the freezing order."

27. There is also a short answer to this point which is that the letter was written at a time when DAC Beachcroft LLP were instructed only by Warren and Stuart and not by ITC, and that it has no bearing on the entitlement of ITC.
28. I am quite satisfied that it was not incumbent upon ITC to draw attention to what was said in the solicitors' letter of 28 October 2014.
29. It was for these reasons that at the conclusion of the argument I joined in the decision to dismiss the appeal.

Mr Justice Keehan :

30. I agree.

Lord Justice Moore-Bick :

31. I also agree with the judgment of Tomlinson LJ which sets out my own reasons for holding that the appeal should be dismissed.