England and Wales Court of Appeal (Civil Division) Decisions

II. THE FACTS IN MORE DETAIL

(a) From the start of the project to June 2007

“GEHC is the key element to the acquisition strategy. You, myself and many others played a major role in helping this to happen over the years.  You were my partner in GEHC for the period and you still are. You and I (plus the others in GEHC) as part of GEHC have an absolute right to a meaningful part of the Acquisition Vehicle. This work has been performed by GEHC over the long 4 years and it was the principal goal to hold a carried interest in such a vehicle as the PARAMOUNT method of monetisation for GEHC.

You have been working on this as a principal partner in GEHC and you cannot walk off with intellectual property, work and rights to another company and ignore GEHC as GEHC has been the ONLY continuity in this whole project from the beginning.”

i)                    the fund was set up as a partnership called RegEnersys LP in which Mr Gray was a limited partner subscribing 20% of the capital of the partnership (for which he paid $625);

ii)                  the other limited partner was also a Heerema group entity called RegEnersys Inc which committed to lending $250 million to the partnership. It would also subscribe 80% of the capital of the partnership (a sum of $2,500);

iii)                the general partner was another Heerema entity, RegEnersys (Bermuda) Limited, which was entitled to a share of 2% pa of RegEnersys Inc’s $250 million commitment, that is $5 million per year; and

iv)                returns would be applied 20% to Mr Gray and the balance to the Heerema group after payment of (i) all expenses and liabilities; (ii) $5 million a year; and (iii) a preferred return to RegEnersys Inc of 6% of funds invested (effectively interest on RegEnersys Inc’s loan).

“we will need to tie up the carried interest that GEHC has earned over the last two years and also determine if there is a role for GEHC in RegEnersys (If you recall we had talked about you and I on the board and GEHC’s role as an adviser).

Let me know what your thoughts are as we must get the old business put to bed quickly so as we can both work together to get the new deals in!”

i)                    RegEnersys Inc entered into a share purchase agreement with Mr Zolezzi to buy a 10% shareholding in Klamath Falls for $7.5 million.

ii)                  RegEnersys Inc also entered into a subscription agreement with Klamath Falls to acquire a further, larger tranche of shares for $13.9 million.

iii)                RegEnersys Inc and Klamath Falls entered into a non-exclusive licence in respect of the ultrasound technology (‘the Licence Agreement’).

iv)                RegEnersys Inc, Klamath Falls and other shareholders in Klamath Falls entered into an agreement to cooperate towards the testing and commercialisation of the technology (‘the Cooperation Agreement’).

“That was something I had looked forward to doing for more than four years of hard labour and costs. …  In going forward, we need to get the problem of the carried interest resolved.”

(b) The liability phase of the proceedings

(i) The Liability Judgment

“Mr Gray would be motivated to reduce GEHC’s interest so as (i) to increase Mr Heerema’s share and therefore (ii) to increase Mr Gray’s own return on his intended 20% shareholding. The third problem is that Mr Gray was secretly taking a personal interest in a business opportunity belonging to GEHC.”

“465.  In my judgment, Mr de Clare's change in understanding began with the 11th September 2006 email and proceeded gradually through his 24th November 2006 email until the exchanges of early December 2006 finally brought it home to him that Mr Gray was saying that he would be protecting Mr Heerema's position across the board. Even then, as I have found above, Mr de Clare was looking at the problem through rose tinted spectacles and still thought — or perhaps more accurately — hoped that Mr Gray would continue to advance GEHC's claim to a carried interest.”

“The possibility of contracting with Klamath Falls for a licence to the ultrasound technology was a business opportunity that was being actively pursued by GEHC at all material times, even after the December 2006 emails. By that time, GEHC may not have had much hope of obtaining a carried or any interest in the acquisition SPV, but its only hope at that stage was to rely, as it did, on Mr Gray’s better nature to promote its interests as best he could with Mr Heerema.”

i)                    From January 2006, when Mr Gray began to further Mr Heerema's interests in the Acquisition Strategy and in the ultrasound technology, Mr Gray was acting in breach of his duty of good faith to GEHC and had an actual conflict of interest.

ii)                  From 17 March 2006, Mr Gray put himself in a position where his duties to GEHC conflicted or might possibly conflict with his personal interests in relation to the Acquisition Strategy and the ultrasound technology, because Mr Gray was to be paid a share of Mr Heerema's profits from the SPV.

iii)                When Mr Gray finally obtained his interest in the profits from RegEnersys in 2007, he had taken advantage of a maturing business opportunity belonging to GEHC in breach of the no profit rule.

(ii) The Vos Order

“Mr Gray acted in breach of his fiduciary duty to GEHC and is liable to account to GEHC in equity for all monies and benefits received by him directly or indirectly arising out of Mr Gray's actions in:-

a) putting himself in a position from 17 March 2006 onwards where his duties to GEHC conflicted or might possibly conflict with his personal interests in relation to the Acquisition Strategy and the ultrasound technology; and

b) taking advantage of a maturing business opportunity of GEHC, namely the opportunity to participate in the Acquisition Strategy and to obtain rights in the ultrasound technology, in breach of the no profit rule.”

“GEHC is entitled to an account of all sums due and orders for transfer and/or payment to GEHC in respect of monies and benefits received or receivable by Mr Gray directly or indirectly as a result of the said breaches of fiduciary duty, including his indirect personal interest in RegEnersys Investment I Ltd, but not including any amounts received in respect of the purchase of an interest in Klamath Falls Inc.”

(c) Picking up the narrative for the Enquiry phase

(i) Mr Gray’s share of the Acquisition Strategy SPV

i)                    the previous 80:20 split of returns in excess of the carrying value of the investments as between Celloteck and Mr Gray was changed to a 50:50 split;

ii)                  the hurdle rate of 6% would not apply after 1 January 2010;

iii)                Mr Gray’s annual management fee of 2% of the committed funds would be replaced by a one-off payment of $10 million.

“by no later than 25 October 2010, Mr Gray had come to a clear agreement, arrangement or understanding with the Russian Scientists as to the terms of the interest RegEnersys was to have in the Russian operation ….”

(ii) The Klamath Falls arbitration

i)                    Klamath Falls paid $5.1 million to RegEnersys I and Celloteck. The money was in fact credited to Mr Gray’s account held by the Heerema accounting department.

ii)                  $2.1 million of that $5.1 million was used to buy other shares in Klamath Falls and the remaining $3 million was drawn down by Mr Gray and used to buy shareholdings in unrelated companies.

iii)                All the shares in Klamath Falls previously owned by Mr Zolezzi and Mr Hurtado were transferred to a company called Chiloquin Manana Investments I Limited (‘Chiloquin’) which was an indirect subsidiary of RegEnersys (UK) LP, the partnership in which Mr Gray by then held a 51% share with Celloteck holding the remaining 49%.  The remaining shares in Klamath Falls were acquired by Chiloquin in September 2012.

(iii) The creation of Petrosound and events of 2012 and 2013

i)                    Celloteck took a 15% shareholding in Petrosound through its subsidiary Chiloquin in exchange for the transfer to Petrosound of all the patents held by it and its subsidiaries in the ultrasound technology.

ii)                  Petrosound’s 74.9% subsidiary Sonoplus would acquire shares in a company called Petrosound International Ltd.

iii)                Other shares in Petrosound International Ltd would be issued by the company by way of equity financing.

iv)                Celloteck would provide Sonoplus with the equipment it needed to operate the ultrasound technology.

(d) The Enquiry Hearing and the Enquiry Judgment 

i)                    the first stage was to determine what assets owned by Mr Gray were potentially within the scope of the account;

ii)                  the second stage was to consider whether there was a sufficient link between the assets and Mr Gray’s breaches of fiduciary duty to make those assets subject to the duty to account;

iii)                the third stage was to consider what expenses should be deducted from the gross value of the assets in order to arrive at Mr Gray’s net profits and whether an equitable allowance should be granted to reflect Mr Gray’s skill and work in making the net profit;

iv)                the final stage was to determine the value to be ascribed to the asset where it was possible to do so on the basis of the evidence before her.

(i) The management fees 2006 - 2009 and the consultancy fee for 2010

(ii) The sums paid under the Klamath Falls Settlement

“because the litigation from which the settlement derived involved the affirmation of RegEnersys I’s rights as the owner of the interest in the Klamath Falls technology, RegEnersys I being the special purpose vehicle used to pursue the opportunities in relation to the ultrasound technology and the Acquisition Strategy of which Mr Gray wrongfully took advantage.”

(iii) The Russian Business Assets: Chiloquin’s 15% holding of shares in Petrosound

(iv) The Russian Business Assets: the VIYM Executives’ 15% share of Petrosound

(v) The ROW Business Asset: 51% of Opco

(vi) Valuation of the Business Assets

(vii) Equitable allowance

(e) Asplin J’s orders

i)                    Mr Gray would satisfy his liability to account to GEHC in respect of the Klamath Falls Settlement by paying £1,930,950 (para 1(a));

ii)                  he would satisfy his liability to account to GEHC for the management fees in respect of the period 2006 to 2009 by paying £980,525.79 (para 1(b));

iii)                he would satisfy his liability to account to GEHC for the consultancy fee of $10 million by paying £692,841 (para 1(c));

iv)                he was liable to account to GEHC for 51% of 15% of the issued shares in Petrosound held for Mr Gray through Chiloquin (para 1(d));

v)                  he was liable to account to GEHC for 51% of 15% of the issued shares in Petrosound held for Mr Gray by Professor Abramov or the VIYM Executives (para 1(e));

vi)                he was liable to account to GEHC for a 51% interest in 51% of Petrosound’s international ultrasound technology business (also referred to as Opco) (para 1(f)).

“To the extent that Mr Gray retains any of the assets referred to in paragraphs 1(c) to 1(f) above in specie, or the traceable proceeds thereof, GEHC is entitled to an order or orders requiring Mr Gray to transfer to GEHC (at GEHC’s election) either the asset itself (or its traceable proceeds) or (including in the event that Mr Gray no longer retains the relevant asset or its traceable proceeds) a sum of money representing its value, along with equitable interest …”

 (f) The Valuation Hearing and the Valuation Judgment

i)                    the beneficial interests Mr Gray held in shares in Petrosound being his 51% interest through Celloteck in the 15% of shares that Celloteck’s subsidiary Chiloquin held in Petrosound and his 51% interest through Celloteck in the 15% of shares that the VIYM Executives held in Petrosound for the benefit of Celloteck; and

ii)                  The beneficial interest that Mr Gray held through his 51% share in Celloteck in the 51% of the ROW business to which Celloteck was entitled.

(g) The Valuation Consequentials Rulings and the Arnold Order

“take all steps available to him to require Chiloquin or any third party or parties that now hold such shares or all property, rights, interests, or claims representing such shares for the defendant to transfer such shares or all property, rights, interests or claims representing such shares to [GEHC].”

(h) Mr Gray’s Applications D and E and the hearing of the appeals

(i) The Grounds of Appeal in summary

i)                    Grounds 1 and 2 challenge Asplin J’s conclusion that there existed a sufficient connection between, on the one hand, Mr Gray’s breaches of fiduciary duty and, on the other hand, the indirect interests he was found to have in Petrosound and in the ROW business, and the management and consultancy fees received by him, to  make him accountable for those assets and benefits.

ii)                  Ground 3 takes issue with the amount of expenses deducted from the consultancy fee of $10 million to arrive at the net profit for which Mr Gray was liable to account.

iii)                Ground 4 concerns amounts for which Mr Gray says he should have been given credit in respect of the Business Assets (but only if he was ordered to transfer those assets to GEHC) and in respect of payments made by him personally (but only if the consultancy fee of $10 million is removed from the account).

iv)                Ground 5 asserts that Asplin J erred in refusing to deduct an equitable allowance for the work Mr Gray undertook in respect of ultrasound technology between 2006 and 2012.

v)                  Ground 6 challenges Asplin J’s findings of fact on the critical issues of the existence of the 2010 agreement and the secret agreement. In the alternative, Ground 9 relies on similar matters to assert that the findings should be set aside on grounds of procedural irregularity.

vi)                Ground 7 challenges Asplin J’s decision that the interest that Mr Gray held in Petrosound shares through the VIYM Executives and his interest in the ROW business were sufficiently certain to form the basis of a properly enforceable declaration or order for transfer. The interests are not assets known to the law or equity.

vii)              Ground 8 asserts that Asplin J erred in finding that Celloteck had acquired any interest in the ROW business because such a finding contradicted her earlier finding that the ROW business was going to be self-funding rather than seeking equity funding.

III.  GROUND 1

(a) Introduction

(a) $3 million of the $5.1 million paid by Klamath Falls to Celloteck under the Klamath Falls Settlement in February 2012;

(d) 51% of 15% of the issued shares in Petrosound held for Mr Gray through Chiloquin; and

(e) 51% of 15% of the issued shares in Petrosound held for Mr Gray by Professor Abramov or by either or both of the VIYM Executives.

Assets (d) and (e) together comprise what we have called the Russian Business Assets. For the purposes of Ground 1, it must be assumed that Asplin J was right to find that the Russian Business Assets were received directly or indirectly by Mr Gray, although those findings are of course challenged in other grounds of appeal (Grounds 6, 7 and 9).

“An internal ledger produced by Heerema Group and kept by Mr Smits in the Geneva office shows that this sum was received by Mr Gray into ReVysion’s current account with the Heerema Group and was subsequently used personally by Mr Gray for his own purposes. It is said on behalf of Mr Gray that the ledger amounts only to a rough tally and Mr Pronk stated in cross examination that too much had been paid to Mr Gray and subsequently it had been rolled up into a loan to him from the Heerema Group. He did not mention this in his witness statement and there is no documentary evidence before the court to support the alleged roll up into a loan. As a result, I am unable to accept that evidence. It seems to me that the terms of the ledger are clear and that the $5.1m received in settlement of the Chilean arbitration were used by Mr Gray for his own purposes. However, to the extent that $2.1m of it was used to purchase an interest in Klamath Falls, it seems to me that it may be double counting to treat the entire $5.1m as an asset in or formerly in Mr Gray’s hands.”

“are not connected to his breach of fiduciary duty but instead result from the Klamath Falls settlement and the RegEnersys shareholding in Klamath Falls to which GEHC consented, and fall outside the scope of the account as ordered by Vos J… In particular, the indirect interests in Petrosound and the share of the Klamath Falls settlement fall, on Asplin J’s own findings of fact, outside the scope of the account.”

Accordingly, it is said that “Asplin J was wrong to make Mr Gray account for such assets.”

(b) The scope of the account ordered by Vos J

“for all monies and benefits received by him directly or indirectly arising out of Mr Gray’s actions in: -

(1) putting himself in a position from 17 March 2006 onwards where his duties to GEHC conflicted or might possibly conflict with his personal interests in relation to the Acquisition Strategy and the ultrasound technology; and

(2) taking advantage of a maturing business opportunity of GEHC, namely the opportunity to participate in the Acquisition Strategy and to obtain rights in the ultrasound technology, in breach of the no profit rule.”

“GEHC is entitled to an account of all sums due and orders for transfer and/or payment to GEHC in respect of monies and benefits received or receivable by Mr Gray directly or indirectly as a result of the said breaches of fiduciary duty, including his indirect personal interest in RegEnersys Investment I Limited, but not including any amounts received in respect of the purchase of an interest in Klamath Falls Inc.”

“On 11 September 2006, Mr de Clare emailed Mr Gray about Mr Zolezzi’s plans to monetise 10% of Klamath Falls by selling to Mr Heerema. Mr de Clare said Mr Zolezzi had discussed with Mr Hurtado an approach from Mr Heerema through Mr Gray (acting as advisor to Mr Heerema’s fund) and GEHC acting as advisor to Mr Zolezzi, and suggesting a conference call with Mr Gray acting for Mr Heerema and Mr de Clare acting for Mr Zolezzi.”

Counsel then appearing for Mr Gray (Mr Stephen Atherton QC) relied on this email as making clear for the first time that Mr de Clare understood that Mr Gray would be acting for Mr Heerema on the other side of the negotiations from Mr de Clare and GEHC acting for Mr Zolezzi: see [Vos/502].

“503. In my judgment, however, Mr de Clare was only consenting to Mr Gray acting in that capacity to the exclusion of GEHC’s interests in respect of the narrow area of the existing debate concerning the share sale. That was partly why the temperature rose so rapidly when the possibility of a term referring to access to the technology was inserted in the draft Co-operation Agreement, and when Mr Gray referred to needing “front end access to the tools” on 13 November 2006. Mr de Clare may indeed have been naive in drawing this fine distinction between the Alfredo mandate and the Acquisition Strategy, but he undoubtedly did so. Mr Gray may have been commercially correct in arguing as he did in late November and early December 2006 that the linkage was inevitable, but he did not make that clear to Mr de Clare before the emails culminating in those on 6 December 2006.

504. GEHC cannot be taken to have given its fully informed consent to Mr Gray forsaking his duty to protect GEHC’s interests in relation to the Acquisition Strategy, when that was not even mentioned in the 11 September 2006 email. Mr de Clare did not understand, in any sense, that his email could be taken as consent to the loss of Mr Gray’s promotion of GEHC’s interests in relation to the Acquisition Strategy and the AWS [Acoustic Well Stimulation, or ultrasound] technology.”

“Overall, looking at all the factual circumstances in December 2006, it does not seem to me that it can fairly be said that GEHC was consenting to Mr Gray’s breaches of the fiduciary duties he owed to GEHC. Specifically, Mr de Clare cannot be said to have consented to Mr Gray taking a personal interest in the acquisition vehicle, which was precisely what the Acquisition Strategy had set out to achieve for GEHC. GEHC never gave any consent, let alone fully informed consent, to Mr Gray taking a personal interest in the maturing business opportunity that belonged to GEHC, namely the chance of obtaining a licence in the AWS technology from Klamath Falls and a share of the profits that would thereby be derived.”

“In my judgment, these authorities take Mr Gray nowhere. Mr de Clare never consented to his taking a personal interest of any kind in the acquisition SPV or in the ultrasound technology, as opposed to the shares in Klamath Falls to be acquired from Mr Zolezzi.”

“GEHC only gave its fully informed consent to (i) Mr Gray acting for Mr Heerema in the negotiation for the purchase of Mr Zolezzi’s shares, and (ii) Mr Gray taking a personal interest in the purchase of those shares. Otherwise, GEHC gave Mr Gray no fully informed consent to act in breach of his continuing fiduciary duties to GEHC.”

“(i) The fundamental rule is that a fiduciary must not make an unauthorised profit out of his fiduciary position;

(ii) The fashioning of an account should not be allowed to operate as the unjust enrichment of the claimant;

(iii) The profits for which an account is ordered must bear a reasonable relationship to the breach of duty proved;

(iv) It is important to establish exactly what has been acquired;

(v) Subject to that, the fashioning of the account depends on the facts. In some cases it will be appropriate to order an account limited in time; or limited to profits derived from particular assets or particular customers; or to order an account of all the profits of a business subject to all just allowances for the fiduciary’s skill, labour and assumption of business risk. In some cases it may be appropriate to order the making of a payment representing the capital value of the advantage in question, either in place of or in addition to an account of profits.”

“In the case of a business, it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal’s goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances… This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.”

“Relief given by way of an account of profits is measured by the gain made by the wrongdoer irrespective of whether the claimant has suffered a corresponding loss. On the taking of the account, the object is “to determine as accurately as possible the true measure of the profit or benefit obtained” [a reference to Warman, loc.cit, at 588]. Typically, the court must determine the sums impermissibly received and deduct any allowable expenses. An account of profits therefore proceeds on a different principle from reparative compensatory damages or equitable compensation.”

“arising out of any matters, causes, acts, conduct, claims, or events from the beginning of the world to this date, including but not limited to the claims of breach of contract, fraud, and mutual mistake asserted by RegEnersys in the Arbitration Proceedings, excepting only the rights and obligations created in connection with this Agreement and the enforcement thereof.”

Clause 4 contained a release in similar terms given by Klamath Falls. Clause 5 stated that there was no admission of liability on either side. Clause 6 provided, among other matters, that the agreement was to be governed by New York law, and that it contained “the complete and exclusive statement of the terms of the agreement between the parties”. The agreement was signed by Mr Gray on behalf of Celloteck, Mr Adam Kantor, a colleague of Mr Gray, on behalf of RegEnersys I and Mr Hurtado on behalf of Klamath Falls.

(e) Mr Gray’s liability to account for asset 1(a): the $3 million derived from the Klamath Falls Settlement

“Further in my judgment, the receipt of $5.1m paid by Klamath Falls in the settlement of the arbitration was causally linked to Mr Gray's breaches of fiduciary duty because the litigation from which the settlement derived involved the affirmation of RegEnersys I’s rights as the owner of the interest in the Klamath Falls technology, RegEnersys I being the special purpose vehicle used to pursue the opportunities in relation to the ultrasound technology and the Acquisition Strategy of which Mr Gray wrongfully took advantage.”

“193. … In my judgment, quite clearly, both the interest in the Russian business and any international roll out is intimately concerned with the ultrasound technology and the Acquisition Strategy and accordingly, has a causal connection to the breaches of fiduciary duty. The opportunity of which Mr Gray availed himself in breach of duty can be traced first into Mr Gray’s initial interest in RegEnersys I, when owned by RegEnersys LP from August 2007. After 31 December 2010, it became his 51% interest in RegEnersys I, when owned by RegEnersys UK. He succeeded in using this to obtain a 51% interest in Chiloquin’s interest in Klamath Falls in February 2012, and then in turning both into a beneficial stake in Celloteck or Chiloquin by secret agreement with Mr Pronk in 2012 - which beneficial stake gave him his interest in Petrosound Ltd in 2013.

…

195. I agree with Mr Fraser that Mr Gray’s interest in Petrosound through Chiloquin would not have happened had Mr Gray not taken advantage of GEHC’s maturing business opportunity because: (i) Mr Gray would not have been introduced to the ultrasound technology and the Russian Scientists, or the opportunity of reaching agreement with them to take an interest in the Russian operations; and (ii) Mr Gray would not have obtained an interest in, and later been able to take control of the Klamath Falls technology which (as the evidence showed) was seen by everyone involved as one of the keys to being able to commercialise the technology and agree a structure with the Russian Scientists for that commercialisation. It seems to me that the licence in respect of the Klamath Falls technology was a manifestation of the opportunity obtained in breach of fiduciary duty and there is no reason to seek to freeze the opportunity at that juncture. Such a conclusion is inconsistent with the acceptance throughout that the Russian Scientists were the key to the technology and my findings as to the nature of that technology.”

(h) Mr Gray’s application to amend Ground 1

(1) First, Mr Gray wishes to amend the existing wording of the ground in relation to the scope of the account ordered by Vos J, so as to state that the assets in question “result in whole or in part from the RegEnersys shareholding in Klamath Falls to which GEHC consented”, instead of the existing wording which says that they “result from the Klamath Falls settlement and the RegEnersys shareholding in Klamath Falls to which GEHC consented”.

(2) Secondly, Mr Gray wishes to add an alternative contention in this form:

“Alternatively, in so far as Asplin J found that either asset was causally connected to the licence held by RegEnersys in respect of ultrasound technology and not also connected to the RegEnersys shareholding, that finding was inconsistent with the terms of the settlement agreement and was wrong.”

IV.  GROUND 2

(a) Introduction

“There was no causal connection, and/or no sufficient other connection, between Mr Gray’s breach of fiduciary duty and the management and consultancy fees for which he was found liable to account.  Asplin J was wrong to find that there was a causal or any relevant connection to Mr Gray’s breach of fiduciary duty.”

(b) The relevant fees

(c) The judge’s conclusions on “causation”

“Despite the fact that the management fees were dependant upon the amount of committed capital rather than the value of the investments themselves, it seems to me that based upon Mr Heerema and Mr Pronk’s evidence in relation to Mr Gray’s duties which included advice in relation to investing in the ultrasound technology, that there is a clear connection between those fees whether before or after 2010 and the breaches of duty in relation to the ultrasound technology and the Acquisition Strategy, at least in part.

I have come to the conclusion that only part of the management fees to 2009 has some causal connection despite the fact that it is not possible to determine how much time or effort was spent on one investment rather than another.”

“It seems to me that some causal connection to the breaches of fiduciary duty can only extend to that part of the net management fee which bears the same relationship to the fund as a whole as the percentage of ultrasound invested funds and investment opportunities… over the relevant period.”

She held that the calculation should be based on the full net amount of the fees for the first period, which she had found to amount, in sterling terms, to £9,457,797: see [Asplin/188].

“As I have already mentioned, I consider that the same approach should be taken as with the management fee before 2010 and therefore, the fee must be apportioned in a way which relates to the ultrasound technology. The causal connection can only extend to that part of the net fee which bears the same relationship to the fund as a whole as the percentage of ultrasound invested funds and investment opportunities including 90% of the figure in respect of the Klamath Falls shareholding over the relevant period. As it is not in dispute that all of the fee was drawn down by October 2012, it seems to me that the relevant period both in terms of investments and expenses to be deducted, should cease at that stage. In order to determine what part of the fees are subject to some causal connection, once again, it will be necessary to recalculate the figures.”

(d) Mr Gray’s submissions

(e) Do the fees fall within the scope of the Vos Order?

“1. Mr Gray acted in breach of his fiduciary duties to GEHC and is liable to account to GEHC in equity for all monies and benefits received by him directly or indirectly arising out of Mr Gray’s actions in: -

(1) putting himself in a position from 17 March 2006 onwards where his duties to GEHC conflicted or might possibly conflict with his personal interests in relation to the Acquisition Strategy and the ultrasound technology;…”

This declaration was therefore founded on Mr Gray’s conduct in placing himself in a position of actual or potential conflict of interest, in breach of his fiduciary duty to GEHC, from 17 March 2006 onwards. He is liable to account to GEHC for all monies and benefits which he has received, directly or indirectly, as a consequence of those actions. The equitable principle here engaged is the obligation on a fiduciary not to place himself in a position of actual or potential conflict of interest when he owes an unqualified duty of loyalty to his principal. This obligation is quite separate from, and often anterior to, the operation of the so-called “no profit rule”, which is reflected in paragraph 1(2) of the Vos Order, and involved Mr Gray taking advantage of GEHC’s “maturing business opportunity… to participate in the Acquisition Strategy and to obtain rights in the ultrasound technology”.

“461. Mr Snowden [counsel for GEHC] submitted, as I have said, that Mr Gray first obtained a personal interest in Mr Heerema’s fund and, therefore, in the Acquisition Strategy when he agreed to the remuneration proposal in Mr Pronk’s 17th March 2006 email. Mr Atherton [counsel for Mr Gray] submitted that in March 2006 no deal had yet been done, and there was no certainty that there would be any investment by Mr Heerema in the Acquisition Strategy at that stage. Moreover, he argued that Mr de Clare must have realised that Mr Gray would be remunerated in some way for managing Mr Heerema’s funds, and what was agreed was no more than a standard kind of fee and remuneration for such activities.

462. It is true that no investment had been committed by Mr Heerema on 17th March 2006, and it is also true that the same email seemed to accept GEHC’s 20% carried interest. But, the email also makes clear that, if an investment were made by Mr Heerema in the Acquisition Strategy, Mr Gray would have 20% of the ordinary shares and a 2% management fee, and would make a co-investment of USD 1 million or 20% alongside Mr Heerema’s fund. This proposed arrangement gave rise to three problems. Mr Gray would be motivated to reduce GEHC’s interest so as to (i) increase Mr Heerema’s share and therefore (ii) to increase Mr Gray’s own return on his intended 20% shareholding. The third problem is that Mr Gray was secretly taking a personal interest in a business opportunity belonging to GEHC. These problems may go more towards the question of breach to which I shall turn in due course.

463. As regards, the existence of duties, it seems to me that only one thing in the 17th March 2006 email can have changed the existence and the nature of the duties that Mr Gray owed to GEHC. That is the fact that, up to 17th March 2006, Mr Gray’s conflict between his personal interests and his duty was a potential one, since he could have been remunerated otherwise than by a direct share of Mr Heerema’s profits. After 17th March 2006, there was an actual conflict between his personal interests and his duty to GEHC, for the same reasons as there was an actual conflict between his duty to Mr Heerema and his duty to GEHC from January 2006.”

“(ii) From 17th March 2006, Mr Gray put himself in a position where his duties to GEHC conflicted or might possibly conflict with his personal interests in relation to the Acquisition Strategy and the ultrasound technology, because Mr Gray was to be paid a share of Mr Heerema’s profits from the acquisition vehicle.”

It is true that the focus, in this brief summary, was on Mr Gray’s entitlement to be paid a share of profits, but this was clearly not intended by the judge to be an exhaustive statement of the profits for which Mr Gray might ultimately be liable to account as a result of the conflict of interest which Vos J had identified. The issue which Vos J was considering, in this penultimate section of his lengthy judgment, was whether GEHC needed to show that it had suffered loss in order to move on to the next stage of the split trial, i.e. the Enquiry Hearing. For that limited purpose, it was enough for Vos J to summarise his main conclusions on liability. He was fully aware that he was in no position to rule definitively on all the profits for which Mr Gray might be liable to account, assuming liability in principle to have been established. As Vos J said, at [516]:

“I have not been provided with the documentation or evidence necessary to determine what profits Mr Gray may or may not have made by taking advantage of the opportunity he did. I know, of course, that he denies that he made any such profit, and that he has adduced some evidence to show that he has not. But I have only seen one side of the story. I cannot, therefore, find that GEHC has no real chance of establishing that it is entitled to recover some material profits once the necessary account is taken. Mr Atherton also seeks to limit the relief that GEHC can obtain by foreclosing the argument about what benefits Mr Gray may or may not have received from his exploitation of GEHC’s maturing business opportunity in relation to the Acquisition Strategy and the ultrasound technology. I do not think that would be appropriate in the absence of clear and undisputed evidence as to what precisely Mr Gray has received or is likely in the future to receive. There may be a whole host of arguments on both sides that I cannot now predict and have not yet been adumbrated.”

(f) Mr Gray’s other arguments

V.  GROUNDS 3A.1 AND 3A.2

(a) Ground 3A.1

“As it is not in dispute that all of the fee was drawn down by October 2012, it seems to me that the relevant period both in terms of investments and expenses to be deducted, should cease at that stage.”

The relevance of October 2012 is that this was the date by which the $10 million had been drawn down in full.  It is common ground that the timing of the drawdown of the $10 million was left for Mr Gray to determine to suit his own convenience, and that it was taken by him over three years for tax reasons: see [Asplin/190].  In that paragraph (as we have already noted) the judge accepted the evidence of Mr Pronk and Mr Heerema that “the fee was agreed in relation to Mr Gray’s continuing his work on the ultrasound technology as well as other investments remaining in the fund” and rejected the evidence of Mr Ward that it was paid under a separate consultancy agreement. It was this finding that grounded the judge’s conclusion, which is not appealed, that the $10 million “should be treated in the same way as the remainder of the management fees”.

“In fact, the structure of the fund going forwards was set out in an email from Mr Gray to Mr Pronk of 7 April 2010, the form of which had been approved by Mr Pronk in advance. The email recorded amongst other things:

“Further to our discussions with Pieter Heerema and his meeting with me on February 16th, my understanding is that the format of RegEnersys as an investment vehicle of the Heerema family office will change.

…

PHH [i.e Mr Heerema] wishes to relinquish day to day control. You will continue to manage and monitor the RegEnersys fund activities along with Revysion.

The current 80/20 split of returns in excess of the carrying value of the investments as per the 2009 balance sheet will be changed to a 50/50 split.

…

Capital released from agreed liquidation of selected fund assets or incoming funds from other investors will be shared 50/50. Heerema's 50% share of these incoming cash flows will be deducted from the current carrying value of the investments.

As from January 1, 2010 the hurdle interest rate (6%) will not be applicable anymore.

ReVysion will be entitled to the USD 10 million 2010 management fee as provided in the original agreements.

…”

“As in relation to the management fees received, the expenses of ReVysion should, in my opinion, be deducted from the $10 million consultancy fee, in arriving at the net benefit received by [Mr Gray].”

Mr MacGregor then reviewed the relevant expenses, and explained why in his view legal expenses should be excluded. In sterling terms, he concluded that net expenses of £6,440,498 fell to be deducted, over the full four year period, from the consultancy fee of £6,696,653, leaving a positive balance of £256,155. (Mr MacGregor also considered that an allowance should be made for Mr Gray’s time and skill in the sum of £4 million, a point to which we will need to return under Ground 5 below).

“It seems to me that some causal connection to the breaches of fiduciary duty can only extend to that part of the net management fee which bears the same relationship to the fund as a whole as the percentage of ultrasound invested funds and investment opportunities including 90% of the sums included in relation to the Klamath Falls shareholding, in Mr Cavender’s Schedule A, over the relevant period. The 10% reduction is to reflect the fact that some of the fee related to managing the Klamath Falls shares rather than the licence. The calculation should be based on the full £9,457,797.”

VI.  GROUND 4

VII.  GROUND 5

(a) Introduction

“Asplin J was wrong to refuse to grant Mr Gray any allowance for the work he undertook in respect of the ultrasound technology between 2006 and 2012.”

Accordingly, the issue raised by Ground 5 is whether Asplin J erred in refusing to grant Mr Gray an equitable allowance for the work which he performed over the period of approximately seven years between 2006 and 2012 in procuring the receipts of money and other benefits in respect of which he is liable to account to GEHC.

“They acted with complete honesty throughout and the respondent is a fortunate man in that the rigour of equity enables him to participate in the profits which have accrued as a result of the action taken by the appellants in March, 1959, in purchasing the shares at their own risk.”

Those circumstances had fully justified the trial judge, Wilberforce J, in ordering an allowance to be made to the appellants in respect of their work and skill in obtaining the shares and the resulting profits “on a liberal scale”.

“Ex hypothesi, such an allowance was not in the circumstances authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plaintiff beneficiary. The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr. Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit.

The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed. Strictly speaking, it is irreconcilable with the rule as so stated. It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, as I see it, such a conflict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.”

“The rules of equity against the retention of benefits by fiduciaries have been applied with severity.”

He then referred to Boardman v Phipps, and quoted from the judgment of Lord Denning MR in the Court of Appeal which included this passage ([1965] Ch. 992 at 1020):

“The claim for repayment cannot, however, be allowed to extend further than the justice of the case demands.  If the defendant has done valuable work in making the profit, then the court in its discretion may allow him a recompense. It depends on the circumstances.  If the agent has been guilty of any dishonesty or bad faith, or surreptitious dealing, he might not be allowed any remuneration or reward.”

“These latter observations (and those of Lord Denning MR and the judgment of Wilberforce J at first instance) accept the existence of a power in the court to make an allowance to the fiduciary. And I think it is clearly necessary that such a power should exist. Substantial injustice may result without it. A hard and fast rule that the beneficiary can demand the whole profit without an allowance for the work without which it could not have been created is unduly severe. Nor do I think that the principle is only applicable in cases where the personal conduct of the fiduciary cannot be criticised. I think the justice of the individual case must be considered on the facts of that case. Accordingly, where there has been dishonesty or surreptitious dealing or other improper conduct then, as indicated by Lord Denning MR, it might be appropriate to refuse relief; but that will depend upon the circumstances.”

“Although equity looks at the advantage gained by the wrongdoer rather than the loss to the victim, the cases show that in assessing the advantage gained the court will look at the whole situation in the round.”

(b) The claim for an equitable allowance as presented to Asplin J

“Mr Ward notes that the expenses of ReVysion do not include any remuneration for the defendant… Thus, in order to arrive at the true net income received by the Defendant from the Heerema Group, one also needs to deduct an amount to take account of what ReVysion would have been expected to pay for a chief executive of the experience and calibre of the defendant. Mr Ward suggests that such a remuneration package would be in the region of £1 million annually, which is also similar to his [i.e. Mr Gray’s] remuneration package when he worked at Bankers Trust and then Deutsche Bank from 1998 onwards. On the basis of the evidence available to me, particularly the Defendant’s salary at his previous employer, I agree this is a reasonable basis for estimating an allowance for the Defendant’s personal skill, expertise and contribution to the business.”

Mr MacGregor then applied this methodology to the management fees for the four calendar years from 2006 to 2009 inclusive, deducting an allowance for Mr Gray’s time and skill of £4 million, as well as net expenses, before arriving at the net benefit received by him from the management fees during that period.

“In addition… I consider that an allowance should be made for the Defendant’s time and skill in advising on and managing the RegEnersys Fund. As the Defendant continued to advise and manage the fund for the years 2010, 2011, 2012 and 2013 and as the $10 million consultancy fee was drawn down by the Defendant over the four years ended 31 March 2014, I consider the amount that should be deducted is £4 million.”

“491. As Mr Ward confirmed in his oral evidence, if ReVysion had brought in a professional CEO to undertake the management of the business which Mr Gray was carrying out, the cost to it would have been approximately £1,000,000 per annum. Mr Ward went on to explain in detail (a) the basis upon which it was appropriate to make such deduction; (b) the bases on which he assessed the appropriate level of compensation; and (c) the expertise and experience which allowed him to do so. The Defendant’s valuation expert, Mr MacGregor, confirmed the appropriateness of such deduction and the amount.

492. The cost of retaining a professional CEO to undertake the management of the business from April 2006 until 31 March 2010 should therefore be set off against the Management Fee and Consultancy Fee which was paid to ReVysion in respect of its role as manager of and advisor to RegEnersys for the period from 2006 to 31 March 2010 and, following the 2010 Restructuring, after which ReVysion has acted as manager and advisor to RegEnersys UK. In the event, however, that for some reason this cost is not set off in this way, it is submitted that the Court should nevertheless exercise its equitable discretion and grant Mr Gray an allowance in this sum on account of his skill and efforts.”

“for the personal skill, expertise, labour and exertion of Mr Gray in generating any such benefit, with due regard for the fact that:

(a) Mr Gray worked full-time as effective CEO of ReVysion;

(b) Mr Gray did not receive a salary as effective CEO of ReVysion;

(c) an appropriate salary for such a position is £1 million.”

(c) Did Asplin J misdirect herself on the law?

“There is no dispute as to the final stage of the test. It is that the court has a discretion to apply an equitable allowance both as to disbursements and the skill and effort of the defaulting fiduciary.”

This passage appears to repeat the error in [Asplin/130], and also to suggest that the allowance of disbursements itself forms part of the process of making an equitable allowance. As before, the judge was purporting to record common ground. As before, she said unambiguously that “the court has a discretion” which extends both to the allowance of disbursements and to the making of an equitable allowance for the skill and effort of the fiduciary.

“A further question arises as to whether any costs or allowance should be taken into account. I shall return to that below, having considered the question of causation.”

In our view this passage does not take matters much further, although the judge again appears to equate the deduction of costs with the making of an equitable allowance. It is also relevant to note that, after discussing the question of causation at [Asplin/193 to 211], the judge then continued with the question of an equitable allowance at [Asplin/212 and 213] under the heading “Allowance for skill and labour?”

(d) Asplin J’s reasons for refusing an equitable allowance

VIII. GROUNDS 6 AND 9

(a) Introduction

(i) The Enquiry Judgment 

“Further, after the beginning of 2011, all but a single email between RegEnersys/Mr Gray and the Russian Scientists took place on private email addresses. As I have already said, I do not accept that the step was taken as a result of concerns about hacking and industrial espionage. In addition, in 2012, Mr Kantor set up his “Bill Barrett” email address used for correspondence with the Russian Scientists which he did not disclose until its existence had been revealed in disclosure from VIYM provided in November 2014. The account was closed in 2013 and Mr Kantor accepted that he knew that in doing so the emails would be deleted. It seems to me that such conduct from which I draw an adverse inference, was designed once again to shield the existence, nature and extent of the RegEnersys/Gray interest in Petrosound Ltd from detection.”

“Furthermore, it seems to me that Mr Pronk’s response later on 30 April 2012 that he would be happy to think of another solution but not a Heerema entity is inconsistent with the explanation that the August 2012 transaction was always intended to enable the debt owed by RegEnersys to be reduced. Mr Pronk’s explanation in cross examination was incoherent and I was unable to follow it. I also take into account in this regard the fact that there is no contemporaneous documentary evidence of any kind either seeking repayment of any part of the $65m on the part of the Heerema Group or a desire to do so on behalf of Mr Gray. I also consider it relevant that there was no obligation to repay the loan directly. It was to be repaid over time from a percentage of any monies realised on the sale of assets. In this regard, I also take account of the fact that Mr Heerema was unable to explain how the figure of $65m had been arrived at and that Mr Pronk was unable to point to a document recording Mr Gray’s alleged desire to pay back the loan or to give particulars of when such a desire was made clear and gave untruthful evidence in relation to the use of the remainder of the Chilean arbitration settlement monies. Overall, therefore, I am unable to accept Mr Pronk’s evidence and Mr Gray’s case that the August 2012 transaction was driven by debt reduction.”

“It is alleged that the secret proposal to put Chiloquin (and therefore, Klamath Falls) together with RegEnersys I into Celloteck and that Celloteck would take a 30% stake in the “HoldCo” of a joint venture business with the Russian Scientists and set up a “rest of the World company” in which Celloteck would hold 51% of the equity, was discussed on this occasion. Mr Pronk denied such a discussion took place that weekend but did accept that it had been discussed and that he had probably discussed and approved Celloteck taking over Klamath Falls before a draft of the SPA was sent to Mr Smits by Mr Kantor on 27 April.”

“I also place weight upon Mr Gray’s email of 30 April 2012 in which he stated that he just wanted the equity “remote from me.” This comment was not addressed by Mr Gray in witness statements or affidavits. Nor for that matter is there any reference to debt reduction. Paragraph 111(d) of Mr Gray’s Further Information of 22 October 2014 implies that the phrase “remote from me” was intended to mean that he “wanted out.” However, in my judgment, given the ordinary meaning of the phrase coupled with the use of the word  “remote” in the subsequent emails to Mr Ward of 25 September 2012, in a context in which Mr Gray was seeking to disguise his investment in Stratum Energy, and which Mr Gray merely stated that he could not recall, and in the light of the fact that Mr Ward’s evidence was that Mr Gray was familiar with the use of trusts, nominees and deeds of beneficial interest which is not surprising given his profession, on the balance of probabilities, I consider that it is more likely than not that the email provides an insight into Mr Gray’s intention to hide his interest in the ultrasound technology by means of his secret agreement with Mr Pronk and the 2012 SPA and loan agreement.”

“Taking this untruthful evidence together, it seems to me that on the balance of probabilities, it is more likely than not that the untruthful evidence was an attempt by Mr Gray to conceal the reason for the enquiry. I accept Mr Fraser’s submission that the attempt to conceal the reason supports the conclusion that it was indeed part of a plan to try to get around the problem raised by Mr Pronk about ownership of Klamath Falls, with a view to transferring Celloteck to a trust in which Mr Gray would have an interest and is indicative of Mr Gray having retained an interest in the ultrasound business.”

“On the balance of probabilities, it seems to me that in the context of Mr Gray’s “keep the equity remote from me” email and the agreement reached between Mr Pronk and Mr Gray before the Belarus trip, the task in hand was to create a suitable structure in which Mr Gray could retain a secret interest which was difficult to trace back to him. This conclusion is further supported by Mr Gray’s email to his solicitor of 19 July 2012 in which he states that the 2012 SPA is needed before he is able to sign his witness statement.”

“In relation to the fax, it appears to be the only occasion on which fax communication was used between Messrs Gray and Pronk. It has not been produced and none of Mrs Deeney, Mr Pronk and Mr Kantor were able to assist as to what it might have contained. It is not mentioned in Mr Gray’s evidence. However, in cross examination in relation to his email in response to Mr Kantor’s email to Han Smits in the Geneva office of 6 September 2012, in which he stated: “Really don’t know what this is Rob. Why he sends this to Han?????????”, Mr Pronk accepted that he did not want anyone else dealing with the Celloteck matter in his office. On this basis, I consider that it is appropriate to infer that the fax related to an agreement to keep Mr Gray’s interests in Celloteck and the ultrasound technology “remote” but that Mr Gray had not divested himself of them and that accordingly, Mr Pronk was concerned that no one but himself should deal with the Celloteck matter.”

“108.     Despite having executed the Sale and Purchase Agreement on 17 August 2012, Mr Gray travelled with Mr Kantor to Russia on 19 August. Mr Kantor suggested that it remained important to have Mr Gray’s presence because of his gravitas and that he continued to tell the Russians that Heerema was involved in the project. No mention was made of Mr Gray allegedly having sold out. Mr Kantor also accepted that in August he had discussed the terms upon which VIYM would invest and take up its shares in Sonoplus. He said that he did so as a friend of Professor Abramov. In September he discussed the form of a subscription agreement and the proposed licence agreement between Klamath Falls and Sonovita in relation to the US patents. Given Mr Kantor’s detailed involvement in the ultrasound business on behalf of Mr Gray, and his subsequent involvement in the proposed licence agreement, I am unable to accept his evidence that his involvement in relation to the terms of the VIYM investment was merely as a friend.” 

(ii) The detailed grounds

i)                    Asplin J failed properly to address the serious allegations of conspiracy to create false evidence and to give dishonest oral evidence. She failed to bear in mind the improbability of such a conspiracy and to apply authoritative guidance as to the need for cogent evidence to establish allegations of serious misconduct. She also failed to address evidence on which Mr Gray relied. (Ground 6.1).

ii)                  Asplin J misdirected herself in relation to adverse inferences which led or contributed to her rejection of Mr Gray’s account of the 2012 SPA and his denial of any secret agreement. For example, she wrongly drew adverse inferences from Mr Gray’s failure to address certain allegations in his evidence where those allegations had been made following service of his written evidence and where he was prevented from attending court to give oral evidence due to ill health. She made cumulative inferences which were speculative and not properly founded in the evidence (Ground 6.3).

iii)                Asplin J was misled, by unsupportable submissions by GEHC and by its failure to disclose relevant documentary evidence to the court and to its expert witnesses, into making findings which were not available on the evidence which was, or should have been, before the court (Ground 6.4).

i)                    Asplin J failed to have regard to relevant evidence, the specific example provided being Mr Gray’s shareholding in GEHC. In short, no account had been taken of the fact that Mr Gray would benefit, through his shareholding in GEHC, from any interest held by GEHC in the Russian or ROW business (Ground 6.2).

ii)                  Asplin J made findings that were plainly wrong (Ground 6.5).

i)                    Asplin J made improper adverse inferences against Mr Gray which led to her finding that he had a continuing secret interest comprising the Russian and ROW Business Assets (Ground 9.1).

ii)                  GEHC misrepresented the documentary evidence to the court (Ground 9.2).

iii)                GEHC had caused the suppression of relevant documents from the court by not providing them to its expert (Ground 9.3).

iv)                As a consequence of the above, Asplin J made an order of her own motion for the valuation of the assets found by her to be held on trust by Mr Gray for GEHC to be determined at a further hearing while nonetheless giving judgment on issues for which the valuation of those assets was relevant evidence (Ground 9.4).

v)                  As a consequence of Asplin J adopting the above approach, the High Court has given two inconsistent judgments in the same account of profits, it being common ground by the time of the Valuation Hearing that the evidence relevant to valuation could not be reconciled with Asplin J’s findings of fact. Specifically, this related to the ownership of the ROW Business Asset. Asplin J held that, through RegEnersys, Mr Gray was entitled to a 51% interest in the ROW business, but it was common ground before Arnold J that that business was carried on by one or more subsidiaries of Petrosound. Asplin J found, or assumed, that OpCo was a separate company established for that purpose, which was not the case. It would be a serious procedural irregularity if both judgments were allowed to stand (Ground 9.5).

i)                    Ground 6.1 stands alone and is addressed as such.

ii)                  Grounds 6.3 and 9.1 are addressed together.

iii)                Ground 6.4 is addressed with Grounds 9.2 and 9.3.

iv)                Ground 9.4 is addressed separately.

v)                  Ground 9.5 is addressed later with Grounds 7.2 and 8.

(iii) Asplin J’s finding as to the 2010 agreement

(b) Ground 6.1

(i) Inherent improbabilities

“When assessing the probabilities 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. Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury…this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”

“Talks have continued with the Russians to determine if there is a structure in which we can merge the Klamath Falls IP with their business in Russia. To date there has been discussion around a bifurcated structure where Celloteck would control international operations and the Russian Organization (RO) would control operations within the Former Soviet Union in exchange for an assignment of the Klamath IP. However, as discussions have progressed, it has become increasingly apparent that there will be a material price tag attached to Celloteck participation. While this was not clear in the initial discussions, I believe now that that the RO will not complete a deal unless both the IP is contributed and funding in the area of $3-5MM is committed (either as equity or as a shareholder loan)”

“Separately, it may be time to see what sort of deal we can put together with the Russians. I don’t think there is much of a market for Klamath IP alone (I have had our patent agent talk with IP purchasers), and industrial buyers want operational capacity before they are willing to spend cash. Of course, for us to discuss that we have to imply a relationship with the Russians that we don’t have, and I believe this has been the best strategy as we have been sounding out the market. However, I think we may have exhausted our flexibility, and it may be prudent to focus on locking down some sort of interest in the Russian technology while our IP and equipment still has some value. Hopefully we will soon get a better sense of what a deal would look like given what we can put on the table (i.e. the IP and equipment but no cash or deployment opportunity), and I will revert back with that information.”

“The basic principle of ownership of RoWCo is the following: 51% will be owned by Partner 1 and 49% will be owned by Partner 2. The parties agrred [sic] that they will do best affords [sic] to save this basic principle but there might be some frictions from it”: and

“Partner 1 will take a 30% stake in [PetroSound] along with the Russian Inventors, which will entitle them to [1] board seat and certain management rights in the main Russian entity [SonoPlus]”.

“120.     The first occasion upon which the 15% holding rather than 30% had been mentioned was an email on 4 October 2013 from Mr Knight to Mr Kantor attaching a letter from his company, Chateaufine Ltd, essentially reflecting the terms Mr Kantor had proposed in September but with the equity stake for Celloteck reduced to 15%. There are no documents which shed light on the change.

121.       As I have already mentioned, in cross examination, Mr Knight accepted that he believed that a 30% shareholding in the Russian Scientists’ company had been agreed in mid 2010. However, he said that in fact, he had agreed the shareholding at a lunch with Mr Kantor in London in early October 2013 and having agreed upon 30%, he telephoned Professor Abramov and was very surprised and angry when the Professor informed him for the first time that shares had already been allotted to Messrs Ivanov and Volchenkov. In fact, Mr Knight said that Professor Abramov had said that a total of 20% had been allotted to the two VIYM executives and that a further loan facility of $1m was being made available from VIYM. However, Mr Knight says that during his telephone conversation the Professor suggested offering only 10% of the shares to Celloteck and as a result he hung up on him. He went on to explain that in a further conversation later that evening, the Professor agreed to 15% instead of 30% for Celloteck. In fact, the 30% shareholding had been canvassed in email correspondence between Mr Kantor and Professor Abramov in September 2013 and Mr Knight accepted that he had been in Moscow the previous week and had had a relatively lengthy meeting at which the 30% had been hammered out.

122.       The written evidence of both Mr Knight and Mr Kantor in relation to the shareholding was different and Professor Abramov did not mention the alleged telephone conversation at all. In their witness statements, both Messrs Knight and Kantor referred to Messrs Volchenkov and Ivanov receiving 7.5% each. Mr Knight also stated in writing that the Professor had eventually been persuaded to offer Celloteck 15% whereas in cross examination he said that the negotiation had all taken place in one afternoon/evening and that it was the Professor who had called him twice. Further, the Professor’s oral evidence was that he agreed the 15% for Volchenkov/Ivanov on 18 October 2013, some two weeks after the alleged conversation at the restaurant, and appeared to dismiss any discussion of the matter with Mr Knight. As I have already mentioned, the Professor’s evidence was that Celloteck deserved no more than 15% and he could do as he liked because the business was his.

123.       I found Mr Knight’s evidence in this regard to be unsatisfactory. He made no complaint it would seem and none is recorded of the reduction to 15%. Further, I find his explanation of the discovery at the restaurant wholly implausible and on the balance of probabilities, untrue given that he was in Moscow the previous week. The only contemporaneous document is an email of 4 October which records the 15% share but makes no reference to the alleged telephone call and the discovery of 15% having been allotted elsewhere. Accordingly, I am unable to accept it. It also seems to me that had the reduction from 30% come about in the way it was described, there would be a large number of email complaints on behalf of RegEnersys/Heerema and possibly the involvement of lawyers. There is also no explanation of why if Messrs Volchenkov and Ivanov were holding 15% of the shareholding on behalf of VIYM, it is said that their employment was terminated.  Mr Knight was also unable to explain why he had been provided with Mr Volchenkov’s private email address in November 2013.

124.       In addition, it was Mr Knight’s evidence in cross examination that despite having sought a shareholding as part of his severance package from ReVysion in August 2011 and been refused it in a conversation he had had with Mr Ward, he spoke to Professor Abramov who subsequently decided that he would like to give Mr Knight 3.5% of the shares in Petrosound Ltd.  Professor Abramov on the other hand, stated in cross examination that his estimation of Mr Knight’s ability in relation to the oil and gas business was extremely low, that he viewed him as Mr Gray’s driver and that his relationship with Mr Knight had been destroyed. Save to say that the company was his to do with as he pleased, he did not explain why, therefore, he had allotted shares to Mr Knight and had allotted only 15% of the shares in Petrosound to Celloteck.  He did state that he had reached an agreement with Messrs Volchenkov and Ivanov “for one year and $750,000”. He added that they had returned the 15% shareholding allotted to them to him. The Professor also denied any connection between Petrosound International Ltd and Petrosound. I found his evidence in this regard to be wholly unconvincing and I am unable to accept it.”

“While, unfortunately, the Court has not had the opportunity to hear the oral evidence of Mr Gray (whose evidence GEHC does not accept in any case), it is sufficiently equipped to deal with the issues. It has had the benefit of eight factual witnesses and six experts together with vast documentation in order to consider GEHC’s claim.”

(ii) Adverse inferences

(v) Withheld documents: the confidential fax

(vi) Withheld documents: attachment to the Feasibility Study

(vii) Withheld documents: emails after 2010

(viii) Withheld documents: conclusion

(x) Failure to address the alleged conspiracy

“68.       I should mention that Mr Cavender submitted that Mr Fraser’s case amounted to there having been a conspiracy between Messrs Gray, Knight, Kantor, Pronk and Heerema, if not also Mr Ward and Professor Abramov and that Mr Fraser had not put this to them and as a result, was not able to close his case upon such a basis. It seems to me that Mr Fraser put to each of the witnesses the entirety of his case on behalf of GEHC and that there can be no legitimate complaint in that regard. Each witness was made fully aware of the extent to which it was alleged that he together with others was seeking to shield Mr Gray’s alleged interest in the various shareholdings.”

(xi) Failure to address the email dated 30 April 2012

(xii) Conclusion on Ground 6.3

(d) Grounds 6.4 and 9.2 - 9.3

(i) Introduction

(ii) Mr Gray’s preliminary submissions

(iii) The principal grounds

(iv) Ladd v Marshall

(v) Could Mr Gray have obtained the evidence with reasonable diligence?

(vi) Would the documents probably have had an important influence on the result of the case?

(vii) Documents relevant to the rejection of Professor Abramov’s evidence

“125.     During 2014 numerous well treatments have been carried out. On 4 September 2014, Mr Ildyakov sent the results of 19 ultrasound treatments carried out between 25 January and 31 August 2014 to Mr Knight. The results show an increase in production and do not contain any reference to damage caused by jet pumps. Furthermore on 10 November 2014, Professor Abramov’s daughter, Anna, sent answers to questions to Mr Knight, included in which was a reference to negotiations with a company called Weatherford. Further, in the case of Samatlorneftegaz, 40 wells were to be treated between April and December 2014, 36 of which were completed by the end of November.  In the case of RN-Nizhnevartovsk, 20 wells were treated between April and December 2014, 18 of which had been treated by the end of November when the Professor signed his witness statement. He made no reference to any problems with the contracts. However, in cross examination, he stated that the contracts were “not going smoothly” and in re-examination stated that a jet pump used in conjunction with the treatment had destroyed “three fields” by which it was assumed he meant wells. He also attributed difficulties and a move purely to geological consultancy upon the collapse of the rouble. He neither made reference to any equipment difficulties in his witness statement nor to the alleged effects of the exchange rate which in fact, was much the same when he gave evidence to how it had been when he signed his witness statement.

126.       The Professor also stated that the 42mm tool was no longer used. However, as pointed out in the written closing on behalf of GEHC, the most recently published academic paper, “Development of ultrasonic equipment and technology for well stimulation and enhanced oil recovery” in the Journal of Petroleum Science and Engineering 125 (2015) refers to both the 42mm and the 102mm tools. 

127.       Given his written evidence, the Professor’s demeanour in cross examination, the content of his academic paper written in 2015 and the lack of a further deterioration in the exchange rate for the rouble since the Professor’s witness statement was signed, I am unable to accept his evidence in this regard in cross examination.”

(x) Documents relevant to the 2010 agreement 

(xi) Alleged breach of duty to disclose documents

“9.2 Misrepresentations of the documentary evidence by the Claimant (by misleading statements being made to the court by the Claimant that such documents did not exist, and by mischaracterising such documents as were before the court which supported the absence of an interest of Mr Gray, as being “window dressing” by Mr Gray, when they were (a) known by GEHC to be relevant and authentic and (b) were third party documents;

9.3 the suppression of relevant documents from the court by not providing them to the Claimant’s expert (contrary to the Claimant’s duties under CPR Part 35, CPR 1.3, and The Ikarian Reefer [1993] FSR 563) or to the court.”

“…where documents were not translated, including the documents which Mr Gray has recently translated and on which he now wishes to rely, these were never read by me. Contrary to what is now said at paragraph 58 of the 23 December letter, I only recall conducting one pass of the Russian disclosure with our temporary paralegal. Any Russian documents not translated in those first couple of days were not reviewed again or referred to ever again. Accordingly, in almost all cases, the reason I did not put these documents to the Court is that I was never aware of their detail, or in almost all cases of their existence. As I shall explain, the handful of those documents which I dimly recall being drawn to my attention, I did not consider relevant.”

“Further, and as I explained to Bird & Bird, and explain further below, I did not consider that the evidence on which Mr Gray now wishes to rely appeared on its face to [be] relevant. In my view, from the summary of these documents in Ms Bruce’s statements, financial statements and/or tax returns for Viatech and Sonovita and cashflow information for Viatech would not be relevant to the value of Mr Gray’s interest, since neither of these were operating companies deploying the technology…Furthermore, and in any event, financial information for 2012 would not have assisted Dr Becker when valuing a developing technology as of May 2015, particularly when that technology was still being tested and developed throughout 2014/15 and where Dr Becker’s valuation was premised upon anticipated revenues based on the small tool’s test results, a spreadsheet for which (covering all of the small tool results in limited detail, but none of the big tool results) was provided to the experts and the Court after we had discovered it in a secret and hidden page to an excel spreadsheet.”

“As I recall, there were however only a couple of isolated emails with Mr Voronkov to this effect, and with no context and no confirmation as to whether the funding issues were resolved. My recollection is that in circumstances where much of the email correspondence which had been disclosed by VIYM was transparently fake, and where no financial projections or internal VIYM investment reports had been disclosed, I did not consider this email would have assisted the Court in assessing the value of Mr Gray’s interest in the Technology.”

(xiii) Abuse of process

“If a party puts forward a positive case, as the basis of asking the court to make the order which that party seeks, and then at trial declines to proceed and accepts that the claim must be dismissed, then that party must, in our view, save in exceptional circumstances, lose the right to raise again that case against the other party to those proceedings…The court is applying principles which are intended to “treat an issue as laid to rest” (per Brightman LJ in Khan v Golechha International Ltd [1980] 1 WLR 1482, 1490G), where it would be unfair and unjust between the parties to treat it otherwise; and in particular, the court is concerned to prevent abuse of the court’s procedure by any party. At the time at which the court had directed trial of the issue, the second defendant decided in seeking her own advantage and convenience, not to proceed with her application.”

(e)  Ground 9.4

(f) Conclusions on Grounds 6 and 9

IX.  GROUNDS 7, 8 and 9.5: THE ORDERS RELATING TO THE BUSINESS ASSETS

(a) Ground 7.1: the interest in the VIYM Executives’ 15% in Petrosound

i)                    Mr Gray was initially given a 20% interest in return for a capital subscription of $625 on becoming a limited partner in RegEnersys LP formed on 16 February 2007.

ii)                  That interest was increased to a 51% interest in RegEnersys LP when Mr Gray’s remuneration package for managing the RegEnersys fund was revised in April 2010, following Mr Heerema’s decision to cap the fund.

iii)                That 51% interest in RegEnersys LP was later converted to a 51% interest in RegEnersys (UK) LP when the fund was restructured in December 2010.

iv)                RegEnersys LP and then (after the December 2010 restructuring) RegEnersys (UK) LP owned RegEnersys I, and Chiloquin was an indirect subsidiary of RegEnersys I.

v)                  Chiloquin held all the shares in Klamath Falls after the transactions following the settlement of the Klamath Falls arbitration in 2012.

vi)                Although RegEnersys (UK) Ltd then sold RegEnersys I and Chiloquin to Celloteck under the 2012 SPA, Asplin J found that by the secret agreement, Mr Gray maintained his 51% indirect interest in RegEnersys I and that interest was thereafter held on his behalf by Celloteck.

vii)              Those shares in Klamath Falls were then swapped in November 2013 for shares in Petrosound when all the patents held by Chiloquin were transferred to Petrosound.

viii)            The interest acquired by Celloteck in Petrosound in return for the transfer to Petrosound of the Chiloquin/Klamath Falls patents was not only the 15% interest in Petrosound issued to Celloteck but also the 15% interest in Petrosound issued to the VIYM Executives.  This second tranche of 15% was the fulfilment of the 2010 agreement with the Russian Scientists according to which that the RegEnersys fund would receive 30% of the Russian business arising from the exploitation of the ultrasound technology. 

X.  GEHC’S APPEAL

XI. SUMMARY, OUTSTANDING GROUNDS OF APPEAL AND CONCLUDING OBSERVATIONS

(a) Summary of conclusions on the Grounds of Appeal

(b) The outstanding grounds of appeal

i)                    Ground 5 challenges, in the event that any of Grounds 1 - 4 of GEHC’s appeal succeeds, Arnold J’s decision that there should be no order as to costs of the Enquiry phase.  Since we have dismissed Grounds 1 - 4 of GEHC’s appeal, this Ground does not arise for decision.

ii)                  Ground 6 also challenges the decision that there be no order as to costs of the Enquiry phase even if the other grounds of its appeal are dismissed. GEHC raises four points: (a) Arnold J wrongly took into account or placed too much weight on the nil valuation of the assets; (b) Arnold J was wrong not to award GEHC its costs of the Enquiry phase whilst awarding Mr Gray the costs of the Valuation phase because that decision effectively deprived GEHC of the majority of its damages; (c) Arnold J was wrong to decide that GEHC had ‘lost heavily’ at the Enquiry phase when it had achieved an order for damages in its favour of £3.6 million; and (d) Arnold J did not attach proper weight to the poor conduct of Mr Gray throughout the Enquiry phase.

iii)                Ground 7 asserts that Arnold J was wrong not to order Mr Gray to pay GEHC’s costs of the withdrawn Set Aside Application.

(c) Concluding observations