England and Wales High Court (Chancery Division) Decisions

Deakin and Ors v. Faulding and Ors [2001] EWHC Ch 7 (31st July, 2001)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand London WC2A 2LL

31 July 2001

B e f o r e

THE HONOURABLE MR JUSTICE HART

BETWEEN:

HC 98 06637 Richard S Deakin & Or Claimants

v

Peter John Faulding & Or Defendants

and

HC 000986 Specialist Group International Ltd Claimants

v

Richard Simon Deakin & Or Defendants/Part 20 Claimants

&

Specialist Group International Ltd & Peter John Faulding Part 20 Defendants

Mr John Dagnall (Instructed by Messrs Boyd & Hutchinson, Solicitors) appeared on behalf of the Claimants.

Mr Leslie Kosmin QC & Miss Catherine Roberts (Instructed by Messrs Manches, Solicitors) appeared on behalf of the Defendants.

JUDGMENT

Hearing:06.06.2001-27.06.2001

Judgment: Tuesday 31 July 2001

JUDGMENT

Introduction

1. There are two actions before me. In one ("the Shares action") Richard and Charles Deakin ("the Deakins") claim a variety of relief against Peter Faulding ("Peter Faulding") and his mother ("Nora"). The primary claim is for specific performance of an alleged agreement whereby Peter Faulding agreed on behalf of himself and his mother to vest in the Deakins two thirds of the issued share capital of a company now known as Specialist Group International Limited but known for most of the period with which I am concerned as Specialist Rescue Limited ("the Company"). In the other ("the Bonuses action") the Company seeks repayment by the Deakins of bonuses paid to them as directors of the Company without, it is said, the agreement of the shareholders. The Company is a private company limited by shares and was incorporated on 28^th September 1995. The 2 issued shares in the Company have throughout been held as to one share by Peter Faulding and the other by Nora. At all times from the incorporation of the Company, Peter Faulding has been a director of the Company.

2. The business relationship of Peter Faulding and the Deakins lasted from early 1996 until October 1998. It presents a number of unusual features. Chief among these are the circumstances which brought such disparate characters together, and the manner in which the Company's business developed over the course of the relationship to an extent which has (in their own eyes) justified the parties in risking what must be considerable sums in costs in the course of these lengthy proceedings.

3. Peter Faulding (who was born in 1962) left school at the age of 16. He did an apprenticeship as a ground radar technician with the Civil Aviation and, with day release and night school training, obtained an HNC in engineering by 1985. He also became a reservist with the 10th Battalion Parachute regiment, qualifying in 1980 as a military parachutist. His abiding interest lay, however, in a skill which he had acquired in childhood as a result of his father's own passion. This was pot-holing and caving. From 1981 onwards he began to develop contacts with fire brigades around the country, who began to recognise the particular skills which he had developed in the techniques of confined space rescue. He developed training courses in this skill which he made available to the fire brigades and other emergency services. By 1995, after the failure of an earlier business venture which had resulted in the loss of his home, he had determined to try to make his living from his rescue work, principally by offering training courses to the emergency services but always with the hope that the business might develop in such a way that he could earn money by the actual rescue work itself which was his chief love. He was by this time trading on his own account under the style "Specialist Rescue International". All the administration was carried out by Peter Faulding and his wife Mandy from the living room of their home, with the assistance in relation to the accounts of Susan Gwilliam, the wife of Peter Gwilliam, an officer with the London Fire Brigade ("the LFB"). Nora Faulding assisted from time to time with basic tasks.

4. In September 1995 Peter Faulding was encouraged by his bank manager to form a limited company as the business had expanded and the bank manager was concerned about limited liability. At the end of September 1995 the Company was acquired from company registration agents. Having been told by the bank manager that it was necessary for the company to have two shareholders, Peter Faulding decided that they should be himself and Nora. In October 1995 at the suggestion of his bank manager Peter Faulding was put in contact with a local firm of accountants called Fraser Russell.

5. In the early 1990s Peter Faulding was introduced by Peter Gwilliam to Helicopter Emergency Medical Service ("HEMS") which is the Air Ambulance Service in London with which the LFB have strong links, and began training London Air Ambulance crews. In May 1993 whilst carrying out work for HEMS Peter Faulding had met Charles Deakin, an anaesthetist employed full time by Southampton General Hospital but who also had an interest in work with the emergency services on a voluntary basis and with a view to developing his skills in pre-hospital traumatic care. At the time Charles Deakin was working with HEMS at the Royal London Hospital. Peter Faulding and Charles Deakin got to know each other.

6. In due course Charles introduced Peter Faulding to his twin brother Richard Deakin. There is an issue as to why the introduction took place. Peter Faulding says it was because he had told Charles Deakin of his need for commercial expertise in connection with his business and that Charles Deakin had recommended that he meet and talk to Richard Deakin who was a "whizz kid" in business. Charles Deakin and Richard Deakin both say that it arose out Peter Faulding's wish to pursue defamation proceedings against the LFB over a press release which had been issued in August 1995 suggesting that it was not LFB policy to employ him in any capacity whatsoever. It is, however, common ground that an introduction did take place in January 1996.

7. Richard Deakin was at that time (as he remained throughout the period with which I am concerned) an executive with British Aerospace, having obtained a first class degree in aeronautical engineering in 1987 and then completed an MBA at Cranfield School of Management. The first meeting between himself and Peter Faulding took place on 17th January 1996. Also present at the meeting was a Mr Andrew Kain, the owner of a specialist security and person protection company ("AKE Ltd"). Richard Deakin used that meeting to promote the idea that (to adopt the wording of a draft Business Proposal put up by him in February 1996) "three separate groups, specialists in their own fields, come together to form a group that can specialise in offering the very best in personal protection to visitors to the UK". The three groups consisted of Air Plus (providing medical emergency cover and helicopter services), AKE Ltd (providing security and personal protection) and the Company (providing specialist rescue techniques). Although presented by the document as an existing business, Air Plus was in fact no more than a creature of Richard Deakin's very fertile imagination. Richard Deakin's ability on this occasion to conjure this capability out of thin air turned out to be typical of several later business proposals formulated by him which featured in the evidence.

8. Nothing came of this particular proposal for a joint business venture, and Mr Kain disappears at this point from the story. What happened next, however, was critical. During the course of construction of the Newbury by-pass, environmental protesters developed a new tactic of tunnelling under the proposed route and occupying the tunnels. The Thames Valley Police were uncertain as to the best method of coping with this form of protest. Someone who had been on one of Peter Faulding's training courses mentioned his name to someone else. The upshot was that the Company secured a contract to perform the role of ensuring that the tunnels were empty before work commenced. This contract, concluded in February 1996, was the first of several such contracts. There were three more contracts at Newbury in 1996, one at the Honiton by-pass in early 1997, at Manchester airport in mid 1997, at the Huntingdon Life Sciences Laboratory and so forth. By June 1997 enough cash had been generated by the contracts for the Company to have purchased for about £100,000 an industrial unit from which to operate (prior to such purchase it had operated from the front room of Peter Faulding's council flat and Peter Gwilliam's garage) and to be contemplating distributing significant profits. By this time Peter Faulding had agreed that the Deakins should be formally appointed as directors of the Company. It was decided that the three directors should each have £200,000 by way of bonus (the £200,000 being calculated after bringing into account lesser sums paid on various pretexts to their respective spouses or fiancees).

9. In the following year, the Company again prospered although not so mightily. In June 1998 the three directors agreed to pay themselves bonuses of £60,000 apiece, but to leave these sums (net of tax) in the Company as loans. In October 1998 the directors fell out. Negotiations between them designed to achieve an amicable parting of the ways broke down. Shortly before Christmas 1998 the Deakins commenced the Shares action, and a further action ("the Loans action") against the Company for payment to them of their loan accounts. The Company submitted to a consent order in the Loans action in January 1999. Subsequently it has commenced the Bonuses action against the Deakins in order to recover the bonuses paid to the Deakins in 1997 and 1998.

10. The primary claim of the Deakins in the Shares action is set out in paragraph 3 of the re-re-re-amended Particulars of Claim. It is that in or about February or March 1996 and subsequently at meetings in March 1997 and on 2nd January 1998 and on 6th August 1998, it was orally agreed and confirmed that the Deakins would become and remain directors of the Company and that Peter Faulding would procure the issue or transfer to them of shares in the Company, and "in and from" from a meeting in March 1997 it was agreed that each of the Deakins would hold one-third of the share capital of the Company, that agreement being evidenced and affirmed by certain written documents. In other words it is said that it was, right from the outset, agreed that the Deakins were to become shareholders in the Company and that from March 1997 onwards it was agreed between them that each of the Deakins would be a one third shareholder.

11. This is hotly denied by Peter Faulding. What is not, however, denied by him is that on 2nd January 1998 he signed a document bearing that date headed "SPECIALIST GROUP INTERNATIONAL GENERAL & FINANCIAL CORPORATE GOVERNANCE BOARD RESOLUTION DATED 2nd January 1998". This document ("the 2nd January 1998 Document") includes within it the propositions:

• Mr Peter Faulding, Mr Richard Deakin and Dr Charles Deakin shall remain Directors of the above companies on an indefinite basis. No directors can be removed from the board unless that Director resigns on a voluntary basis.
• Each director shall hold one voting share in the company. Each director therefore has equal ownership of all new companies and their assets. The capital value of the companies is therefore equally split.
• All Directors will act in the best interests of the company at all times.
• The quorum for Directors meetings is two Directors.
• Directors decisions not to be overruled by another Director without agreement.
• Reserved matters are as follows (100% agreement needed by all Directors):
• -New share issues
• -Appointment of new Directors
• -Directors benefits & bonuses"

The circumstances in which Peter Faulding came to sign this document, and its subsequent history are heavily disputed between the parties.

12. The Deakins claim that Peter Faulding signed a further document at a meeting on 6th August 1998 in the form of a document headed "SPECIALIST RESCUE LTD. THE COMPANIES ACT 1985. REGISTERED NUMBER 3107819" which purports to contain the terms of a Special Resolution passed at an extraordinary general meeting "duly convened and held at the Company's offices on 6th August 1989" [sic]. This Special Resolution included the sentence that

"the shares held in this company will be transferred so that each of the listed Directors will own one share each in the Company "

The document provided space for the signatures of Peter Faulding and the Deakins as directors, and for Nora, who was not given any description. Peter Faulding denies having signed this document, and there is no evidence that Nora ever did.

The witness evidence – general findings

13. The contemporary documentary evidence of the evolution of the parties' relationship provides ground for doubting both the honesty and the accuracy in a number of respects of the accounts given by them in evidence before me. In Peter Faulding's case his view of events is coloured by the perception he now has that the contribution made by the Deakins to the growth of the business was, with the benefit of hindsight, marginal at best. The Deakins' current perceptions are distorted in a not dissimilar way by their belief that Peter Faulding deliberately engineered a staff revolt in October 1998 which precipitated their effective departure from the Company. In Richard Deakin's case they are also distorted by his personal tendency to confuse present reality with the future as he would like to see it.

14. I did not find the evidence of any of the principal protagonists to be wholly satisfactory or reliable. Various productions of Richard Deakin (to some of which I refer below) demonstrated a shameless ability to lay claim, on his own behalf and of the company, to experience and capabilities which were non-existent. Justifying some of them, he said at one point in his evidence that it was necessary to give third parties a false impression because they would obviously not be interested in doing business with the company had they known that it was run by one man from a council flat (as was the case at the time). It was, as Mr Kosmin observed in his closing speech, conduct which would embarrass even a pyramid salesman. His brother and Peter Faulding allowed themselves to be swept along by this approach. His attempt in the witness box to disclaim all responsibility for the errors which had occurred in the company's VAT accounting were quite inconsistent with his assumption of the title of Commercial and Financial Director, and his having taken responsibility for the company's invoicing of its major contracts, his selection of the accounting software, and his insistence that he should be the main channel of communication with the accountants. It was also at odds with the account which he gave to the employees at the meeting on 1st October 1998. Charles Deakin was in general a more cautious witness, but showed a tendency to support his brother to a degree which, in some instances, was untenable in the light of the contemporary documents. He also at one point in his evidence began to embroider his case with specific recollections which, when investigated, appeared to be extremely fragile (see Transcript Day 5 am 819-823). In general, however, he played a far less significant role than his brother in relation to any discussions with Peter Faulding over shares and so forth, claiming that in these matters he allowed himself to be guided by Richard Deakin and Peter Faulding. As to this I accept that he allowed himself to be guided by what he was told by his brother was Peter Faulding's attitude. I do not accept that there was any sense in which at any time he allowed himself to be guided by Peter Faulding on these matters. Peter Faulding was also an unsatisfactory witness. He too had seized on some documents, to the exclusion of others, in seeking to recall to memory the sequence of events which had led him into a relationship far more intimate than he could now bring himself to believe he could ever have committed himself to except as a result of some trickery on the Deakins' part. His passionate belief that he had been the victim of some deception led him into a variety of inaccuracies, some merely careless, others wild, in his oral evidence. In his closing speech Mr Dagnall submitted that there were on any view fourteen minor and seven major inaccuracies in his account of events. While not accepting that each and every one of these was in fact an inaccuracy, most of them were. They demonstrated a recklessness with historical accuracy, and an inability to confront the fact that his relationship with the Deakins had, until a very late stage, been not only a close and trusting one but one for which he was sincerely grateful.

15. In addition to the principal protagonists I heard evidence from on behalf of the Deakins from Mr Hall and had the unchallenged witness statement of Dr Langley. Mr Hall had been retained by the company, on Richard Deakin's introduction, to help the company obtain an IS900 kite mark (which it was thought would assist the company in obtaining MoD contracts). His relationship with the company, which had started auspiciously with Richard Deakin procuring him a large up-front payment, ended in tears. His evidence was directed, so far as the issues before me were concerned, to asserting (1) various conversations with Peter Faulding which, if they took place, supported the thesis that it had been Richard Deakin's initiative that had led to the tunnelling contracts being so lucrative, (2) that Peter Faulding had on one or more occasions acknowledged to him that he only had a small percentage of the company, and (3) that Miss Chow, although personally plausible, was not a satisfactory office manager. Mr Hall was supportive of Richard Deakin's marketing techniques. I did not find him an impressive witness, and derived no assistance from his evidence in coming to a conclusion on the issues before me.

16. On behalf of Peter and Nora, I heard Nora's oral evidence, and deal with it below. I also heard the evidence of Mr James and Mr Duley of Fraser Russell, Miss Chow (who was employed as the office manager of the company from April 1997 until July 1998), Mr Peter Gwilliam (at the material time an officer with the LFB and a long standing friend of Peter Faulding, employed on a part time basis by the company), and Mr John Butterfield (who was introduced by Charles Deakin to the company and who became a full time employee from September 1997 and who remains so employed). I also had the benefit of witness statements (which were unchallenged) from the company's bank manager (Mr Creaton), from Mervyn Edwards (a Superintendent with the Thames Valley police who spoke to Peter Faulding as having been the initial contact so far as the Newbury contract was concerned) and from Mandy Faulding, Peter Faulding's wife. Of these Mr James and Mr Peter Gwilliam were particularly impressive witnesses whose oral evidence was given in a completely unvarnished manner and which I had no difficulty in accepting in its totality. Mr James' evidence is much the more important. Mr Dagnall invited me to discount its force on the ground that Mr James was not an independent witness, having early formed an adverse view of Richard Deakin. I accept that he did form such a view, but it was a view which in every sense was independently formed. Making the usual qualifications for the effect of time on the memory, I found him to be a particularly impressive and careful witness. Greater circumspection was required in the case of Mr Butterfield, having regard not only to his continued employment by the company but to the fact that there was, I think, a degree of personal hostility to the Deakins attributable to the way in which he felt he had been treated by them as an employee. Very much himself the NCO in background and attitude, he perceived them as being typical of the worst sort of officer material. Nevertheless I formed the view that his evidence to me was honest and careful.

17. The first test of the accuracy of the respective accounts of the principal protagonists is whether there is support for the Deakins' claims that in February or March 1996 there was an agreement by Peter Faulding to reward them for their work for the Company by the allotment of shares in it which ripened into an agreement reached orally in March 1997 that they would each have a one third shareholding in the Company. Peter Faulding denies that there was any such agreement, claiming that the only agreement was that the Deakins would be remunerated for their services by a share of the profits in relation to the various contracts undertaken during the first year of the association, such share to be agreed on at the year end. His broad approach is that from the outset it was understood that the remuneration would take the form of a share of profits.

The Deakins' contributions to the company

18. Before examining the available documentary and independent evidence for the early period it is convenient at this point to state some general findings as to the contributions made by the Deakins to the Company's development. I find that Richard Deakin's role was valuable in a number of important respects. First and foremost he seems to have provided a crucial pillar of psychological and commercial support to Peter Faulding in his negotiation of the contracts (particularly the initial one) with the Under-Sheriffs. Peter Faulding acknowledges that when first approached in connection with the Newbury contract he was "in a bit of a panic". Richard Deakin was able to advise him how to approach the negotiations, and how to price the contracts. Richard Deakin also drafted the form of contract to be used. He also formulated the marketing strategy of offering to provide not only the specialist rescue services to the contractors but also the provision of on-site specialist medical assistance (in the person of Charles Deakin or one of his colleagues). The pricing of the contracts allowed for some 40% of the charge to be ascribed to the medical services provided. Peter Faulding is now inclined to belittle these services, and in particular the device of charging so much for the medical element of the service. The fact remains that the customers were persuaded to pay for it, and the resultant profits were made by the Company. Charles Deakin was in this respect a valuable member of the team, having serious, and relatively rare, qualifications in pre-hospital trauma care and extensive experience of assisting with the emergency services. This provided the company with credibility on the medical side, as well as a number of potentially useful contacts.

19. In another respect, Richard Deakin's contribution seems to have been energetic but not self-evidently valuable. This took the form of "punting" in the name of the Company for a number of ambitious contracts. Mr Kosmin QC for Peter Faulding compared these to the day dreams of a Walter Mitty. The comparison, meant unkindly, had a measure of justification. I have already mentioned "Air Plus", the business which Richard Deakin proposed to contribute to the joint venture with Mr Kain. There were many other examples of such thinking. A proposal put together by Richard Deakin in October 1996 for the provision of "Operational Support for the Tenke Fungurume Mining Programme in Zaire" is typical of the sort of bombast produced: it gives a false account of the Company's history and current organisation, claiming inter alia that the Company "also provides a 24-hour call-out service for world-wide medical evacuation.." and that it "can [my italics] provide a range of aviation support services" and "can provide packages for the provision of wet lease aircraft operations through to in-country maintenance and overhauls for a range of support aircraft". Nothing came of this proposal. However the mere fact of its having been made enabled Charles Deakin to write in the following month to a US defribrillator manufacturer, seeking distribution rights and making the claim that:

"The success of the company to date is a reflection of the standards that we set and the quality of service that we provide. To underline that success, one of the contracts in which we are now involved requires us to set up and run the medical facilities for a hospital of up to 100,000 people in Africa. The hospital itself is attached to a mining community serving what will be the third largest mine in the world. If the medical services prove a success (and we have every confidence that they will), the company by whom we have been employed intend to offer medical support to other mining companies in the region"

This was all pie in the sky, but typical of the Deakins' carelessness of the truth when it came to seeking to impress others, as well as illustrative of the magnitude of their (no doubt genuine) business ambitions.

20. Both the Deakins in their evidence attested to the enormous amount of work done by each of them under the aegis of the company in their spare time (they were both employed full time in demanding jobs elsewhere). It is difficult on the material before me to conclude that much of the time which they undoubtedly did spend was in the event productive of value to the company. The key to the profits actually earned by the company lay in the tunnelling contracts. Here their contribution was, as I have indicated, valuable, and much more so than Peter Faulding is now prepared to admit. It was not, however, particularly time-intensive.

Outline of events from March 1996 to September 1997

21. I turn to the early documentary evidence. The evidence here consists essentially of two documents, the first a fax from Richard Deakin to Peter Faulding dated 5th March 1996, and the second a Business Plan produced by Richard Deakin in March 1996 (and subsequently revised).

22. The 5 March 1996 fax was a covering note to the enclosure by Richard Deakin of the invoice in respect of the Newbury Contract. It included the following passage:

"In addition, we also need to think about some of the other areas where we are going to incur some costs, and allocate an appropriate amount of money from this contract and from future funds. In particular we will need to spend some money on:

Brochures and leaflets for advertising and to answer queries.

A possible home page on the Internet to advertise our services.

Some money put aside for an accountant to qualify the accounts at the end of the year.

In addition, from my point of view, I have asked around other people in the company to see what rates they think would be appropriate. Figures seem to vary from 15%-20% depending on the type of work. I would like to suggest a figure in the region of 12.50% of Specialist Rescue's turnover. How does that sound to you? Obviously, by its very nature, that is performance related, and may also need to be revised up or down in future depending on my level of involvement. Such a sum would include assistance with all the commercial, marketing, advertising and negotiating sides of the business, and as with the Newbury contract should more than pay for itself. Do let me know what you think.

In addition, we also need to consider Charles and I becoming Directors if we are passing ourselves off as such! Also from a tax point of view there are issues that we need to discuss on this front."

23. This fax was clearly envisaging that Richard Deakin was to have a continuing involvement with the Company and was expecting in due course to be paid. It also makes the suggestion that both Richard Deakin and Charles Deakin should become directors. Not long afterwards Peter Faulding was party to the production of business cards for himself and the Deakins in which Richard Deakin was described as "Commercial & Finance Director" and Charles Deakin as "Medical Director".

24. The March version of the Business Plan declares itself to have been "prepared to show how Specialist Rescue International can develop its business plans to enable it to exploit the opportunities that exist in the international market". Under the heading "The current key management team" it is stated:

"The current Private Limited Company structure has Peter Faulding as the Managing Director. Other people current assisting with the company are:

Richard Deakin BSc(Hons), MBA, CEng, MRAeS

Dr Charles Deakin MA, MB, BChir, MRCP, FRCA"

Under the heading "Options for expansion of business legal structure" it stated:

"It is worthwhile considering the possibility of merging the operations of Specialist Rescue International with Air Plus, which has in the past been involved in the field of emergency medicine and air ambulance operations. Such a combination would be fitting to the aspirations of Specialist Rescue International and would help to strengthen both its marketing and negotiating position when joining with other companies, especially on an international basis.

It would also be appropriate to consider expanding the existing company structure to include Richard Deakin and Dr Charles Deakin as company directors. This would enable the company to be better represented and would also allow these two individuals to act on behalf of Specialist Rescue International in a legal capacity, i.e. agreeing contracts and committing the company to various actions. The exact %'s would need to be discussed in due course and new shares issued to reflect the agreed arrangement. From a tax point of view, this would also mean that revenues would not need to be drawn from the company's account until an appropriate time.

It is also important to note that all directors are equally responsible for the conduct of the company, irrespective of their share holding."

By the following month a further passage had been added to this in the following terms:

"It is proposed that income is shared on a basis proportional to the shareholding of individuals in the company. It is worth noting that if the Director's (and staff's) salaries are equal to the profits before tax of the company, then no corporation tax will be payable, although Directors will obviously be liable for tax on a personal basis."

Under the heading "Organisational Structure and Staffing" it stated:

"As described in Section 1, a Private Limited Company has been formed to run the operations. The Company will trade under the name of 'Air Plus Ltd.' The organisational structure will be as shown below.

The proposed management team when the company is fully operational is as follows. (Note Directors positions are shown in bold outline)."

27. There then followed a chart, showing Peter Faulding as managing director with a salary to be determined and a 70% shareholding, Charles Deakin as Medical Director at a salary to be determined and a 10% shareholding, Richard Deakin as Commercial & Finance Director at a salary to be determined and a 15% shareholding with the remaining shareholding being spread thinly amongst operational and support staff. The document continued:

"It is proposed initially that staff are limited to directors of the company acting in a part-time and unsalaried capacity. This will be reviewed as the profitability of the organisation improves. To compensate for this it is proposed that directors take a shareholding in the organisation which will provide appropriate dividends in due course. In addition this will also help to reduce the financial burden on the company in the early months of the business.

4.2 Organisational development plan

All reward and recognition packages will be linked to the required business performance. Initially, directors of the business will receive no salary, as the only paid staff will be limited to those involved in the day to day operations and business development activities. Directors will however have a shareholding in the business as shown in the organisational chart above.

All staff will be shareholders in the company, and this system will be administered through the government's Employee Share Ownership Plan (ESOP). Through this system, all employees will have a direct link between their rewards and the success of the company. In addition, tax allowances are also available for up to 5% of salaries where there is an element of performance related pay."

28. It is the Deakins' case that the proposal in the Business Plan that they should have shares was transmuted over the course of the next year into a firm agreement that each was to have a one third shareholding. No documents, however, exist which directly evidence any further discussions as to shareholdings until 23rd June 1997 when the three met (for the second time in 1997) with Mr James of Fraser Russell. In the intervening period, while the parties continued to meet about every four to six weeks, and were in regular contact by e-mail, no discussion about shareholdings is recorded as having taken place. It was (or at least became) Peter Faulding's case at the trial that during this period he proposed remunerating the Deakins from the profits of each job but that Richard Deakin proposed that they review the matter at the financial year end. For their part the Deakins, while asserting that it had been clear from the start that they were to be remunerated by means of a shareholding, maintain that no attempt was made to agree precise percentages until March 1997.

29. So far as the written record is concerned, it is clear that a meeting took place on 10th March 1997. By this stage the Company was short of funds and the Deakins had lent a total of £11,000 (Richard Deakin £2,000 and Charles Deakin £9,000) to avoid the Company taking an overdraft. (Similarly in November 1996 Nora had lent the Company £3,500 to tide it over pending payment by the Under Sheriff of Berkshire for the Newbury work.) By this time, however, the Company was expecting to receive a substantial sum from the Honiton contract (over £534,000). Richard Deakin's note of the meeting records that "Charles and Richard to be registered as directors at the Accountant's offices" and that a "Finance Meeting with accountants ASAP once money has been paid in by [Balfour Beatty the Honiton contractors]". The meeting also approved the purchase of accounting software (a package known as MYOB) and reviewed expenditure to be incurred in connection with the purchase of the industrial unit Under the heading of "full-time staff" it was recorded that "Peter's Salary was agreed at £30,000" and that Miss Chow was to be taken on at a salary of £14,000. Richard Deakin was to produce a contract of employment for Peter Faulding. Under the heading "part-time staff" Peter Gwilliam was to be paid £500 a month once the Honiton monies had been received, and reference was made to making contact with John Butterfield (a contact of Charles Deakin) over future employment (in the event John Butterfield later in September 1997 became a full time employee).

On 1st April 1997 Peter Faulding sent an e-mail [E3 / 711 ] to the Deakins in the following terms:

"DEAR RICHARD & CHARLES

I WOULD JUST LIKE TO THANK YOU BOTH FOR ALL YOUR HARD WORK AND SUPPORT OVER THE LAST YEAR. WHAT WE HAVE ACHIEVED TO DATE WOULD STILL BE A DREAM WITHOUT YOU.

I AM CONFIDENT NOW THAT SRI CAN TRULY BECOME A WORLD LEADER IN THE SUPPLY OF SPECIALIST TRAINING AND EQUIPMENT. LETS LOOK FORWARD TO THE NEXT YEAR.

IT GIVES ME GREAT PLEASURE WORKING WITH TWO SUCH HONEST AND CARING PEOPLE.

BEST WISHES

PETE"

What specific event prompted this effusive message at this particular time was not recalled by Peter Faulding, but he accepted that it represented his attitude to the Deakins during this period.

31. On 21st April 1997 the Deakins and Peter Faulding met Mr. James in order to discuss the affairs of the Company (in particular the accounts to 30.9.96) and to consider the predicted results to September 1997. This was Mr. James' first meeting with the Deakins. Mr. James gave evidence at the trial, his recollection assisted by a note he had made at the time. He could recall no discussion of shareholdings at this meeting. The discussion had however proceeded on the basis that all three directors would be sharing in distributable profits after providing for a salary for Peter Faulding (of £30,000 for the year to 30.9.96, but to be notified for the current year). His evidence was that Richard Deakin led all the discussions and appeared confident ("aggressive even") about financial and business matters. "[Peter Faulding] did not take much part in the discussion about the accounts, as he had not much to contribute and his attitude to remuneration levels and other recommendations was generally 'whatever you say'"…..I formed no opinion as to the trustworthiness of either Richard or Charles Deakin at that time. They were just very different creatures from Peter Faulding, very much more sophisticated, better educated and with much more experience of business. They understood what a company was, were much more business-like and seemed to know what was expected."

32. By a letter to Mr James dated 28th April 1997 Richard Deakin referred to various matters which had been discussed on 21st April 1997 and provided follow-up information that had been promised. The letter stated that Peter Faulding would be paid a salary of £30,000 and that there would be a payment to each of the directors of an equal bonus amounting to one–third of the remaining profit of the Company.

33. On 23rd June 1997 Peter Faulding and Richard Deakin met again with Mr. James in order to review the Company's accounts to 30th September 1996 and give consideration to the completion of forms PII D. Richard Deakin questioned Mr. James as to the most tax efficient method of taking money out of the Company. The question of the Deakins becoming shareholders in the Company was raised at this meeting: indeed it seems likely from Mr James' notes that he had forewarning that the question would be raised along with a question about creating a group structure and changing the Company's name to Specialist Group International Limited. There was also discussion about the relative tax efficiency of taking the money out of the company by way of bonuses or dividends. Mr James told me that he thought that it was Richard Deakin who had raised the subject of shareholdings at the meeting and said that "he felt that they ought to be shareholders in the same way that they were directors…….I did not get the impression that Peter Faulding understood quite what was happening. He did not say very much at meetings at all. My note there indicated that I needed to explain the situation to him". The reference to the note was to his contemporary note under the heading 'Shareholdings' – "call Peter Faulding re shares". Mr James' recollection is that after the meeting he found an opportunity to talk over the question of shareholdings with Peter Faulding, explaining to him that a majority of shareholders have total control over directors.

34. Mr James wrote to Peter Faulding on 26th June 1997 following up certain of the points covered at the meeting. This letter was replied to by Richard Deakin by letter dated 5th July. Richard Deakin's letter dated 5th July in large measure followed the form of a draft letter (dated 30th June) which he had composed prior to his receipt of Mr James' letter of 26^th June, which appears to have been copied to Peter Faulding. The letter recorded that "[f]or FY 96/97, the current plans are for the three Directors to take out £200,000 each in the most tax efficient way…" and that "[w]e also agreed that for FY 96/97 you would advise us about the benefits of the remuneration being paid as Dividends to the Directors rather than as straight remuneration". Under the heading 'Directors and Share allocations' the letter of 5th July said:

"Directors and Share Allocations "

Included in this letter are the forms to appoint Charles and I as Directors. As agreed we have listed out address as the PO Box and trust that the logic that applied to Peter Faulding will also apply to Charles and myself. If for any reason it is not the case, we would appreciate you contacting me before we proceed further.

In terms of the share split, the current situation is that Peter and his mother have one share each. In agreement with Peter Faulding, we would like to change this so that Peter, Charles and I have one share each. This would mean transferring one share from Peter's mother to Charles or myself and creating another one to make the third share."

35. The words "In agreement with Peter Faulding" do not appear in the 30th June draft. In fact, possibly prompted by receipt of 30th June draft, Peter Faulding had on that day telephoned Mr James. Mr James' attendance note records the following:

"PF called because he had concerns regarding proposals from the Deakin Brothers that all 3 should have equal shares. Thereby opening up the possibilities of PF being voted out. This is not acceptable - PF currently holds 1 share and his mother holds 1 share.

I confirmed that shareholdings were vital to control regardless of Directorships and PF indicated that he wanted 60% of issued shares which I said seemed reasonable as he was taking all the physical risks - Charles and Richard Deakin both have good jobs elsewhere. PF will discuss with C & RD and report back on the outcome."

36. There is no indication that Peter Faulding ever made a specific proposal to the Deakins either at this, or any later, stage that there should be a split of shares along these lines. Discussions (in so far as there were any) proceeded on the basis that a way had to be found to accommodate on the one hand the idea that the three of them should be equal shareholders and, on the other, that Peter Faulding should retain control. A further meeting with Mr James was scheduled for 28th July 1997. Amongst the items on the agenda (prepared by Mr James) was "Shareholdings. Establish agreed number of shares to be issued." Mr James put forward the idea that there might be two classes of shares (voting and non-voting) to address the issue of control by Peter Faulding.

37. On 31st July 1997 Mr. James wrote to Peter Faulding enclosing the Company's 1996 accounts and dealing with matters previously discussed. The letter referred to Fraser Russell putting together "the necessary resolution to change the company's Memorandum and Articles of Association to effect your voting rights and control. Once this had been approved the relevant shares can be issued/transferred."

38. Of this, and his subsequent role at this period, Mr James' witness statement said this:

"Despite my writing that "we are now putting together the necessary Resolution", we did not do so. We simply looked at the principles and mechanism involved. The question of shares had not been agreed and I do not think Peter Faulding had completely understood what the 'A' and 'B' shares meant as he appeared quite vague about it at the meetings, Richard and Charles Deakin had not been very enthusiastic either and I never received a response on this issue.

I clearly could not ignore Peter Faulding's instructions about the shares, his wish not to lose control of the business, and the meetings of 23rd June and 28th July. Peter Faulding had made it clear that he wanted to retain control. He was a heavily dependent client personally in that he was clearly dealing with issues he did not fully understand. I therefore felt a heavy responsibility to get the arrangements right.

On the two occasions in which shares had been discussed, Richard Deakin had led the discussion. Peter Faulding never contradicted him in these meetings. What Richard Deakin was saying in the meetings was not quite the same as what Peter Faulding was saying outside the meetings. I was therefore conscious that I was potentially getting into a difficult position.

I went to see Richard Rose of Morrisons as I know the firm well. At that time they had offices across the road, and I knew them well enough to talk to them informally. It then transpired that Peter Faulding had used them on a company debt collection matter.

I told Richard Rose that I was a bit worried about the shareholding issue and that there was an apparent conflict developing. I needed to sort out a way of creating pre-emption provisions and to retain control for Peter Faulding. I thought it could be done but was unsure whether the mechanism I had in mind was right or all that needed to be done.

By this time Richard Deakin's attitude was quite antagonistic towards me and my firm. He and his brother seemed greedy. I thought they were exploiting Peter Faulding and that he had to be protected as far as possible. The advice is reflected in Morrisons' letter. It was clear that Richard Rose would have to see Peter Faulding before anything could be done. Peter Faulding was never invited to the meeting with Morrisons and was not told about it in advance. However, I subsequently told Peter Faulding of the general suggestions made by Richard Rose and suggested that a further meeting with him and Richard Deakin would be helpful to progress matters.

My underlying worry was that I was acting for Peter Faulding and the Company but Richard Deakin was pushing a very personal interest. Peter Faulding did not fully understand the implications of what was proposed and he had given me instructions, essentially at variance with what Richard Deakin was saying. I also thought from "asides" at meetings, phrases like "Don't worry, we'll iron out the problems", or "Don't worry about the details", that Richard Deakin was making all sorts of comforting noises to Peter Faulding which were probably just not right. I can't identify a specific occasion at this point when these things were said, but I have a clear impression of this. Nothing was ever required of Peter Faulding after these meetings. It was always Richard Deakin who would do things.

Furthermore it was clear that Peter Faulding believed in Richard Deakin's technical competence and deferred to him on financial matters. Peter Faulding appeared to be under Richard Deakin's influence, and relied on him to set the financial strategy for the business. It appeared to me that Charles Deakin was also reliant on Richard Deakin, but I was much less confident as to the extent of Richard Deakin's knowledge and grasp of what was going on."

39. By a letter to Mr. James dated 13th August 1997 Mr. Rose set out his preliminary advice including a reference to a shareholders' agreement to protect the interest of all parties. By a letter dated 21st August 1997 Richard Deakin wrote to Mr. James making further proposals for the extraction of money from the Company. With regard to the shareholdings in the Company Richard Deakin asserted that at their last meeting "we effectively decided on the principles which we want to adopt. Peter, Charles and I are discussing a number of points that we would like to include in any final arrangement and I shall be in touch shortly to outline our joint thoughts." By a letter in reply dated 21st August 1997 [E4/1273-1276] Mr. James noted this statement and pointed out that having discussed the situation with Mr. Rose at Morrisons it would seem sensible to put a shareholders' agreement in place in order to avoid future problems.

40. A possible split of the share capital of the Company into A shares and B Shares was the subject of discussion between Richard Deakin and Peter Faulding in the period that followed. A document headed "Share Points Proposal" appears to have been produced by Richard Deakin on his computer in August. That envisages a possible scheme under which the value of the Company is represented by A shares issued equally to the three directors but all voting rights are concentrated in B shares held by Peter Faulding. The document then contains a counterpoint scheme under the heading "Points for Equal Shares with Equal Voting rights". The first point made under this heading is "All three of us remain directors". On or about 22nd September 1997 Richard Deakin met with Peter Faulding to discuss the Company's affairs including operational issues. During the course of that meeting they discussed a proposal that the Deakins become shareholders in the Company with non-voting shares. Richard Deakin agreed to send Peter Faulding a note to outline how they could structure the shareholdings for the Company.

41. An e-mail from Richard Deakin to Charles Deakin and Peter Faulding dated 25th September 1997 contained Richard Deakin's proposals. It was in the following terms:

"Following our meeting on Monday, I agreed to drop you a note to outline how we could structure the company shareholding for Specialist Group International and associated companies.

I would propose that the three Directors each have one share in each of the Companies. This would give everyone equal voting rights and ensure that people were capable of having an equal share in how the company developed. I think that this would be better than the other alternative that we discussed which was for Charles and I not to have any voting rights and for you to have caveats about issuing other shares etc. It seems that it would be difficult to draw up a long list of exclusions on this basis, and easier for all three directors to have an equal vote, but agree to a list of points outlined below:

With equal voting rights each director could sign up to:

- Not voting any director off the board

- Any other matters along these lines

In addition we could have 'Reserved Matters' where all three directors would need to approve a resolution for something to be agreed. This could cover such issues as:

- The issue of new shares

- Capital expenditure over £50,000

- Taking on new staff

- Sale and Purchase of property

- Company Pension Scheme

- Agreement of contracts where personal risk (i.e. ALF) was involved

I am sure that there are probably other points that could be included, and that the accountants could advise us accordingly.

Do feel free to discuss this with them, but in my view this would seem to be a sensible way to proceed that would also give you the security and protection that you are aiming to achieve with the agreed structure."

42. Both this document, and the earlier Share Points Proposal, contain the same muddled thinking about voting rights qua shareholders and voting rights qua directors. The suggestion in the latter document that, if Mr James' idea of A and B shares were to be adopted, it would mean that Richard Deakin and Charles Deakin could no longer be directors was not, I think, an attempt by Richard Deakin to cajole Peter Faulding into adopting his proposals by deliberately misrepresenting the position. For all his talk, he was out of his depth himself on this sort of point. I think, however, that he intuitively grasped that concentration of the voting rights in one class of shares but of value in another was a difficult circle to square. He was therefore anxious to persuade Peter Faulding that the same result could be achieved much more simply by spreading the voting rights equally but restricting the range of matters on which Peter Faulding could be outvoted. The one argument which he did not deploy was that the whole question had already been resolved by agreement. It is also a reasonable inference that Peter Faulding was not putting a counter-proposal that the question could be solved by his having 60% of the issued shares. My overwhelming impression both from the documents and from the oral evidence is that, at this stage, Peter Faulding was reluctant to engage on the issue at all. He did not really understand what was being proposed; nor was he quite sure to what he had already committed himself in agreeing to Richard Deakin and Charles Deakin being directors and sharing profits. He knew that he wanted to remain the master of what he saw as his own livelihood. He admired, trusted, and did not want to confront the Deakins. Both literally and metaphorically, when it came to discussions of this nature he would rather be down a hole in the ground. There is no suggestion that he ever responded to this e-mail.

Was there a March 1997 agreement?

43. Against that background I turn to consider whether there was an agreement in March 1997 that the shareholding would be split in equal one thirds. All that the documents indicate is that by 28th April there had been some kind of agreement that the profits so far earned would be split three ways, and that by 23rd June Richard Deakin was proposing (without any dissent from Peter Faulding until after the meeting with Mr James on that date) that the shareholding be similarly held. Both the Deakins are insistent, however, that Peter Faulding had already committed himself in March to the split of the shareholdings, and that the agreement as to bonuses was simply a reflection of this. They further insist that the subsequent discussions as to preserving "control" for Peter Faulding were merely a matter of mechanics and not a matter of principle: they were not interested in taking control as such. This in itself suggests that whatever discussions did take place between the parties prior to the first meeting with the accountants on 21st April capable of being interpreted as referring to shareholdings were of a very imprecise nature whose significance may not have been altogether apparent to one or more of the parties.

44. The actual account given by the Deakins of the occasion on which they say the agreement was reached lends support, not only to the theory that the discussions were of such a nature, but also to a suspicion that they may have been reconstructed out of thin air. Their accounts coincide in describing, with a good deal of circumstantial detail, a routine meeting in Mr Faulding's office, during which, at a point when Charles Deakin had left the meeting to make coffee, Peter Faulding volunteered to Richard Deakin that "we should agree to divide the shares in the Company as to one-third each". This was then reported to Charles Deakin on his return to the office. In cross-examination Richard Deakin said: "I think the conversation went something along the lines of, well, we obviously got on to talking about that subject and I said to him, "What sort of percentage are we going to go for in terms of our interest in this?", and Peter said, "Why do we not just go for an equal percentage between the three of us," which seemed a very equitable way of doing it, given our input and the success we had brought to the company."

45. Doubts about the Deakins' evidence as to the March meeting arise both in relation to what was specifically said at the meeting, and as to whether (assuming there to have been a meeting at some point at which something along the lines suggested was said) that meeting should be dated to March. As to the former point it is clear from the documents that the question of a one equal third sharing of something is likely to have been the subject of discussion between the parties before 28th April, and a reasonable inference from the documents that the something on which the parties minds were focused was the profit about to be received from the Honiton contract, with further prospects of a substantial profit to be earned in the ensuing months from the Manchester contract. In the Deakins' minds, given the approach adopted by Richard Deakin in the earlier Business Plans, agreement on profit share may have equated to agreement on permanent shareholding. In Peter Faulding's mind, an agreement on the sharing of the profits earned to date by their joint efforts would have been just that. Given the extremely rudimentary nature of Peter Faulding's understanding at this stage of what was entailed in a shareholding, or for that matter a directorship, scope for rival interpretations of the same conversation could undoubtedly have existed. I should add that Richard Deakin's understanding of these matters, although immeasurably more sophisticated than Peter Faulding's, was itself less than perfect (as his later confusion between the voting rights of directors and shareholders was to demonstrate). His thesis (shared by Charles) was that because the discussions had from the outset been premised on the basis that they were to be rewarded by shares, the conversation was about shares. The principal obstacle in the way of that thesis was the letter of 5th March 1996. To sustain his thesis, he found himself obliged to say that the reference to "turnover" in that letter was a reference to "shareholding". As he put it in his witness statement "..as we were discussing the percentage or interest or share we would each take, the words were, in my view, interchangeable." He maintained this stance in cross-examination, although anxious to divert attention instead to the Business Plans in order to convey the shareholding flavour of the early discussions. The suggestion that "turnover" in the 5th March 1996 letter is an equivalent for shareholding was, to my mind, transparent nonsense. It is untenable in itself, and in any event quite inconsistent with the suggestion, made in the same letter, that the percentage might have to be revised up or down "depending on my future level of involvement." Richard Deakin's insistence that this is what the document meant gave me little confidence in his straightforwardness as a witness. Even if I were to accept his evidence, it would itself cast considerable doubt on the clarity with which matters were being discussed between himself and Peter Faulding.

46. Peter Faulding's approach to the 5th March document was also unsatisfactory. In his witness statement he had said, of the early discussions: "I was happy to pay them but did not want it to be open ended and we agreed that Richard would send me a bill for 12.5% of the price of each job he was involved in." In cross-examination he admitted that this was incorrect, and that there had been no such agreement (Transcript Day 6 pm pp1129-1130). He had clearly reconstructed an agreement to that effect from looking at the letter rather than from any independent recollection. His evidence in cross-examination was that the question of paying out bonuses was discussed towards the end of the Honiton contract: "[Richard Deakin] said, "I will tell you what we will do. After Honiton, after this job has finished and once we get the money from Manchester we will take a bonus", and that is what happened. It was discussed. I cannot remember. I would be lying to you if I remembered every conversation." He also maintained that his memory of the one third division of bonuses came up for the first time at a meeting with the accountants, recalling that he had been a little surprised at this and had queried it with Richard Deakin. In his witness statement he puts this as following receipt of the copy letter dated 5th July: "I was surprised and I remember thinking that in terms of who did most of the work it was a bit unequal. However, Richard Deakin said we all had to have the same. I got the impression it was the law, or company rules. He also said that he and Charles Deakin had put a lot of work in and they were after all directors. I accepted what he said. I was getting a lot out of it, more money than I had previously imagined…"

47. The grounds for doubting the Deakins' evidence as to when the allegedly critical meeting took place rest principally on their description of it as a routine meeting in Peter Faulding's office. The problem with this description arose from the fact that Peter Faulding did not have an office as such until the Company moved into its industrial unit in (at the earliest) late April 1997. In their oral evidence they grappled with this awkward fact by describing the meeting as one which had taken place during a period when the industrial unit was being cleared of the rubbish left by the previous occupants, the implication being that the Company had been allowed into occupation prior to contract and completion for this purpose, and the references in their witness statement to the "office" being to the room which Peter Faulding was subsequently to occupy as the office. On this occasion, the rubbish clearers had been Peter Faulding and Peter Gwilliam. I was, I regret to say, left with the impression that this identification of the occasion when the agreement was alleged to have been made owed more to their desire to stick to the March date than it did to any genuine memory they had of the relevant conversation having taken place on such an occasion. Had it been otherwise I do not think either would have failed to advert to the unusual circumstances of the meeting in their witness statements, or there described the meeting as a "routine" one.

48. The result is that I am unable to accept the Deakins' assertion that there was in March 1997 an unequivocal agreement by Peter Faulding that he would procure that they became entitled between them to two thirds of the share capital of the Company. I am confirmed in that view by the fact that there is no mention of any such agreement having made in Mr James' notes of the meeting on 21st April 1997. Had there been such an agreement it is remarkable that the accountants were not then asked to take the necessary steps to implement it. It is also surprising that when, later in the year, Peter Faulding appeared resistant to the idea, Richard Deakin did not invoke the earlier agreement to forestall further discussion. The explanation lies in the fact that there was either no such agreement at all, or a recognition by all parties to it that it was incomplete. When Peter Faulding's desire to retain "control" was raised it was recognised by the Deakins that there were issues here which required to be addressed.

The nature of the understanding between the parties

49. I am also unable to accept the Deakins' case that from the outset they were promised that their assistance to the Company was to be rewarded by a shareholding. I find that the only common understanding was that they were to be remunerated from the profits made on the various contracts entered into by the Company with their assistance, but that all concerned were content to leave over the question of the amount each was to be paid until a clearer financial picture from the new line/s of work had emerged. I find that Peter Faulding was throughout the period ready and willing to be guided by Richard Deakin both as to the amounts which it was appropriate should be extracted from the Company in the summer and autumn of 1997, the manner in which the extraction should take place, and that (having regard to their respective contributions to date) an appropriate division was in equal one thirds. I find nothing surprising in the fact that Peter Faulding was agreeable to (if a little surprised at) the latter suggestion. Each regarded the other's contribution as having been indispensable to the earning of those profits, and those profits were well in excess of anything which the parties could sensibly have dreamed of a mere twelve months before. I accept Peter Faulding's evidence that he did raise with Richard Deakin, after one of the meetings with Mr James, the question of whether it was right that all the directors should be paid equally when it was he who was doing the bulk of the work, and that he received the impression from Richard Deakin that this was in some way required as a matter of company law. The explanation for this incident is probably that Richard Deakin was proceeding on the basis that an agreement for an equal split of the shareholding was, so far as he was concerned, as good as arrived at. It was clear, however, that Peter Faulding did not really understand the implications of this line of thinking. This was apparent to, and alarmed, Mr James when the subject was expressly addressed by Richard Deakin at the meeting on 23rd June 1997. I do not, however, think that the agreement as to profits either reflected or implied an existing agreement as to the ownership of the business itself. I find that the question of shareholdings as such was not discussed except at the meetings with Mr James, and that the initial discussions with Mr James were in the context of examining the relative tax efficiency of dividends as against bonuses. Mr James' perception was that Peter Faulding was simply not following,- did not properly understand the implications of – what Richard Deakin was proposing. There is every reason to suppose that perception to have been accurate. Following the July meeting it was clear to the Deakins that there was an issue between themselves and Peter Faulding over "control" on which it was not easy to propose a solution acceptable to Peter Faulding. In so far as there was any understanding between the parties as to shareholding it was that the equity of the company should be held equally but that Peter Faulding would remain in control, two concepts which were inherently in conflict.

Outline of events from October 1997 to October 1998

50. My earlier narrative broke off at the point at which Richard Deakin had sent his e-mail dated 25th September 1997. Peter Faulding did not respond to this. He found having to think about these issues uncongenial. The alternative proposals had in any case achieved a level of complexity which would have taxed the ingenuity of an experienced company lawyer, let alone a man of his limited education whose metier lay in dangerous physical activity. It is common ground that no further discussion took place between the parties in relation to the question of shareholdings until 2nd January 1998.

51. At some time in October 1997 Richard Deakin sent to Peter Faulding a copy of a document headed "FINANCIAL CORPORATE GOVERNANCE. BOARD RESOLUTION DATED XXXX" containing a series of draft board resolutions for discussion. I will refer to this as "the XXXX document". This document was in the following terms:

"Financial Authority:

The following signatories will be required to cheques issued by Specialist Group International or any of its subsidiary companies

Up to £4,999.99 One Director

£5000 - £9,999.99 Two Directors

Above £10,000 Finance Director GPAR Angus one other Director

Note that these authorities also apply to the transfer of money out of the Company's accounts (including on account and on Credit Cards) and of the spending of money, or commitment to spend money on behalf of the company, by all Directors.

The Finance Director will be the main point of contact for dealing with the Accountants.

The Finance Director may move any sum of money between Company accounts providing he communicates the transfer and reasons behind the transfer to the other two Directors.

The payment of Director's Bonuses and remuneration will be managed between the Company and the Accountants by the Finance Director.

The Finance Director will be responsible for the management of the Accountants and for their satisfactory performance in the management of the Company's business.

The Finance Director and Company Secretary will be responsible for choosing Accountants that meet a satisfactory level of performance.

These resolutions will be notified to the current Accountants and the Bank.

Any changes to these statutes will be recorded at a Board Meeting in writing by a majority vote of Directors. "

52. On 3rd December 1997 Mr. James met with Peter Faulding and Richard Deakin to consider the Company's affairs. At this meeting there was a general discussion about the obligations of Fraser Russell as auditors to the Company and the scale of their fees. It is common ground that there was no discussion of shareholdings at this meeting. On the same day there was a board meeting where again the issue of shareholdings was not discussed.

53. By an e-mail to the Company dated 14th December 1997 Richard Deakin set out a number of items to be discussed at the next directors' meeting which was then fixed for Friday 2nd January 1998. Amongst the items was "Signing of Financial Resolutions already agreed (Copy attached for reference)." The attached document was the XXXX document.

54. It is common ground that on Friday 2nd January 1998 Peter Faulding and the Deakins met at the Company's premises in Dorking. What took place at that meeting is heavily disputed. What is not disputed is that Peter Faulding on that occasion signed the 2nd January 1998 document. That document is an amalgam of the passages quoted in paragraph 11 above (which appear as the first six bullet points) and the XXXX document (with one omission and with the alteration of the word "majority" to "a unanimous" in the final bullet point). The rival accounts in the witness statements are as follows.

55. Peter Faulding stated as follows:

"We then had a family Christmas and I had a few days off before going to a meeting on 2nd January. I had arranged to meet Richard and Charles Deakin at the office on the 2nd. No-one else was due back at work until 5th January. I remember going into the industrial estate, which was deserted. I opened up the office and put the heating on and changed the tape in the CCTV camera. I was there for about 20 minutes before they came. They came in one car. I remember that I let them in and made them a cup of tea - it was always me who made the tea - I also remember that Nigel Hall's hamper was still on the floor. Neither Richard Deakin nor Charles Deakin ever had keys to the office. They never wanted them.

I have seen copy e-mails from Richard Deakin dated 14th December and 18th December 1997 (documents nos. 96 and 101 of the Claimants' e-mails) and a draft resolution attached to a letter to Alan Duley dated 16th October (document no.271 of the Defendant's Amended List) and confirm that they represent the items that were to be discussed at the next meeting. None of these drafts refers to shareholdings. The e-mail of 18th December seems to suggest that Susan Chow was going to be at the meeting, but at the last minute Richard Deakin told her not to come. The meeting lasted about an hour. At the end of the meeting everyone stood up and, as we were packing up to leave, Richard Deakin pulled a piece of paper out of his briefcase. Richard Deakin put the document on the table. It was a low-level coffee table, so it was not easy to use for documents, and asked me to sign it, showing that he and Charles Deakin had already done so. I asked what it was and Richard Deakin showed me some of the paragraphs which Richard Deakin said were about us being equal directors who cannot sack each other and general administration such as Richard Deakin should be the point of contact with the bank. However, they did not give me any time to read it properly nor did they take me through the document paragraph by paragraph nor did they explain it to me. They did not show me that there was additional material to the previous draft resolutions that I had seen. They said they were in a hurry. Charles Deakin was in a hurry as he wanted to get home for a meal. I said that I wanted to take it to a lawyer. Although we had discussed financial arrangements like this before, I was not sure what this was or why we had to have a written agreement. The drafts of the document I had seen earlier made no mention of shares, and I saw no reference to shares in this one.

Richard Deakin told me not to worry about it and that he and Charles Deakin would not stitch me up and that it was not necessary to get any legal advice. He also said that we had been friends for a long time and I could trust them. I think that there were two pages to the document and I had to sign one page, but I confirm my handwriting on the copy document produced (document no. 147 of the Defendant's Amended List). I signed it and then wanted to get it photocopied. Charles Deakin was not willing to wait for the photocopier to warm up, so Richard Deakin said he would get it copied and send it to me, the bank and the accountants. So I handed it back to Richard Deakin, who dropped it back into his briefcase. The whole thing took no more than a couple of minutes. There was no mention of me keeping the document and giving it to the accountants or getting my mother to sign it. If I had been able to keep the document I would have shown it to Paul James before I signed it. Because I did not get the chance to read it properly, I cannot even confirm that the document disclosed at no.147 of my List is an exact copy of this document. In particular, I note that this document contains three pages, rather than two. However, I do not dispute that the initials are mine. Now, comparing this document with the earlier drafts I am aware that just how blatant the trick was.

Then Richard and Charles Deakin left, leaving me to wash up, lock up and leave. Nothing else was produced for me to sign and I did not see a copy of the document until August 1998. At the time I did not think that I had been tricked as I trusted Richard and Charles Deakin. I forgot about the document and did not notice that I had never been sent a copy. I did not know then what they were trying to do about shares. However, I now appreciate that the document incorporates an agreement for equal shareholdings as well as new financial procedures. This was not something pointed out to me by either Richard or Charles Deakin nor was it something to which I had agreed. It had not been in any other draft of the document. Richard and Charles Deakin tried to take advantage of my ignorance about companies and my lack of business experience. I believe that they knew that if they had shown me the document at the beginning of the meeting, I would not have signed it until I had shown it to Paul James and probably a lawyer. "

56. Richard Deakin's account is given in his first Witness Statement at paras 52 – 56:

"52. The three directors agreed to meet again on 2 January 1998 to discuss these and other operational matters. All three directors had also agreed a document entitled "Financial Corporate Governance" [A33 D 271] which we decided to incorporate along with the other points we has been discussing into one Shareholders Agreement. This became the "Board Resolution dated 2 January 1998" [A36].

53. Mr Faulding claims in his Amended Defence that no agenda was produced for this meeting, and that Dr Deakin and I produced the already typed and signed agreement for his signature at the end of the meeting. However, I did prepare an Agenda for the meeting on 2 January 1998, and circulated it on at least two occasions to Dr Deakin and Mr Faulding by e-mail [A32, 33]. On the agenda was the item: "signing of the Financial Resolution already agreed (copy attached for reference").

54. This Board Resolution merely formalised the long-standing equal ownership arrangements and is clear evidence of the express terms agreed by Mr Faulding, Dr Deakin and I; it contained nothing new regarding the agreed ownership of the Companies.

55. No advance drafts of the Board Resolution were presented to either Mr Faulding or Dr Deakin, other than the e-mail of 25 September 1997 [A32] and the "Financial Corporate Governance" agreement [A33]. At the meeting, I typed the agreement as we discussed the points and agreed the wording. At Mr Faulding's request, we included the term that no director could be dismissed unless on a voluntary basis. This we agreed to include believing that it gave Mr Faulding the protection he was seeking. The completed document was printed out, and each page read and signed by all three directors. Mr Faulding claims that the document was produced at the meeting already signed by Charles Deakin and Richard Deakin. However, the document was printed off from my lap top computer in the meeting at 12.36pm on 2 January 1998, as I have confirmed from the "document properties" section of the computer which cannot be edited by the user. The agreement was left with Mr Faulding who was to pass it on to the accountants and bank. At no stage did Mr Faulding ever state that he wished to take legal advice on the contents and neither did I (or Dr Deakin that I witnessed) advise him that legal advise him that legal advice was unnecessary. There was nothing new that had not already been agreed and I had already actively encouraged Mr Faulding to consult with the accountants on any issues that he wished to. It is clear from documents revealed on discovery that Mr Faulding did indeed do so, both before and after the 2 January 1998 agreement. As far as I know, Mr Faulding never expressed any concerns about signing the document either before or after he did so, until this dispute arose in autumn 1998. Despite his protests (which Mr Faulding and his representative have vociferously maintained throughout this action) I believe that the evidence points to Mr Faulding having kept the original of the document after our meeting, as I contend.

56. Mr Faulding has claimed that he was not left with a copy of this document. However, I now know that Mr Faulding's Personal Assistant, Ms Susan Chow sent the original of the 2 January 1998 agreement to Nat West bank on 21 January 1998. This fact was also a late disclosure by Mr Faulding in this action. Had the arrangement been that I was going to send copies of the document to the accountants and bank myself as Mr Faulding claims, I would have sent them directly and not through Ms Chow. (She was Mr Faulding's personal assistant, not mine). As Mr Faulding was the sole authorised signatory for the Company accounts it would have served no purpose for me to send them to the bank as they would of course have had to have been sure of Mr Faulding's consent before changing the existing arrangements. It was agreed on 2 January 1998 that Mr Faulding himself would arrange to send a copy of the agreement to the bank which is what would appear to have happened."

57. This was expanded on his second witness statement as follows:

"Dealing with the document of 2 January 1998 first, it is worth pointing out that this document is merely a confirmation of the agreement that had already been entered into by the three parties, rather than the agreement itself. The points of agreement within this document are entirely consistent with the equal-ownership agreements reflected in the conduct of the all of us both before and after 2 January 1998, that is to say that we each recognised that we owned the SGI companies equally and were treated by the accountants as if that were the case. The intention was that this document would form the basis of the formal shareholders agreement that was in the process of being drawn up by the accountants, and the accountants met with the company's solicitors both before (on the 28 July 1997) and after (on the 24 August 1998) this date to effect the agreement. As described in my witness statement of 4 November 1999 (paragraphs 67-69), several letters were also written by the Company accountants as late as August 1998 which referred to the need for a formal shareholders agreement.

Such a document simply would not have been necessary if no agreement had been reached on the shareholdings.

The only reason that a shareholders agreement was necessary was to protect Peter Faulding's interests in reducing his shareholding to below 50%, which was exactly what had been agreed through the equal ownership arrangement. The discussions that took place with the accountants and Mr Faulding centred on 'control' issues related to his reduction in voting rights below 50%."

Charles Deakin supported Richard's account.

58. The original of the 2nd January 1998 document was sent by Susan Chow to NatWest Bank on 21st January 1998 under cover of a letter of that date. Susan Chow's evidence was that the original was sent to her by post by Richard Deakin with a "post-it" note attached instructing her to send it to the bank. Although not mentioned in the Deakins' witness statements it is clear that Richard Deakin had a photocopy of it.

59. The evidential issues to be resolved here are therefore the following: (1) whose account of what happened at the meeting is to be preferred? Was it dealt with and discussed at the beginning of the meeting, or was it produced in a hurry for signature at the end of the meeting? On either view, did Richard Deakin make the representations alleged as to the nature of the document, his intentions in regard to it, or the absence of need for legal advice alleged by Peter Faulding? (2) What happened to the original of the document following the meeting. Was it taken by Richard Deakin (as is said by Peter Faulding, supported by Miss Chow), or by Peter Faulding? Since some light is thrown on these issues by the subsequent conduct of the parties I defer consideration of them, returning to them at paragraph 72 below.

60. Following the Board Meeting on 2nd January 1998 there is no evidence of any further discussion of shares between the Deakins and Peter Faulding or with Mr. James until July 1998. The 2^nd January 1998 document disappears from view until the middle of August. In the months which followed the Deakins made no attempt to implement the agreement in relation to shares apparently contained in the 2nd January 1998 document whether by convening a shareholders' meeting or dealing with any of the requisite formalities before shares can be issued or transferred. In particular they sought no advice from solicitors, gave no instructions to Fraser Russell, prepared no stock transfer forms and took no action to draw up the shareholders' agreement that had been suggested in August 1997 and of which, according to Richard Deakin's second witness statement, the 2nd January 1998 document was intended to "form the basis".

61. In early July 1998 the Company dispensed with Miss Chow's services. She was in any event shortly to have departed on maternity leave, and the Company agreed to pay her until the birth of her child in September. According to a note by Mr Duley (Mr James' assistant) the precipitating factor was the discovery that contrary to previous instructions no effective steps had been taken by Miss Chow to register the three proposed new subsidiaries of the Company. When this omission was discovered she was suspected of having sought to rectify the situation by sending off documents to Companies House, signing one of them in Peter Faulding's name but without his knowledge or consent. On the evidence I heard she was never confronted with the allegation at the time, simply being told that she was not up to the required standard of efficiency. The task of registration of the proposed three proposed new subsidiaries was placed in the hands of Fraser Russell. An internal note of Mr Duley dated 11th July 1998, apparently based on a conversation he had had with Peter Faulding, sets out in somewhat garbled form what he understood was required in order to achieve the new group structure. It includes the sentence "The intention is that the top 3 companies are wholly owned subsidiaries of the last company and that the parent company will be owned jointly by Peter Faulding, Charles Deakin and Richard Deakin."

62. Peter Faulding was on holiday between 19th July 1998 and 3rd August 1998. Prior to his departure he gave instructions as to the Company matters to be dealt with in his absence, and in particular he noted that there was a VAT return that needed to be completed and signed by Richard Deakin and sent off by 28th July 1998 or the Company would be fined. During his holiday Peter Faulding was telephoned by Richard Deakin and informed that it had been discovered that the Company faced an additional undisclosed VAT liability of about £100,000. Peter Faulding was shocked at this discovery.

63. On 29th July 1998, in Peter Faulding's absence, Richard Deakin met with Paul James in order to finalise the Company's accounts for the year ended 30 September 1997 and other issues. The establishment of the new group of companies was discussed. Mr. James gave to Richard Deakin a pro forma of a Special Resolution changing the Company's name from Specialist Rescue Limited to Specialist Group International Limited. During this meeting Richard Deakin informed Mr. James that an agreement had been reached between the Deakins and Peter Faulding about the revision of the shareholdings in the Company and that (per Mr James' note) "he would let us have a copy in order that FR could effect transfers and issue new share certs etc.". Richard Deakin's note reads "Transfer of Shares..-send Paul resolution. He will do share transfer forms." Mr James' understanding, reflected by his note, was that Richard Deakin was referring to an existing written agreement. Richard Deakin's own reference to the "resolution" which he was to send to Mr James is consistent with this impression having been conveyed. My conclusion is that, at this point, it was Richard Deakin's intention to send to Mr James a copy of the 2^nd January 1998 document.

64. On Monday 3rd August 1998 Mr. James telephoned Richard Deakin and informed him of the extent of the VAT under-payment following investigations by Fraser Russell. Mr. James warned that the Company would need to make a voluntary disclosure to Customs and Excise of the substantial underpayment of approximately £95,000. On Tuesday 4th August 1998 Peter Faulding returned from his holiday but on his return had to go to Stafford in order to discuss a possible job in connection with the Birmingham North Relief Road with the Under Sheriff of Staffordshire. Peter Faulding did not speak to Mr. James until Thursday 6th August 1998 when he learned the details of the Company's serious position with its VAT.

65. Later in the day on 6th August 1998 Peter Faulding met with the Deakins. What happened at this meeting is in dispute, the Deakins claiming that on this occasion there was produced to the meeting the 6th August document, which was then signed by the three of them and taken away by Peter Faulding for signature by his mother. I accept (as claimed in a letter to Mr James by Richard Deakin on 30^th October 1998) that the 6^th August document was produced at the meeting, signed by Richard Deakin and Charles Deakin, and handed by them to Peter Faulding for him and his mother to sign. I am not satisfied that Peter Faulding himself signed it there and then (as both Richard Deakin and Charles Deakin claimed in evidence), but nothing seems to me to turn on this point. I accept that Nora never saw the document. Those findings involve my rejecting Peter Faulding's denial that the document was produced at the meeting. That denial is, I think, to be explained largely by his lack of appetite for paperwork (and on Charles Deakin's own account the production of the paper was "no big deal" – simply formalising something that was uncontroversial). That the document was produced at the meeting is supported by the letter written by Richard Deakin to Mr James dated 10th August 1997 which included the following passage:

"We would like to go firm with the above structure. SGI will own all the shares in all four tier 2 companies. SGI will be owned by the three directors each having 1/3 share in the company.

The Special Resolution to change the Company name was approved on 6 August and will be sent to you very shortly by Peter

The Special Resolution to transfer the shares so that SGI will be owned by the three directors each having 1/3 share in the company forms part of the above resolution and will be sent by Peter when his mother who currently owns one share has also signed the resolution, as will form 288b."

66. In the light of his conversation with Peter Faulding the previous year Mr James found the contents of this letter "incredible". He responded by writing separately to Richard Deakin and to Peter Faulding. To the former he explained that the change of company name should be kept entirely separate from the question of transfer of shares or issue of new share capital. As to the latter he advised that there were potential tax problems arising from the arrangement that Charles and Richard should acquire one third shareholdings. To Peter Faulding, he repeated these concerns, but added:

"However, the main reason for writing to you is to confirm that you are happy with the arrangements, whereby effectively you give up total control of the business down to a one-third interest. When we discussed this possibility some time ago, I indicated that we believe there ought to be in place a shareholders agreement indicating the arrangements for share transfers in the future and other related matters, to avoid control passing completing away from you. In addition, I would recommend that you have a strong contract of employment formalising arrangements which are presently operating but, giving rather more security for a longer term.

I hope that you do not think I am out of order writing in this vein but, I believe that you discussed some form of documentation for security purposes with Richard Rose, of Solicitors, Morrisons. If therefore, you would like to discuss this matter further, please do not hesitate to let me know."

67. The result was that he arranged to see Peter Faulding and did so on 20th August. At that meeting they discussed the 2nd January 1998 document, of which by this time Mr James had a copy. One of the mysteries in the case is how, and when, this document came into the possession of Mr James. He does not believe that he had a copy on the 11th August when he wrote his letters of that date to Richard Deakin and Peter Faulding (and the internal contents of those letters certainly do not support the view that he was then conscious of the existence of that document). One possibility is that he was sent it by Richard Deakin, possibly in response to his letter of 11th August in which he had insisted that these questions be dealt with quite separately from the change of name resolution. But if so the absence of any covering note on the file is odd. Another possibility is that he received it from Peter Faulding, which he, Mr James thinks is unlikely, and which Peter Faulding denies. On this not unimportant issue I find, with some hesitation, that the former possibility is the more likely. It is consistent with the intention which I have found he had on 29^th July 1998. It is consistent with the fact that Richard Deakin certainly had a photocopy of that document. It is supported by Mr James' recollection that he (Mr James) produced it to Peter Faulding at the meeting on 20^th August 1998.

68. At that meeting Mr James emphasised to Peter Faulding the need to seek legal advice on the enforceability of the document. He was told by Peter Faulding that the latter had some recollection of having signed such a document at the end of a meeting in January, and himself formed the impression that Peter Faulding had not appreciated the possible consequences of the document. Although pressed in cross-examination with the theory that what really concerned both of them at this time was not whether the apparent agreement as to shareholdings was binding, but with whether the concomitant provisions designed to protect Peter Faulding's position would hold water, Mr James was firm in his view that the matter of concern both to himself and Peter Faulding was the agreement over the shareholding. Peter Faulding did not suggest to Mr James that he had been tricked or deceived into signing the document. Mr James was, however, clear in his evidence that Peter Faulding was upset: he felt let down by Richard Deakin over the unexpected VAT liability, and that he had apparently signed a document so foreign to the intentions which he had expressed to Mr James the previous year. Mr James sought and obtained Peter Faulding's consent to his seeking advice from Mr Rose on the enforceability of the document. On 21st August 1998, having consulted Mr. Rose of Morrisons on behalf of Peter Faulding, Mr. James wrote to him outlining the legal advice. This included the observation that the attempt to exclude the shareholders' rights to remove directors did not work as a matter of company law. It was strongly recommended that a shareholders' agreement be drawn up and that Peter Faulding approach the subject with the Deakins to see whether a meeting involving all parties could be arranged to settle the important issues.

69. No such meeting in fact took place. Peter Faulding was on an operational rescue job in Oxford between 7th and 12th September 1998 and Richard Deakin went on holiday on 13th September 1998, returning on 26th September 1998. On 1st October 1998 Peter Faulding met with the Deakins at the Company's offices. This meeting was also attended by two members of the Company's staff, John Butterfield and Peter Gwilliam. Peter Faulding covertly recorded the meeting. The meeting reviewed the Company's operations and the contribution of the Deakins amongst other matters. Peter Gwilliam and John Butterfield complained at the failure of the directors to take a grip on the Company's affairs. Peter Gwilliam said that he had been shocked to learn that the directors had taken bonuses of £200,000 each. Richard Deakin blamed Susan Chow for the mistake with the VAT and denied any personal responsibility. He said that he and Charles Deakin had only a limited amount of time to assist the Company as they both had full-time jobs. Charles Deakin rejected criticisms that he had devoted little time to the Company in recent months. The meeting became ill-tempered. John Butterfield handed in his resignation. After the others had left Richard Deakin suggested to Peter Faulding that the Deakins should possibly resign as directors. On 4th October 1998 John Butterfield sent an e-mail to Peter Faulding explaining his position and the reasons for his resignation from the Company. On 5th October 1998 Peter Faulding sent a copy of that letter to the Deakins and suggested that in the best interests of the Company they should resign as directors. He later spoke to John Butterfield and Peter Gwilliam and persuaded them to stay on. Thereafter Peter Faulding took legal advice from Mr. Rose at Morrisons who drafted resignation letters for the Deakins.

70. On 8th October 1998 Peter Faulding met with the Deakins to try to resolve matters by agreement. Richard Deakin offered the suggestion that he and Charles Deakin should "back off totally" and end their involvement with the Company so that Peter Faulding could continue to work with Peter Gwilliam. Peter Faulding suggested that the Deakins should take over the Company's medical repatriation business (still at the planning stage but a pet project of the Deakins) and run it as a separate company as he was not interested in it and they were. There then followed a period of unsuccessful settlement negotiations with proposals and counter-proposals on both sides. The Deakins insisted that they were entitled to be compensated for giving up their "shareholdings" in the Company. The negotiations terminated with letters dated 27th October 1998 and 29th October 1998.

71. The Deakins hold the view that the events of, and following, the 1^st October meeting were the result of a deliberate and cunning orchestration by Peter Faulding. Having heard the evidence of Peter Faulding, John Butterfield, and Peter Gwilliam, and read in full the transcript of the meeting, I do not share that view.

The unanswered questions about the 2^nd January meeting

72. None of the accounts given by the parties of what took place at this meeting is wholly satisfactory. Peter Faulding's earliest account (given to Mr James) was that the document was produced for signature at the end of the meeting. He has stoutly stuck to this account ever since. In the face of Richard Deakin's reliance on its having been printed out at 12.36 pm (as recorded in the "document properties" section of Richard Deakin's laptop) an attempt was made on his behalf to demonstrate either that the clock of the computer was inaccurate or that the record on the hard disc of the lap top had been deliberately tampered with. These theories were supported by elaborate expert evidence, which in due course revealed that the document on the hard disk of the lap top was not in fact in precisely the same form as the 2nd January document. The former had been recorded by the program as having been printed out at 12.36, but last modified some 13 minutes later at 12.49. In my judgment not too much can be made of this 13 minute gap. It does not explain the difference between the version on the hard disc and the signed document (which I will call "the final revisions"): the document as it appears on the hard disk will have included everything up to and including whatever was done by the last recorded modification. The final revisions cannot have been saved on to the hard disk. The simplest explanation of how the final revisions were made is to assume that, if made on the lap-top at all, they were saved only to a floppy disk, and then printed out from that. That would fit with Richard Deakin's evidence that the office printer was used to print out the document, and that his lap top was not equipped to link directly into the office ethernet for the purposes of such a printing out. The procedure most likely to have been adopted was that the document to be printed would first be saved to floppy, and the floppy then taken downstairs, inserted into office computer, and then printed out. Assuming this to be correct, the explanation for the final revisions not appearing on the hard disk of the laptop would be that they were only ever saved to the floppy. The reason why not too much should be made of the 13 minutes is that, as I understand the expert evidence, the time of "last printing" (12.36) would have been taken (on the assumed scenario) from the office computer, whereas the time of "last modification" would have been taken from the clock on the laptop when the document was last saved onto the hard disk. (I interpose that it must have been saved again to the hard disk after the last recorded printing in order for the latter to appear on the record on the hard disk). Only if one assumes that both clocks were correct can one assume that the 13 minutes is an accurate reflection of the time between the last printing and the last recorded modification, or indeed even that those two events took place in the recorded order. I am certainly not prepared to make that assumption.

73. The weight of the evidence supports the Deakins' case that the 2nd January document was printed out on the office computer on 2nd January 1998. The case that the document record history had been deliberately tampered with by Richard Deakin was (properly) not put to Richard Deakin in cross-examination, and can be discounted as a theory. I accept that the lap-top clock may not have been accurate, but consider it unlikely that it would have been showing an inaccurate date, as opposed to time: computer clocks for a variety of reasons sometimes show inaccurate dates and times, and users can re-set them when they do. They are likely to do so when the inaccuracy extends to showing the wrong date, but relatively less likely to do so when the inaccuracy goes only to time. The final revisions seem to me likely to have been made using the procedure hypothesised above. Their nature (revision of the office telephone numbers and the change of "majority" to "unanimous" in the last line) suggests they are more likely to have emanated from Peter Faulding than from Richard Deakin. It is therefore probable that the document on the hard disk was worked on at the meeting and was itself printed out at that meeting having been saved to a floppy for that purpose, the final revisions being made after the last recorded printing. Accepting that as a working hypothesis, the evidence of both computer clocks (i.e. the office computer and the laptop) is that the document was being worked on during the first 45 minutes or so of the meeting (which it is common ground was scheduled to begin at 12.00).

74. This tells me that Peter Faulding's account of the document having been produced from the brief case at the end of the meeting is unlikely to be correct. Peter Faulding's insistence on the correctness of his account led him to make a series of allegations as to the impossibility of Richard Deakin's account being true. Apart from the theory that Richard Deakin had tampered with the computer clock, these ranged from allegations that the office computer could not have been switched on that morning, that Richard Deakin could have connected his laptop directly into the office ethernet, and (a very late allegation) that Richard Deakin had had a different model of laptop altogether at the relevant time. At a critical point in his cross-examination (critical in the sense that it was at a point where he became so overcome with emotion that I had to rise in order to allow him to compose himself) he also introduced a new explanation for no photocopy having been taken of the document. These allegations gave rise to very serious misgivings on my part as to his credibility in relation to the events which took place at this meeting.

75. The Deakins' account is also unsatisfactory. They disagreed between themselves as to how long the meeting took. Apart from that, Richard Deakin's evidence (with which Charles Deakin was in general agreement) suffered from the defects which characterised his evidence in other respects, namely a tendency to "spin" the written record in a manner which that record really does not sustain. Thus, paragraph 53 of his first witness statement sought to give the impression that an agreement as to shareholding was on the written agenda for the meeting. That was false. What was on the agenda was discussion of the XXXX document. Paragraph 12 of his second witness statement was also designed to give the reader a misleading impression of the instructions which the accountants had and of the role of the "company's solicitors" in August 1997. It was also quite incorrect to say that the 2nd January 1998 document represented no more than a confirmation of what had already been agreed between himself and Peter Faulding. As I have already found, there were issues between himself and Peter Faulding which the written record shows clearly had not been agreed as at the date of his last communication on the subject on 25th September 1997. What the 2nd January document contained (over and above the contents of the XXXX resolution) was what Richard Deakin had decided was the correct solution to that impasse, not something which had already been agreed.

76. I have difficulty also in accepting Richard Deakin's account of the way in which the document was created at the meeting itself. The document which had been tabled for discussion was the XXXX resolution. Richard Deakin's account was that, at the meeting itself, this document was amended, inter alia, by the addition to it of the first six bullet points which appear in the 2^nd January 1998 document. This is all said to have taken place on his laptop, Peter Faulding and Charles Deakin discussing the wording and watching the document being typed by Richard Deakin as it was being created. At the same time he insists that the document contained nothing that had not previously been agreed. What I find difficult to believe, simply as a matter of probabilities, is that he had not drafted out the main points to be included before arriving at the meeting. There was quite a lot of business to be got through at the meeting (on his own account the meeting lasted several hours). If the document was first printed out at about 12.39, and the meeting began at 12.00 with Peter Faulding going downstairs to make tea for everyone (which is entirely plausible), there was relatively little time for the process of drafting and discussion to take place. What I find much easier to imagine is Richard Deakin opening the meeting by saying that he had expanded the XXXX resolution to deal with the points about shareholding and control which they had talked about before, reassuring Peter Faulding that it clearly provided that he could not be sacked as a director and thus answered his earlier qualms about giving up control, and explaining that it was a document which they needed to have in place so that the accountants could get on with the business of creating the group structure. The supposition that the essential elements of the first six bullet points had already been composed before the meeting is reinforced by the close match between the document and the equivalent part of the "Share Points Proposal" which had been put in front of Peter Faulding in September of the previous year: the points appear in exactly the same order. The technique adopted by Richard Deakin was to include in a document dealing with a different and agreed subject matter an item which had been discussed but not previously agreed. He did the same thing prior to the 6^th August meeting, and again (it would appear) in the final abortive settlement discussions in October.

77. I am also unable to accept Richard Deakin's version of what happened to the document after the meeting. Miss Chow's recollection was clear that she had received the document from Richard Deakin with instructions to communicate it to the bank. She had no reason to make this up. It is known that the version received by the bank was the original of the document. Moreover Richard Deakin's insistence that it was left with Peter Faulding in order that he could implement the penultimate resolution ("These resolutions will be notified to the current Accountants and the Bank") is wholly inconsistent with the tenor of the document as a whole which emphasised that it was to be Richard Deakin who should "be the main point of contact for dealing with the Accountants", be responsible "for the management of the Accountants", and, with the Company Secretary (i.e. Charles' law student wife Denise), "be responsible for choosing Accountants..". These parts of the document all originated in the XXXX resolution, the contents of which Peter Faulding does not deny that he agreed. It would be very odd for Richard Deakin, having gone to the trouble of securing this agreement that he should be the main point of contact with the accountants, then to have left it to Peter Faulding to communicate this fact to them. In addition, as already noted, at the meeting with Mr James on 29^th July 1998, there is no suggestion that Richard Deakin was surprised that the terms of the resolution had not previously been communicated to the accountants.

78. For these reasons I am unable to accept any of the parties' accounts of the meeting as an accurate one. I do not however reject the whole of any one account. In particular I am not prepared to reject as necessarily inaccurate Peter Faulding's recollection that the question of signing the document arose only at the end of the meeting. The fact that the document was printed out early on in the meeting is not inconsistent with the question of his signature having been raised at the end, or with his recollection that by that stage it already bore the Deakins' signatures. Nor do I reject his evidence that he was reluctant to sign and said that he wanted to take it to a lawyer. I accept also that Richard Deakin told him not to worry about it, that the Deakins would not stitch him up, and that it was unnecessary for him to take legal advice. Given his attitude the previous autumn it is entirely probable that Peter Faulding expressed reluctance to sign the document. Mr James bore witness to the way in which Richard Deakin would make reassuring noises to Peter Faulding when a financial topic was passing over his head, as well as to the difficulty which Peter Faulding had in grasping what was entailed by the concept of a shareholding.

The Deakins' contractual claim

79. On the above findings the only occasion on which Peter Faulding expressed an unambiguous agreement that the Deakins and himself were to be equal shareholders in the company was the occasion when he signed the 2^nd January 1998 document. It was submitted by Mr Kosmin that a contractual claim based solely on that document was not open to the Deakins on the pleadings. It is true that the substance of their evidence was that the document did no more than reflect an agreement which had been reached in March of the previous year. However, in my judgment it was open to them on the pleadings to make out their contractual claim even on the limited finding which I have made.

80. There are six pleaded defences to the contractual claim, of which, in his closing submissions, Mr Kosmin relied on four: (a) misrepresentation and unconscionable conduct, (b) undue influence, (c) lack of legal effect and (d) lack of intention to create legal relations. I begin by considering the last two of these.

81. On any view the 2^nd January document is a strange animal. It is headed "General & Financial Corporate Governance" when its critical subject matter, from the Deakins' point of view, is not "governance" but ownership. It is described as a "Board Resolution" but purports to do things manifestly beyond the power of a board of directors. It refers to companies not then in existence (Specialist Rescue International and Specialist Medical International) as if they already existed. The signatories are described by reference to imaginary capacities (Peter Faulding is described as Group Managing Director, Richard Deakin as Group Finance and Commercial Director, and Charles Deakin as Managing Director of the imaginary Specialist Medical International. It is a bizarre mixture of the banal ("All Directors will act in the best interests of the company at all times") and the enigmatic ("Directors decisions not to be overruled by another Director without agreement"). Despite these oddities, I do not think that there is anything in the document itself which renders it intrinsically incapable of operating as a contract between its three signatories. Assuming that the parties intended that it should have some legally binding effect, and that it can only have such an effect as a contract between the three signatories as opposed to a board or company resolution, I do not think that it should be deprived of that effect merely because it has been artlessly framed as a board resolution.

82. Even on the Deakins' case it was not envisaged that the document was to be the final word on the relationship between the parties as shareholders. It was simply (in Richard Deakin's words) to "form the basis of the formal shareholders agreement that was in the process of being drawn up by the accountants". It was plainly envisaged that the formal shareholders agreement would have to cover other matters. Some of these had been adverted to in Mr Rose's letter to Mr James of 13^th August. Although it is unclear whether Richard Deakin knew of the contents of that letter, the way in which he expresses himself in his second witness statement shows that he accepted in principle that the accountants were to have further input into the agreement, with the benefit of legal advice. The matters with which the 2^nd January document did not deal but which must have been contemplated as having to be covered in a formal agreement in my judgment included, first, the question of Peter Faulding's service agreement, and, secondly, provisions designed to deal with the possibility that the relationship of the shareholders breaking down in the future. In the latter connection Mr Rose had advised that this was probably the most important matter to be covered by a shareholders' agreement, pointing out that the terms on which a buy-out would take place would need to be agreed.

83. Mr Rose had also correctly advised that under the company's articles of association any new share issue required to be offered first pro rata to existing shareholders. The proposal that the Deakins have two thirds of the shares necessarily contemplated the issue of new shares. The contemplated formal shareholders' agreement would therefore obviously have had to include Nora as a party if she was still at that date a shareholder. I consider separately below the question of whether Peter Faulding was in a position to compel Nora to join in any arrangements. At this stage it is only necessary to note that Richard Deakin knew that her co-operation would in due course be necessary. That is plain from the terms of his letter dated 5^th July 1997 and from the way in which he drafted the 6^th August 1998 document.

84. The reality of the matter, in my judgment, is that the purpose which Richard Deakin was seeking to achieve by the 2^nd January document was to secure Peter Faulding's agreement to the instructions which were to be given to the accountants on what Richard Deakin saw as the principal points to be covered in a shareholders agreement, and to secure Peter Faulding's agreement to his being the channel of communication by which those instructions were to be conveyed and, so far as necessary, elaborated. The solemnity of the language of the resolution ("these statutes") and the fact that it was initialled on each page and signed at the end was calculated to impress on the reader the intended finality of the document. He knew however that there were other important matters which would require to be agreed before there could in fact be finality between the parties. Pushing through his preferred solution to the ownership/control equation at the meeting on 2^nd January 1998 was a very important step on the road towards the finalisation of a shareholders agreement but it cannot, in my judgment, be regarded as a final agreement between the parties to it.

85. If that conclusion is wrong it is necessary to consider whether the defences of unconscionable bargain or undue influence succeed. Indeed it is necessary to consider these in any event since they are relevant to the Deakins secondary claims based on quantum meruit and proprietary estoppel. I observe at the outset that an agreement entered into between the directors of a prosperous limited liability company does not provide a context in which one would normally expect either doctrine to have much room for operation.

86. There is no doubt as to the existence of the court's jurisdiction to relieve against unconscionable bargains: see Credit Lyonnais v. Burch [1997] 1 AER 144. It is clear, however, that for the jurisdiction to arise something more than a bad bargain must be shown. Bad bargains are made, and hard bargains driven, every day in commercial life. As Millett LJ pointed out in Burch (at 152-3) in order to invoke the jurisdiction it is necessary

"to show not only that the terms of the bargain are harsh and unconscionable but that 'one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience' (see Multiservice Bookbinding Ltd v. Marden [1979] Ch 84 at 110 per Browne-Wilkinson J and Alec Lobb (Garages) Ltd v. Total Oil GB Ltd [1983] 1 AER 944 at 961, [1983] 1 WLR 87 at 95, where I pointed out that there must be some impropriety, both in the conduct of the stronger party and in the terms of the transaction itself, but added that 'the former may often be inferred from the latter in the absence of an innocent explanation'). "

87. In the present case the question whether there was morally reprehensible conduct on the part of Richard Deakin in procuring Peter Faulding's signature of the 2^nd January document can only be answered by considering that conduct in the context of the previous dealings between himself and Peter Faulding and the relationship in which the one stood to the other. That itself raises the question whether that relationship was such as to give rise to the rebuttable presumption of undue influence (i.e., in the classification adopted in Barclays Bank v. O'Brien [1994] 1 AC 180 at 189, a class 2b case).

88. Whichever approach is adopted, it is necessary to consider first whether the terms of the transaction were (in the language of the one doctrine) harsh and oppressive or (in the language of the other) manifestly disadvantageous (see National Westminster Bank v. Morgan [1985] AC 686 at 704-5). In the present case I have no doubt that it was. Under the agreement Peter Faulding was to give up two thirds of the company which provided him with his livelihood, and with it all control for the future as to the type of business to be done by the company or as to how its profits might be distributed. He retained a veto in relation only to new share issues, the appointment of new directors and "Directors' benefits and bonuses". The latter expression may or may not have included his own remuneration under the employment contract which Richard Deakin had undertaken the previous year to draw up. Whether it did or not, the Deakins were being left in a position to control both his future remuneration and the future dividend policy of the company. What was the consideration being offered to him for the loss of these important rights? In his submissions to me, Mr Dagnall submitted that Peter Faulding's motivation in entering into this agreement was the fear that, if he did not accede to their demands he would provoke a row with the Deakins and would risk losing their services. Accepting for the sake of argument that this was his motivation, it does not answer the question of what consideration passed under the agreement for the substantial rights he was giving up. On analysis, the answer to that question is that, while there was no doubt some consideration in the legal sense (the contrary was not argued) there was none of any substance. There was no commitment whatsoever on the Deakins' part to provide any future services: their time remained their own to devote, as they chose, either to the development of the company or their own independent careers. Whichever course they took, they were enabled by the agreement to enjoy two thirds of every pound of profit which Peter Faulding might bring into the company. It is to my mind clear that in entering into the agreement Peter Faulding cannot have understood its implications. I am not in the least surprised that Mr James found it "incredible" that Peter Faulding should have entered into this commitment, or that Peter Faulding was "rather shocked" and "upset" when its potential implications dawned on him (see Mr James' evidence at Transcript Day 9, pp.1707 and 1711).

89. The relationship between Richard Deakin and Peter Faulding was also unquestionably one in which Peter Faulding both trusted and had confidence in Richard Deakin. He regarded himself (quite correctly) as inferior to both Richard Deakin and Charles Deakin in education, and looked up to and relied on Richard Deakin for what he perceived to be the latter's immeasurably superior commercial and financial wisdom. In evidence he used the word "frightened" at one point to justify his failure more openly to confront the Deakins with his concerns over the issues of ownership and control: Richard Deakin would "shoot him down" in discussion, and an appeal to Charles Deakin would result in the latter sagely agreeing with his brother (see Transcript Day 7 pp 1381-2). This picture is fully supported by the evidence of other witnesses, in particular Mr Butterfield, Mr Gwilliam and Mr James. I have already quoted relevant parts of Mr James' witness statement (see paragraph 38 above). In cross-examination he described Peter Faulding as being "in awe or cowed in Richard Deacon's presence" (Transcript Day 9 p.1644). I accept all this evidence. In addition there was a measure of emotional dependence on those whom he had addressed in his e-mail of 1^st April 1997 as "such honest and caring people". The tone of Richard Deakin's letter to him of 25^th September 1997 suggested that Richard Deakin was, in an honest and caring way, dispassionately setting out alternative methods of achieving the same desired result and inviting him to agree (after consultation with the accountants if desired) that Richard Deakin's preferred solution would "give you the security and protection that you are aiming to achieve with the agreed structure".

90. In my judgment, this was the type of relationship which attracts the presumption of undue influence, and casts upon the presumed influencer the onus of showing that the agreement was entered into by Peter Faulding with a full understanding of its implications. In my judgment, the Deakins fall a long way short of satisfying that burden. The document was produced at the meeting without any forewarning. Richard Deakin had no reason to suppose that prior to the meeting Peter Faulding had taken the opportunity to discuss the matter further with the accountants. There was not (as I find) a detailed line by line discussion of the contents such as was deposed to by the Deakins in their evidence. There was, on the contrary, the reassurance from Richard Deakin that it was unnecessary for Peter Faulding to seek legal advice and that the Deakins would not "stitch him up". No-one in Peter Faulding's position (ex hypothesi still the owner with Nora of the company and under no commitment to alter that state of affairs) who understood the potential implications of the document could possibly have been advised to sign the document if it was to have legal effect as a contract. The Deakins should have known that.

91. For these reasons in my judgment the Deakins cannot rely on the 2^nd January 1998 document in support of their contractual claim. Apart from that document, nothing which took place between the parties amounted to a contract. The Deakins' primary contractual claims therefore fail.

The secondary claims: (1) Proprietary estoppel

92. The Deakins rely on the doctrine of proprietary estoppel to make good their claim to an interest in the shares of the company in the event that their contractual claim fails. In this respect the vagueness or imprecision of any assurance given them by Peter Faulding would not be fatal to the claim. As Slade LJ observed in Jones v. Watkins [1987] CA Transcript 1200, in a passage quoted in the judgment of Robert Walker LJ in Gillett v. Holt [2000] 2 AER 289 at 302:

"At first sight, it may be surprising that a promise to confer an interest in property which is so equivocal in its terms that it would be incapable of giving rise to a binding contract may be capable of conferring on the promisee a right in equity to a transfer of the whole property. However, I think that Mrs Hill must be right in describing this as simply one instance of equity supplementing the law. The equivocal nature of the promises found by the judge is clearly one relevant factor when considering whether or not it would be unconscionable to permit the administrators to rely on their strict legal title having regard to any detriment suffered by the plaintiff in reliance on them."

93. As the Court of Appeal emphasised in Gillett v. Holt, at the root of the doctrine is equity's concern to prevent unconscionable conduct. On my findings the Deakins had, by the summer of 1997, manoeuvred themselves into a position in which, so far as shares were concerned, the point at issue between themselves and Peter Faulding was not whether they would have shares but whether, and how much, their ownership of shares should be allowed to impinge on Peter Faulding's control of the company. They had also acquired control of the board of the company and were thus in a position to control the distribution of the company's profits. They also assumed that they were in a position to vote themselves bonuses as directors. Does the fact that Peter Faulding allowed them this far into the company give rise to an equity in their favour, and if so should that equity be satisfied by awarding them a shareholding in the company? The answer is clearly no, and for the very same reasons that they cannot rely on the 2nd January 1998 document. The "entitlement" to which they lay claim by the route of proprietary estoppel is just as manifestly disadvantageous to Peter Faulding as the position under the alleged contract, and its parentage lies in the same unequal relationship. Equity will not take with its right hand only to give back with its left.

The secondary claims: (2) quantum meruit.

94. I accept that the Deakins made their contribution to the company's fortunes on the footing that, if it prospered, their recompense would be a share of the profits made as a result of the joint efforts. The claim under this heading gives rise to the following three questions. First, how should one approach the quantification of their claim? Secondly, is their claim sustainable at all against Peter and Nora, and, if it is not, is it sustainable against the company as is claimed (by counterclaim) in the Bonuses action? Thirdly, how do their claims to a quantum meruit relate to the fact that they (and their spouses/fiancees) have taken large sums of money from the company in respect of services? The answer to that question is in turn dependent in part on the outcome of the Bonuses action.

95. As to quantum it is clear in principle that it may be appropriate for the court to fix a sum on a "share of profits" or "participation" basis rather than by attempting to value the services as if they were rendered in return for a fee: see Way v. Latilla [1937] 3 AER 759. The court may not make a bargain for the parties which they have not made themselves, but in fixing a figure which is "fair and reasonable to both parties, on all the facts of the case" the court may consider "the communings of the parties while the business was going on" (see per Lord Wright in Way v. Latilla, ibid. at p.766 A-B). In the present case those communings point to the three parties sharing distributable profits equally. For reasons which will be apparent I have doubts as to whether that division was in fact fair and reasonable as between the parties, but Peter Faulding has never sought to resile from it. I also have doubts as to whether the amounts which were agreed to be distributed would be the same as the amounts which a court might have determined to be "distributable" in the absence of the agreement which in fact existed: the amount actually distributed in bonuses seems to have been determined by a desire in part to reduce the company's corporation tax liability to zero, and without regard to the need to reserve for future commitments (a point which the employees were to make with some force during the course of the fateful October 1st 1998 meeting). Suffice at this stage to say that, had the court been faced with the task of fixing a quantum meruit in, say, April 1997, I doubt very much whether it would have concluded that the profits to be distributed should be calculated in the way subsequently decided upon by the directors, or that the Deakins would have been held entitled to two thirds of them.

96. In relation to the second question, the argument that the liability lay with Nora and Peter depended heavily on establishing that the promise to remunerate was a promise to remunerate with shares. On that premise it was argued by Mr Dagnall that the Deakins must throughout have been dealing with Peter Faulding in his own right rather than on behalf of the company. I am not sure that the premise is correct, since it is possible to envisage a company retaining services on a promise to allot shares in itself. However that may be, I have rejected the premise as a matter of fact. The Deakins expectation was to be paid by the company, rather than by Peter Faulding or Nora personally.

97. In support of the proposition that Peter Faulding and Nora had rendered themselves personally liable Mr Dagnall relied on the facts in Way v. Latilla (where the relevant adventure had been undertaken by a company) and on the legal analysis provided in the judgment of Eady J. in Novack v. Wilson, New Law Online 500099101, 28.07.00. However, in the present case, there was no room for confusion about the corporate entity to which the relevant services were being supplied and by which the remuneration was to be paid. The natural inference is that in requesting those services, Peter Faulding was acting in his capacity as the sole director of the company. I would add that the case in this respect against Nora seems to me to be unarguable. If, as the Deakins claim, she was a mere nominee of her share for Peter Faulding, the proposition that thereby she was expressly or impliedly authorising Peter Faulding to incur personal liability on her behalf seems to me plainly unsustainable. Equally, if she was the beneficial owner of the share, something more than that fact alone needs to be shown before any such agency is established. All that is pleaded in this respect is that she "left [Peter Faulding] in full control of the Company": see paragraph 4 of the Re-re-re-amended Particulars of Claim.

98. The objections to this claim against Peter Faulding and Nora seem to me to apply with equal force to each of the alternative methods by which the pleading seeks to assert a personal liability against one or both of them, and I do not need therefore to elaborate them in this judgment.

99. So far as their alternative claim against the company is concerned, this seems to me in principle a good one, subject to the answer to the third question. That cannot be answered until conclusions have been drawn on the issues raised by the Bonuses action. I therefore now turn to that action.

The Bonuses action

100. The Bonuses action is concerned with the bonuses which the three directors agreed to pay to Richard Deakin and Charles Deakin in 1997 and 1998. The 1997 bonuses (of some £180,000 to Richard Deakin and £156,600 to Charles Deakin) were paid out in November 1997 (subject to deductions in respect of income tax and national insurance), but the 1998 bonuses (of £60,000 to each, but after deductions a total of £68,808.48) were left in the Company as loans (which were subsequently recovered by a separate action ("the Loans action") after the parties fell out). The bonuses were agreed with Peter Faulding who signed accounts prepared by the accountants which were prepared to reflect them.

101. The Company did not contest the Loans action and it was the subject of a compromise and order by consent made in January 1999. It had not then been appreciated that the company might have a claim to recover the bonus (or a defence to the Loans action) based on the proposition that the remuneration of the Deakins as directors had not been authorised by the shareholders in accordance with Article 82 of the Companies Act 1985. When the penny finally dropped and the Company commenced the Bonuses action the Deakins contended that the Company's claim against them was an abuse of process relying on the extended doctrine of res judicata as set out in Henderson v- Henderson (1843) 3 Hare 100 and subsequent authorities. That question was resolved in the company's favour by judgments of Rimer J dated May 22nd 2000 and of the Court of Appeal (Aldous and May LJJ) on 23rd May 2001.

102. The company's claim is straightforward. Article 82 of Table A (incorporated by the company's articles) provides that "The directors shall be entitled to such remuneration as the company may by ordinary resolution determine…". Absent such an ordinary resolution, the company relies on the general principle that directors, as fiduciaries, are not entitled to any remuneration whether on a quantum meruit basis or otherwise, unless the articles of association provide for it, and the provisions of the articles have to be strictly complied with for the remuneration to be authorised. The principle was emphatically endorsed and applied by the House of Lords in Guinness plc v. Saunders [1990] 2 AC 663 (esp per Lord Templeman at 692C-G). I should add that, while the same criticisms could be levelled at the bonuses which were at the same time paid or agreed to be paid to Peter Faulding, those have been retrospectively sanctioned by Peter Faulding and Nora in general meeting.

103. The Deakins have a number of defences to the Bonuses action.

104. First, in relation to the 1997 bonuses they rely on the fact that, as they assert, the bonuses were agreed to be paid at a date prior to that at which they became directors.

105. Secondly, they rely on Article 84 of Table A and say that they were appointed by the directors to executive offices and there were agreements/arrangements for them to be employed and to provide services outside the scope of the ordinary duties of a director. Thus, it is argued, the directors did have power to remunerate them. They have a Part 20 Claim for breach of such agreements.

106. Thirdly, they say that the shareholders did concur (with Nora acting through Peter, her agent) in the awarding of the bonuses and thus they are rendered lawful by Article 82 and the Duomatic principle (see Re Duomatic Ltd [1969] 2 Ch 365).

107. Fourthly, they rely, contingently, on their success in the Shares action under which it said that they will obtain either a shareholding or remedies sufficient either to validate the Bonuses (as has already occurred with regard to Peter) or to claim section 459 relief.

108. Fifthly, they rely on section 727 of the Companies Act 1985 ("the 1985 Act") and/or seek an equitable allowance for their services.

109. Sixthly, they dispute quantum: with regard to tax and national insurance deducted at source as the Company can (if it is right) recover such from the Inland Revenue; and with regard to the 1998 bonuses they dispute that such have been paid in law, Mr Dagnall maintaining (with ingenuity) that this argument was open to him despite the apparent reasoning of the Court of Appeal.

110. The Deakins also have a Part 20 Claim against Peter Faulding for injunctions, damages, indemnity and contribution. This is put in various ways, in particular as follows. First, if he had complied with the agreement to vest two-thirds of the shares in them then they could have sanctioned the Bonuses. Second, he agreed to the payment of the Bonuses and the remuneration but he failed to validate them and instead is now seeking to undo them. Third, he represented and acted as if he was Nora's agent, and if he had been then Duomatic would apply. Fourth, he represented and acted as if he had the Company's authority to make these payments, and by implication would ensure that there was done anything necessary for such, which it now says was not the case. Fifth, if there is a liability to the Company then such is a joint one of all the relevant directors, including Peter, and in the circumstances he should make a 100% (or lesser) contribution under the Civil Liability (Contribution) Act 1978 ("the 1978 Act"), and if not that then general equitable principles.

111. I deal first with the defence based on Article 84. Article 84 provides:

"Subject to the provisions of the Act, the directors may appoint one or more of their number to the office of managing director or to any other executive office under the company and may enter into an agreement or arrangement with any director for his employment by the company or for the provision by him of services outside the scope of the ordinary duties of a director. Any such appointment, agreement or arrangement may be made upon such terms as the directors determine and they may remunerate any such director for their services as they think fit. Any appointment of a director to an executive office shall determine if he ceases to be a director but without prejudice to any claim to damages for breach of contract of service between the director and the company. A managing director and a director holding any other executive office shall not be subject to retirement by rotation."

112. It will be noted that the article contemplates three possibilities: (1) an appointment of a director to an office; (2) an agreement or arrangement with him for employment or (3) an agreement or arrangement with him for the provision of services outside the scope of the ordinary duties of a director. Mr Dagnall's submission was that because Richard Deakin enjoyed the title of "Commercial and Financial Director" and Charles Deakin that of "Medical Director", each had been appointed to an executive office under the company. Alternatively he argued that they were employees, or had in any event provided services to the company outside the scope of the ordinary duties of a director.

113. Read in the context of the articles as a whole (and in particular Article 82), and the general equitable principle that remuneration is not payable to a director in the absence of specific authorisation by the articles, the correct approach to the construction of Article 84 is to construe it restrictively. So construed, the concept of appointment to an executive office implies, in my judgment, some formality in the process of such an appointment. One would expect to find some minute by the board recording the decision. One would expect to be able to identify by reference to some formal act the date when the executive office was created, and the date on which the director was appointed to it. None of these can be found here. The titles assumed by Richard Deakin and Charles Deakin predated by more than a year their appointment as directors, and were independent of that appointment. On an objective analysis of the evidence it is not possible to discern any act of the board which reveals an intention to invoke Article 84. So far as subjective intentions were concerned, the directors proceeded in blithe disregard of the existence of the articles.

114. The same objection exists to the suggestion that there was any agreement or arrangement for their employment by the company or for the provision by them of services to the company outside the scope of the ordinary duties of the director. In my judgment the article contemplates that the agreement or arrangement is made prior to the commencement of the employment or the provision of services, and contemplates that, under such agreement or arrangement, the director concerned will owe the company legally enforceable duties in respect of such employment or such services. I can find no trace of such an arrangement or agreement here. The matter may be tested by asking what the remedy of the company would have been if, at any time during the period of their directorships, Richard or Charles had announced that he no longer had the time to spare to spend on any active involvement in the company's business. In my judgment it is not possible to identify the arrangement or agreement of which such conduct would have been a breach. As for the provision in article 84 permitting remuneration for "such services" it is, I think plain that in deciding to award themselves equal bonuses (after providing for a £30,000 salary for Peter Faulding), the directors were not applying their minds to what was a fit remuneration for the services provided. It was a simple division of profits between themselves effected on the basis that there were no separate interests of shareholders to be considered. If there were such interests to be considered, it seems to me obvious that article 84 could not justify the course taken in this case.

115. I turn to the question whether the Duomatic principle has any application in this case. That principle is that "where it can be shown that all the shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be": see per Buckley J. at [1969] 2 Ch 365 at 373. There is no doubt that Peter Faulding assented to both the 1997 and the 1998 bonuses. It is said that he did so under the mistaken assumption, induced by Richard Deakin, that there was some requirement of company law which dictated equality. I have accepted his evidence that he did form some such impression as a result of something said to him by Richard Deakin but I do not think that it vitiated his assent to the proposal. He was willing to see an equal division of the profits as between the directors: his complaint can really be seen as going to the relative size of his package as managing director. In any event, looking at the issue as one between the directors on the one hand, and the shareholders on the other, Peter Faulding is hardly in a position to claim that qua shareholder he had not assented to what was resolved by the directors. The question whether the Duomatic principle can apply here depends, therefore, wholly on the view one takes of Nora's position.

116. The questions raised by Nora's position are threefold. First, did she hold her share on trust, or as a nominee, for Peter Faulding; and, if so, does Peter Faulding's consent as the beneficial owner count for Duomatic purposes? Secondly, did Peter Faulding have authority to assent on her behalf? Thirdly, did she in fact consent herself?

117. Mr Kosmin submitted that, as a matter of law, the assent of the shareholder himself must be proved, and that it was not sufficient simply to show that assent had been given by the beneficial owner of a share held by a nominee. He cited Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797 as authority for that proposition. I am unable, however, to derive any such proposition from my reading of that case. Nor do I see why as a matter of principle it should be regarded as correct. We are concerned here with the application of the equitable rule that a fiduciary must not profit from his office without the consent of the corporators. Where a person (Peter Faulding) has an equity to compel a consent, I see no reason why equity should not have regard to the position of the beneficial as opposed to the legal owner in its application of the rule.

118. Whether Nora was a bare nominee involves a consideration of how and why she came to have a share issued to her. The position, shortly, is that Peter Faulding was told by his bank manager that in order to incorporate his business it was necessary to have two shareholders (the advice was not in fact correct). Peter Faulding's evidence is that he made his mother the other shareholder because she had helped him so much in the past, although it is accepted that the £1.00 subscription was paid by him. Nora's evidence was that Peter Faulding had asked her to be a shareholder and that she was glad to oblige despite being warned by her husband not to get involved in possible liabilities. Her subsequent practical involvement during the whole period prior to 1st October 1998 was limited to a weekly visit to the office where she had a cleaning and tidying role. There were never any general meetings of the company. So far as the conduct of its corporate affairs were concerned she might as well not have existed.

119. It was clear to me from their evidence that, at the time at which the shares were issued, neither Peter nor Nora had much concept of what a shareholding was beyond that it was a necessary formality to have two shareholders in order for Peter to be able to trade as a limited company. It was also clear to me that neither could readily grasp the concept of a nominee ownership. Nora's level of sophistication can be simply illustrated from her answer in cross-examination:

"I just went along with my son, you know. I never had any schooling hardly, Mr Dagnall, so I do not know an awful lot about it – and I forget a lot of things as well."

120. I was not persuaded by any of the evidence given either by Peter Faulding or Nora that Peter Faulding's intention in causing a share in the company to be issued to her was that she should become the beneficial owner of that share. Mr Kosmin suggested that it was significant that the share had been vested in Nora rather than in Peter Faulding's wife Mandy, inviting me (I suppose) to draw the inference that, had he chosen that course, it would have been clearer that the intention was nomineeship rather than gift. That is to reverse the normal equitable presumptions (of which it can be safely assumed that Peter Faulding was ignorant). His selection of his mother as the recipient can be explained on the basis that he knew the decision had some importance and that his relationship with his mother was such that he knew that he would be able to rely on her co-operation in any conceivable event. There was evidence that his earlier financial vicissitudes had put his marriage under strain. Told that he had to find another shareholder (whatever that implied) he chose his mother. That does not rebut the presumption of resulting trust. The subsequent conduct of himself and Nora is entirely consistent with the understanding that her role was of the most nominal kind.

121. Even if I am wrong in that conclusion, it seems to me that there was ample evidence to support Mr Dagnall's argument that she had expressly or impliedly clothed Peter Faulding with authority to exercise on her behalf her rights as a shareholder in the ordinary course of the running of the business, and that this authority extended to his making decisions about his own remuneration and that of anyone he decided should be a director and remunerated. There was a conflict between her written and her oral evidence as to the extent to which she knew about the remuneration being paid to the Deakins but I am satisfied that she knew that they were being remunerated. She was perfectly content to leave such matters to her son. As she said in her evidence, she expected Peter to run the company as if it was his own. I would add that this conclusion, that she had clothed him with authority to assent to their remuneration, does not entail that she had also clothed him with authority to agree to dispose of her share (or, for that matter, to waive rights of pre-emption on an allotment of new shares had that issue ever arisen). I would add also that, had it been necessary to show Nora's own consent to the bonuses (as opposed to one given on her behalf) the evidence did not establish that she had the necessary knowledge to give an informed consent.

122. In my judgment, therefore, the Deakins are entitled to retain the bonuses as a result of the application of the Duomatic principle. Given that conclusion it is unnecessary to consider in any detail the separate defence in relation to the 1997 bonuses that they are not repayable because they had been agreed to before the Deakins became directors. As to this my findings as a matter of fact are that it was agreed that they would be paid a share of profit before they formally became directors, but that the amount was not fixed until after that date. It does not seem to me that their taking office as directors will have destroyed their accrued right to be paid up to that date on a quantum meruit basis. I do not, however, consider that the decision to pay bonuses at the rate of £200,000 each (subject to adjustment by reference to payments to spouses/fiancees) can be regarded as a species of compromise of the amount of that quantum meruit claim.

123. Given that conclusion the remaining defences to the bonuses action do not therefore need to be considered.

124. I return to the question whether the Deakins are entitled to any relief by way of quantum meruit against the company in addition to their being able to retain the substantial bonuses already received by them. Mr Dagnall submitted that the bonuses only covered the period up to July 1998 when the 1998 bonuses were agreed (and then debited to the 1996/1997 accounts). The period from July 1998 to October 1998 was a period during which they continued to hold office as directors and to work on behalf of the company in the expectation of being paid. During this period a tunnelling contract at Oxford was performed, although it is unclear whether it was in fact profitable (Charles Deakin told Mr Gwilliam and Mr Butterfield at the meeting on 1st October that he doubted whether it would allow any distribution to the directors). I think that the answer to this claim is that they were no longer providing such services as they did perform during this period on the footing that they were entitled to anything by way of remuneration. The 2nd January document had given Peter Faulding a veto over this question. What they must have been counting on, had they stopped to think about it, was their power to recommend and authorise a payment to themselves by way of dividend. They were in this respect victims of their own false belief that they had secured themselves a position as shareholders. I do not therefore consider that they are entitled to any further remuneration on a quantum meruit basis over and above what they have already received.