England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London WC2A 2LL
		8 October 2003

Mr Justice Park

ABBREVIATIONS, GLOSSARY, DRAMATIS PERSONAE, ETC.

1. These are set out in the Table in the Annex at the end of this judgment. A reader who is unfamiliar with the facts of the case might find it helpful to detach the Annex or make a loose copy of it so as to have it readily to hand when reading the judgment. Although all abbreviations are in the Annex, I will mention three here, since they are particularly important and recur frequently throughout the judgment. IM Ltd is MDA Investment Management Ltd, the company which is at the heart of the case. MDA Partnership is Malcolm Doney Associates, a partnership of individuals. BC Ltd is MDA Business Consultancy Ltd. Statutory references are, except where otherwise indicated, to sections of the Insolvency Act 1986.

II OVERVIEW

2. IM Ltd was ordered to be wound up by the court on 23 February 2000. The applicant, Mr Whalley, is the liquidator. The respondent, Mr Doney, had been the principal shareholder and director. Indeed he had been the sole director for about the last eighteen months before the company went into liquidation. In these proceedings the liquidator seeks orders requiring Mr Doney to pay sums of money to the company, either as damages for breach of duty (misfeasance and breach of a director's fiduciary duties to the company), using the statutory machinery for such a claim which is available under s.212, or under s.238 (transactions at an undervalue), or under s.239 (preferences).
3. IM Ltd had been engaged in the financial services business. In July 1998 it entered into an agreement whereby its business was sold to a third party. MDA Partnership, an associated business entity in which Mr Doney was the main participant, was also a party to the sale agreement. The agreement provided for part of the total consideration from the purchaser to be paid to IM Ltd, but for a farther part of it to be paid (or, because part of it was convertible loan stock in the purchaser, issued) to MDA Partnership. The largest part of the liquidator's claim against Mr Doney arises from this splitting of the consideration for the sale of IM Ltd's business. The liquidator says that the whole of the consideration ought to have gone to IM Ltd, or if any part of it could justifiably have gone to MDA Partnership it was a much smaller part than actually went to the partnership. He does not challenge the global value of the consideration provided by the purchaser: the sale was an arm's length bargain. But he says that the unjustifiable splitting of the price meant that IM Ltd received much less than it should have done, and that that was caused by breach of duty on the part of Mr Doney. He also says that the transfer of IM Ltd's business was, so far as IM Ltd was concerned, a transfer at an undervalue covered by s.238, and that Mr Doney was responsible for it. On those two alternative grounds (misfeasance and s.238) he claims monetary compensation against Mr Doney. I agree in principle with the liquidator's arguments on misfeasance, and subject to anything which may emerge from further submissions (to which I refer principally in paragraph 110 below) I will make an order against Mr Doney accordingly. I also agree with most of the liquidator's submissions under s.238, but for a technical reason which I will explain in paragraphs 122 and 123 below, I do not think that I could make an order against Mr Doney under the section.
4. The liquidator has further claims arising from certain payments which IM Ltd made after the sale of its business but before it went into liquidation. Several payments were made in that period, and to some of them the liquidator has no objection. But a number of payments were made to Mr Doney or to business entities associated with him, and the liquidator says that those payments were misfeasances or preferences within s.239 or both. On most of the payments I agree with the liquidator, and I shall order Mr Doney to make reparation to the company accordingly (but, as with the liquidator's claim based on the splitting of the consideration, subject to anything which may emerge from further submissions).
5. In the pleadings the liquidator also claimed relief against Mr Doney in respect of moneys paid by the company to a number of investors who had purported to subscribe for preference shares in the company. For reasons which are too complicated to encapsulate here and which I will describe in the main body of this judgment (especially in paragraph 162), the liquidator does not now pursue that head of claim.
6. I record that Mr John Randall QC appeared for the liquidator, and Mr John Davies QC appeared for Mr Doney. I am grateful to both of them for their thorough and helpful presentation of their respective cases.

III THE FACTS IN OUTLINE

7. Later I shall have to go in some depth into the particular facts which preceded and followed the sale of IM Ltd's business in July 1998. At this point I give a broad historical account of the business in order that the matters which I shall investigate in detail can be seen in their context.
8. Mr Doney, who is now aged 66, became involved in the financial services business in the late 1970s. In the early 1980s he established his own business under the trading name Malcolm Doney Associates. I believe that at that time Mr Doney was the sole proprietor of the business, but in 1985 he went into partnership with Mr Colin Paddon, who at the time was his brother in law. The business continued to bear the name Malcolm Doney Associates, and that is the business to which I am referring in this judgment as the MDA Partnership. I do not think that there was ever a written partnership agreement. Mr Doney appears to have been entitled to about 80% of the profits. In the early 1990s there were two other partners, a Mr Windsor and a Mrs Upward. I have no evidence about the extent of their shares or of their involvement in the business, The impression which I have is that the partnership continued to be substantially a Doney/Paddon vehicle, and that in practice Mr Doney was the dominant partner who continued to receive around 80% of the partnership profits. It is convenient to mention at this stage that, in circumstances of which I know virtually nothing, Mr Doney and Mr Paddon fell out at some time before 1998, but Mr Paddon continued to have his interest in the partnership and (as I will explain below) his interest in IM Ltd.
9. The partnership established a business of providing financial services, such as advice and fund management, to clients, most of whom Mr Doney says were retired individuals of high net worth. The business included advice and assistance to clients in connection with life assurance, pension policies, and other financial products. The principal offices of the business were in Bournemouth. There were several self-employed account executives or consultants, who provided the personal link between the partnership and its clients. As far as I know the business was generally successful in the 1980s.
10. Until about 1990 the entire business seems to have been carried on by MDA Partnership. IM Ltd had been incorporated under another name some years previously, but had been dormant. However, at some time in 1990 the company started to trade, carrying on at least some of the activities which had previously been carried on exclusively by MDA Partnership. The shares in IM Ltd were owned as to 80% by Mr Doney and as to 20% by Mr Paddon.
11. From about 1990 the accountants for the partnership and the accountants and auditors of IM Ltd were Rothman Pantall. Rothman Pantall is a firm of chartered accountants with offices at a number of locations, mostly in Hampshire. One of the offices is at Chandlers Ford, near Southampton, and that was the office which looked after the affairs of MDA Partnership and of IM Ltd. There were three partners based there: Mr Bennett (the senior partner in the particular office), Mr Smyth, and Mr Perriam. Mr Smyth specialised in taxation. Mr Perriam joined Rothman Pantall, initially as an employee, in the early 1990s. He became a partner in 1995. In the years with which I am principally concerned he was the person at Rothman Pantall who, by himself or by his staff, did most of the accounting and auditing work which was required for MDA Partnership and IM Ltd.
12. IM Ltd became active in the business for reasons connected with statutorily-based regulation of the provision of financial services. At the earlier part of the period with which I am concerned the regulatory authority was FIMBRA. Later FIMBRA was replaced by the PIA, but the same regulations continued to apply. Any organisation which carried on financial business required to be a member of FIMBRA, and there were different categories of membership. Only category 1 members were authorised to handle clients' money and assets and to deal as principals with clients. I am not sure whether MDA Partnership was ever authorised to carry on category 1 business, but in 1990 Mr Doney (and, I assume, Mr Paddon) decided that category 1 business should be carried on by a limited company. IM Ltd became that company. MDA Partnership continued to be a category 3 member of FIMBRA until the beginning of 1995, when it gave up its membership.
13. There are quite a lot of respects in which the background facts of this case are unclear, even after several days of evidence. One of those respects concerns precisely what business was carried on between 1990 and 1995 by IM Ltd, and what business continued to be carried on by MDA Partnership. To an extent the relationship between the two entities was supposed to have been regulated by a number of agreements which I will have to look at more closely later. However, the agreements were in my view drawn up by Mr Doney personally and without any legal advice. They are hard to understand, and I do not find them particularly illuminating. Taken together with the accounts of IM Ltd and with a limited amount of information which became available in the course of the trial about the MDA Partnership accounts (the accounts themselves were not before me), they give me the impression that by far the greater part of the business, in so far as it consisted of dealing with clients and with financial institutions like insurance companies and unit trust groups, was or came to be carried on by IM Ltd, not by the partnership. Commissions from financial institutions (the largest component of the business's receipts) were paid by the institutions to IM Ltd, not to the partnership, but under internal arrangements between IM Ltd and the partnership large shares of the commissions were paid over by IM Ltd to the partnership.
14. In the previous paragraph I said that the agreements between IM Ltd and MDA Partnership were 'in my view' drawn up by Mr Doney personally and without legal advice. There was an evidential dispute about this. Mr Doney, who is now deeply hostile to Rothman Pantall, the former accountants for his business enterprises, says that nearly all of the agreements were entered into on the advice of, and largely drafted by, Mr Perriam of Rothman Pantall. Mr Perriam says that that is not true: the agreements were devised by Mr Doney and, so far as Mr Perriam knows, drafted by him. Mr Perriam was informed about them after they had been executed. I accept Mr Perriam's evidence on this. He was and is an accountant, not a lawyer. Drafting legal documents is not within his professional expertise. In 1992 and 1993, when some of the agreements were entered into, he was quite new to Rothman Pantall, and was not yet a partner. It is inherently unlikely that he would have drafted legal agreements for a client of the firm, and I accept his evidence that he did not. The corollary is that I do not accept Mr Doney's evidence that he (Mr Perriam) did.
15. As I have indicated, in my view the bulk of the underlying trading activities from which profits were earned were, from 1990 onwards and (possibly) increasingly as time passed, carried on by IM Ltd, not by MDA Partnership. The partnership still existed, but my analysis of the evidence is that for the most part its activities consisted of providing services to IM Ltd (e.g. office facilities, probably in the rented premises which had been used by MDA Partnership when it was the only trading entity). Mr Doney presents a different picture, namely that from 1990 to 1995 it was still MDA Partnership which was the main trading entity, and that the business which IM Ltd did was comparatively unimportant. I do not agree with that, and in any event it was certainly the case from the beginning of 1995 onwards that all the current trading activities were carried on by IM Ltd. Until 1995 MDA Partnership had been a category 3 member of FIMBRA, so that it was authorised to carry on some kinds of financial business (although in my view it was IM Ltd, not the partnership, which carried on most of them, including those which could have been carried on by the partnership). However, as I have said, the Partnership ceased to be any sort of FIMBRA member from the beginning of 1995, so I cannot see how it can itself have carried on any financial services business at all for the three and half years which preceded the sale of IM Ltd's business in July 1995. It did, however, continue to receive repeat commissions on further investments made by clients on financial products which had originally been set up by it. A typical case was the payment by a client of a further premium on a policy which had been arranged by MDA Partnership at a time when it was still carrying on financial services business.
16. There are some other events which happened in 1995 (or in the case of one of them may have happened then) which I should mention here. One is that another limited company which in a loose sense was part of the same wider organisation as MDA Partnership and IM Ltd started to play a role. This was BC Ltd. Despite its name ('MDA Business Consultancy Ltd') I do not think that it did any business consulting. It entered with IM Ltd into an agreement dated 3 January 1995 for it to provide business services to IM Ltd, and for commission earned by IM Ltd from new business to shared by IM Ltd with BC Ltd at such rate as might be agreed. This was one of the agreements which Mr Doney says were devised and drafted by Mr Perriam, but which I believe were Mr Doney's own productions. From the beginning of 1995 onwards the wider commercial group consisted of IM Ltd, MDA Partnership, and BC Ltd, and I find it even more difficult to make clear sense of the financial movements between the three of them. (Having just said that the wider commercial group consisted of IM Ltd, MDA Partnership, and BC Ltd, I ought to add that there were one or two other lesser companies, including a trustee company, but they are not important in this case and do not need to be referred to any further.)
17. Secondly in 1995, there is a hotly controversial document which bears the date 16 January 1995. On its face it appears to be another in the series of agreements between IM Ltd and MDA Partnership which attempted to regulate the relationship between the two entities. Mr Doney does not say that Mr Perriam drafted this agreement, but he does say that he advised upon it and that Rothman Pantall knew all about it. This is denied by all three Rothman Pantall partners concerned (Mr Bennett, Mr Smyth and Mr Perriam). The agreement is potentially important because, for reasons which I will explain later, Mr Doney says that it provides a justification for the 1998 sale consideration being split between IM Ltd and MDA Partnership. Virtually everything to do with the agreement is disputed, and I shall have to say much more about it later. At this stage I draw attention to its existence (or apparent existence) and I record that I shall return to it.
18. Thirdly in 1995, towards the end of the year Mr Doney and his wife left this country and moved to live in Florida, USA. Mr Doney continued to be a director of IM Ltd and of BC Ltd, and a partner in MDA Partnership. The general thrust of the evidence was that, although Mr Doney ceased to be involved to the same extent in the day to day affairs of the business, he was still the dominant personality and the driving force in it. He was after all the 80% controlling shareholder in IM Ltd. Mr and Mrs Doney have lived permanently in Florida since 1995, except that, as I will describe, there was a period of several months in 1998 when Mr Doney came back to this country to attend to the problems of the business.
19. A number of things, some serious, started to go wrong with the business in 1996, 1997 and the first part of 1998. I will describe them under the next heading, but they led to Mr Doney's temporary return in the spring of 1998. I do not know whether he came back with an already formed intention of selling the business – I suspect not but he soon formed the view (a realistic view in my opinion) that the business could not continue under its existing ownership, and would have to be sold if it was to survive at all. From an early date he was in contact with a potential purchaser called Farlake Group PLC. Negotiations for a sale of the shares in IM Ltd fell through, but Farlake was willing to purchase the business and assets. Contracts were exchanged on 15 July 1998 and the sale was completed on 29 July 1998.
20. I give a fairly detailed summary of the agreement at a later point in this judgment. Here it is sufficient to say that each of IM Ltd and MDA Partnership was a party to it ('the First Vendor' and 'the Second Vendor'), and that the consideration for the sale, partly in cash and partly in Farlake instruments (described as loan stock) which would convert into Farlake shares at future dates, was divided between IM Ltd and MDA Partnership. The maximum consideration (assuming unrealistically that there would be no reductions or 'clawbacks' on account of warranties and the like) would be £2.41m. IM Ltd could receive a maximum of £1m in cash. MDA Partnership could receive a maximum of £160,000 in cash and £1.25m in Farlake convertible loan stock.
21. As I have said the agreement was exchanged on 15 July 1998 and completed on 28 July 1998. Within about a week Mr Doney returned to Florida. All the other directors of IM Ltd had resigned, so he was the sole continuing director. That remained the position until IM Ltd went into liquidation. IM Ltd had no continuing business, and I presume that Mr Doney visualised that its affairs would be run down, after which it would be placed into members' voluntary liquidation. The internal accountant, Mr Hare, stayed on for about a month, but does not seem to me to have done much. Mr Mills, who had been an office manager in the business before the sale, stayed on on a part-time and self-employed basis for several months, but he would himself say that his business skills and experience did not fit him to take charge of an orderly rundown of the company's affairs. I do not think that he had any significant authority to take decisions himself. Mr Mills caused some payments to be made by the company, but I believe that (except perhaps for trivial amounts) he was dependent on instructions from Mr Doney. Such controlling authority as there was rested with Mr Doney, the sole director. However, he was thousands of miles away. As I will explain later, he had fallen out with Rothman Pantall, so no-one was acting for the company on its financial affairs, in particular its tax affairs.
22. There was a dispute building up with Rothman Pantall about the firm's unpaid fees. Mr Doney occasionally wrote long, rambling, and in my opinion unhelpful letters to Mr Bennett (the senior partner at Rothman Pantall's Chandlers Ford office), but he did nothing effective to get any control over IM Ltd's financial affairs put in place. In March 1999 Rothman Pantall served a statutory demand on IM Ltd claiming unpaid fees of some £56,000. Mr Doney did nothing about it, and in July 1999 Rothman Pantall presented a winding-up petition against the company. At that stage Mr Doney did take professional advice with a view to opposing the petition on the ground that Rothman Pantall's claim was disputed on various grounds, including over-charging and an assertion that IM Ltd had a cross-claim in damages for professional negligence.
23. However, nothing came of that because the Inland Revenue intervened. The company owed large amounts to the Inland Revenue for corporation tax, interest and penalties (and also, I think for arrears of unpaid PAYE and NICs). A lot of these tax liabilities had arisen from determinations of the General Commissioners, reached after the company had been allowed several adjournments and after letters had been sent to Mr Doney warning him of the consequences if accounts were not submitted and questions were not answered. Mr Doney complains that these letters were sent by surface mail, but I find from the evidence of the Inspector of Taxes, Mr Martin, that they (or at least the most important of them) were also sent to the Florida fax number which Mr Doney had used in a letter to the Inspector of Taxes. The patience of the Inspector and the General Commissioners finally ran out and, at one or more hearings where the company was not represented, assessments were confirmed in substantial sums. The Inland Revenue were substituted for Rothman Pantall as the petitioning creditor on the winding-up petition. There was by then no defence to the Revenue's claims. (Mr Doney blames all of this on Rothman Pantall. In my opinion the responsibility was his own.) On 23 February 2000 Registrar Buckley made an order on the Revenue's unopposed petition, placing IM Ltd in compulsory winding-up. The Revenue and Rothman Pantall were the largest claiming creditors, although there were a few others, including two former employees or self-employed consultants, for lesser sums.
24. In the first instance the Official Receiver was the liquidator. The documents include a statement made by Mr Bishop, who had in the past been the in-house solicitor and company secretary at the company, dated 7 March 2000. I do not know what source materials he had access to: he had left the company at the time of the sale of its business to Farlake some 20 months before. However, he records that IM Ltd had about £6,700 in cash at the bank, and claimed to be owed about £120,000 by two alleged debtors. I am sure that neither of the alleged debts has yielded anything in the three years which have elapsed since. Mr Bishop listed creditors who between them were claiming something like £325,000. The largest claimant was the Inland Revenue and the next largest was Rothman Pantall.
25. The documents also include a letter of 25 April 2000 to the Official Receiver from Mr Doney in Mr Doney's characteristic style. He blamed the company's financial predicament on everybody except himself: Mr Paddon; Mr Windsor; Rothman Pantall; the regulators at FIMBRA and the PIA; the managing director of Farlake, Mr Ewing; an outside insurance company which had made a clawback of commission which Mr Doney disputed.
26. On 26 April 2000 the Official Receiver was replaced as the liquidator of IM Ltd by Mr Whalley, the present liquidator. Mr Whalley wrote to Mr Doney on 3 May 2000, enquiring whether they could meet and asking for information about some specified payments which IM Ltd had made while Mr Doney was the sole director. On 15 May 2000 Mr Doney wrote a long and rambling letter to Mr Whalley. He may not have received Mr Whalley's letter, since he made no reference to it. He said nothing about meeting and he did not answer any of Mr Whalley's questions. On 17 May 2000 Mr Whalley sent in reply a letter which seems to me to have been entirely reasonable and businesslike. It prompted an aggressive and totally unhelpful reply from Mr Doney. One or two further letters passed between the two of them, including a particularly disagreeable and abusive letter from Mr Doney of 17 August 2000.
27. No progress was being made in correspondence, and the next effective step so far as the present case is concerned was the commencement by Mr Whalley of the present proceedings by an originating application dated 21 December 2000. Points of claim followed. Both the originating application and the points of claim have been amended at least once so as to raise the issues which are currently before me. In the first instance the application was brought against Mr Doney and against MDA Partnership (the partners at the time being Mr Doney and Mr Paddon). At one time Mr Paddon was made a personal respondent, but in January of this year the liquidator dropped his claim against Mr Paddon, both personally and as regards his share as a partner in MDA Partnership. Mr Whalley explained that he had decided on pragmatic cost-related grounds that it was not worth pursuing the claim against Mr Paddon. By consent the claim was dismissed with neither party paying costs to the other. The claim against MDA Partnership still stands, but it is now brought only against Mr Doney's interest in the firm. Effectively the present claim is simply one against Mr Doney.

IV THE EVIDENCE

28. There were extensive bundles of documents before me, although as commonly happens with companies which have gone into liquidation some years ago there were some gaps. Each party adduced quite a substantial body of oral evidence. Mr Whalley, the liquidator, gave evidence on his own behalf. He also adduced evidence from four Rothman Pantall partners (the three Chandlers Ford partners and Mr Ryman, an insolvency partner in the London office), and Mr Martin, the Inspector of Taxes who has at all times been responsible for IM Ltd's tax liabilities. On Mr Doney's side, he gave evidence himself, and also adduced evidence from Mrs Rayner (an account executive of IM Ltd and a director of the company, and also Mr Doney's daughter), from Mr Hare and Mr Mills (former employees of the business), and from IM Ltd's solicitor for the transaction with Farlake, Mr Coombs.
29. Each party presented expert accountancy evidence. The witness for the liquidator was Mr Fanshawe, who is a specialist in insolvency matters (like Mr Whalley himself). The expert for Mr Doney was Mr Mason, a large part of whose practice consists of preparing and giving expert accountancy evidence in legal disputes.
30. I do not wish to be understood as complaining that I did not have enough evidence, but it is worth mentioning some persons who were not witnesses. One was Mr Paddon. I have described how the liquidator initially was proceeding against Mr Paddon as well as against Mr Doney, but how before the trial began he settled his claim against Mr Paddon. Before me the case proceeded against Mr Doney alone, and Mr Paddon did not give evidence either for him or against him. There was also no evidence from Mr Windsor, who was a director of IM Ltd for some time (including until the time of the sale to Farlake), or from Mr Bishop, the in-house solicitor at the Doney organisation. Nor was there evidence from Mr Ewing or anyone else from Farlake.

V THE AGREEMENTS BETWEEN IM LTD, MDA PARTNERSHIP AND BC LTD

31. I have already referred to these agreements in a general way: see paragraph 13 above. They are the agreements as respects most of which Mr Doney says that they were entered into on the advice of and drafted by Mr Perriam, but as respects which my view is that they were decided upon and drafted by Mr Doney. I have mentioned earlier that there was an in-house solicitor, Mr Bishop. However, no-one has suggested that he had anything to do with the agreements. He was not a witness and there was virtually no evidence from anyone else about what sort of legal work he did. A possibility is that he became involved when some legal issue or other arose in connection with matters on which IM Ltd or MDA Partnership was acting for a client. He does not appear to have had any role as respects the internal legal structure of the operating trilogy of MDA Partnership, IM Ltd and BC Ltd.
32. The first agreement which has survived is dated 31 July 1992. It is between MDA Partnership (which at the time had four partners, including Mr Doney and Mr Paddon) and IM Ltd. It recited that under the FIMBRA rules the partnership was authorised to transact category 3 business and the company was authorised to carry on category 1 business. It also recited that 'The Company was incorporated to provide Discretionary and Advisory Management services and client account facilities for clients of the Partnership.' In the operative provisions clause 1 provided that clients were to enter into appropriate client agreements and that they would thenceforth be regarded as clients of IM Ltd. Subsequent clauses dealt with receipts arising to IM Ltd from its activities for clients, and distinguished between (1) fees from the clients themselves and (2) commissions. I assume, although the agreement did not say so, that the commissions referred to were commissions paid to IM Ltd by insurance companies, unit trust groups, and the like. The agreement also set a pattern, which characterised a lot of the business of IM Ltd, whereby some of the amounts received by IM Ltd from activities which it undertook on behalf of its clients were not to be retained by it, but were to be paid over by it to MDA Partnership (or, pursuant to a later agreement of 1995, to BC Ltd). Although fees from clients were to be retained by IM Ltd, all commissions earned by IM Ltd were for a year (until 31 July 1993) to be paid to MDA Partnership. After that year the agreement provided that some commissions were to continue to be paid to MDA Partnership, but that others were to be shared equally between IM Ltd and the partnership. Clause 5 provided that MDA Partnership was to provide accommodation and facilities for IM Ltd at such cost to IM Ltd as might be agreed from time to time.
33. Mr Perriam said in evidence that he had a vague recollection that this agreement replaced an earlier one under which virtually all of IM Ltd's receipts were to be paid to MDA Partnership. He thought that FIMBRA had taken exception to the earlier agreement, so this one of 31 July 1992 provided for IM Ltd to retain at least some part of the receipts which derived from its activities on behalf of clients. I do not recall Mr Doney specifically commenting on this in his evidence, but on his behalf Mr Davies said that there could be something in Mr Perriam's recollection. It seems quite plausible to me. IM Ltd had been carrying on category 1 business for two years already. The accounts nevertheless suggest that most of the money being earned by IM Ltd was not reflected in its profits, so something of the nature which Mr Perriam recalls may have been happening. It is certainly the case that, as I will explain later, this basis and other bases on which IM Ltd paid receipts over to MDA Partnership or BC Ltd were a regular source of difficulty between IM Ltd and FIMBRA.
34. So much for the July 1992 agreement. The next agreement was dated 8 June 1993 and was expressed to be an amendment to the July 1992 agreement. Whereas that agreement had provided that the whole of IM Ltd's commissions were to be payable to MDA Partnership only for one year, and after that were to be divided between IM Ltd and MDA Partnership, the amendments had the effect that the whole of the commissions were to be payable to MDA Partnership without any provision for the position to change after a year. The agreement underlines the feature that, although IM Ltd carried on business activities from which it derived significant income receipts from commission-paying institutions, IM Ltd did not keep that income for itself but paid it over to MDA Partnership.
35. I now move to 1995. There was certainly one agreement in that year, and there may have been two. It may be appropriate to see them against the background of two factors. First, until the end of 1994 MDA Partnership had continued to be a category 3 FIMBRA member, so that it could carry on category 3 business itself (although how far it, rather than IM Ltd, actually did so, is another question, and is in my view obscure). Second, MDA Partnership ceased to be any sort of FIMBRA member at the beginning of 1995, and thus had no legal capacity to carry on any kind of financial services business itself.
36. The agreement which was certainly made in 1995 is dated 3 January 1995; to commence from 1 January 1995. It was between IM Ltd and BC Ltd; MDA Partnership was not a party to it. There were two operative clauses. Clause 1 provided that all commission earned by IM Ltd in respect of new business was to be shared with BC Ltd 'at such a rate as may be agreed between the Directors of the First and Second Companies to take account of the services provided in marketing, introducing and administering new clients.' I comment at this point that the agreement did not explain how BC Ltd was in a position to provide services in marketing, introducing and administering new clients, and the evidence of Mr Doney and of other witnesses on his behalf did not illuminate the matter for me. It was also curious that the agreement referred to IM Ltd sharing commissions with BC Ltd when, at the time of the agreement, IM Ltd was bound by the 1992 and 1993 agreements to pay all of its commission income to MDA Partnership. Clause 2 of this agreement of 3 January 1995 said that BC Ltd was to provide 'professional, clerical and administrative services to IM Ltd in respect of its normal corporate activities and [should] make such management charges as shall from time to time be agreed by the Directors of the First and Second Companies'.
37. There was nothing to indicate how this agreement of 3 January 1995 was to relate to the 1992 and 1993 agreements between IM Ltd and MDA Partnership, which I described in the previous few paragraphs. However, the impression one gleans is that it was anticipated that BC Ltd would be responsible for the routine administrative costs of the operation, and that the agreement sought to present justifications for IM Ltd to pay over to BC Ltd proportions of its commission income from time to time. IM Ltd certainly did that from 1995 onwards.
38. The other agreement which may have been entered into in 1995 is the controversial agreement dated 16 January 1995 to which I referred in paragraph 17 above. Its authenticity is not admitted by the liquidator, and, even if it was entered into on the date which it bears, there are still serious disputes about whether it was properly made under the requirements of company law and about whether it was ever intended to be acted upon anyway. I will have to consider those issues later. For the moment I simply record what the document says. It is an agreement between MDA Partnership (which had three partners at the time) and IM Ltd, and it is described as an agreement supplemental to the July 1992 agreement between the partnership and the company as amended by the agreement of 8 June 1993. The operative clauses are clauses 2, 3 and 4. I find their meaning obscure, so I will not attempt to summarise or paraphrase them but will simply set them out in full:

"(2) The Company hereby acknowledges that the Partnership is entitled to receive commissions in the mariner set out in [the] original Agreement, as amended, notwithstanding the fact that the Partnership is no longer authorised to transact investment business.

(3) The Partnership hereby relinquishes its right to continue to receive the Commissions due to it under clause (3) of the original Agreement, as amended, and the Company agrees that the Partnership shall be entitled for a period of five years thereafter, to retain all rights in respect of the Company's trading activities.

(4) Any consideration paid to the Company as a result of transferring its Goodwill or its funds under management shall be the property of the Partnership."

39. I could go on at length about the obscurity of the foregoing clauses, but I will do so only briefly. It is odd that clause 2 says that MDA Partnership can still receive commissions, but clause 3 immediately says that it will not do so. The second part of clause 3 is very opaque. And what is meant to be the relationship between the second part of clause 3 and clause 4? The agreement, and in particular clause 4, is of some importance, because it is relied on as one justification for the division of the price for IM Ltd's business upon the sale in July 1998, with a large proportion of it going to MDA Partnership. I will consider at a later point (beginning at paragraph 84) whether the reliance can be sustained, and I will conclude that it cannot.

VI PROBLEMS WHICH AROSE IN THE CONDUCT OF THE BUSINESS

40. Whatever may have been the theoretical answers to some of the questions which arose or might have arisen from the agreements, in the actual carrying on of the business or businesses of the three entities a succession of problems of varying kinds kept arising. I do not think that there was anything wrong with the basic trade of providing financial services to clients. As far as I can tell IM Ltd (if it was IM Ltd which was carrying on the business), or MDA Partnership (if and in so far as it was MDA Partnership which carried on some part of the business until the end of 1994), or the two of them together had a satisfactory number of clients, a reasonable quantity of funds under management, and what could have been a good flow of inward cash receipts in the form of fees, commissions, and interest. However, on the managerial side of the business, particularly the financial and structural aspects, there were constant problems, the nature of which I will outline in the following sub-paragraphs.

i) IM Ltd's tax affairs were never up to date and under control. The documents contain many examples of the Revenue pressing for overdue returns, for answers to enquiries, and for payment of overdue liabilities. For example in November 1994 the Revenue threatened distraint. In September 1995 they commenced County Court proceedings to pressurise the company into paying overdue arrears of tax. In February 1996 the Revenue wrote complaining that the company was defaulting on an arrangement to pay £3,000 a month in order to clear the arrears. And so it went on, not just until the sale by the company of its business, but also afterwards. In the outline account of the facts which I gave earlier I described how the company neglected its tax affairs after the sale and in the result had large assessments against it confirmed by the General Commissioners. Mr Doney would blame all of this on Rothman Pantall, but I believe that the real problem was within the company itself.

ii) The position between the company and Customs & Excise about VAT was very similar. The documents are littered with letters and notices from Customs & Excise about arrears. Surcharges were imposed. Default notices were sent. There is a letter of 3 February 1995 in which Customs & Excise refused the company an extension of time to pay its VAT debt, because it had previously been granted one but had breached it. I could give many other examples of the same sort of thing. As I will explain in more detail under the next heading, shortly before the sale to Farlake Customs & Excise actually served a winding-up petition on the company on account of unpaid VAT.

iii) The company had an unsatisfactory relationship with its regulatory authority, FIMBRA, and later with FIMBRA's successor, the PIA. FIMBRA complained on a number of occasions about breaches of the rules, many of them but not all admittedly technical rather than fundamental in nature. A substantial issue which constantly recurred was whether IM Ltd was complying properly with the FIMBRA rules as to its minimum required financial resources. The detailed rules about this are complex, and it would be disproportionate for me to explain them. The basic principle was that a FIMBRA-regulated company needed to have capital resources at least equal to a proportion of its annual expenditure. IM Ltd adopted a number of ways of paying money to MDA Partnership (and thus to Mr Doney and Mr Paddon) which it argued did not count as expenditure for this purpose and so reduced its financial resources requirement. IM Ltd said that payments described as shares of commissions did not count. It said that payments to MDA Partnership labelled as 'directors' profit shares' did not count either. I acknowledge that IM Ltd was supported by Rothman Pantall in its arguments on these issues, but what it was doing was disliked by FIMBRA and by the PIA, which did not accept IM Ltd's arguments that it was not in breach of the rules. Mr Doney's attitude to FIMBRA comes through clearly from a passage in a letter of 22 July 1997 which he wrote to Mr Bennett of Rothman Pantall: '... these relentless bureaucrats who continue to demonstrate their incompetence whilst they continue to speak with forked tongue and do the opposite of what they said'.

iv) IM Ltd was persistently late in filing its returns at the Companies Registry. It was two years behind at the time of the sale of its business to Farlake, and three years behind when it went into liquidation. There are some letters in the documents which suggest that towards the end the Companies Registry was threatening criminal proceedings over IM Ltd's persistent failures to bring its returns up to date.

v) IM Ltd's auditors and accountants, Rothman Pantall, plainly found the company, and Mr Doney in particular, to be a difficult client. The main evidence from the firm came from Mr Perriam, who was the partner principally involved in acting for the company. Mr Bennett confirmed that in so far as Mr Perriam's witness statement referred to matters within his (Mr Bennett's) knowledge it was correct. I quote two extracts from the statement:

"Mr Doney is a very effective and persuasive salesman, but he is a rather dominating personality. He was never an easy person to deal with. He operated on a 'need to know' basis and would accordingly only release information to me if he thought it necessary for the performance of instructions placed with Rothman Pantall. He never took me fully into his confidence. ... [IM Ltd] (and its sister companies and the firm [MDA Partnership]) were persistently late in paying Rothman Pantall's bills."

Under the next heading I will give details of the disputes between Rothman Pantall and IM Ltd (always in the person of Mr Doney) about fees. The disputes were building up before the sale of the business to Farlake, and they continued thereafter until the commencement of the liquidation.

vi) More generally IM Ltd appears to have had recurrent difficulties over paying its trade creditors. In Mr Doney's letter of 22 July 1997 to Mr Bennett (referred to in sub-paragraph (iv) above for the quotation about 'relentless bureaucrats') he said: 'We all know that the business is undercapitalised and has struggled like hell to get to where it is today.' In oral evidence he said that he did not have sufficient financial resources to build a category 1 business within MDA Partnership: if that was true (and it seems very likely that it was) I cannot see that it was any different when Mr Doney attempted to build a category 1 business within IM Ltd, a company with the modest paid up share capital of £10,000. Mr Hare, a witness for Mr Doney, said in oral evidence that he remembered IM Ltd being under pressure to pay its debts from the first six months that he was the internal accountant. He thought that the company might have been undercapitalised. In a letter to the PIA dated 22 January 1996 Rothman Pantall said that IM Ltd had cashflow difficulties, and in a later letter dated 24 May 1996 they said that a number of suppliers had commenced legal action against the business (although they believed that in general such disputes had been settled before reaching court).

vii) A more general point is that, although there was little or no specific evidence about it, it seems clear that at times there was internal dissension within the company. At some time (I do not know precisely when) Mr Doney and Mr Paddon, the two shareholders and two of the directors, fell out. In the period leading up to the sale of the business to Farlake Mr Paddon was refusing to attend meetings. Another director had been Mr Windsor. He also, at a time and in circumstances which I do not know, appears to have fallen out with Mr Doney. In the months leading up to the sale to Farlake there were four directors: Mr Doney (who was back in this country at the time), Mr Paddon, Mr Windsor, and Mr Doney's daughter Mrs Rayner. At the only meeting in that period of which there are minutes (I will say more about the absence of minutes of board meetings later, particularly in paragraph 96) Mr Paddon declined to attend and Mr Windsor sent his apologies for absence. At the trial Mrs Rayner gave evidence and understandably was supportive of her father. However, she was one of the consultants or account executives who were the company's contact with clients. Her work in that capacity was her main concern, and I do not think that she was involved to any appreciable extent in the sort of matters to which I have been referring in the foregoing sub-paragraphs.

VII EVENTS LEADING UP TO THE SALE OF IM LTD'S BUSINESS TO FARLAKE

41. Under the previous heading I described some aspects of IM Ltd and its affairs which gave rise to problems of a general and continuing nature. Under this heading I focus on some specific matters which preceded the sale to Farlake and which, in my view, combined to make that sale or something like it essential if the business was to have any chance of surviving.
42. I begin in mid-1996. There was an active proposal for IM Ltd to become a public company and to be quoted on the Alternative Investment Market, the AIM. Mr Doney was living in Florida by that time, but I have no doubt that he was fully aware of the proposal. Indeed, I would be surprised if he was not instrumental in the proposal arising in the first place. Nothing came of it in the event. I do not know what specifically went wrong, but the idea fell through. The importance for the present case is that Rothman Pantall did a lot of work in connection with the AIM project, and IM Ltd incurred quite a substantial debt for fees to Rothman Pantall on the project as well as on more routine accounting work.
43. By the middle of 1997 IM Ltd was substantially in arrears on the fees which it owed to Rothman Pantall. I will not go into details here, but the documents and the oral evidence, in particular the oral evidence of Mr Bennett, record a progressive build up of arrears as Rothman Pantall continued to undertake accounting work for IM Ltd, and IM Ltd, while making some payments, fell further and further behind, More recently Mr Doney has been alleging that Rothman Pantall were overcharging, and were negligent in various respects. That is not what he was saying in 1997 and 1998. There are several letters from Mr Doney acknowledging arrears of fees and making promises of payment. It is true that, in his long letter of 22 July 1997 to Mr Bennett (to which I have referred on one or two occasions already), Mr Doney, as well as making proposals for clearing the arrears, asked for details of what work the fees were for. On the documents it was a long time before Rothman Pantall provided details in writing, but Mr Bennett said that he had several conversations with Mr Doney (mostly by telephone, because Mr Doney was in Florida until the spring of 1998) and that the information which Mr Doney requested was provided. Rothman Pantall expected that the arrears of fees would all be paid out of the money received by IM Ltd from Farlake on completion of the business sale. The arrears were reduced by a payment in September 1998, but large amounts were still owing and were never paid. As I have described in the outline account of the facts which I gave earlier, Rothman Pantall eventually issued and served a winding-up petition on account of unpaid fees which it alleged were owed to it by IM Ltd.
44. A drain on the cash resources of IM Ltd arose from the large payments which the company made to MDA Partnership or BC Ltd out of its receipts. Some of these payments were described as 'shared commissions'. In earlier years they were paid to MDA Partnership, reflecting the July 1992 agreement between IM Ltd and MDA Partnership which I described in paragraph 32 above. From 1995 onwards they were paid to BC Ltd, reflecting the agreement of 3 January 1995 between IM Ltd and BC Ltd (see paragraph 36 above). Others of the payments were described as 'directors' shares in profit' and were paid in the first instance to MDA Partnership. I believe that, in so far as the receipts of the partnership from IM Ltd for years before 1995 were not absorbed by expenses paid by the partnership (which do appear to have included meeting many of the overheads of the entire operation of itself and IM Ltd, like the rent), they would have been taken out of the firm as drawings by the principal partners, Mr Doney and Mr Paddon. I suspect, but am- not sure, that some part of the shared commissions which, from 1995 onwards, were paid by IM Ltd to BC Ltd was passed on in some form to MDA Partnership and drawn out of the partnership by Mr Doney and Mr Paddon. (I have already recorded that both of these kinds of payments by IM Ltd – shared commissions and directors' shares in profits – gave rise to dissatisfaction on the part of FIMBRA and the PIA in connection with the capital resources requirements under the FIMBRA rules.) The sums so paid away by IM Ltd were substantial. For the accounting year ended 31 July 1996 IM Ltd resolved on 28 January 1997 to pay to BC Ltd a share of commissions of £725,545. For the same year it paid to BC Ltd £360,000 as directors' shares of profit. For the next accounting year (to 31 July 1997) it resolved on 16 February 1998 (at which date its financial position was already precarious) to pay to MDA Partnership directors' shares of profit of £575,000 and to pay to BC Ltd a share of commissions of £510,654.
45. 1 do not suggest that the whole of these large sums was taken out of the business in the form of drawings by Mr Doney and Mr Paddon and used for personal expenditure. The running costs of the business had to be met, and it appears likely that in the last three years BC Ltd paid for most of them and recouped the cost by way of management charges to IM Ltd. Nevertheless the personal cash demands on the business of Mr Doney and Mr Paddon, especially Mr Doney, were heavy. Mr Perriam, in his witness statement, said that one reason why IM Ltd had problems satisfying FIMBRA was that Mr Doney made heavy cash demands, which had an impact on liquidity ratios: that situation continued after Mr Doney went to live in America. Mr Doney himself wrote in his letter of 22 July 1997 to Mr Bennett: 'Since I have been a permanent resident in the USA my personal need for money has increased.' He did say in oral evidence that his need for money in the USA did not last long, but that statement is not in my view consistent with the figures which I have given of the large amounts transferred away from IM Ltd. In any case, by July 1997 he had already been in the USA for almost two years, and his letter does not suggest that his need for money had started to decrease by then.
46. A different and detailed point arising from the payments to MDA Partnership of directors' shares of profits, is that the payments gave rise to problems under PAYE and NICs. It appears that MDA Partnership agreed with IM Ltd that it (MDA Partnership) would bear any PAYE and NICs, but it was IM Ltd which was liable to the Inland Revenue. Included in the tax debts which the Revenue were asserting against IM Ltd and which ultimately led to the compulsory winding-up of the company were arrears of PAYE and NICs. A point which never seems to have been examined in that connection is whether Mr Doney's residence in the United States may have meant that United Kingdom income tax and NICs were not payable on directors' remuneration for him. There was a possible argument to that effect, although IM Ltd muddied the waters considerably by paying Mr Doney's director's profit share, not to Mr Doney personally, but to MDA Partnership, a business organisation which was based in the United Kingdom. However, the argument appears to have gone by default and was never put forward.
47. A specific event which had serious consequences for the financial position of IM Ltd was that at some time round about the middle of 1997 FIMBRA (possibly in the course of a routine inspection visit) discovered that £180,000 which should have remained in a clients' account (that is an account which was in the name of IM Ltd, but the money in which belonged to clients, not to IM Ltd) had been transferred to IM Ltd's own account. Thus it had to be repaid. It was not suggested that this had been done in deliberate breach of the rules. It appears to have resulted from a series of innocent errors by an internal accountant (not Mr Hare) at the company. Mr Doney was not personally at fault except in the sense that as the principal director of the company he had a responsibility for any substantial matter which went wrong. However, the company had to find £180,000 at a time when it was having constant cash flow problems. The documents record that IM Ltd had repaid £78,000 to the clients' account by the end of 1997, and that it repaid another £82,000 in April 1998. The £82,000 was part of £85,000 borrowed from personal friends of Mr Doney, Mr and Mrs Westgate. I do not know what happened about the other £20,000 which on the face of it still needed to be repaid to the clients' account. There appears to have been just under £8,000 still not repaid at the time of the sale to Farlake.
48. I move to another matter. In the second part of 1997 and in early 1998 IM Ltd set out to raise money by making an issue of convertible preference shares. It seems likely that the need to use other funds in repaying part of the amounts incorrectly transferred from clients' account contributed to the decision to make a preference share issue. I also believe that increasing the capital available to meet the requirements of FIMBRA and the PIA influenced the decision. It appears from Mr Doney's witness statement that the preference shares were offered to existing clients of IM Ltd, and were presented as an opportunity to invest in the company. In January and February 1998 the company received a total of £164,500 from investors. However, the operation was carried out in a totally inept way. The documents include a form of share certificate which states that the holder holds a specified number of 'Convertible Preference Shares of £1 each fully paid in the above named company, subject to the Memorandum and Articles of Association of the Company'. But the memorandum and articles of IM Ltd were never amended so as to create the separate class of shares. They did not identify the rights attaching to the alleged shares. They did not state what preference dividends were payable. They did not state what happened to the shares in a winding-up. They did not state in what circumstances and at what times the shares were convertible from preference shares into ordinary shares, nor did they give a formula to show how many ordinary shares they would be converted into. Nor as far as I can see were any of those matters described in any other documents which were supplied to investors. In the result both counsel agree (as do I) that IM Ltd never succeeded in issuing any preference shares, convertible or otherwise, at all. The £164,500 could only be regarded in law as giving rise to a debt under which IM Ltd was liable to repay it on demand. So, far from the £164,500 increasing the shareholders' funds, it increased the company's indebtedness on a pound for pound basis, and did so in circumstances where the company probably parted with a significant part of the money raised almost as soon as it received it.
49. There are two other matters which arose in the months before the sale to Farlake which I need to mention. The first concerned IM Ltd's membership of FIMBRA's successor, the PIA. I assume that a part of the arrangements for the PIA to take over from FIMBRA was that existing members of FIMBRA had to become members of the PIA. At any rate, IM Ltd applied for PIA membership. According to the pleadings it initiated its application as early as 1994. The application had to come before the PIA Membership Committee. In a letter of 5 June 1997 the officer concerned at the PIA wrote that IM Ltd's application would be placed before the Committee. (The particular officer who wrote this letter was also an officer of FIMBRA, and had had a lot to do with the exchanges between FIMBRA and IM Ltd. I imagine that he was one of the 'relentless bureaucrats' of Mr Doney's perception.) He warned that the Committee might decide to reject the application. That is what happened: in January 1998 IM Ltd's application for PIA membership was refused. This was a potentially disastrous development for IM Ltd, its shareholders and directors. The consequence if the decision stood would be that IM Ltd could not continue in business.
50. At the instigation of Mr Doney IM Ltd appealed against the Membership Committee's decision. Mr Doney, in his oral evidence, said positive things about the prospects of the appeal. However, in his witness statement he had written that 'we had a huge mountain to climb'. His daughter, Mrs Rayner, records in her witness statement that that was his view at the time. Although I have no previous personal experience of applications for PIA membership I have to say that, having read through the correspondence and other documents, I would have been very pessimistic about the chances of the appeal succeeding. In the event it did not proceed, because it was dropped in consequence of the business being sold to Farlake. On 2 September 1998 the PIA issued a Press Release in which it announced that IM Ltd's application for membership had been rejected. The grounds were stated to be 'that [IM Ltd] had failed to demonstrate that it had sufficient financial resources; and the firm's poor compliance record whilst a member of FIMBRA.'
51. The second matter which I wish to mention and which arose in the months before the sale to Farlake concerns a legal action which had been brought against IM Ltd by an insurance company called Albany International. I do not know what the issue was, but there was a claim for damages against IM Ltd. On 16 February 1998 the board of IM Ltd resolved that there was no need to make a provision in IM Ltd's accounts in respect of Albany's claim. The reason was stated to be: 'because the claim has not been substantiated and the directors consider, after taking legal advice, that no liability will fall on the company as a result of this action.' However, when in March 1998 the case was determined IM Ltd lost and was ordered to pay £110,000 to Albany. I am not sure whether that award included Albany's costs, but even if it did IM Ltd had all of its own costs to pay, so that the loss of the Albany case cost the company, or was going to cost it, a good deal more than £110,000.
52. Another problem which IM Ltd had is one which I mentioned under the previous heading, but one which was becoming critical in the first half of 1998. It was seriously in arrears over paying the professional fees which it owed to Rothman Pantall. The partners at Rothman Pantall were pressing for payment, and there was a considerable danger that, unless some arrangement about the fees was made, Rothman Pantall would stop working on the company's affairs.
53. I believe that the foregoing paragraphs under this heading speak for themselves. By the spring of 1998 IM Ltd was in a serious financial situation, and its prospects of survival as a trading company in its existing ownership were very poor.

VIII THE SALE TO FARLAKE

54. Mr Doney returned to this country at some time in the spring of 1998. He says that the specific matter which caused him to return was the need to deal with the appeal against the decision of the PIA Membership Committee to refuse IM Ltd's membership application. I suspect that that was one factor but that there were others as well. As the account under the previous heading has shown, problems of all sorts were piling up around IM Ltd in late 1997 and early 1998. Mr Paddon had probably fallen out with Mr Doney by then, and it seems obvious that Mr Doney had to come back, to take charge, and to reach some important decisions about the future of the company. That is what he did, and he says that he soon perceived that the company or its business would have to be sold. No-one criticises him for that: he may have been responsible to a greater or lesser extent for the situation in which the company found itself, but, given what that situation was, the company was, I believe, doomed if it stayed as it was. If the business was to survive, and if any value was to be salvaged for Mr Doney as the principal shareholder (and for Mr Paddon, the minority shareholder, although I imagine that Mr Doney understandably did not care much about that), a sale to an outside purchaser (which had to be acceptable to the PIA) was essential. At some time in the spring of 1998, probably very close to the time when Mr Doney came back to this country, a company of brokers (called Hoare Worth) which specialised in arranging sales of companies, was appointed to find a buyer for IM Ltd.
55. It seems that two years or so previously there had been brief contacts with Farlake about a possible sale. They may have been initiated by Mr Paddon without the knowledge of Mr Doney, who was then living in America. Nothing came of it at that time, but in 1998 Farlake was still interested. Farlake was a quoted company. I do not know much about it, but it obviously operated in the same area of providing investment management services as did IM Ltd, and I think that I can assume that it was in good standing with FIMBRA and the PIA. The managing director of Farlake was Mr Sean Ewing. Whether by the introduction of Hoare Worth or otherwise I do not know, but serious contacts about a sale to Farlake began in March 1998 and culminated in the exchange of contracts on 15 July and completion on 28 July 1998. Farlake's interest in acquiring the business for a total consideration valued at over £2.4m confirms my view that IM Ltd had a good underlying business, and that it was problems of different kinds – the problems which I have described under the two previous headings – which were threatening the continued existence of the company.
56. In March and early April there were meetings and telephone calls between Mr Doney, supported by Mr Mills (the office manager at IM Ltd) and sometimes by a director of Hoare Worth, and Mr Ewing of Farlake. Most of the meetings seem to have taken place at Farlake's offices, which were in Bath. Mr Doney and IM Ltd had solicitors. They were Anstey Sargent & Probert, a west country firm. For the most part the partner who acted for Mr Doney and IM Ltd was Mr Coombs, who was based in the Exeter office. Farlake naturally had its own solicitors acting for it. However, the negotiations appear to have progressed for quite some time between the principals to the proposed transaction before Mr Coombs became significantly involved: I will not attempt to trace the detailed course of the negotiations. In broad terms they went through four phases, as follows.

i) In the first instance what was visualised was a simple sale by Mr Doney and Mr Paddon of the shares in IM Ltd to Farlake or to a subsidiary in Farlake's group. On behalf of Farlake Mr Ewing made a subject to contract offer for the shares in IM Ltd, and Mr Doney signed a copy of the offer to indicate his subject to contract accePIAnce. He probably did that on 16 April 1998. The consideration was to be £2.5m, half in cash and half in Farlake shares, but there were detailed conditions and warranties which could result in 'clawbacks' reducing the amount finally received by the vendors. However, quite soon Mr Ewing seems to have gone off the idea that Farlake should buy the shares in IM Ltd. I imagine that this arose as a result of due diligence investigations of IM Ltd undertaken by Farlake. It seems to me that virtually every time that, in the course of such investigations, a cupboard was opened, a skeleton would have fallen out.

ii) Mr Doney still wanted the transaction to take the form of a sale of shares by himself and Mr Paddon, for obvious tax reasons deriving from what he perceived to be his non-resident tax status. (I have my doubts about whether Mr Doney was correct on that point. In the tax years 1997/8 and 1998/9 he seems to me to have been resident in the United Kingdom.) There was a phase in the negotiations when Mr Doney and his advisers were trying to interest Farlake in a scheme whereby the business would somehow be transferred into a new company which came to be owned by Mr Doney and Mr Paddon, and that new company would then be sold to Farlake. This idea was canvassed for some weeks, but in the end was not proceeded with. Farlake's solicitors pointed out that, even if the scheme worked for tax, the new company would not be registered with either FIMBRA or with the PIA, so it would not be able to carry on the business. An incidental comment which I add here is that it seems to have been during this phase that there were the first direct personal contacts between Mr Doney and Mr Coombs of Anstey Sargent & Probert. They spoke on the telephone on 15 June 1998, and they met on 18 June 1998. (It appears that it was at that meeting that Mr Coombs was told of the purported preference share issue. When he and a colleague saw the documents, they pointed out that they 'looked rather shaky', a decidedly tactful way of putting it.)

iii) Farlake, through its solicitors, proposed a simple sale by IM Ltd of its business and assets. In the letter in which the solicitors pointed out the insuperable objections to the company scheme which Mr Doney and his advisers were proposing, the partner with charge of the matter wrote: 'I remain of the view that this deal is not likely to happen other than by way of a straight forward assets transfer from [IM Ltd] to Farlake.'

iv) A simple sale of the business by IM Ltd was unattractive to Mr Doney for tax reasons, since it would give rise to a capital gain in IM Ltd, all of which would be liable to corporation tax. Thus it would take no advantage of Mr Doney's non-resident tax status (as he believed it to be). In the fourth phase of negotiations the focus moved to a transaction which was basically a sale by IM Ltd of its business and assets, but where the consideration was split into two parts, one part going to IM Ltd, and the other to MDA Partnership (i.e. to Mr Doney and Mr Paddon personally). The first trace of this which I can find in the documents appears in a fax of 29 June 1998 from Mr Doney to Mr Coombs. Mr Doney proposed a structure which was not quite the same as that finally adopted: it involved him entering into a contract with the various consultants whose services Farlake would require, and then selling the benefit of that contract to Farlake. So there would have been two contracts with Farlake: one made by IM Ltd to sell its business, and the other made by Mr Doney (or possibly by MDA Partnership – Mr Doney's fax is not clear about this) to sell a contract whereby he had some sort of control over the consultants.

57. The final structure, seen in the contract which was exchanged on 15 July 1998, involved one contract, not two, but IM Ltd and MDA Partnership were both parties to it, and it divided the consideration between the two of them. It is a long document, and it would be excessive for me to reproduce it, or large parts of it, here. I will try to summarise the parts of it which are relevant to the present case in the following sub-paragraphs.

i) There were four parties: IM Ltd, called 'the First Vendor'; MDA Partnership (a partnership consisting of Mr Doney and Mr Paddon), called the Second Vendor; a Farlake subsidiary, IPS (which was to be the vehicle to acquire the business), called 'the Purchaser'; and Farlake itself.

ii) The main sale provision in clause 2.1 provided for IM Ltd to sell to IPS 'the Business as a going concern'. 'The Business' was defined as the business carried on by IM Ltd.

iii) Clause 2.3 provided for MDA Partnership to sell to IPS all such interest as it (MDA Partnership) might have in the Business, and 'all the assets and rights owned by or under the control of [MDA Partnership] and used in the conduct of the Business including, but without limitation, all rights of [MDA Partnership] to Commission Income.'

iv) There was a definition of 'the Account Executives'. They were seven named individuals who worked as account executives for IM Ltd and who were in contact with the clients. Mr Doney had referred to them as 'the consultants' in earlier documents. Clause 2.4 recorded that it was important that the seven account executives should transfer to IPS. The sub-clause continued: 'For this reason it is specifically agreed that [MDA Partnership] shall procure that on or before Completion each of the Account Executives shall enter into service agreements with the Purchaser in the Purchaser's standard form as annexed hereto.'

v) The total consideration for the sale is referred to in background documents as £2.41m, but the detailed provisions of the agreement are much more complicated in at least three respects.

a) The £2.41m was a maximum, and there were various detailed provisions under which it was not all paid at once. There were also provisions under which it could be reduced if things did not go exactly as visualised once the Farlake group had acquired control of the business. These provisions were referred to in the hearing before me as 'clawbacks'.

b) The total consideration to be provided by Farlake and its subsidiary was split between cash and instruments described as Farlake loan stock. The maximum amount of cash was to be £1.16m. The loan stock was expressed as having a nominal value of £1.25m. (Thus the consideration has sometimes been referred to as £2.41m: £1.16m plus £1.25m equals £2.41m.) 'Loan stock' was in my opinion a misleading expression. Unless I have missed something I do not think that there could ever have been a situation under which Farlake would owe to the holder of the loan stock a money debt of £1.25m or any other sum. The so-called loan stock was really a right to receive Farlake shares at future dates. The stock would be converted into predetermined numbers of Farlake shares in three tranches on three different dates. Further, it was not assignable. It appears to have been worth £1.25m at the time of the transaction, given the then quoted value of Farlake shares, but what it would prove ultimately to be worth would depend on the values of Farlake shares at the three conversion dates. I understand that the first tranche to be converted produced Farlake shares of a satisfactory value, but that matters have changed since. The second and third tranches have not been converted yet, and when they are they will be converted into shares in a successor company of Farlake which will have low values. However, despite these complications and changes which result from post-sale events affecting Farlake, it seems appropriate to appraise the sale on the footing that, at the time when it took place and ignoring the possibility of clawbacks, the part of the total consideration which consisted of Farlake loan stock was thought to be worth £1.25m. Thus, clawbacks apart, Farlake valued the business at £2.41m.

c) The total consideration to be provided by Farlake or its subsidiary IPS was divided between IM Ltd and MDA Partnership. The maximum amount of consideration which IM Ltd could receive was £1m in cash, and that amount was subject to possible reduction on account of clawbacks. The balance of the consideration (£160,000 in cash and £1.25m in Farlake convertible loan stock) all went to MDA Partnership, also subject to possible reductions on account of clawbacks. This feature whereby more than 50% of the value of the consideration was allocated to MDA Partnership is critical to this case, since it is attacked by the liquidator of IM Ltd as being a misfeasance by Mr Doney, or alternatively as giving rise to a transfer at an undervalue by IM Ltd, a transfer for which Mr Doney was responsible.

vi) The consideration going to MDA Partnership (namely £160,000 in cash and the issue of £1.25m of Farlake convertible loan stock) was stated by clause 3.5 to be consideration for MDA Partnership complying with the provision quoted in (iv) above whereby it was to procure the seven Account Executives to enter into service agreements with the Purchaser.

vii) The first £350,000 of cash consideration payable to IM Ltd was to be paid to its solicitors (Anstey Sargent & Probert), who undertook that they would apply it in discharge of IM Ltd's liabilities to certain creditors who or which were listed in Part A of Schedule 7 to the agreement. I should stress that this was not intended to cover all of IM Ltd's liabilities to creditors. The commercial point lying behind this provision is, I think, obvious: Farlake, having acquired IM Ltd's business and desiring to make a success of it, did not want to have to deal with disgruntled business creditors of IM Ltd.

viii) There was provision for a further £50,000 of the cash due to IM Ltd to be paid into a joint account of the solicitors for the purchaser and the solicitors for the vendors. It was to be used to settle those creditors of the business who or which were nominated by the purchaser and agreed to by IM Ltd.

ix) The vendors gave various warranties as to the state of the business, but in the usual way these were subject to a Disclosure Letter, to some of the contents of which I will refer at later stages in this judgment.

58. One event which occurred in the interval between exchange of contracts and completion was that on 24 July 1998 IM Ltd withdrew its appeal to the PIA Membership and Disciplinary Tribunal against the decision of the PIA Membership Committee which had refused its application for membership. In the document by which IM Ltd did this (in form a joint submission by IM Ltd and the PIA to the Tribunal) it agreed to pay the PIA's costs attributable to the appeal, and also undertook to repay in full all the investors in the so-called preference shares (as to which see paragraph 48 above). The repayment was to be made on behalf of IM Ltd by Anstey Sargent & Probert out of the £350,000 received into their clients account from Farlake. Although the formal document by which IM Ltd withdrew its appeal and undertook to repay the preference shares was executed after the exchange of contracts, Mrs Rayner says in her witness statement that the PIA had previously insisted on those two items as conditions before it would allow the sale of the business to Farlake to proceed. Even apart from Mrs Rayner's evidence, it seems to me obvious that what she says would have been the case. Indeed Mr Coombs says in his witness statement that Mr Doney had told him much the same thing in a telephone conversation in June. The point here is that IM Ltd could not have gone ahead with the sale of its business to the Farlake group and also continued with its appeal against the refusal of PIA membership. This is of some importance because IM Ltd had to agree to pay the PIA's costs of the appeal, and that is one of the many features which have a bearing on whether or not IM Ltd was solvent at the time of the agreement with Farlake.
59. Completion of the sale took place on 29 July 1998. The seven Account Executives referred to in clauses 2.4 and 3.5 of the sale agreement did all agree terms to work for a Farlake subsidiary (not in the event IPS, the Farlake subsidiary which was the Purchaser under the contract, but, unless I have misunderstood, a different subsidiary called Rowan & Co). Accordingly Farlake or a subsidiary paid £160,000 to MDA Partnership and Farlake issued convertible loan stock to the partnership.
60. As regards the cash consideration payable to IM Ltd (the maximum possible being £1m), amounts were paid in varying sums over some nine months. I believe that the instalments were related to transfers to Farlake by former clients of IM Ltd of the funds which were under management. That at any rate is how Farlake would see it. One of Mr Doney's complaints is that Farlake did not pay over as much as he says it ought to have done. Most of the amounts which Farlake did pay were paid to Anstey Sargent & Probert, IM Ltd's solicitors. Anstey Sargent & Probert used some of the money to pay those creditors of IM Ltd which were listed in Schedule 7 to the sale agreement. This included Anstey Sargent & Probert's own fees and many of the other significant creditors of IM Ltd, but it did not include all creditors. In particular it did not include Rothman Pantall or the Inland Revenue.
61. The balance of the sums which Anstey Sargent & Probert received from Farlake was paid over to IM Ltd. Mr Coombs gives details in his witness statement. If I have followed them correctly Anstey Sargent & Probert transferred a total of about £415,000 to IM Ltd on six occasions between August 1998 and April 1999 (some £390,000 of it being transferred in August and September 1999). The second head of claim which Mr Whalley brings against Mr Doney in the present case challenges some of the payments which IM Ltd made out of these receipts. I will give details under heading XII below.
62. As I said in paragraph 57(viii) above, in addition to the £350,000 which Farlake paid to Anstey Sargent & Probert for onward payment to specified creditors of IM Ltd, the agreement provided for a further £50,000 to be paid into a joint account of Anstey Sargent & Probert and Farlake's solicitors, to be used in payment of creditors of IM Ltd nominated by Farlake and agreed by IM Ltd. The £50,000 was held in a joint account, but Farlake and IM Ltd (before it went into liquidation) were not able to agree upon how it should be applied. (I mention for completeness that, after Mr Whalley had become the liquidator of IM Ltd, he and Farlake reached a compromise on this, which effectively split the £50,000 between them.)
63. Going back somewhat in time to shortly after completion of the sale (which was on 29 July 1998), on 10 August 1998 Mr Paddon resigned as a director of IM Ltd. Since Mrs Rayner and Mr Windsor had already resigned on 16 and 17 July (just after exchange of contracts with Farlake) the result was that Mr Doney was the sole director. As I said in paragraph 21 above, he had returned to the United States early in August.
64. Back in March 1998 Customs & Excise had presented a petition for IM Ltd's sister company, BC Ltd, to be wound up on account of non-payment of arrears of VAT. On 5 October 1998 the court made an order for BC Ltd to be compulsorily wound up. As I understand it the petition was not opposed. The debt was not large, but Mr Doney was prepared to allow BC Ltd to be placed into liquidation.
65. I have described earlier the other relevant events which occurred after the sale to Farlake. In outline the simmering dispute between Mr Doney and Rothman Pantall about Rothman Pantall's unpaid fees got worse, with lengthy and hostile letters being written by Mr Doney to Mr Bennett of Rothman Pantall. Rothman Pantall ceased to do further work for IM Ltd (because of the lack of progress over payment of unpaid fees) in late October 1998. There was therefore no-one acting for IM Ltd in relation to its tax affairs, The predictable result was that large estimated assessments against IM Ltd were confirmed on appeal hearings where IM Ltd was not represented. Rothman Pantall presented a petition for a compulsory winding-up order against IM Ltd. Later the Inland Revenue were substituted as petitioning creditor. The petition was not opposed, and IM Ltd was placed into compulsory winding-up on 23 February 2000. Mr Whalley became the liquidator in succession to the Official Receiver, and he now brings the present claims against Mr Doney.
66. In the previous paragraph I referred to estimated tax assessments made by the Inland Revenue. There is a detailed factual point which arises in respect of one assessment of that nature. It does not fit naturally in any account of the critical events involved in this case, but I need to deal with it, and I will do so now. IM Ltd was consistently late in submitting tax returns and associated accounts. Corporation tax for the accounting period to 31 July 1996 was payable by IM Ltd on 1 May 1997 (nine months after the end of the accounting period), and a return should have been filed by 31 July 1997. On 10 February 1998 the Inspector of Taxes (Mr Martin, who briefly gave evidence on this and other tax matters) wrote to Rothman Pantall, as IM Ltd's accountants, saying that he only got replies to his enquiries when appeals were listed for hearing by the General Commissioners. To safeguard against further delay he had made estimated corporation tax assessments for both the accounting period to 31 July 1995 and the accounting period to 31 July 1996. For the second of those accounting periods he had intended to make an assessment on estimated profits of £150,000. Unfortunately, as he added in an embarrassed concluding paragraph, he had made a keying mistake so that the assessment came out at £1,500,000 instead of £150,000. The corporation tax payable under the assessment was also ten times too high. He apologised and asked Rothman Pantall to pass his apologies on to the company.
67. There was never any realistic possibility of the assessment being upheld on the basis of profits of £1.5m. As Mr Martin said, if it had come before the Commissioners, he would have asked them to amend it to £150,000. And in any event what he was looking for was not a determination of corporation tax based on £150,000, but rather the receipt of a return and accounts which would show the true figures of profits for the period. Further, what actually happened was that, as I am sure Mr Martin took for granted would happen, Rothman Pantall lodged an appeal against the estimated assessment. They suggested that all except £9,749 of the assessed tax should be postponed, and Mr Martin agreed. The inadvertent addition of the extra '0' in the assessment was obviously a regrettable slip on Mr Martin's part. Mr Doney complains about it, understandably so, but I do not think that in reality it has any impact on the matters with which I am concerned. If there is any suggestion that, but for Mr Martin's error, Farlake would have been willing to buy the shares in IM Ltd, I do not agree. There were far too many other things which were seriously wrong within IM Ltd for a prospective purchase of that company by Farlake to have any chance of surviving a due diligence investigation.

IX THE CLAIM BASED ON THE SPLITTING OF THE CONSIDERATION FOR THE SALE OF THE BUSINESS: THE LAW

68. The liquidator does not challenge Mr Doney's initial decision, reached shortly after he returned to this country in the early months of 1998, that IM Ltd or its business should be sold. Nor does he challenge the decision to sell it to Farlake for the total consideration, partly in cash and partly in convertible loan stock, which Farlake was offering. The challenge is to the division of that consideration between IM Ltd and MDA Partnership. The liquidator's argument is that the whole of the consideration should have gone to IM Ltd, or at least that, if any element of the consideration was to go to MDA Partnership, it should have been a much smaller element than MDA Partnership actually received. The liquidator contends first that the transaction as actually carried out was a misfeasance on the part of Mr Doney and/or a breach of Mr Doney's fiduciary duty to IM Ltd. On the basis that it was a misfeasance or breach of fiduciary duty he says that the court should make an order against Mr Doney under s.212. The liquidator contends secondly that the transaction was, so far as IM Ltd was concerned, a transaction at an undervalue within s.238, and submits that the court should make an order intended to restore the position to what it would have been if the company had not entered into the transaction.
69. In paragraph 393 of my judgment in re The Continental Assurance Company of London plc [2001] BPIR 733, I wrote:

"Misfeasance is the customary expression for breach by directors of duties owed to the company, one of which is their common law duty to exercise an appropriate level of care and skill in the performance of their functions."

Another duty owed by directors to the company is their fiduciary duty, which is owed in equity but in practice covers much the same ground as the common law duty. It extends to transactions where the director has acted improperly in his own interest rather than in the interests of the company.

70. In the present case there was no real argument about the legal principles involved, and I will not enlarge on them in this judgment. I should, however, spell out two specific points. First, the duties relied upon by the liquidator in these respects are not limited to circumstances in which the company is insolvent. Obviously claims against directors are most likely to be brought when a company has become insolvent and when its affairs (including the bringing of legal proceedings) are in the hands of a liquidator. But it is perfectly possible for a wholly solvent company to have a good claim for compensation from a director on account of common law misfeasance or breach of fiduciary duty. Second, however, when a company, whether technically insolvent or not, is in financial difficulties to the extent that its creditors are at risk, the duties which the directors owe to the company are extended so as to encompass the interests of the company's creditors as a whole, as well as those of the shareholders. See for example West Mercia Safetywear Ltd v Dodd [1988] 1 BCLC 250 at 252-3; Facia Footwear v Hinchcliffe [1998] 1 BCLC 208 at 228b-c.
71. I said in paragraph 2 above that the liquidator, in consequence of what he alleges were breaches of duty by Mr Doney, seeks an order of the court under s.212. That section does not create duties which did not otherwise exist. It provides a convenient procedure for relief to be claimed and awarded for breaches of the common law and equitable duties which a director owes under the general law. So far as relevant to the present case the section reads as follows.

"212 Summary remedy against delinquent directors, liquidators, etc

(1) This section applies if in the course of the winding up of a company it appears that a person who –

(a) is or has been an officer of the company,

…

has ... been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

…

(3) The court may, on the application of ... the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him–

…

(b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just."

In the Continental Assurance case (supra) I wrote at paragraph 393:

"It has long been settled in relation to predecessor sections that what is now s.212 does not create liabilities and obligations which did not exist apart from it. The section might, however, give the court a measure of discretion as to the remedy for misfeasance [I might have added a reference also to breach of fiduciary duty], being a discretion which would not exist, or at least would not be so extensive, at common law. That is the result of the word 'may' in subsection (3)."

I could have added that it was also the result of the words 'as the court thinks just' at the end of subsection (3)(b).

72. I turn to the law governing the liquidator's alternative claim under s.238. The relevant parts of that section are as follows.

"238 Transactions at an undervalue (England and Wales)

(1) This section applies in the case of a company where –

…

(b) the company goes into liquidation

(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the [liquidator] may apply to the court for an order under this section.

(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.

(4) For the purposes of this section ... , a company enters into a transaction with a person at an undervalue if–

…

(b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company.

(5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied –

(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company."

73. By subsection (2) the section can only apply if the transaction at an undervalue was entered into at 'a relevant time'. That expression is explained in s.240. The section is quite complicated. Rather than simply setting out the statutory words, I will try to explain how they fall to be applied in the present case. Because the transaction relied upon by the liquidator was with a connected person (MDA Partnership, or, looking through the partnership, Mr Doney personally: see s. 249 for the definition of 'connected'), the initial rule is that, to be entered into at a relevant time, it had to be entered into within two years before the commencement of the company's winding up ('the onset of insolvency' as defined in s.240(3)(b)). The agreement for the sale of IM Ltd's business was entered into on 15 July 1998, which was within two years before IM Ltd commenced to be wound up on 23 February 2000 and even more comfortably within two years before the date of presentation of the winding up petition (which is deemed to be the commencement of the winding up by s.129(2)). If the section stopped at that point the transaction would undoubtedly have been entered into at a relevant time. However, the initial rule (that a transaction was at a relevant time if it was within two years before the commencement of the winding up) does not apply after all unless at the time of the transaction the company was unable to pay its debts within the meaning of s.123 or became unable to do so in consequence of the transaction: s.240(2). In the present case there is a major issue over whether that statutory condition is fulfilled. Even then there is one other complication. The last part of s.240(2) enacts that, in the case of a transaction with a connected person, it is presumed that, unless the contrary is shown, the company was unable to pay its debts within the meaning of s.123 at the time of the transaction.

X THE CLAIM BASED ON THE SPLITTING OF THE CONSIDERATION FOR THE SALE OF THE BUSINESS: ANALYSIS AND DISCUSSION: MISFEASANCE AND BREACH OF FIDUCIARY DUTY

74. In my view the liquidator's case that the transaction was a misfeasance or a breach of fiduciary duty on the part of Mr Doney succeeds. I have a little more difficulty about the alternative claim under s.238, for a detailed reason which I will explain later. My reasons for my conclusion on misfeasance and breach of fiduciary duty appear in the following paragraphs. The critical factual background is that over half of the value of the consideration which Farlake and its subsidiary IPS provided for the acquisition of the business went to MDA Partnership (and through MDA Partnership to Mr Doney as to 80% and to Mr Paddon as to 20%), not to IM Ltd.
75. There is no dispute that, as a director of IM Ltd in the period up to (and indeed after) the transaction with Farlake, Mr Doney owed to IM Ltd the common law duty to take reasonable care and the fiduciary duties which directors owe to their companies. Further, in my judgment those duties were definitely owed in circumstances where it was relevant to have regard to the interests of creditors as well as the interests of shareholders. In this connection I refer to the principles mentioned in paragraph 70 above. In the Facia Footwear case, [1998] 1 BCLC 218 at 228, Sir Richard Scott VC referred to the company being 'in a very dangerous financial position'. In this case, whether IM Ltd was technically insolvent before the transaction or not (and in my view it was anyway), it was on any view in a dangerous financial position, and Mr Doney knew it. In that connection I mention the following factors.

i) If IM Ltd had not been in a precarious financial situation Mr Doney would not have decided that the business needed to be sold.

ii) The company had received a winding up petition from Customs & Excise. The petition had been dealt with on a temporary basis by the company's solicitors, Anstey Sargent & Probert, giving an undertaking to Customs & Excise that they would discharge the VAT arrears out of proceeds of the anticipated sale of the business to Farlake.

iii) The VAT debt was by no means the only one which IM Ltd owed and which it was not able to pay at the time. I will give other examples at a later point in this judgment when I consider whether or not IM Ltd was, in terms of s.123(1)(e), unable to pay its debts as they fell due. See paragraph 119 below.

iv) The items on the Agenda for what was described as an Emergency Board Meeting on 21 May 1998 make it obvious that deep concern was felt about the financial position and about the directors' responsibilities in the circumstances. For example Item 1 was 'Fiduciary responsibilities of Directors', and the minutes on that item read: 'The fiduciary duties of the Directors were explained in detail to the Directors by David Hare and Adrian Bishop. The Directors confirmed that they fully understood that they should act bona fide in the interests of the Company.'

v) At around the end of May 1998 Mr Doney spoke on the telephone to the specialist insolvency partner, Mr Ryman, at Rothman Pantall's London office. This may have been done at the suggestion of Mr Smyth, the tax partner in the Chandlers Ford office. Mr Ryman gave evidence before me. He had not made an attendance note of his conversation with Mr Doney in 1998, and could only speak from vague recollection. As sometimes happens with a witness in the box, some hazy details returned to him as he was being questioned. He recalled one conversation of about 30 minutes' duration. He could not recall the name of the subject company. He did, however, recall that there was only one subject company, that it was FIMBRA-regulated, that it was of doubtful solvency, and that it was proposing to make a transfer to another company which was solvent. It is in my view clear that Mr Doney spoke to Mr Ryman because of concern over the solvency status of IM Ltd. I do not accept Mr Doney's evidence that the company about which he was concerned was not IM Ltd but was BC Ltd: BC Ltd was not a FIMBRA-regulated company, and it was not proposing to make a transfer to another company.

76. In my opinion the business which was sold to Farlake was entirely owned by IM Ltd. There had obviously been an earlier time when the financial services business was owned by MDA Partnership: before 1990 IM Ltd was a dormant company. On behalf of Mr Doney it is contended that at all times after 1990 MDA Partnership continued to be, if not the owner of the goodwill of the business, at least an owner. It was suggested that 'the client base' had been built up by the partnership and continued to be owned by the partnership. I do not accept this. Although the source documents which I had before me were not complete, because they did not include accounts of the partnership, it did emerge that, although the partnership conducted some trading of its own from 1990 to 1994, it did far less than IM Ltd. In any case, from the beginning of 1995 onwards MDA Partnership had no FIMBRA membership of any category, so that of necessity all the trading which took place was conducted by IM Ltd.
77. In this connection I am not influenced by the circumstance that there appears to have been no document which formally transferred the goodwill of the business from MDA Partnership to IM Ltd. It frequently happens that an individual, or two or more individuals in partnership, carry on a trade personally for a time, and then he or they set up a company and thereafter carry on the same trade through the company. Commonly they will just do it that way, without any document which formally transfers the trade to the company. In such a case it is obscurantist and unrealistic to say that the company has not become the owner of the trade. What I have just described is in essence what happened in the present case, even if the process by which MDA Partnership ceased to be and IM Ltd became the owner of the entire trade occurred progressively over several years. The process was certainly complete by the time of the transaction with Farlake.
78. Further, the agreement with Farlake was structured on the basis that the owner – and the sole owner – of the business was IM Ltd. Although MDA Partnership was a party to the agreement, 'the Business' was defined as 'the business of providing financial services ... as carried on by the First Vendor at the Effective Date.' The First Vendor was IM Ltd. The principal operative provision of the agreement (clause 2.1) stated that 'the First Vendor shall sell to the Purchaser ... the Business as a going concern.' It is true that clause 2.3.1 provides for the Second Vendor (MDA Partnership) to sell to the Purchaser 'all such interest as the Second Vendor may have in the Business', but the way in which the sub-clause is expressed plainly does not assume that the partnership had any interest in the business which it could sell: it is in the nature of a 'just in case' provision.
79. Indeed, I go further. The way that the agreement is structured and expressed proceeded on the basis that, although the partnership was to receive more than half of the value of the consideration, that was not because it (the partnership) was being paid for selling any interest in the business. As I pointed out in paragraph 57(iv) and (vi) above, clauses 2.4 and 3.5 provided that MIDA Partnership was to procure the seven Account Executives to enter into service agreements with the Purchaser (IPS, the Farlake subsidiary), and that the consideration which MDA Partnership was to receive (£160,000 in cash and £1.25m in Farlake convertible loan stock) was in return for MDA Partnership complying with that obligation. So the partnership was not to get paid for selling anything to Farlake: it was to be paid for procuring seven individuals, whose activities formed part of the business which Farlake was buying from IM Ltd, to agree that they would continue to work in the business.
80. There is one comparatively small respect in which I should qualify what I have said in the last few paragraphs. Although by the time of the transaction MDA Partnership was not the owner or an owner of the business as a going concern, it did own rights to repeat or renewal commissions on continuing payments by clients pursuant to investments which the partnership had arranged in earlier years. The typical case was the payment of further premiums on continuing insurance policies. It appears that this renewal income was one of the items which passed to the Farlake group on the sale, and the vendor of the right to it can only have been MDA Partnership, not IM Ltd.
81. I do not know what the renewal income was worth, but I am sure that its value was small by comparison with the value of the business as a going concern. It follows that the receipt by MDA Partnership of more than half of the value of the consideration coming from the Farlake group cannot be justified on the basis that the partnership was selling more than half of the business which Farlake was buying. On the contrary, except for the right to its renewal income it was not selling any part of the business.
82. I move on to consider whether the receipt by the partnership of so large a part of the consideration can sensibly be justified on any other ground, and 1 consider first the basis spelt out in the agreement: namely that the consideration which the partnership was to receive was for it (the partnership) procuring the seven Account Executives to sign agreements with the Farlake subsidiary (IPS according to the agreement, but Rowan & Co in the event). In my judgment the split of the consideration cannot be justified on that basis. I accept that Farlake would not want to proceed unless sufficient of the former IM Ltd personnel came with the business to make it likely that most of the clients of IM Ltd would stay with the business in its new ownership. It is obvious that what Farlake wished to obtain was the ability to manage the investment funds which IM Ltd had previously been managing, and it was important that the clients whose funds they were could be told that they would continue to be looked after by the persons with whom they had become familiar. Mr Mills gave evidence that, at one meeting which he attended in the negotiations with Farlake, Mr Ewing of Farlake said something to the effect that it would be a foolish man who acquired the assets of IM Ltd without securing the contracts of the self-employed consultants. (Incidentally, Mr Mills dates this meeting at 5 March 1998. I think that he is probably mistaken in that respect, and that the meeting was a month or two later. However, I do not doubt that at a meeting on some date Mr Ewing did say what Mr Mills attributes to him.)
83. Nevertheless, despite the importance of getting the key consultants to sign up with the Farlake group, I cannot accept that that can justify the attribution of more than half of the consideration (indeed of any part of the consideration) to MDA Partnership. I say that for three reasons.

i) It was in my view artificial, contrived and unreal to say that it was to be MDA Partnership which was to procure the consultants to sign up with Farlake or a Farlake subsidiary. The consultants were consultants to IM Ltd, not to MDA Partnership. That had been so in the case of all of them for at least three and a half years (since MDA Partnership ceased to have any sort of FIMBRA membership), and in my view probably for longer. It was IM Ltd, not MDA Partnership, which owned the business and was transferring the goodwill of it to Farlake. In the circumstances the proper person to be responsible for procuring the consultants to agree to work for the Farlake group was IM Ltd. Mr Doney says that the consultants felt loyalty to him personally. There was evidence of that from one of them – Mrs Rayner, Mr Doney's daughter – but not from any of the other six. The other six included Mr Paddon and Mr Windsor, both of whom were disaffected from Mr Doney at the time. They also included Mr Heaver, who was suing the company for unpaid commission and was almost certainly hostile to Mr Doney. But in any case, if personal persuasion and influence from Mr Doney was important in securing the agreement of the seven consultants, the capacity in which it was proper for him to bring it to bear was as a director (and, possibly, controlling shareholder) of IM Ltd.

ii) Even Mrs Rayner's evidence does not support the proposition that it was by MDA Partnership that she was procured to sign up with Farlake. She says that she spoke herself to Mr Ewing in relation to the future running of the business and in relation to her package, because she wished to try and ensure that her clients (that is the clients of IM Ltd who were accustomed to dealing with her) would be properly served by the Farlake subsidiary for which she would be working.

iii) In any case, the evidence does not suggest that the nature of the agreements which Mrs Rayner and the other six consultants concluded with the Farlake group was such as to justify more than half the consideration being attributed to them. The sale agreement provided that the agreements were to be in 'the Purchaser's standard form as annexed hereto'. In fact no such form was annexed, and I have already referred to Mrs Rayner's evidence that she negotiated her own package with Mr Ewing. The agreements which at least some the consultants had signed with MDA Partnership in 1990 (agreements which, in my view, must have continued as agreements with IM Ltd from not later than the beginning of 1995) were terminable by either party on only one month's notice. In the absence of evidence to the contrary I assume that the agreements with the Farlake group were the same. Mrs Rayner left the Farlake group after about a year and joined another financial services group. I note that Mr Mason, the expert witness for Mr Doney, said that the consultants were only 'the foot soldiers'. They were important to 'keep the continuity flow', but Mr Mason did not think that Farlake was buying the consultants: it was buying the clients. That seems to me almost certainly right. It seems plain to me that, if the clients would have transferred their business to Farlake but the consultants would not have moved, Farlake would have gone ahead, whereas if the consultants were all willing to join Farlake but the clients would not transfer their business to that company, then it would not have proceeded with the transaction.

For the foregoing reasons I do not accept that the diversion away from IM Ltd, the true and only vendor of the business, of more than half of the value of the consideration can be supported on the basis that MDA Partnership procured seven consultants or Account Executives to sign up with Farlake.

84. I move on now to consider another justification which is advanced on behalf of Mr Doney for the splitting of the consideration between IM Ltd and MDA Partnership. This justification relies on the controversial agreement dated 16 January 1995 which I described in paragraphs 38 and 39 above. Mr Davies, on behalf of Mr Doney, relies in particular on clause (4), which I repeat:

"Any consideration paid to the Company as a result of transferring its Goodwill and/or its funds under management shall be the property of the Partnership."

There are several reasons why I do not accept Mr Davies's submissions in this respect.

85. First, the cash and Farlake convertible loan stock went to MDA Partnership directly from Farlake and its subsidiary IPS, and went to it because the sale agreement said so. If clause 4 of the 1995 Agreement was the justification for consideration going to MDA Partnership one would have expected the whole of the consideration from Farlake to have gone to IM Ltd, and for IM Ltd then to have paid it (all of it, not just some of it) to MDA Partnership in discharge of its obligation under clause 4. There is no reference to the 1995 Agreement anywhere in the sale agreement. In a letter of 8 July 1998 from Mr Doney to Mr Ewing there is a passing reference to MDA Partnership having 'reserved the rights to the trade by agreement with [IM Ltd]', but apart from that there is no evidence to indicate that the existence of the 1995 Agreement was even known to Farlake. When it is argued that the reason why Farlake paid and issued more than half of the consideration to MDA Partnership, not to IM Ltd, was because of clause 4 of the 1995 Agreement, that invites the comment that Farlake had no idea that that was the reason why it was doing what it did.
86. Additionally, Mr Randall, on behalf of the liquidator, advances the more far-reaching submission that I should be very sceptical about the 1995 Agreement altogether. He says that it might not have been entered into at the date which it bears, but later, possibly when the transaction with Farlake was being negotiated. Mr Randall also says that, even if the document was created on 16 January 1995, I cannot regard it as having been genuinely intended to take effect in accordance with its terms. There is then a further argument that it could not in any event bind IM Ltd because of non-compliance with s. 317 of the Companies Act 1985. These are substantial and powerful arguments, and I must consider them at some length.
87. The agreement is signed on behalf of both parties (MDA Partnership and IM Ltd) by Mr Doney and Mr Paddon. In January 1995 there were other directors of IM Ltd as well as Mr Doney and Mr Paddon, and although the previous pattern for agreements between the partnership and the company had been for all directors to sign, in this case that did not happen. Mrs Rayner established in evidence that on 16 January 1995 she and Mr Windsor, two of the directors, were abroad on a skiing trip. However, they had been in this country on 3 January 1995, when the agreement between IM Ltd and BC Ltd was entered into, and they had signed that agreement. So also had Mr Goodman, who was the fifth director of IM Ltd at the time. Mr Doney suggested that the 16 January 1995 agreement was a necessary consequence of the 3 January agreement, because otherwise there was a conflict between the two agreements as regards the right or expectation to share in commissions originally received by IM Ltd from third parties like insurance companies and unit trust groups. That may be so, but there is no explanation of why the two agreements were not entered into at the same time as each other, when all the directors of IM Ltd were available to sign both of them on behalf of the company.
88. Mrs Rayner, Mr Hare and Mr Mills all said that at some stage, which they were inclined to place later in 1995 or in 1996, they became aware in a general way of the existence of the 16 January 1995 agreement. They said that it was mentioned at meetings. Yet none of them had ever seen it, and they certainly did not know what the specific terms of it were.
89. A particularly significant point is that (as I find on an issue which was controversial in the trial), if the 16 January 1995 agreement existed from that date onwards, none of the partners in Rothman Pantall were told about it. Mr Doney said that the partners in the firm were told about it, and indeed gave advice about it when it was in preparation. All three partners (Mr Bennett, Mr Smyth and Mr Perriam) were adamant that they had never seen the agreement until documents and witness statements were exchanged in the present case, and that they did not give any advice about it. Rothman Pantall were the auditors of IM Ltd, and they were largely responsible for the conduct of IM Ltd's dealings with FIMBRA. If the agreement both existed and was intended to have legal effects I would have expected Rothman Pantall to have been informed about it. Apart from anything else its existence would have needed to be disclosed in a note to IM Ltd's accounts. No such note appeared. I accept the evidence of the partners that they knew nothing about the alleged agreement, and I do not accept the evidence of Mr Doney that they did. All three partners struck me as transparently honest witnesses, and they would not have told me that they had not seen the agreement if they knew that in truth they had. Further, I do not think that they could have seen it but by now had forgotten doing so. Mr Perriam made the convincing point that, if he had been told about the agreement, he would certainly have remembered, because he would instantly have realised that the agreement was going to have to be disclosed to FIMBRA and was entirely contrary to the general position being adopted in exchanges with FIMBRA, namely that rights possessed against the FIMBRA-registered IM Ltd by the unregistered MDA Partnership were being reduced rather than increased.
90. On the question of whether the partners in Rothman Pantall knew about the 16 January 1995 agreement, Mr Davies draws my attention to a letter of 8 May 1996 from Mr Smyth to Mr Hare at MDA Partnership. It contains this sentence: 'Since dictating this I have received the copy of the contract with [MDA Partnership].' Mr Davies says that the contract referred to must have been the 16 January 1995 agreement between IM Ltd and MDA Partnership. Mr Smyth did not accept that. He did not specifically recall the occasion on which he had written the letter, but it did not cause him to change his firm view that, until the present case began, he had never seen the 16 January 1995 agreement. His conjecture was that the contract referred to in his letter was the agreement of 31 July 1992 between IM Ltd and MDA Partnership (as to which see paragraph 32 above). I accept what he says. Mr Davies points out that the partners in Rothman Pantall agree that they had been informed of the 1992 agreement around the time when it was made. However, that does not mean that Mr Smyth must have remembered all about it four years later. It is significant that the content of the 1992 agreement was relevant to what he was writing to Mr Hare about in May 1996, whereas the content of the agreement of 16 January 1995 was not. A VAT difficulty had been raised by Customs & Excise arising from the agreement of 3 January 1995 (not the agreement of 16 January 1995 which is central to this part of the case), which provided for BC Ltd to provide management services to IM Ltd and to receive a share of commissions. The agreement of July 1992 provided for something quite similar except that it operated between MDA Partnership and IM Ltd. It therefore made sense for Mr Smyth to have wanted to reconsider the 1992 agreement in the context which he was addressing in his letter of 8 May 1996. There was no apparent reason why, in a letter about VAT as between BC Ltd and IM Ltd after 1995, it would have been relevant for him to consider or to refer to the agreement dated 16 January 1995.
91. It is also relevant to note that, in so far as Mr Doney, in reliance on the letter of 8 May 1996, says that the time when the 16 January 1995 Agreement was shown to Rothman Pantall must have been between the time when Mr Smyth dictated his letter and the time when he finalised it and sent it, that is not at all the case which Mr Doney put forward in his pleadings and in his witness statement. He pleads that the document was disclosed to Rothman Pantall, in particular to Mr Perriam and Mr Smyth. He does not put a time on which that happened, but the natural inference is that it happened around the time when the agreement was signed. He says in his witness statement that, when the agreement was being drafted, advice on it was given by the same two Rothman Pantall partners.
92. Accordingly, despite the one sentence in Mr Smyth's letter of 8 May 1996, I accept the evidence of himself and his partners that they knew nothing about the 16 January 1995 agreement until the time of this case. That must raise a substantial doubt to the effect that, even accepting that the document was in all probability signed on 16 January 1995, the date which it bears (it was witnessed by Mr Bishop, a solicitor, and I would not be prepared to assume that he had witnessed a falsely dated document), it was not regarded as having any effects between the two companies.
93. There are other factors which raise the same doubt. I have mentioned that in 1996 and 1997 a lot of work was done on a prospective flotation of IM Ltd on the AIM. How could IM Ltd be floated if it was subject to a contract which, on a sale of its business, bound it to pay the whole consideration away to MDA Partnership? I asked Mr Doney about this, but no clear answer emerged. Although the matter was not gone into in depth, my belief is that the discussions about the AIM project proceeded on the basis that the contract did not exist. A similar point arises much closer in time to the sale to Farlake and in the context of the negotiations with Farlake. I described in paragraph 56(i) above how, on 16 April 1998, Mr Doney signed subject to contract Heads of Terms for a sale by himself and Mr Paddon of the shares in IM Ltd. The Heads of Terms made no commercial sense if IM Ltd was bound by the 16 January 1995 agreement. It is not mentioned in them, and it is obvious that, when Mr Doney reached a subject to contract agreement with Mr Ewing of Farlake, he said nothing about that agreement. When he was asked about this all that he could say was that, if the share sale agreement envisaged by the Heads of Terms had proceeded, the 16 January 1995 agreement would have had to be terminated in some way. I think it likely that he had never thought of the point.
94. A final point is that, if the agreement was signed into on 16 January 1995 and if it was intended to take legal effect according to its terms, it (and particularly clause 4) were required by law to be formally disclosed to a meeting of the Board of Directors of IM Ltd. That was the effect of s.317 of the Companies Act 1985:

"317 Directors to disclose interests in contracts

(1) It is the duty of a director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company."

Subsection (2) specifies the meeting at which the declaration has to be made: in the case of a proposed contract it has to be made at the meeting of the directors at which the question of entering into the contract is first taken into consideration. There is a regulation similar to s.317 in Table A to the Companies Act 1948 (which applied to IM Ltd). The only consequence of non-disclosure which s.317 spells out is that a director who fails to comply with the section is liable to a fine. However, there are other consequences. One is that the contract which the director should have disclosed to the board but did not is voidable at the instance of the company unless it is too late to restore the parties substantially to the previous position; see Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 585-586. In this case there is at the very least an argument that, if the 16 January 1995 agreement was not formally disclosed by Mr Doney and Mr Paddon to a meeting of the board of IM Ltd when it was entered into, then, if it would otherwise have taken effect according to its terms, it is voidable at the instance of the company (which by now means the liquidator), at least in so far as Mr Doney now seeks to invoke it against the company to justify the share which MDA Partnership received of the total consideration provided by Farlake. The attitude to the alleged agreement taken by Mr Whalley in this case is, as it seems to me, equivalent to him exercising his right to avoid the agreement, if he needs to and if the right is still available to him.

95. On the evidence I find that the agreement was not formally disclosed to the board of IM Ltd before or soon after it was made. No minute has been produced recording the disclosure. As to the importance of disclosure being formally made at a constitutionally convened board meeting see the judgment of Lightman J in Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 1 BCLC 352 at 359a. Other cases which show the importance of proper compliance with s.317 and with a company's Articles in this respect include Guinness plc v Saunders, particularly in the Court of Appeal reported at [1988] 1 WLR 863 (the case went to the House of Lords on a different point: see [1990] BCLC 402), and the recent Court of Appeal decision in Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048 (see especially paragraphs 58 to 63). The section is not a mere procedural aspiration with no consequences if it is not complied with, and the same is true of articles having an effect similar to that of the section.
96. The evidence about board meetings generally was unsatisfactory. Mr Doney, Mrs Rayner and Mr Hare said that there were monthly meetings, but Mrs Rayner also said that they were meetings which considered the affairs of all the entities which were parts of the Doney organisation: MDA Partnership, BC Ltd, a few other less important companies (including a trustee company), as well as IM Ltd. I think it likely that they were meetings of senior management personnel rather than formal board meetings. There was no minute book in the papers of IM Ltd which the Official Receiver handed over when Mr Whalley took over as liquidator. The papers did include a folder which contained a few loose pages of minutes. They were almost all of a formal nature, although the minutes of a meeting on 21 May 1998 (to which I refer on occasions in this judgment) addressed some substantive issues. Mr Doney and Mr Mills said that there was a loose leaf minute book for IM Ltd, but they gave conflicting descriptions of what it looked like. If it existed and contained minutes of meetings of the directors of IM Ltd, why were the loose pages which I have just mentioned not contained in it?
97. I should in fairness add that if, as I think likely, constitutional board meetings of IM Ltd usually dealt with formalities only, that would not surprise me or be a matter which I would be disposed to criticise. In many privately owned companies or groups it is common for board meetings only to be held for formal matters, and for matters of management policy and business decisions to be determined in other ways. Normally that does not matter, but if an agreement is entered into where directors have personal interests in it in other capacities it does require formal disclosure to a constitutionally convened board meeting. If such disclosure is not made and problems later arise (as has happened in this case) the lack of such formal disclosure may have significant consequences, and indeed one would expect it to do so.
98. There is one other point to make about whether the agreement of 16 January 1995 was duly disclosed to a board meeting, as would have been required by s.317 and the Articles if the agreement was intended to be legally effective. Mrs Rayner's evidence effectively shows that the agreement was not so disclosed. She was the only director other than Mr Doney who gave evidence. She did say that she became aware of the agreement, but she also said that she never saw it. She said that she became aware of it because it cropped up on occasions in discussion at meetings. She did not say that there was an occasion when, in order to comply with the Articles and with company law, it was formally disclosed to a meeting before it was entered into, so that the board had the opportunity to approve or disapprove of it. The whole tenor of her evidence is inconsistent with that having happened, and I believe that she would have remembered if it had happened.
99. For all the foregoing reasons I consider that Mr Doney cannot successfully invoke the 16 January 1995 agreement to justify the splitting of the Farlake consideration between IM Ltd and MDA Partnership. There is one other matter connected with the splitting of the consideration upon which I must comment. Mr Doney said in evidence that the split was suggested not by himself but by Mr Ewing of Farlake. Two other witnesses, Mr Hare and Mr Mills said that Mr Doney had said the same thing to them at the time of the transaction. I can accept that Mr Ewing was involved in some way in decisions about the split consideration, but not to the extent that Mr Doney says.
100. In my opinion it is necessary to distinguish between (1) the basic idea that the consideration should be split between IM Ltd and MDA Partnership, and (2) the detailed content of how it was to be split. I do not believe that the basic idea that the consideration should be split originated with Mr Ewing. I can see no conceivable reason why he should himself have come up with such a suggestion. Further, as I have recorded in paragraph 56(iv) above, the first written suggestion that there could be a split of the consideration appears in a document prepared by Mr Doney of which he sent a fax copy to Mr Coombs. I would not be surprised if he sent another copy to Mr Ewing. The document is not itself dated, but receipt of the fax was acknowledged by Mr Coombs on 29 June 1998. The document visualised a split which would be justified because Mr Doney would first have made contracts in his own name with the consultants whereby they agreed with him to stay with a purchaser of the business for a minimum period. There would then be two contracts with Farlake: one by IM Ltd to sell the business for a price which Mr Doney suggested could be as low as £300,000, and another by Mr Doney to sell the benefit of the contract for the balance of the price. That particular way of having a split consideration did not proceed, but the significant point is that the idea of having a split of some sort appears to have originated with Mr Doney (which is what one would expect).
101. From his point of view the problem with a simple sale of the business from IM Ltd to Farlake was that the whole of the consideration would go to IM Ltd, where it would suffer corporation tax and where the balance would be likely to be absorbed by claims of creditors, leaving nothing for Mr Doney and failing to take advantage of what he believed to be his non-resident tax status. I note that the opening paragraph of Mr Doney's document which I mentioned in the previous paragraph reads: 'The following suggestion could resolve the problems being encountered as a result of MD needing to use his and [Mrs Doney's] non-resident tax status to make the sale of any value to him.' I think that what happened is that, when Farlake was not prepared to go ahead with a purchase of shares (either in IM Ltd itself or in another company), but instead wanted to buy the business and assets, that transaction in a straightforward form was not accePIAble to Mr Doney because he could see little benefit in it for himself. (I do not say that in a critical sense. Mr Doney's reaction was understandable. That, however, is not sufficient to protect him from liability.) Mr Doney and Mr Ewing must have discussed the position. Farlake did not want to lose the opportunity of acquiring the business, and I believe that Mr Ewing, in order to ensure that the whole transaction did not fall through, picked up on Mr Doney's idea of a split sale. I imagine that, in discussions between the two of them and between the respective solicitors, the manner in which the split sale proceeded would have emerged.
102. When I move from the principle that there should be a split sale to the question of how, given that there was to be a split sale, the total consideration should be divided between IM Ltd and MDA Partnership, I am prepared to accept that Mr Ewing may have contributed to the decision. Nevertheless, a document shows that it was not his initial intention that he should do even that. A fax of 30 June 1998 from Mr Ewing to Mr Doney, after beginning 'Further to the new proposal', refers to the respective solicitors getting in contact with a view to exchange of contracts at 3 July 1998 (an unrealistically early target date), and continues by asking Mr Doney in the interim to provide several items of information, including: 'The percentage split, or not, of the Consideration to be paid for delivering the Consultants and the Warranting of Funds and Renewal/Fee Income.' When this was put to Mr Doney in cross-examination my impression was that initially he was non-plussed. However, he said that he believed that he had never replied to the letter. That appears to be correct: at any rate there is no evidence of a letter or fax from Mr Doney in reply. I believe that the figures for the split must have been discussed between him and Mr Ewing, and it could well be that the figures finally adopted originated in a suggestion by Mr Ewing.
103. Even if they did, that does not in my view enable Mr Doney to say that the diversion away from IM Ltd (and thus from the creditors of IM Ltd) to himself and Mr Paddon of more than half of the value of the consideration was something for which he had no responsibility.
104. At this point I can draw the threads together on the aspect of the liquidator's claim against Mr Doney. In my view it was IM Ltd which owned the business and which was in a position to sell it to Farlake. I have considered four different justifications which have been proffered on behalf of Mr Doney for a large part of the consideration going, not to IM Ltd, but to MDA Partnership (that is to Mr Doney and Mr Paddon), and I have rejected all four of them. The unacceptable justifications are: (i) that MDA Partnership was the owner of part of the business which was sold to Farlake; (ii) that MDA Partnership procured the seven consultants or Account Executives to sign up with Farlake or a Farlake subsidiary, and on that account could justifiably expect to receive a large part of the consideration; (iii) that the 16 January 1995 agreement between IM Ltd and MDA Partnership, in particular clause (4), gave rights to MDA Partnership which justified it in receiving a large part of the price; and (iv) the suggestion for the price to be split was made by Mr Ewing of Farlake. It remains for me to consider whether the transaction was a misfeasance, that is a breach of Mr Doney's duty to IM Ltd, or a transfer at an undervalue in respect of which the court may order Mr Doney to make a payment to the liquidator.
105. I will consider first whether the transaction was a misfeasance on Mr Doney's part. In my judgment it was. There is no doubt that it caused significant receipts from Farlake (in cash and in convertible loan notes) which could, and in my view should, have gone to IM Ltd where they would have been available towards meeting the claims of creditors, to have gone to MDA Partnership instead, that is to Mr Doney and Mr Paddon personally. Mr Doney and Mr Paddon were of course directors of IM Ltd and owed to the company the common law and fiduciary duties which I have identified in earlier paragraphs.
106. Mr Doney has said in evidence that he was very concerned to see that all the creditors of IM Ltd should be paid (and not only those who, being on the list in Schedule 7 to the sale agreement, were to be paid out of the £350,000 which was to be received by IM Ltd's solicitors, Anstey Sargent & Probert). There was evidence, which I accept, that he made statements along those lines to various persons, including Mr Coombs, Mrs Rayner, Mr Hare and Mr Mills, in the period running up to the exchange of contracts with Farlake. Unfortunately I have to say that what Mr Doney said was not borne out by what he did. If his prime concern was for the creditors of IM Ltd, how could he participate in the consideration being split so that a large part of it was not received by IM Ltd at all?
107. He has sought to defend the structure whereby part of the consideration went directly to him on the basis that it would increase the amount available for creditors of IM Ltd. The argument is that what he received would not be liable to capital gains tax in this country but only to a lower tax charge in the United States, whereas if it was received by IM Ltd it would all have suffered corporation tax. The corporation tax charge within IM Ltd would have reduced the net funds available to pay the company's debts to creditors. Mr Doney has made calculations intended to show that the only way to be sure that there was enough left after tax to pay all the creditors was to take advantage of his favourable tax status (as he saw it). I would be more impressed by this analysis if Mr Doney had acted in accordance with it, but he did not. The split element of the consideration received by MDA Partnership was, by definition, not received by IM Ltd, so it would only be an asset of the company which could be used to pay the company's creditors if Mr Doney and Mr Paddon transferred it to the company first. When MDA Partnership received £160,000 of cash from Farlake or IPS at completion Mr Doney did not pay over his 80% share of it to IM Ltd. When he sold for £850,000 the Farlake shares which resulted from the conversion of the first tranche of Farlake loan stock he did not pay the £850,000 to IM Ltd to enable it to pay off all or some of the debts which it owed to its continuing creditors.
108. Mr Doney's concern for the creditors of IM Ltd was tempered by a concern for the financial needs of himself and his wife – understandable, but not something which protects him from liability for breach of duty to IM Ltd. It is striking that, in a letter to Mr Ewing dated 23 June 1998 (written at a time when Mr Doney was trying to persuade Farlake to adopt the corporate scheme which I mentioned in paragraph 56(ii) above), Mr Doney wrote: 'With regard to payment of Creditors generally, all of the Creditors of [IM Ltd] will be paid as soon as possible after the monies have been received, bearing in mind the Vendors' own requirements for income.' The implication is that Mr Doney would put his own requirements for money from the transaction with Farlake first, and the repayment of creditors would come after his own requirements were met. Or at least Mr Doney's own requirements for money ranked equally with the claims of creditors. That attitude is not consistent with the duties which, as a director, he owed to the company.
109. There is another point to make. In connection with the agreement of 16 January 1995 I have already referred to s.317 of the Companies Act 1985, the section which requires a director who is personally interested in a contract proposed to be entered into by the company to disclose the interest to a meeting of directors. The contract on 15 July 1998 (between IM Ltd, MDA Partnership, Farlake and IPS) was plainly such a contract. S.317 was not complied with in relation to it. It is, I think, clear and not disputed that the last board meeting which took place before the sale to Farlake was on 21 May 1998. The meeting resolved that the company should proceed, if possible, on the basis of the corporate scheme involving the transfer of the business to a new company and the sale of that company to Farlake. That way of proceeding later proved not to be possible. The Board Meeting had anticipated that contingency, and the relevant minute (drafted by Mr Mills, who was not a director but had been in attendance) reads as follows: 'In the event that the proposed structure does not proceed to a contract for sale and if no other option is available it was agreed that the company would sell the business and authorised the Chairman to sign a contract for sale.' That minute clearly visualised and authorised only a simple sale by IM Ltd of its business to Farlake or (possibly) to another outside purchaser. It did not visualise or authorise the split transaction which was in fact adopted and under which Mr Doney and Mr Paddon (directors of IM Ltd) had interests in their different capacities as partners in MDA Partnership. As respects that transaction there was no compliance with s.317. I refer to my discussion of the section (and of the corresponding Article in Table A to the Companies Act 1948) in paragraph 94 above, in which I make the point that a company (which in this case means the liquidator) may be entitled to avoid a contract which has been entered into in breach of the section and of the Article. I would not suggest that the liquidator of IM Ltd could now avoid the transaction as between IM Ltd and Farlake, but I do suggest that Mr Doney's breach of the statutory obligation to notify the contract to the board of IM Ltd adds further support to the conclusion that he was in breach of the duties which, as a director, he owed to the company.
110. For the foregoing reasons I conclude that Mr Doney was in breach of duty to IM Ltd by causing or allowing the transaction to take the form which it did, with the consideration being split between IM Ltd and MDA Partnership to the detriment of IM Ltd and its creditors. At the hearing Mr Davies naturally concentrated his submissions on the proposition that Mr Doney was not in breach of duty at all. He suggested in his closing speech that, if I disagreed, there should be an opportunity for further submissions to be addressed to me as to the consequences. For example Mr Doney has pleaded that if necessary he should be relieved of liability under s.727 of the Companies Act 1985, but Mr Davies has not yet addressed arguments to me on that point. I will certainly hear further submissions if either party wishes. I add that Mr Davies may also wish to address submissions based on the word 'may' in s.212(3). I will hear him on that also if he wishes, but I do say now that, as I see the matter at present, I am not inclined to refrain from making an order against Mr Doney because of that word.
111. Subject to anything which may emerge from a hearing to consider further submissions, the result of my judgment so far appears to me to be in principle that Mr Doney is liable in damages to the liquidator of IM Ltd, or alternatively accountable to the liquidator for the personal benefit which he obtained. The quantum of liability appears to me at present to be Mr Doney's percentage share (which I believe to be 80%) of the benefit received by MDA Partnership from the transaction (but subject to the possible reduction which I mention in the next paragraph), That benefit consisted of £160,000 in cash (reduced by such clawbacks, if any, as applied to the £160,000) and, as regards the Farlake loan stock, it consisted not of the nominal value of the loan stock when it was issued (which was £1.25m), but of the amount realised or realisable from any quoted shares into which the loan stock was or is eventually converted. The first tranche of loan stock was converted into Farlake shares which were sold for £850,000. Mr Doney is in principle liable for that sum (or, if that amount fell to be shared between him and Mr Paddon, for his percentage of it). As respects subsequent tranches of loan stock, if I understand Mr Doney's witness statement correctly, they have not yet been converted into shares which can be realised, and, if and when they are, it seems unlikely that they will have any significant value. The matter is complicated by reason of Farlake having been taken over by another company in the meantime. Mr Doney says that it was called Talisman House plc but is now called Seymour Pierce Group plc. This is a matter on which I will need further assistance from counsel in any event, but I do not think that Mr Doney should be required to pay to the liquidator more than he can realistically obtain from the Farlake loan stock which he still owns.
112. There is one reduction which in my view should be made to the amount for which Mr Doney is in principle liable to the liquidator. It relates to the point which I made in paragraph 80 above. Although IM Ltd was in my view the sole owner of the going concern which was sold to Farlake and IPS, MDA Partnership did have some continuing rights to receive renewal income reflecting such matters as current premiums on policies which had originally been effected on behalf of the client by the partnership, not by IM Ltd. My understanding is that Farlake or IPS became entitled to that stream of income. MDA Partnership must have been the vendor of it, and was properly entitled to the part of the total consideration which was attributable to it. Therefore Mr Doney's share of whatever that part may have been should be deducted from the amount for which he would or might otherwise have been liable to the liquidator.
113. I have nothing further to say about the liquidator's claims in so far as they are based on misfeasance or breach of fiduciary duty.

XI THE LIQUIDATOR'S CLAIM UNDER S.238

114. The liquidator's alternative claim which challenges the splitting of the consideration is that Mr Doney is liable to him under s.238 (transactions at an undervalue). In paragraph 72 above I have set out the relevant parts of the section, and in paragraph 73 I have summarised the ancillary provisions in s.240 (describing what is a 'relevant time'). Reference to those paragraphs may need to be made in connection with the discussion which follows. I believe that in most respects the liquidator meets the conditions to have a good claim under s.238, but there is one detailed respect in which I see a difficulty in his way.
115. I will begin with the aspects of the section where I agree with the liquidator's contentions. IM Ltd has gone into liquidation, so s.238(l)(b) is satisfied. There is no dispute about that. As respects s.238(2) there is a dispute as to whether the transaction involving IM Ltd, MDA Partnership, Farlake and IPS was a transaction at an undervalue within the meaning of the section. I believe that it was, because the value of the consideration which IM Ltd received was worth substantially less than the value which it provided (see s.238(4)(b)). What it provided was the business as a going concern, valued by Farlake at £2.41m reducible by clawbacks. What it received was a maximum of £1m reducible by clawbacks. The fact that the consideration was received from Farlake's subsidiary, IPS, not from MDA Partnership, makes no difference. The transaction was still a transaction with MDA Partnership as well as with IPS and Farlake.
116. Another requirement for liability under the section which is in my view satisfied is that the transaction was entered into at a 'relevant time'. I have already explained about this in paragraph 73 above, but I will repeat the essential points here before examining how they apply on the facts of the case. The transaction was entered into on 15 July 1998, which was less than two years before the petition for IM Ltd to be wound up. That satisfied s.240(1)(a) read with s.240(3)(b) (and see also s.129(2)). However, it was also necessary for the transaction to have been entered into at a time when IM Ltd was unable to pay its debts within the meaning of s.123: see s.240(2)(a). Because the transaction was with a connected person (MDA Partnership) the liquidator is entitled to the presumption that IM Ltd was unable to pay its debts unless Mr Doney can establish the contrary: see the last part of s.240(2).
117. In my view Mr Doney cannot establish the contrary. Indeed, even if the burden was the other way round, I believe that the liquidator would have succeeded in showing that IM Ltd was unable to pay its debts without needing the benefit of any presumption in his favour. This question of whether IM Ltd was or was not able to pay its debts in the statutory sense is large and complex, and occupied a great deal of time and material in the course of the trial. Most of the expert evidence of Mr Fanshawe for the liquidator and Mr Mason for Mr Doney was devoted to the question. I must say something about it, but, given that I have already decided in favour of the liquidator on the misfeasance and breach of fiduciary duty issue (which does not depend on whether IM Ltd could or could not pay its debts on 15 July 1995), I will try to do so comparatively briefly and without going into all the intricate complications which were explored in the hearing.
118. S.240(2)(a) takes one to s.123 for the meaning of 'unable to pay its debts'. Under the part of s. 123 which is relevant to this case there are two different circumstances in which a company is regarded as unable to pay its debts. One is if it is unable to pay its debts as they fall due (often referred to as 'cash flow insolvency'): see s.123(1)(e). The other is if the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities: see s. 123(2). This concept is often referred to as 'balance sheet insolvency', although the statutory requirement to take account of prospective liabilities may make the test more rigorous than the shorthand expression 'balance sheet insolvency' might imply. I should add that in Mr Davies's skeleton argument he suggested that only balance sheet insolvency had been pleaded against Mr Doney by the liquidator. However, he did not press the point, and I do not think that it was correct. The Points of Claim averred that at any and all times IM Ltd 'was unable to pay its debts within the meaning of the Insolvency Act 1986 ("insolvent")'. In a later paragraph they averred that: 'Immediately prior to the Transaction, [IM Ltd] was insolvent and had net liabilities of £549,995.' In my opinion the pleading was asserting that both kinds of insolvency existed in the case of IM Ltd at the relevant time. The assertion that the company had net liabilities was an assertion of balance sheet insolvency, but the prior assertion that IM Ltd was 'insolvent', coupled with the definition of that term, also contained an assertion of cash flow insolvency.
119. I will consider cash flow insolvency first. In my judgment the evidence clearly shows that IM Ltd was cash flow insolvent. At the very lowest Mr Doney cannot rebut the presumption that the company was insolvent in that sense. I will not prolong this judgment by listing every single item which supports my view, but I will give some of the foremost ones.

i) IM Ltd owed an admitted VAT debt in respect of which Customs & Excise had already served a winding up petition. This had been staved off for the time being by a formal undertaking from Anstey Sargent & Probert to Customs & Excise that the arrears would be paid out of the proceeds of the anticipated sale to the Farlake group. How can Mr Doney plausibly argue that IM Ltd could pay its debts as they fell due when it owed a debt for VAT which had admittedly fallen due, and it negotiated to be allowed time by Customs & Excise on the ground that it could not pay then but expected to be able to pay later?

ii) IM Ltd owed arrears of corporation tax and PAYE: something which appears persistently to have been the case with the company. It was constantly paying its Inland Revenue debts late, and failing to catch up with the further accrual of new liabilities as time went on. It is worth adding that, in my understanding, IM Ltd's lateness in submitting its returns did not prevent its tax debts becoming due.

iii) IM Ltd was heavily indebted to Rothman Pantall, and that was so notwithstanding that Mr Doney later took to making various allegations against Rothman Pantall. He had on several occasions acknowledged that IM Ltd was overdue in paying Rothman Pantall's fees, and he had promised that they would be paid as soon as possible. He did not adhere to the promises. The disclosure letter which accompanied the sale agreement said that £65,000 was owing to Rothman Pantall. It added that part of it was not referable to 'the Business', meaning, I assume, that part of the £65,000 was referable to MDA Partnership or BC Ltd or both, rather than to IM Ltd. However, I have no doubt that most of the £65,000 was referable to IM Ltd. Further evidence on this came from Mr Hare, who was the in-house accountant at the time of the sale. He agreed that a creditor which IM Ltd could not pay at the time of the sale was its own auditors, Rothman Pantall.

iv) IM Ltd had not paid the full amount due to Albany under the court judgment which had gone against it (IM Ltd) in March of 1998. It still owed over £20,000. This was one of the creditors still owing at the time of the sale contract which, under Schedule 7 to the sale contract, were to be paid out of the £350,000 of the price which was to go in the first instance to Anstey Sargent & Probert.

v) IM Ltd was overdue in paying leasing charges to finance companies. Over £10,000 of indebtedness of this nature was another item listed in Schedule 7. It was also referred to in the disclosure letter.

vi) According to Schedule 7 there was still £7,911 owed to the clients' account in order completely to rectify the unauthorised transfers from it which I have described in paragraph 47 above.

vii) Another entry in the Schedule recorded that IM Ltd owed £37,275 to Sales Consultants. I believe that this would have been commissions payable by IM Ltd to consultants, being agreed percentages of the commissions which had been paid to IM Ltd by insurance companies, unit trust groups and the like. In Mr Doney's paper of 29 June 1998 which made the first proposal of splitting the consideration (see paragraph 56(ii) above) he said that the proposal was advantageous to Consultants because '[IM Ltd] has been frequently in breach of contract with its consultants in respect of paying commissions when due.' One of the documents in the case shows that one of the consultants, Mr Heaver, had actually commenced a County Court action against IM Ltd for unpaid commissions.

viii) Another substantial debt arose from the failed issue of preference shares: IM Ltd owed to the subscribers the full amounts which they had paid, namely £164,500. One of the witnesses (I think Mrs Rayner) suggested in evidence that a reason why IM Ltd could have paid all its debts when they fell due was because the preference share money was available to pay creditors. There would have been force in that if the shares had been validly issued, but, as I have explained in paragraph 48 above, they were not: the subscribers were creditors, IM Ltd owed the money back to them, and the debt was due. Further, as appeared from the evidence of Mr Coombs of Anstey Sargent & Probert (see sub-paragraph (xi) below), the PIA was pressing for the repayments to the subscribers to be made.

ix) In the disclosure letter paragraph 3.1.1b stated that, because of the Albany judgment and the need to replace the deficiency of £180,000 in the Clients' Account, 'cash flow remains extremely pressed'.

x) Mr Hare, the in-house accountant, agreed that IM Ltd's finances at the time of the sale were under severe strain. He said that IM Ltd sought to deal with the problem by extending payments to creditors beyond the due dates.

xi) Mr Coombs of Anstey Sargent & Probert said in his witness statement that after exchange of contracts he was engaged in dealing with pressure from various creditors and from the PIA for payment of the sums due to the preference shareholders.

120. In the circumstances described in the foregoing paragraphs it is in my view plain that at the time of the contract with Farlake IM Ltd had many debts which had fallen due and, even if it could have paid some of them, it certainly could not pay all of them. When this was put to Mr Mason, the expert witness for Mr Doney, he said that IM Ltd's case was one of 'Won't pay' rather than 'Can't pay'. I simply cannot agree, and I was surprised that Mr Mason was able to take the view which he did.
121. I therefore consider that another condition for liability under s.238 – that the transfer at an undervalue took place at a relevant time within the meaning of s.240 – was satisfied. I have reached that conclusion by reference to the first of the two meanings of 'unable to pay its debts' in s.123 – the cash flow insolvency meaning. The liquidator's case is that I can and should reach the same conclusion by reference also to the second of the two meanings – the balance sheet insolvency meaning. I will pass over the arguments on that issue just for the moment, because I wish to explain now why, notwithstanding what I have said in the last few paragraphs, I do not think that the liquidator's claim under s.238 can be upheld.
122. The reason is this. Where the conditions for s.238 to apply exist, the consequence is described in subsection (4): the court is to make such order as it thinks fit 'for restoring the position to what it would have been if the company had not entered into the transaction'. That requires me to assume that IM Ltd had not entered into the sale transaction at all, and to ask: what would the position have been in that eventuality? Usually where a company has transferred an asset at an undervalue it would have been better off not to have done it. But in the particular circumstances of this case, I consider that (paradoxical though it may seem) IM Ltd would not have been better off if it had not entered into the quadripartite transaction between itself, MDA Partnership, Farlake and IPS. The reason is that the company was on the verge of collapse and, if it had not entered into the agreement, it would in my view have been in an even worse state. Farlake valued the business at £2.41m, but IM Ltd was in no condition to keep on running the business itself, and there was no other purchaser willing to step in. There had been some contacts with another potential purchaser called Frazer Smith, but for reasons which I do not know it was not in a position to proceed.
123. If IM Ltd had not entered into the transaction with Farlake (the hypothesis which s.238(3) requires) I believe that it would have had to close down its business, so it would not have been able to receive anything for it. It is of course true that IM Ltd would have been better off if it had entered into a transaction of sale to Farlake but without the feature whereby the consideration was split between itself and MDA partnership. However, the section permits me only to restore the position to what it would have been if IM Ltd had not entered into the transaction at all: it does not permit me to reconstruct the position to what it would have been if IM Ltd, as well as not entering into the actual transaction, had entered into a different transaction instead. On the facts of the case, although I consider that IM Ltd did not get full value for what it parted with under the actual transaction, it would have been in an even worse condition if it had not entered into the transaction at all.
124. I should add that the reason which I have just explained for concluding that the liquidator's claim cannot succeed under s.238 was not the subject of argument in the hearing. It comes from my own deliberations after the hearing was concluded. Since I agree with the liquidator's claim in so far as it is based on breach of duty by Mr Doney, my view that the claim does not succeed additionally under s.238 does not affect the ultimate result of the case. If it had I would have asked the parties whether they wished to make further submissions about it. As matters actually are, however, I believe that the convenient and proper course is for me simply to state my view on the point, as I have done in the immediately foregoing paragraphs.
125. I shall now return to the issue which, a few paragraphs ago, I said I would pass over just for the moment. Was IM Ltd 'unable to pay its debts' within the meaning of s.123, not only because of cash flow insolvency, but also because of balance sheet insolvency? In the hearing a lot of documentary material, factual evidence, expert evidence, and oral argument was directed to this second meaning. It was a strenuously disputed issue. I have been in a quandary about what to do about it in this judgment, but I have decided that I will not go into it in depth. This judgment is already going to be very long, and if I examined the balance sheet insolvency issue in the degree of detail which would be required to do justice to the evidence and arguments upon it I would increase the length of the judgment very substantially. I have already concluded: (1) that the liquidator's claim against Mr Doney-succeeds on grounds of misfeasance and breach of fiduciary duty; (2) that as regards the s.238 claim IM Ltd was unable to pay its debts (as the claim required by virtue of s.240(2)) by reason of cash flow insolvency; but (3) that the s.238 claim would still not succeed because to restore the company to the position it would have been in if it had not entered into the transaction would not require any money to be paid to it. In those circumstances it does not make any difference to the result of the case whether, at 15 July 1998, IM Ltd was balance sheet insolvent as well as cash flow insolvent. I will, therefore, limit myself to a brief description of how the issue arises, without embarking on a detailed examination of it.
126. IM Ltd had a computer-based system which produced monthly unaudited balance sheets. The last balance sheet produced by that system was dated 30 June 1998. It showed the company to be solvent with shareholders' funds of over £400,000. There were further transactions in July before the completion of the sale to Farlake. They had been posted in the nominal ledger by staff at the company, but IM Ltd did not itself carry them into a balance sheet. After the sale and at a time when Rothman Pantall were still acting for IM Ltd, Mr Perriam and his staff updated the 30 June 1998 balance sheet to create a draft balance sheet which reflected the July postings. There are a number of versions of this draft July balance sheet, but they still show the company as comfortably solvent in balance sheet terms, So far the documents indicate that IM Ltd was balance sheet solvent before the transaction. And if it was balance sheet solvent before the transaction it ought to have been balance sheet solvent after the transaction as well. The receipt of up to £1m from IPS, even after provisions for corporation tax and for the costs of running the company down and. winding it up, would be expected to improve its solvency by hundreds of thousands of pounds.
127. However, after the company had gone into liquidation and Mr Whalley had become the liquidator he prepared two balance sheets showing what in his view was the true position of IM Ltd: one before the transaction with Farlake and the other after the transaction. He made several substantial adjustments to the Rothman Pantall balance sheet, reducing the figures shown as assets of IM Ltd and making additional provisions for various liabilities. Both of these balance sheets (the pre-transaction balance sheet and the post-transaction balance sheet) showed IM Ltd as being significantly insolvent. Mr Doney has put forward a balance sheet of his own, which showed the company to have been solvent. I need not examine the contents of either Mr Whalley's balance sheets or Mr Doney's, because expert accountancy evidence has been adduced by each party, and I can focus on the experts' reports and the differences between them.
128. Both experts are accountants. The expert for the liquidator was Mr Fanshawe, who, like Mr Whalley, is a specialist in insolvency and regularly acts as liquidator of companies. This was only the second occasion on which he had been an expert witness. He was none the less impressive for that. The expert for Mr Doney was Mr Mason, who has considerable experience of acting as an expert witness. I hope that I have correctly understood the final difference between the experts. If so the difference is very large indeed. On a pre-transaction balance sheet Mr Fanshawe considered that IM Ltd had net liabilities of £1,067,384, and Mr Mason considered that it had net assets of £269,557. The difference between them was therefore £1,336,941. On a post-transaction balance sheet Mr Fanshawe's figure was net liabilities of £630,202, and Mr Mason's was net assets of £811,493. The difference between them was £1,441,695.
129. The experts have helpfully analysed the detailed respects in which they disagree. There are over twenty. Some of them are small in amount, but many are large. If I was to go into this issue in depth I would have to explain and evaluate all of the differences, and I would have to do so at some length as regards the larger ones. In the circumstances I hope that my decision not to attempt that exercise, which (as I have said) would make no difference to the ultimate outcome of the case, will be understood.
130. I will, however, say in a general way that on most of the points of disagreement I find myself more in sympathy with the views of Mr Fanshawe than with those of Mr Mason. Mr Mason produced several most helpful and informative analyses and schedules derived from the source materials which he had before him and from his own researches. Mr Randall, counsel for the liquidator, described some of Mr Mason's contributions as workmanlike, which in my view is the least that could be said. They were thorough and impressive. However, when it came to matters of opinion I have to say that I consider that Mr Mason's opinions were overly generous to Mr Doney in several ways. In paragraph 120 above I have said that I cannot accept the opinion which he expressed in evidence that Ltd was not cash flow insolvent because its history of not paying its debts was an instance of 'won't pay', not 'can't pay'. Another example was that on more than one occasion in oral evidence he referred to his belief that IM Ltd was a 'well-run company'. In view of all the problems which I have described in earlier sections of this judgment (such matters as problems with the Inland Revenue and with Customs & Excise, disagreements with FIMBRA and the PIA, internal dissension between some of the directors, lateness and disputes over commissions payable to consultants, arguments with the auditors about fees, and so on) I cannot possibly share that belief.
131. On specific accounting matters I accept Mr Fanshawe's view that in several respects Mr Mason had not given sufficient effect to the accounting principle of prudence in his evaluation of the assets and liabilities of the company, particularly given that balance sheets had to be prepared for a company which, pursuant to the clear intention of the directors, was going to cease to trade. I am going to give just one example (a particularly large one), and then I am going to resist the temptation to examine other individual items.
132. The one example concerns the amount at which debts owed to IM Ltd by associated entities should be shown. The balance sheet at 30 June 1998 and the Rothman Pantall updated balance sheet at 31 July 1998 showed as an asset of IM Ltd debts owed by associated companies, almost entirely BC Ltd, of £338,168. (I may be wrong, but I think that £327,286 of that sum was owed by BC Ltd.) Mr Fanshawe wrote that asset down to nil on the ground that prudence required it to be regarded as irrecoverable. He supported his treatment by pointing out that BC Ltd had received a winding up petition from Customs & Excise earlier in 1998 and the directors of BC Ltd (who were wholly or partly the same persons as the directors of IM Ltd) appeared to have no intention of contesting it. Assuming that BC Ltd did indeed owe over £300,000 to IM Ltd, how could it be supposed that it was going to be able to pay it? In contrast Mr Mason treated the asset in IM Ltd's balance sheet as having its full nominal value of £338,168. In the event BC Ltd went into compulsory liquidation a few months later and nothing was paid by the liquidator (the Official Receiver) to IM Ltd.' I know that hindsight is dangerous, but simply on the basis of what was known in July 1998 it seems to me that Mr Fanshawe's treatment of this item in the balance sheet of IM Ltd was right and that Mr Mason's was wrong. When questioned about this Mr Mason referred to the possibility that BC Ltd might have been able to pay after all because it may have owned a large asset of its own in the form of a debt due from MDA Partnership (i.e. from Mr Doney and Mr Paddon). However, Mr Hare said in his evidence that BC Ltd was not in a position to pay the debt to IM Ltd. He was the internal accountant to the companies and was presumably in a position to know. Further, when BC Ltd went into liquidation neither Mr Doney nor anyone else told the liquidator about this alleged asset. Mr Fanshawe made enquiries of the Official Receiver, who said from limited information which he still had available on his computer records that IM Ltd was not listed as a creditor of BC Ltd in liquidation, and (more critically so far as the present point is concerned) that the listed assets of BC Ltd did not include a debt due to the company from MDA Partnership (or anyone else).
133. I could repeat many times over the exercise of comparing Mr Fanshawe's and Mr Mason's treatments of particular assets or liabilities of IM Ltd, both before and after the transaction. (One specific respect in which I have already touched on the issue is whether, in assessing IM Ltd's balance sheet solvency or insolvency, a provision needed to be made for payment to the PIA of its costs of IM Ltd's appeal against the refusal of membership: see paragraph 58 above.) If I undertook the exercise, in nearly all cases I would be inclined to agree with Mr Fanshawe. However, for the reasons which I explained above, I do not need to do that and I refrain from doing it. My final comment on the issue of balance sheet insolvency of IM Ltd is to record an incisive answer which Mr Fanshawe gave to a question in cross-examination. He said that the improvement in the net asset or liability position of IM Ltd in consequence of the transaction with Farlake would have been over £430,000 (the cash received from Farlake less corporation tax and less also a provision for the costs of running IM Ltd down and winding it up); yet after the transaction IM Ltd went into liquidation and was insolvent; since the transaction brought about an improvement the company must have been insolvent before the transaction. The word 'must' may state the position too highly, but Mr Fanshawe makes a powerful case that the insolvent state of IM Ltd in its winding up raises a strong inference that before the transaction the true value of its assets was less than the value of its liabilities (actual, contingent and prospective – see s.123(2)), and that Mr Mason's balance sheet showing the contrary cannot be relied on.
134. In the circumstances, although I do not come to a final and fully reasoned decision on this particular issue, I think it likely that, if I had had to do that, I would have agreed with Mr Fanshawe (in the result even if not on every one of the twenty or more items which are disputed between him and Mr Mason), and I would have concluded that IM Ltd was balance sheet insolvent as well as cash flow insolvent at the time of the transaction by which it disposed of its business.
135. That is all that I have to say about the liquidator's claim based on the splitting of the consideration from Farlake between IM Ltd and MDA Partnership.

XII THE LIQUIDATOR'S CLAIM BASED ON CERTAIN PAYMENTS MADE BY IM LTD AFTER THE TRANSACTION AND BEFORE THE WINDING UP

136. In paragraph 61 above I recorded that after the transaction IM Ltd, of which Mr Doney was sole director at the time, made various payments to other parties. Many of them are not criticised by the liquidator in any way, but there are several payments which he says were made to Mr Doney or to persons associated with Mr Doney in one way or another. The liquidator contends that those payments or some of them may have been misfeasances by Mr Doney, or alternatively preferences within s.239. As respects those which were either misfeasances or preferences he contends that Mr Doney is liable to IM Ltd, either for breach of duty under common law or in equity, or pursuant to s.239, or both.
137. I will first outline the legal background, which is not in itself controversial between the parties. So far as concerns Mr Doney's duties as a director at common law or his fiduciary duty in equity I have summarised the basic legal principles in paragraphs 69 and 70 above and I will not repeat them here. I do, however, stress that, given the parlous financial state of the company, Mr Doney's duties included taking account of the interests of creditors. If he caused or allowed the company to make payments which may have seemed attractive in some respects at the time but which were actually or potentially prejudicial to creditors, he was significantly at risk of being alleged later to have acted in breach of duty. That is, of course, exactly what has happened.
138. As regards s.239, the section, so far as relevant, reads as follows.

"239 Preferences (England and Wales)

(1) This section applies as does section 238. [This means that, so far as the present case is concerned, the section applies if the company goes into liquidation.]

(2) Where the company has at a relevant time (defined in the next section) given a preference to any person, the [liquidator] may apply to the court for an order under this section.

(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference.

(4) For the purposes of this section ... a company gives a preference to a person if–

(a) that person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities, and

(b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.

(5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).

(6) A company which has given a preference to a person connected with the company ... at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5).

(7) …"

139. The basic idea behind section 239 is well known. If a company owes some money to a director (or for that matter to anyone else, but the typical case is of money owed to a director) and pays him in full, but then goes into insolvent liquidation leaving other creditors unpaid, it has preferred the director. If the detailed conditions of the section are fulfilled the liquidator can obtain an order from the court requiring the director to repay the company, leaving him to claim for his debt in the liquidation pari passu with the general body of creditors. The company must be influenced by a desire to prefer the creditor who is paid in advance of the winding up, but if that person is connected with the company (as he will be if he is a director, and as Mr Doney was in this case: see s.249) the desire is presumed unless evidence to disprove it is produced.
140. As well as the simple case where the preference takes the direct form of the company paying a debt to the director or other person who is alleged to be preferred, the section also covers the case where that person is not the creditor whose debt is repaid but rather has guaranteed the company's debt to the creditor. By paying off the creditor before it goes into liquidation the company gets the director (or other person) off the hook of his guarantee, and when it goes into liquidation its continuing creditors may not have the benefit of guarantees from the directors or others. It seems to me that the appropriate order in such a case is that the guarantor-director, who has benefited from the preference, should himself repay to the company the amount which the company paid to the third party, and should then be entitled to claim for the debt himself in the liquidation, claiming pari passu with the other creditors. If the guarantor-director cannot or does not pay, a question might arise of whether the third party creditor (whose debt was paid in full by the company) can be required to repay the company. I have not researched the point, which may well be covered by authority, and the matter was not gone into in argument. So I will say no more about it here.
141. I will now endeavour to apply the legal principles to the various payments which are challenged by the liquidator in the Points of Claim.

Payments to MDA Partnership

142. The liquidator identifies five payments made by IM Ltd to MDA Partnership between September and November 1998, while Mr Doney was IM Ltd's sole director and an 80% partner in the partnership. By far the largest payment was £50,000 on 2 September 1998. Mr Whalley, the liquidator, had no information about what it was for: from the documents which he had all that he knew was that it had been paid. It appeared to him (rightly, in my view) that the payment required explanation. Mr Doney says in his witness statement that he has to rely on his memory, but as respects the £50,000, it 'was used to reduce [MDA Partnership's] overdraft which had been incurred substantially to fund [IM Ltd]'. This does not seem to me to be a sufficient response to overcome the liquidator's claim. If the overdraft was not IM Ltd's liability IM Ltd's money ought not to have been used to repay it at a time when the company was in a dangerous financial state. I can imagine that when, after the sale to Farlake, some free cash came into the hands of IM Ltd, Mr Doney (and, with his authority, those in day to day charge in this country – Mr Hare for a month and Mr Mills after that), being faced with pressing demands to reduce the liabilities of all and any of the three principal Doney entities (IM Ltd, MDA Partnership and BC Ltd), would use whatever cash was available without pausing to consider whether it belonged to the particular entity whose liabilities were being reduced. That was understandable but there was a risk in it: if an insolvent liquidation came along later, as in the event it did, a rigorous analysis might be required of whether a company's money had been used to pay off a different person's liabilities.
143. I am also unconvinced by the part of Mr Doney's evidence which says that MDA Partnership's bank overdraft had been incurred substantially to fund IM Ltd. What does that mean? If it means that MDA Partnership, having borrowed the money from the bank, passed it on to IM Ltd, I cannot detect any evidence in the accounts (where one would expect to find it if it existed) that anything of that sort happened. I add in passing here that Mr Doney has said that he and his wife had sold or realised assets and pumped large sums of money into IM Ltd. I can find no evidence in the accounts of that either. In any case, even if MDA Partnership had borrowed from the bank and passed the money on to IM Ltd, I cannot see that it would make any difference, Either IM Ltd owed the £50,000 to MDA Partnership or it did not. If it did, and paid it while leaving debts to other creditors outstanding, that was a preference and in my view Mr Doney has not rebutted the presumption which arises under s.239(6). If it did not and IM Ltd was in a precarious financial position at the time (as it was), it was a breach of Mr Doney's fiduciary duties to allow IM Ltd's money to be paid to an associated company in order to reduce the associated company's bank overdraft. I conclude that Mr Doney is liable to the liquidator in respect of the £50,000.
144. The other payments to MDA Partnership by IM Ltd amounted to £6,200. Mr Doney believes that they were 'made up of interest payments taken by the bank'. I assume that this means that IM Ltd made the payments to MDA Partnership to enable it to discharge some of the interest which it (MDA Partnership, not IM Ltd) owed to the bank on its bank overdraft. On that basis the £6,200 is in principle the same as the £50,000, and Mr Doney is liable for that sum also.

Payments to BC Ltd.

145. The liquidator has identified 12 payments by IM Ltd to BC Ltd between 5 August 1998 and 3 February 1999. They totalled £61,400.05. The largest was £25,000 on 19 August 1998 and the smallest was £7.30 on 3 February 1999. Mr Doney's evidence is that the payment of £25,000 was paid on to Rothman Pantall, presumably in discharge of some of the outstanding fees owed by IM Ltd. I cannot understand why Rothman Pantall should not have been paid by IM Ltd directly rather than by using BC Ltd as a conduit, but, accepting Mr Doney's evidence about this (as I do), I consider that he is not liable to the liquidator in respect of the £25,000: he would not have been liable if IM Ltd had paid Rothman Pantall directly, and I do not think that he should be liable because of the oddity that IM Ltd paid Rothman Pantall indirectly via BC Ltd.
146. Mr Doney also says in his witness statement that three payments to BC Ltd, totalling £17,800, were used to make onward payments of amounts due to third parties in order to enable IM Ltd to give good title to Farlake or its subsidiary in respect of three assets included in the business sale. There are some puzzling aspects of this also, but I accept Mr Doney's evidence. On the basis of it the payments were plainly for the advantage of IM Ltd, and I consider that Mr Doney is not liable in respect of them. In relation to two other payments, totalling £6,500, Mr Doney says that they were to acquire title to motor vehicles which IM Ltd still owned when it went into liquidation and which were taken by the Official Receiver. Mr Doney's evidence is not disputed, and I do not think that he is liable as respects those payments either.
147. The result so far is that, of the twelve payments to BC Ltd, Mr Doney has given for six of them explanations which are satisfactory and which account for £49,300. The last payment (the small one of only £7.30) was made after BC Ltd had gone into liquidation, and I believe that there must have been a good reason to make it. That leaves five payments totalling (to the nearest pound) £12,093. Mr Doney cannot remember about them. I do not criticise him for that in any way, but there is a presumption against him, either under s.239(6) or on the common sense ground that there is no apparent reason why IM Ltd should have been paying anything to BC Ltd (especially given that the accounts showed BC Ltd to be a large debtor to IM Ltd), and if it did make payments without specific explanation the assumption must be that IM Ltd was making its money available to BC Ltd to enable BC Ltd to pay off its own liabilities. In the financial situation which existed in August 1998 and subsequent months it would not have been at all unlikely that, where there was a pressing need for money in any of the Doney entities (or, for that matter, for Mr and Mrs Doney personally), funds would be drawn from where they were available: at the time they were available within IM Ltd.
148. In the case of the payments to BC Ltd Mr Doney has rebutted the s.239(6) presumption to the extent of £49,307.30, but in my judgment he has not rebutted it to the extent of £12,093. Therefore he is liable to the liquidator in that sum.

Payments to the English and American bank accounts of Mr and Mrs Doney

149. The liquidator has identified five transfers by IM Ltd to Mr and Mrs Doney's bank account in this country between 3 September 1998 and 7 January 1999. They totalled £21,830. In addition he has identified three transfers to Mr and Mrs Doney's American account between November 1998 and 11 March 1999. Two were in sterling, each of £10,000, and one was in US dollars. It was $9,108. In Mr Doney's first witness statement all that he could say about all of these payments (to the English bank account as well as to the American account) was that he believed that they were 'in respect of Florida office expenses due from [IM Ltd] and other expenses associated with the American operation.'
150. There is more in Mr Doney's second witness statement (to which I will come in the next paragraph), but I would not regard what he says in the first witness statement as any sort of answer to the liquidator's claim. I do not think that he established that IM Ltd had an American operation in the sense of having its own trading activities carried on in the United States. There are references in some documents to a United States corporation which included 'Doney' in its name. I do not know whether its activities ever amounted to anything of substance, but if they did they were not the operations of IM Ltd and there was no justification for IM Ltd using its money towards the expenses of a different entity, at least at a time when IM Ltd's own creditors were significantly at risk. I accept that Mr Doney, while living in Florida, was from time to time attending to the affairs of IM Ltd, and that in principle it was proper for IM Ltd to meet such expenses as were incurred in the United States and were properly referable to its business. However, Mr Doney would need to establish that the quite large sums identified by the liquidator were in payment or reimbursement of such expenses rather than of other expenses (quite possibly substantial in amount) which Mr Doney was incurring in that country. Even if he could establish that they were, he would still have the problem that, if he had in the first instance met IM Ltd's expenses himself and was later having them repaid to him by IM Ltd, that would be presumed to be a preference within s.239.
151. I did, however, say that there was more in Mr Doney's second witness statement. He believes that a transfer of £10,000 in November 1998 was used to meet two outgoings. One was 'out of pocket expenses in respect of the Florida office rent'. I do not accept that that is a justification for expenditure of IM Ltd's money. The evidence does not lead me to conclude that the office which was apparently rented in Florida was an office of IM Ltd, as opposed to an office for other ventures of Mr Doney in the United States. However, the second outgoing for which the November transfer was used is described by Mr Doney as follows: 'part payment (on the company's behalf) to an American financial adviser called Mr Warren. He and the company had financed, on a shared cost basis, a seminar programme in this country aimed at gaining experience of the American market.' I read this as meaning that IM Ltd was paying to a third party, Mr Warren, a liability which it had incurred while it was still trading, and that Mr and Mrs Doney's bank account was simply used as a convenient channel through which the company paid its own liability. On that basis I consider that Mr Doney is not liable to pay to the liquidator such part of the £10,000 as was paid on to Mr Warren. Perhaps Mr Doney will be able to be more precise about how much that part of the £10,000 was.
152. A similar point arises in respect of the transfer of $9,108 in March 1999. (Mr Doney's second witness statement refers to £5,640, but I believe that it is the same transfer.) The witness statement says that it was made to meet the US tax liabilities in respect of two administrative employees of the company who had been transferred to the USA. I assume that the US tax liabilities were analogous in some way to PAYE, and were referable to the employees but payable by the employer. I interpret Mr Doney's statement as meaning that the American bank account of himself and his wife was used as a form of conduit for IM Ltd's money to meet IM Ltd's own liability. On that basis I consider that Mr Doney is not liable to the liquidator in respect of this sum either. I should add that Mr Doney explained in evidence that, when he was attempting to keep some form of managerial oversight over IM Ltd's business although he was living in Florida, he found that he needed a former English employee of the company working alongside him: hence the relocations of two employees (one after the other, not so that they were both working in Florida at the same time). Mr Randall was sceptical about this, but I see no reason to doubt Mr Doney's evidence upon it. It may have been an expensive way of proceeding, but when Mr Doney tells me that the two employees concerned did work in Florida on IM Ltd's business I am not prepared to reject what he says.
153. The result on the payments to bank accounts of Mr and Mrs Doney is that Mr Doney is liable to the liquidator to repay the amounts of them except for the amount used to pay the company's liability to Mr Warren and the amount used to pay the company's American tax liability in respect of its own employees.

£85,000 paid to Mr and Mrs Westgate in September 1998

154. I recorded in paragraph 47 above that, in an effort to help IM Ltd with its financial crisis in early 1998, Mr and Mrs Westgate (personal friends of Mr Doney) lent £85,000. Nearly all of it was used by IM Ltd to repay some of the money which it owed to the clients' account. In September 1998 the company paid £85,000 to Mr and Mrs Westgate. This repaid their loan. The liquidator says that Mr Doney is in consequence liable to pay him £85,000, and that Mr Doney must then claim for that amount pari passu with other creditors. I agree, but the analysis is complicated by obscurities about the basis on which Mr and Mrs Westgate provided the £85,000.
155. Mr Doney's witness statement says: 'I did not want, however, the loan to be made directly to [IM Ltd] so that it showed up as a debt which could have been used by the Regulators to argue that the company did not satisfy the Capital Resources Requirement and, accordingly, the money was paid into an account held by my wife and me and was loaned against an obligation given by me on behalf of [IM Ltd] to the Westgates that [IM Ltd] would repay the loan from the proceeds of sale of the business. Further, my wife and I underwrote the transaction (so that IM Ltd itself did not incur any liabilities for the loan over and above the obligation to repay from the proceeds of any sale) and agreed to repay the Westgates from our personal financial resources if no sale took place.' In oral evidence the thrust of Mr Doney's evidence was that the loan was made to him, but IM Ltd was liable to repay it. I should perhaps record that there was no written loan agreement, nor is there any contemporary documentation. I find what Mr Doney says confusing. There is no doubt that Mr and Mrs Westgate made £85,000 available, that it was used by IM Ltd for business purposes, and that Mr and Mrs Westgate were repaid directly by IM Ltd. But to whom did they lend the money? Mr Whalley, the liquidator, was concerned by exactly that question, and he wrote and asked Mr and Mrs Westgate. Mrs Westgate replied as follows: 'My husband and I have spoken to Malcolm Doney regarding the £85,000 loan, and he will give you the details of the payment in current correspondence as he is better informed of the circumstances.' In Mr Doney's letter to Mr Whalley of 12 June 2000 he wrote that he had advised Mr and Mrs Westgate that 'they were not obliged to give you any information whatsoever, unless you can first establish that the Company was insolvent at the time the repayment was made to them and there was a dominant intention to prefer them to other creditors of the Company'. That is all that Mr Doney wrote or said to Mr Whalley about the £85,000.
156. The matter is further complicated by a detail which Mr Mason discovered in his researches and which he mentions in his expert's report. However, leaving that aside for the moment, the possibilities seem to be the following. (1) Mr and Mrs Westgate lent the money to IM Ltd, and only IM Ltd was liable to repay them. (2) Mr and Mrs Westgate lent the money to Mr Doney (or to Mr and Mrs Doney), who lent it on to the company, and Mr Doney was (or Mr and Mrs Doney were) liable to repay Mr and Mrs Westgate. On that basis the payment of £85,000 by the company to Mr and Mrs Westgate in September 1998 operated to discharge two debts: the company's debt to Mr Doney, and Mr Doney's debt to Mr and Mrs Westgate. (3) Mr and Mrs Westgate lent the money to the company, but if the company did not repay them Mr Doney would be liable to repay them. (4) Mr and Mrs Westgate lent the money to Mr Doney, but on terms that, if the company succeeded in selling its business, the company would be liable to repay Mr and Mrs Westgate.
157. If possibility (1) was correct I do not think that Mr Doney could be made liable to the liquidator. The company would have repaid to outside creditors (Mr and Mrs Westgate): a debt of its own which it incurred with a view to keeping its business going. The case would be similar in principle to re MC Bacon Ltd [1990] BCC 78. However, I do not think that possibility (1) can have been correct, and indeed it is not consistent with Mr Doney's own evidence. He personally was involved in the loan in some way. Possibility (4) seems to be along the lines of Mr Doney's evidence, but I cannot accept it. It would be a most unusual transaction, and would have required to be carefully documented. Or at least it would need to be unequivocally confirmed by Mr and Mrs Westgate, which it has not been. Further, if possibility (4) applied in any respect I feel sure that Mr and Mrs Westgate would only have agreed to it on the basis that, if IM Ltd did succeed in selling its business but failed to repay their loan, they would have been entitled to call on Mr Doney to repay. That would amount to the same thing as possibility (3).
158. The realistic possibilities are (2) and (3). On either basis I consider that s.239 applied. Under possibility (2) IM Ltd's payment of £85,000, though made directly to Mr and Mrs Westgate, repaid a debt which the company owed to Mr Doney. It was a preference. Under possibility (3) IM Ltd's payment discharged a debt which it owed to Mr and Mrs Westgate but which Mr Doney had guaranteed. On that basis also it was a preference. It would also have been a preference under possibility (4), assuming, as I do, that if possibility (4) had applied but IM Ltd had defaulted in repaying Mr and Mrs Westgate, Mr Doney would have been liable to repay them. For the section to apply the preference had to be given at a 'relevant time', but for the reasons which I gave in paragraph 116 in connection with s.238 it was: it was given within two years before the commencement of IM Ltd's winding up, and at the time of the preference IM Ltd was unable to pay its debts within the meaning of s.123, certainly by reason of cash flow insolvency and possibly also by reason of balance sheet insolvency: see s.240(i)(a) and (2)(a). I do not consider that Mr Doney can escape liability under s.239 on the ground that the company was not influenced by a desire to give the preference (see s.239(5)). It is presumed to have been so influenced (s.239(6)) and in my view the presumption has not been rebutted.
159. In paragraph 156 above I referred to a detail which Mr Mason had discovered in his researches. It appears that, after the £85,000 had been provided by Mr and Mrs Westgate and had passed via Mr Doney to IM Ltd, book entries were made which Mr Mason interprets as showing that the debt to Mr and Mrs Westgate was owed by BC Ltd, not by IM Ltd. I confess that I find the accounting details on this particular point impenetrable, but I do not think that the point affects my conclusion on this aspect of the case, and I do not think that Mr Mason suggested that it should.
160. A different respect in which the liability to Mr and Mrs Westgate could be relevant is whether it should or should not be provided for as a liability of IM Ltd in assessing the balance sheet solvency or insolvency of IM Ltd at the time of the transaction with Farlake. That was the question which Mr Mason was addressing. The book entries which he describes in his report may or may not have an impact on that question, but I do not think that they have an impact on the different question with which I am now concerned: do the undoubted facts that Mr and Mrs Westgate were repaid and that it was IM Ltd's money which was used to repay them support the liquidator's case that Mr Doney should be ordered to pay £85,000 to him? In my view they do, and I do not think that the book entries make any difference. I notice that in a paragraph of his report Mr Mason writes: 'Mr Doney had agreed to procure that Mr and Mrs Westgate would be repaid by [IM Ltd] from the proceeds of sale and that if the sale did not take place he would repay them from his personal financial resources.' That is essentially possibility (3), on the basis of which I have already concluded that the payment of Mr and Mrs Westgate's debt by IM Ltd was a preference in respect of which Mr Doney is liable to the liquidator in the sum of £85,000. The book entries involving BC Ltd, to which Mr Mason has drawn attention in a different context, do not affect that conclusion.
161. That completes what I have to say about the liquidator's claims against Mr Doney in respect of payments which, in the period after the sale to Farlake, were made to him or to business entities with which he was associated.

XIII THE REPAYMENT OF THE PREFERENCE SHARES

162. In the pleadings the liquidator advanced contentions which attacked the repayment by IM Ltd of the preference shares, and claimed various species of relief against Mr Doney in respect of the repayment. However, from the beginning of the trial it was apparent that the liquidator's case on this part of the pleadings was most unlikely to succeed. That was the result of two factors. First, it had become common ground that the preference shares were never validly issued at all so that the company simply owed the purported subscription moneys back to the subscribers. Thus the company repaid a debt owed to creditors; it did not repay shareholders. Second, the PIA insisted that the subscribers for the preference shares must be repaid as a condition of allowing the sale to Farlake to proceed. So the repayment was not influenced by a desire to prefer the subscribers. It was required by the PIA. In those circumstances Mr Randall on behalf of the liquidator has not proceeded with this part of the pleaded case. I need not say anything more about it.

CONCLUSIONS

163. I summarise the outcome of this long judgment.

i) The liquidator claims that the splitting of the consideration from the Farlake group between IM Ltd and MDA Partnership, instead of the whole or almost the whole of the consideration going to IM Ltd where it would all have been available towards liabilities to creditors, was a misfeasance or breach of fiduciary duty by Mr Doney. That claim succeeds in principle. The liquidator has an alternative claim in respect of the same matter. He makes the alternative claim under s.238. In my view that claim does not succeed, but that does not matter in the result, because Mr Doney is liable for misfeasance or breach of fiduciary duty.

ii) As requested by Mr Davies on behalf of Mr Doney I will hear further submissions about the precise consequences which should follow. At first sight Mr Doney appears to be liable for his partnership share of the full amounts realised or realisable by MDA Partnership from the transaction, less only his partnership share of the value of the partnership's rights to renewal income. However, I will hear further submissions before coming to a definite conclusion.

iii) Mr Doney is liable to the liquidator in respect of the payments made after the transaction but before the liquidation to (i) MDA Partnership, (ii) BC Ltd, (iii) Mr and Mrs Doney personally, and (iv) Mr and Mrs Westgate, to the various extents which I have indicated in the paragraphs of this judgment where I have considered those claims by the liquidator in detail.

ANNEX: TABLE OF ABBREVIATIONS, GLOSSARY, DRAMATIS PERSONAE, ETC.

AIM	Alternative investment market.
Albany	Albany International, an insurance company which had brought against IM Ltd a legal action which succeeded in March 1998.
Anstey Sargent & Probert	Solicitors who acted for IM Ltd and Mr Doney on the sale to the Farlake group. See also Coombs, Mr.
Applicant, the	Mr Whalley, the liquidator of IM Ltd.
BC Ltd	MDA Business Consultancy Limited.
Bennett, Mr	Andrew Bennett, chartered accountant; partner in Rothman Pantall; senior partner in the firm's office in Chandlers Ford, Hants; a witness for the applicant
Bishop, Andrew	Internal solicitor in the Doney businesses; company secretary of IM Ltd.
Coombs, Mr	Richard Coombs, solicitor; partner in Anstey Sargent & Probert who acted for IM Ltd and MDA Partnership on the sale of IM Ltd's business to the Farlake group. A witness for the respondents.
Davies, Mr	John Davies QC, leading counsel for the respondents.
Doney, Mr	Malcolm Doney, former director and controlling shareholder of IM Ltd; principal partner in MDA Partnership; main respondent to Mr Whalley's application in the case; a witness on his own behalf.
Ewing, Mr	Sean Ewing, managing director of Farlake.
Fanshawe, Mr	Anthony Fanshawe; chartered accountant and licensed insolvency practitioner; partner in Fanshawe Tofts; expert witness instructed for the applicant.
FIMBRA	The Financial Intermediaries, Managers and Brokers Regulatory Association, in earlier years the regulatory authority for MDA Partnership and IM Ltd. See also PIA, the.
Goodman, Mr	A director for a time of IM Ltd.
Hare, Mr	David Hare, chartered certified accountant; employed by BC Ltd from 1993 until August 1998; acted as the internal accountant in the Doney enterprises (particularly IM Ltd, BC Ltd and MDA Partnership); a witness for the respondents.
Heaver, Mr	Peter Heaver, a sales consultant who worked for IM Ltd and transferred to the Farlake group; appears to have been in dispute with IM Ltd over allegedly unpaid commissions.
Hoare Worth	Hoare Worth & Co Ltd, a company specialising in introducing and arranging business sales.
IM Ltd	MDA Investment Management Ltd, now in liquidation and the company at the heart of the case.
IPS	IPS Capital Management plc, a subsidiary of Farlake, through which the Farlake group contracted to acquire the business of IM Ltd.
Liquidator, the	Usually the liquidator of IM Ltd; for a short time the Official Receiver was the liquidator, but at most times Mr Whalley has been the liquidator.
Martin, Mr	Raymond Martin, Inspector of Taxes based at Bournemouth; responsible for the tax liabilities of IM Ltd; a witness for the applicant.
Mason, Mr	Michael Mason, FCCA, director of Numerica Forensic Accounting and Dispute Resolution plc; expert witness instructed for the respondents.
MDA Partnership	Malcolm Doney Associates, a partnership. At most relevant times the partners were Mr Doney and Mr Paddon, with interests of 80% and 20% respectively; second respondent to this application, but the terms of the liquidator's settlement agreement with Mr Paddon mean that the partnership is a respondent only to the extent of Mr Doney's interest in it.
Mills, Mr	Steven Mills, an employee of BC Ltd from 1993 until July 1998, working in a managerial capacity in connection with the business activities of all Doney enterprises, including IM Ltd, BC Ltd and MDA Partnership; after July 1998 stayed on until December 1999 part time and in a self-employed capacity; a witness for the respondents.
NICs	National insurance contributions.
Paddon, Mr	Colin Paddon, a director and shareholder in IM Ltd; also a partner in MDA Partnership; Mr Doney's former brother in law; originally a respondent to this application, but the application against him was settled.
Perriam, Mr	Andrew Perriam, chartered accountant; employee of and from 1995 partner in Rothman Pantall, based in the firm's office at Chandlers Ford, Hants; a witness for the applicant.
PIA, the	The Personal Investment Authority, in later years the regulatory authority for IM Ltd. See also FIMBRA.
Randall, Mr	John Randall QC, counsel for the respondents.
Rayner, Mrs	Karen Rayner, a consultant working in the business of IM Ltd; a director of IM Ltd until July 1998; daughter of Mr Doney; a witness for the respondents.
Respondents, the	Mr Doney and MDA Partnership (but as regards MDA Partnership only to the extent of Mr Doney's interest therein).
Rothman Pantall	Rothman Pantall & Co, chartered accountants with offices in several locations, including Chandlers Ford, Hants, and London; auditors of IM Ltd Ltd; accountants for MDA Partnership.
Rowan & Co	Farlake subsidiary which (rather than IPS) appears to have carried on the business acquired by the Farlake group from IM Ltd.
Ryman, Mr	Stephen Ryman, chartered accountant and licensed insolvency practitioner; partner in Rothman Pantall, based in the London office; a witness for the applicant.
s. (for sections)	Except where otherwise indicated, sections of the Insolvency Act 1986. Thus for example 's.2l2' is a reference to section 212 of the Insolvency Act 1986.
Smyth, Mr	Tax partner in Rothman Pantall, based in the office at Chandlers Ford, Hants; a witness for the applicant.
Westgate, Mr and Mrs .	Friends of Mr Doney who provided a loan of £85,000 in the first part of 1998.
Whalley, Mr	Peter Whalley, FCA and licensed insolvency practitioner; the liquidator of IM Ltd and the claimant in the case; a witness.
Windsor, Mr	Adrian Windsor, a director of IM Ltd from 1994 until the sale of the business to the Farlake group; not a shareholder; in the early 1990s a partner in MDA Partnership.