England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		9th September 2005

Mr Justice Patten :

Introduction

1. The Claimants and the Defendant in this action are shareholders in an English private company called British Mediterranean Airlines Limited ("BMed") which was founded as a business in 1994 and which operates scheduled air services between London and various destinations in Asia and the Middle East. The First Claimant, Halton International Inc (Holdings) SARL ("Halton") is a Luxembourg company which was formed from the merger in December 2002 of two BVI companies, Halton International Inc ("HII") and Halton Overseas ("HOL") and their subsequent re-incorporation in Luxembourg as a single company in June 2004. At all times material to this action Halton and its predecessors HII and HOL were controlled by Dr Oussama Tabbara ("Dr Tabbara") and his son Omar and Dr Tabbara is now the sole director and shareholder of Halton. Although at one stage, the Defendant raised an issue about the status of Halton as a claimant and shareholder in BMed, no point is now taken about this.
2. Dr Tabbara and the Second Claimant Mr Kaddoura are two of the original founders of BMed. Dr Tabbara was born in 1938 and has a Degree and Doctorate in Business Administration from the University of Beirut and the International University of Vienna, respectively. He is the Chairman of Nexia Middle East, a major accounting and audit firm with fifteen offices around the Middle East and North Africa, and is also a partner in accounting and audit firms in Beirut and Saudi Arabia. Apart from his professional practice, he has extensive business interests around the world which include a major agricultural business in Chile and a family operated travel agency based in Jordan which is run by a company called Al-Kareem. In his professional capacity he has in the past given expert assistance to the Court in Lebanon and he accepted in cross-examination that he might properly be described as an accountant of some experience and distinction.
3. Mr Kaddoura like Dr Tabbara, is Lebanese by birth and was known socially by Dr Tabbara prior to the events with which this action is concerned. He has lived in Rome since before 1994 and is an Italian citizen. His evidence is that although his flat in Rome was what he described as his legal address, he travelled extensively to Beirut and to Libya on business during the period with which we are concerned and was often away from home. In 1994 Dr Tabbara and Mr Kaddoura received an approach from Mr Nadim Lababidi ("Mr Lababidi") who also ran a travel business in Beirut called Pan Asiatic Travel and was an old friend and business colleague of Dr Tabbara. He invited them to participate in a consortium of private investors based in Lebanon and the Middle East, which Mr Lababidi was forming in order to set up BMed as a scheduled airline. A total of £5m paid up share capital was required and Dr Tabbara and Mr Kaddoura each invested £1m in return for 20 per cent of the issued share capital in the company. Dr Tabbara made his investment through HII. Mr Kaddoura said that his investment represented family money in which his brother Izzat had an interest. His brother owned and operated the Coral Beach Hotel in Beirut. It was put to Mr Kaddoura (but denied) that Ezzat was the person who was primarily interested in the investment because of the benefit BMed could bring to his hotel business and that Mr Kaddoura was used to front the investment because he had an EU passport from Italy. It was apparently a CAA requirement that a majority of the issued shares had to be held by either British or other EU nationals, in order to comply with the agreements made between the UK, Lebanon and Jordan for the operation of scheduled air services between London and those destinations. In the end nothing turns on whether Mr Kaddoura acted for himself or as a nominee for his brother.
4. One of the other investors approached by Mr Lababidi was Mr Wafic Said. He was born in Syria but now lives in Monte Carlo. He is Chairman of the Said Holdings Group of Investment Companies, which have substantial holdings in securities and real estate in Europe, North America and the Far East. He had known Mr Lababidi since the 1980s and agreed to invest £1m in BMed through the Defendant ("Guernroy") which is a Guernsey subsidiary of Royal Bank of Canada (Channel Islands) Limited and holds its shares in BMed on behalf of various Said family trusts. The trustees were not willing to use existing trust money to make an investment in BMed but were prepared to acquire shares as an investment if funded by Mr Said. He therefore paid both the initial investment and for each subsequent acquisition of shares, including those issued and allotted to Guernroy on 6 February 1997 with which this action is concerned. It is worth recording at this stage, that although Guernroy is (for the reasons I will come to) the proper defendant to these proceedings, none of its directors was called to give evidence in its defence. In relation to each of the transactions and other matters in issue in these proceedings, Mr Said (either personally or through his legal adviser Mr William Heard) acted on behalf of and in the name of Guernroy. Guernroy accepts that it is bound by their actions and is liable for the consequences of those actions, if any. So far as intention and notice are relevant to what I have to decide, it is for the same reason unnecessary to look beyond Mr Said and Mr Heard.
5. The other investors were a Mr Mohammed Safadi and a Mr Haig Didizian, also Lebanese businessmen, who each invested £500,000. Mr Didizian made his investment through a company called Hachma UK Limited. The remaining £1m of the £5m start up capital was provided by Mr Lababidi's son, Salah, who granted a power of attorney in respect of his shares to his father.
6. In the case of Dr Tabbara and Mr Lababidi, BMed provided a useful complement to their existing travel businesses which came to act as its general sales agents ("GSAs") providing ticketing services for the airline. According to the evidence, the GSAs held the entire ticket stock of BMed for the particular country in which they were situated. Their function was to distribute tickets amongst travel agents and these sub agents would then sell the tickets and take a commission, which would be deducted from the overall ticket price. The GSA was entitled to a commission, calculated as a set percentage of the amount which was remitted to it by the sub agent, net of the sub agent's own commission. The GSA would then remit the balance to the airline. If the GSA sold tickets direct to a customer rather than through a travel agent, it would be entitled both to the travel agent's commission and to the commission normally due to it as a GSA. The contract with Al-Kareem apparently provided for a GSA commission equal to 3 per cent of the ticket price net of the travel agent's commission. That in place with Pan Asiatic Travel provided for a net GSA commission of 8 per cent of the ticket price.
7. Dr Tabbara said in evidence that this was not a major part of his travel business, but for reasons which I will come to later, this is in issue. What is, however, accepted is that in 1995 he agreed to set up something akin to a partnership with Mr Lababidi and Al-Kareem established the GSA agency in Jordan to enable BMed to obtain regulatory approval from the Jordanian Civil Aviation Authority to fly to Amman. This relationship with Mr Lababidi subsequently broke down and was terminated in June 1998. There are also proceedings in Jordan between BMed and Al-Kareem in relation to monies allegedly due from the ticketing arrangements prior to the commencement in 1997 of a British Airways franchise which lies at the centre of this English litigation.
8. BMed was borne out of the cessation of hostilities in the Lebanon. In 1994 British Airways ("BA") did not fly to Beirut and Middle Eastern Airways ("MEA"), according to Mr Said, had outdated equipment and a disorganised management structure. BMed had been incorporated in 1990 under the name London Airtours Limited by a Mr Hugh Parry and a Mr Jack Romero. In 1994 they were seeking to establish a daily scheduled service between London and Beirut and enlisted the support of Mr Lababidi to find investors willing and able to put up the £5m which was required. On 6 July 1994 the company's name was changed to BMed and on 12 October that year, the authorised share capital was increased from 1,000,000 to 5,500,100 shares of £1 each. The 100 £1 shares held by Mr Parry and Mr Romero were designated 'A' shares and the unissued shares were divided into 2,100 A shares and 5,497,900 B shares of £1 each. At the same time new articles of association were adopted under which voting rights were restricted to the 'A' shares; shares could only be issued so that the issued share capital continued to comprise A and B shares in the proportion 1 : 2,499; and each holder for the time being of 8½ per cent or more of the 'A' shares could nominate a director to the board. Following this re-organisation, Guernroy, HII, Mr Kaddoura and Salah Lababidi were each issued with 380 'A' shares and 999,620 'B' shares, representing 1.9% of the issued 'A'shares. Mr Safadi and Hachma UK each held 190 'A' shares (9.5%) and 499,810 'B' shares. Mr Parry held 35 'A' shares (1.7%) and Mr Romero 65 'A' shares (3.3%).
9. The articles contained no express pre-emption provisions, but the statutory pre-emption rights granted by ss89-95 of the Companies Act 1985 applied, so that any allotment of shares had to be offered first to existing shareholders pro-rata with their holdings unless the directors were authorised by special resolution to make the allotment without complying with s89: see s95(1). At the same time the original investors entered into a shareholders agreement which confirmed the requirement for A and B shares to be issued in the proportion 1:2,499. On the basis of an issue and allotment of shares at a par value of £1, these provisions therefore had the effect of requiring an investment of £2,500 in order to acquire a single A voting share and of permitting the original shareholders to maintain the balance of control created by the original allotment subject to their taking up any further rights that were issued.
10. The shareholders duly exercised their rights under the articles to appoint directors to the board. Dr Tabbara became a director in October 1994 but subsequently HII transferred half of its holdings in BMed to HOL, which in November 1994 appointed Dr Tabbara's son Omar to be a director. Guernroy nominated Mr William Heard, a solicitor who acted as a legal adviser to Mr Said and his companies, and Mr Kaddoura and Mr Safadi also became directors in October 1994. Mr Parry and Mr Romero became the Chief Executive and an Executive Director respectively and Lord Hesketh was appointed as non-executive Chairman of the Company.
11. BMA began to operate its service to Beirut on 28 October 1994. Between then and 1997 it made continuous losses which led to further calls for finance from its shareholders. I shall deal with the events of this period in more detail later in this judgment, but by way of introduction to the issues in this case they can be summarised quite shortly. By March 1995 BMed had lost over £1.8 million and the CAA required the company to find additional capital of £1.5 million. By then, Lord Hesketh had suggested that Mr Des Hetherington who had considerable experience in running an airline, should replace Mr Parry as Chief Executive Officer and he was appointed to this post in April 1995. On 10 May 1995 a rights issue took place which raised £1.425 million. All the existing shareholders except Hachma UK Ltd, Mr Parry and that MrRomero participated but HII and HOL took up Hachma UK's rights thereby increasing their holding of 'A' shares to 22.2% (551) compared to Guernroy's 19.2% (494).
12. In May 1995 the CAA required a further capital injection of £600,000 to cover the extension of BMed's services to Amman. This was provided by subordinated convertible loans from shareholders in June 1995. Neither Mr Kaddoura nor Hachma UK participated, but Dr Tabbara through HII and HOL, took up his pro-rata share of the issue, plus the maximum share available to the Halton companies of the unallocated portion of the loans (a total of £225,500). Guernroy Ltd and Salah Lababidi subscribed £197,500 and £120,000 respectively.
13. In July 1995 Mr Hetherington put forward a three year business plan for BMed which, if implemented would have required further investment of between £10 and £15 million. This led to Lord Hesketh writing to shareholders in September setting out three options for the company: closure, a limited capital injection of £1.5 million; or the substantial injection contemplated by the three year plan of £10-15 million. By then, Mr Said had raised the question of whether it was still appropriate for the board to issue shares at a par value of £1, contending that the issue price should more accurately reflect what he considered to be the actual value of the company. There was also a debate about the composition of the board and the capital structure of the company. Lord Hesketh was in favour of a professional board, independent of the shareholders whom he regarded as lacking in the expertise necessary to run an airline. In his witness statement he described board meetings as frequently descending into chaos, with constant disagreements between the shareholders as to what should be done. The existing capital structure was also perceived to be a problem with its requirement that A shares could only be issued in a 1:2,499 proportion to B shares because this was considered by some to be unattractive to outside investors and an impediment to the future growth of the company.
14. Of the existing shareholders, Mr Said was clearly in favour of changes to the board and to the capital structure of BMed. He indicated that he was not prepared to support expansion of the company on any other terms and in October 1995 he suggested that he would offer Guernroy's shares for sale if the shareholders could not agree on change. At that time a further rights issue was imminent in order to comply with a CAA directive that BMA should raise additional capital of £1 million. In December 1995 an EGM took place at which resolutions proposing an increase in the capital of the company coupled with changes to the articles, were opposed by the Halton companies and by Mr Salah Lababidi and consequently were not passed. A resumed EGM took place on 9 January 1996 at which approval was given for a rights issue to raise £1 million to meet the CAA requirement. By then BMed had accumulated losses of £5m. No further progress was made on the wider issues of capital restructuring and the composition of the board. The rights issue was taken up by all of the original shareholders except Hachma UK and Mr Kaddoura. HII and HOL also took up their share of the unsubscribed portion of rights (a total payment of £308,499). Guernroy subscribed its pro-rata share of the rights issue but did not take up any part of the unsubscribed portion. This left £84k of the issue unsubscribed. Therefore, as of 31 July 1996, Guernroy held 19.4% (571) of the issued 'A' shares compared to the 22.9% (674) held by the Halton companies.
15. In about March 1996 informal discussions took place between Lord Hesketh and Mr Robert Ayling, the Chief Executive of British Airways, about the possibility of BMed continuing its operations as a BA franchise. Lord Hesketh says that the subject was raised by Mr Ayling over lunch at Claridges on 18 March. BA had begun to fly to Beirut in March 1995, but was restricted by the CAA to operating two flights per week compared to the five operated by BMed. It was, however, anticipated that these restrictions would be relaxed in the foreseeable future and that BA was likely therefore to apply increased competitive pressure to its rival. A franchise would remove this and at the same time give BMed access to a much wider passenger base through BA's worldwide network.
16. Throughout this period BMed's financial position remained precarious and in May 1996 pressure was increased by a CAA directive that the company should find an additional £1m by 31 May 1996 and a further £1m by 30 September of that year. Dr Tabbara (together with Salah Lababidi and Hachma UK) offered to provide a further subordinated convertible loan of £1m by not later than 6 June. By now, serious negotiations with BA about a possible franchise were under way, and on 1 June BMed and BA signed a confidentiality agreement for the purpose of these discussions. The immediate funding requirements were met by further subordinated convertible loans from Guernroy, Mohammed Safadi, HOL, HII and Salah Lababidi in June 1996 totalling some £841,283, but Mr Said and Lord Hesketh continued to press for changes to the board and to the capital structure of the company. Mr Said made it clear that Guernroy would make no further investment in BMed unless the changes were agreed. Lord Hesketh even threatened to resign as Chairman.
17. After several adjournments an EGM took place on 23 July 1996 at which changes were agreed to the articles of association. The requirement for shares to be issued in the proportion of 1 'A' share to 2,449 'B' shares was removed and the share capital of the company was re-structured by converting the issued 'A' shares into ordinary shares of 20p each and the issued 'B' shares into deferred shares of 80p each. The authorised share capital of the company was at the same time increased from £8,600,100 to £18,962,550 by the creation of 51,812,250 ordinary shares of 20p each. The deferred shares carried no voting rights and are therefore effectively valueless. The other notable change to the articles of association was the inclusion of express pre-emption rights. New Articles 5.3 and 5.4 were included as follows:

"5.3 Any shares of any class for the time being unissued shall be offered to all the holders of ordinary shares pro rata as nearly as may be to the number of ordinary shares registered in the names of those holders. Such offer shall be made by written notice specifying the number of shares offered, the price per share, a period (not being less than 14 days nor more than 60 days) within which the offer shall be accepted and payment for the shares made to the Company and shall invite each shareholder to notify the Directors of the maximum number of shares for which it would wish to subscribe. If the offer is not accepted and the payment made within that time the offer will lapse and determine.

5.4 After the expiration of that period, or on the receipt of an intimation in writing from the offeree that he declines to accept the shares so offered, the Directors shall in accordance with the provisions of these Articles offer any shares not taken up to those shareholders which have accepted the offer under Article 5.3 and in the case of competition for such shares the Directors shall allocate them pro rata as nearly as possible to the number of ordinary shares registered in the name of the applicants, but subject to any maximum which may have been notified by any shareholder. If any shares are not so taken up the Directors may allot, grant options over or otherwise dispose of them to such persons or companies, on such terms and in such manner as they think most beneficial to the Company."

18. At the same time, the composition of the board was changed. The shareholders relinquished the right under the shareholders' agreement to appoint directors to the board and the new articles provided for a board of not less than five nor more than seven in number, to be appointed by ordinary resolution of all the members. At the same time, the shareholder directors including Dr Tabbara, his son Omar, Mr Kaddoura and Mr Heard all resigned and were replaced by a five man board comprising Lord Hesketh, Mr Hetherington, Mr David Burnside, Mr Simon Elliot and Mr Farouk Kamal. Mr Kamal had been a member of the previous board and was on friendly terms with Mr Nadim Lababidi, Dr Tabbara and Mr Kaddoura. Mr Said said that he supported his membership of the board because he believed he would be able to act as a channel of communication with what are commonly referred to as the Beirut shareholders.
19. The period from 23 July 1996 to February 1997 is the most controversial and I shall have to deal with many of the events in some detail later in this judgment. However, for the purpose of outlining and explaining the issues which arise in this litigation, it is only necessary to mention certain key events. Following the capital re-structuring of BMed, Guernroy held 1,477,218 ordinary shares of 20p each amounting to 20.1% of the total. The corresponding figures for the other major shareholders were: Mr Safadi 780,799 ordinary shares (10.6%); Hachma UK Ltd 500,000 ordinary shares (7%); HOL 780,799 ordinary shares (10.6%); HII 955,213 ordinary shares (13%); Mr Kaddoura 1,283,000 ordinary shares (17.5%); and Salah Lababidi 1,561597 ordinary shares (21.3%). On 23 July the shareholders were also given a presentation by Mr Hetherington on the proposed BA franchise. In particular, they were told that some £5.5m of additional capital would be needed for the franchise to come into existence over and above the £2m already required by the CAA. Of the £5.5m, some £3m would have to be raised by 11 October 1996. This was confirmed in a letter from Lord Hesketh to shareholders sent on 29 July.
20. The discussions with BA about a possible franchise had begun in earnest during the period between May and July when Mr Said and the Beirut shareholders were at odds about the capital re-structuring of the company and the composition of its board. Mr Said (like the board) was informed as early as April of the franchise discussions, but no wider presentation was made to shareholders until the 23 July meeting. The need to raise additional finance of £5.5m did however focus attention on the need to locate possible sources of investment and Schroder Asseily, who were BMed's financial advisers, were instructed by the board to handle the fund-raising operation. Unfortunately, on 2 September they informed BMed that they could not supervise a private placement of shares, thereby leaving the company with little over a month in which to find the additional capital it needed.
21. This led Lord Hesketh to write to shareholders on 4 September, indicating that the only realistic source of investment was likely to be the existing shareholders themselves and inviting them to let him have their views on this. The proper interpretation of this letter is in issue and I shall return to it later. All that needs to be stated for present purposes, is that the 11 October deadline passed without the funds being raised and that despite its extension by BA to 16 October, no additional money was provided. On 19 October BA made a press announcement that the conditions necessary for the implementation of the franchise had not been met, and that BA would therefore continue to operate its own services to Beirut, Damascus and Amman.
22. Throughout the period between July and October 1996, various possibilities of finance had been suggested. At one stage in September there was a proposal to finance the franchise from GE Capital, which is, as I understand it, a venture capital arm of the General Electric Company of the USA. This proposal required a high rate of return for GE Capital and would have been linked to some kind of leasing arrangement involving aircraft equipped with GEC engines. It was, however, partly dependent upon BA itself making a loan to BMed of some £2m and BA was ultimately unwilling to advance this money because it could not be offered adequate security.
23. Dr Tabbara also made certain offers of finance. On 26 September he offered to provide £2m of fresh capital, but on terms which required part of it to be used in the repayment of the earlier subordinated loans. The offer, therefore, amounted to a net increase in the capital of the company of about £600k. At the same time, he was involved in discussions with Prince Al Waleed bin Talal Bin Abdul Aziz ("Prince Waleed") about a possible investment of up to (£10m) and the Prince was obviously interested enough to commission Messrs Arthur D. Little through their branch in Saudi Arabia, to prepare a report on the company. There was also reference to a possible investment by a Mr Magdy Zeid, who wrote a letter applying for some 3 million 20p shares at a price of £1 per share. In the end, however, this was not proceeded with.
24. The critical events began very soon after the failure of the first BA franchise. Mr Said said that he was approached by Mr Nadim Lababidi, who, in effect, begged him to do what was necessary in order to save the company from liquidation by reviving the BA franchise. Mr Lababidi said that he acted on behalf of himself and the other Beirut shareholders and that they were willing to give Guernroy total control of BMed for this purpose and to sign any document necessary to achieve this. There is a dispute as to whether the requirement that Guernroy should have voting control was Mr Lababidi's idea, or that of Mr Said himself, but what is not in dispute is that following this meeting, Mr Said (through Mr Heard) instructed Messrs SJ Berwin (on behalf of Guernroy) to prepare what has been called and I will refer to as the voting agreement, which was sent to each of the shareholders on 23 October 1996 under cover of a memorandum from Mr Heard explaining why it was necessary. This memorandum contained the following statement:

"Guernroy Limited will ensure that all of the existing shareholders of British Mediterranean are given the opportunity to participate on a pari passu basis in all financing proposed during the period of the authority described below.

The directors of Guernroy are of the opinion that in order to protect the interests of British Mediterranean, a full authority must be granted to Guernroy. This is reflected in the terms of the attached document which has been drafted by Messrs S J Berwin & Co, which you are requested to sign and deliver to me by return"

25. The voting agreement had the effect of conferring on Guernroy a power of attorney enabling it to act as the agent of and to vote the shares of the other shareholders for the purposes set out in the agreement. Perhaps the most important provision in the voting agreement is clause 4 which is in these terms:

"4.1 The parties agree and acknowledge that it is intended that Guernroy shall endeavour to procure that the Company obtain funding to provide adequate working capital for the Company to finance its business and to satisfy the requirements of British Airways which the Company shall do in any amount and upon whatever terms it thinks fit.

4.2 The parties agree and acknowledge that Guernroy may seek to raise funding for the Company in any manner which Guernroy, in its absolute discretion, considers fit including for the avoidance of doubt funding raised pursuant to or in connection with a fresh issue of Shares (whether by way of rights or otherwise) or other securities in the Company or by way of bank borrowings or other borrowings of any nature whatever. For the avoidance of doubt in the event that new Shares are issued to the Granting Shareholders pursuant to a fundraising such Shares shall become subject to the terms of this Agreement and each Granting Shareholder shall forthwith comply with the provisions of clause 3.4 of this Agreement in respect of such Shares."

26. The voting agreement was not signed the following day as requested by Mr Heard, but it was signed by Dr Tabbara and Mr Kaddoura on or about 24 October. On 22 October Mr Said had met Mr Ayling to discuss the possible reinstatement of the franchise and during the meeting had assured him that the proposal did have the support of the shareholders. He says that he also told Mr Ayling that if the franchise was reinstated Guernroy would (as a result of the voting agreement) be the only shareholder which BA would have to deal with. His evidence is that Mr Ayling took up this suggestion and adopted it as a condition for any renewal of the franchise. The other main condition was the raising of the £5.5m and Mr Said indicated that Guernroy might be prepared to underwrite the raising of this capital, subject to seeing the terms of the franchise.
27. There was some delay in receiving back the signed copies of the voting agreement and Mr Said went so far as to inform Mr Ayling that his efforts had failed and to tell the board of BMed that all further offers of support from Guernroy would be withdrawn. The company's difficulties were compounded by the news received on or about 29 October that Prince Waleed had also decided not to proceed with any investment in the company due to what he described as "shareholder difficulties". Liquidation, therefore, appeared to be imminent, but by 31 October the voting agreement had been signed by all the principal shareholders and the company received an offer from BA to reinstate the franchise subject to the same conditions about funding being fulfilled. No deadline for the raising of the necessary finance was imposed by BA at this time because various details of the franchise remained to be agreed, but Lord Hesketh said that the board identified the end of November as a target date for obtaining at least commitments to provide the necessary £5.5m. To this end, on the afternoon of 29 November, Mr Heard sent a letter to the shareholders requesting them to notify Schroder Asseily in writing by the end of that day whether they wished to take up shares in the company. Dr Tabbara and Mr Kaddoura say that they never received this letter even when it was re-sent to them on 4 December. Guernroy disputes this and I will have to decide whether the letter was received, or at least the contents communicated in some way, to the claimants.
28. What is clear from the documentary evidence is that on 5 November shortly after BA made its offer to re-instate the franchise, Guernroy agreed to provide BMed with short-term finance in the form of an interest free loan of £700,000, repayable on 1 December 1996. Guernroy was to receive security in the form of a fixed and floating charge over the company's assets and more importantly, the issue to it of a warrant enabling it to subscribe for 27.5m ordinary shares at an issue price of 20p, which was exercisable at any time up to 31 December 1996. This was a date by which it was expected that the franchise would be in place and would have become unconditional. The acceptance of the loan and the grant of the warrant was approved and authorised at a meeting of the board of BMed held on the afternoon of 5 November.
29. At a further board meeting held on 8 November, Mr Hetherington confirmed that although no date had been set by BA for the raising of the additional finance, he was working on the assumption that it would be needed by 30 November. The minute records that BA did not expect the investments to be completed by then or indeed until the franchise became unconditional, but were looking for firm commitments of finance. Mr Heard, who attended the board meeting by invitation, is recorded as saying that Guernroy intended to encourage the present shareholders to take up the warrants and would be writing to them accordingly. Guernroy itself was considering an investment of some £1.5m to include the recent loan of £700k.
30. In fact, as I already indicated, no letter was written to the shareholders until 29 November, when Mr Heard, on behalf of Guernroy, sent the faxed letter to Dr Tabbara, Mr Kaddoura and the other Beirut shareholders, asking them to inform Schroder Asseily by close of business that day, of the number of shares they wished to take up. The fax was re-sent on 4 December, but neither Dr Tabbara nor Mr Kaddoura replied to it. Their case, as I have indicated, is that they never received it. Mr Safadi did reply and complained about the lack of time allowed and the absence of relevant information.
31. At a board meeting held on 7 December, a list of potential investors was presented. This included Lord Hesketh and Mr Albert Abela, each in the sum of £1m; Mr Baha Bassatne and Mr Safadi each in the sum of £500k and Guernroy in the sum of £2m. Guernroy is recorded as intending to hold the remaining £500k of the subscription in reserve for existing shareholders. BA had insisted that all shareholders in BMed should both sign the voting agreement and also execute an option agreement giving BA the right to dispose of their shares in certain circumstances of default by BMed under the franchise agreement. To this end, Mr Heard wrote a letter to all shareholders on 8 January 1997, asking them to re-confirm to Guernroy that the voting agreement remained in full force and effect and authorising Guernroy to execute the option agreement and what is described as a deed of adherence to the voting agreement on their behalf. This letter is important because it refers to the raising of the £5.5m from "new investors" and to the imminent signing of the BA franchise. Both Dr Tabbara and Mr Kaddoura signed and returned the letter to Mr Heard. In his accompanying letter of 13 January 1997 to Mr Heard Dr Tabbara complained about not being kept up to date with developments, but did not ask to subscribe for any shares. Mr Kaddoura also asked to be kept updated on developments, but expressed in terms his full support to Mr Said for what are described as his sincere efforts towards BMed.
32. On 27 January 1997, Mr Said sent letters to Dr Tabbara and Mr Kaddoura and the other Beirut shareholders, via Salah Lababidi. The letters were expressed to be intended to bring them up to date with recent developments and he said in his evidence that they were a response to the requests by Dr Tabbara and Mr Kaddoura to be kept informed. They refer to the BA franchise being due to come into operation on 2 March 1997 and to the £5.5m of new equity having been raised. The claimants deny that either Dr Tabbara or Mr Kaddoura received these letters, but at the end of January, Lord Hesketh went to Beirut to obtain the signature of the claimants and the other Beirut shareholders to the revised option agreement and to the deeds of adherence to the 1994 shareholders' agreement. BA had by then indicated that they wished these documents to be signed personally by the relevant shareholders. Both Dr Tabbara and Mr Kaddoura signed the agreements. This is relied on by Guernroy as further evidence the claimants were aware of what was being proposed, because in the schedule to the deeds of adherence (which Lord Hesketh says that Dr Tabbara at least read with some care) there is a list of the subscribers for the new shares and the numbers of shares involved.
33. On 6 February 1997 an EGM of BMed was held at which Mr Heard, on behalf of Guernroy, and in exercise of the powers contained in the voting agreement, passed a special resolution which: (a) introduced new articles of association under which the voting rights of the shareholders who had signed the option agreement, were suspended for the duration of the BA franchise, and the voting rights of Guernroy were increased by the same number of votes; (b) the board was authorised to issue and allot ordinary shares of 20p at par to four named subscribers. (These were Guernroy (16.25m : £3.5m); Etan Management Inc (a BVI company controlled by Mr Gilbert Chagoury) (5m : £1m); Lord Hesketh (5m shares : £1m); and Novita Ltd (a BVI company controlled by Mr Bassatne) (1.25m shares : £250k) ); and (c) the pre-emption provisions contained in articles 5.2-5.6 of the articles of association and in ss 89 (1) and 90 (1)-(6) of the Companies Act 1985 were disapplied.
34. As a result of these allotments, Guernroy became the holder of 50.9% of the issued ordinary shares; Etan and Lord Hesketh each held 14.3%; and Novita held 3.6%. By contrast the holdings of HOL and HII were reduced to 2.2% and 2.7% and that of Mr Kaddoura to 3.7%. The claimants' case is that in exercising the powers contained in the voting agreement, so as to authorise the issue of shares which took place on 6 February 1997, Guernroy owed them as existing shareholders a fiduciary duty to exercise the powers in good faith and in particular, a duty: (i) not to obtain a secret profit or other advantage for Mr Said; (ii) not to allot any of the new shares to Guernroy or to any close friend or associate of Mr Said before offering them to all existing shareholders on a pro-rata basis substantially in conformity with articles 5.3 and 5.4 of the 1996 articles, unless compelled to do otherwise by the requirements of the BA franchise; and (iii) to comply in substance with the undertaking contained in the memorandum of 22 October 1996 referred to in paragraph 24 above.
35. It is alleged in paragraph 23 of the amended particulars of claim, that the result of the 6 February 1997 allotments was to increase Guernroy's shareholding and to allot shares to friends and associates of Mr Said, by disapplying the rights of pre-emption contained in the articles and without adhering to the undertaking given on 22 October 1996. In particular, it is alleged that Guernroy deliberately deprived the claimants of any proper opportunity to participate in the share issue, because the only invitation to subscribe was that contained in the faxed letter of 29 November, which they never received, and this letter was in fact designed to discourage its recipients from investing. It did this by (inter alia) failing to state that a business plan for the company contained positive cash flow projections which had been vetted by Arthur Andersen, and were described by them as on the conservative side; requiring existing shareholders to provide payment for any new shares they wished to acquire by 6 December, when this was not in fact a requirement of BA and was not a condition imposed by the company upon Lord Hesketh, Guernroy or any of the other subscribers; and failing to notify shareholders that Lord Hesketh and Guernroy were themselves intending to subscribe and in what amounts.
36. The undertaking contained in the 22 October 1996 memorandum is also relied upon as what is described as a collateral undertaking that was not complied with. In opening the claimants' case Mr Steinfeld Q.C said that this was not alleged to have been contractual in effect, but rather gave rise to the fiduciary obligations contended for either independently of or cumulatively with the voting agreement.
37. The claimants' case is that if they had been given what they describe as a proper opportunity to participate in the 1997 share issue, they would have taken up their rights in full. By way of relief, they seek as a primary remedy, the transfer by Guernroy to them of part of its own share holding in BMed so as to bring their holdings up to what they would have been had they been invited to subscribe back in 1997.
38. Guernroy's primary defence is that it owed no fiduciary duties to the claimants, either in relation to the voting agreement, or (so far as separate) as a result of the undertaking of 22 October 1996. Its case is that the voting agreement (which it is conceded was wide enough to empower Guernroy to act as it did) should be limited to its terms. But it also denies, either that it breached any fiduciary duties it owed in the manner alleged, or that the Claimants would have wished to take up rights under the February 1997 share issue however the invitation to subscribe might have been framed. Both Mr Said and Mr Heard gave evidence that they had come to the clear conclusion long before the share issue took place, that neither Dr Tabbara nor Mr Kaddoura wished to increase their investments in the company and that they were each given an opportunity of investing had they wished to do so. They expressly deny any deliberate plan to obtain a controlling interest in BMed for Guernroy and the friends and associates of Mr Said. The defendant's case is that no investors could be found beyond those who actually subscribed and that Guernroy took up what amounted to the lion's share of the subscription only because it had agreed with Mr Lababidi and BA that it would, as a last resort, underwrite the share issue in order to ensure that the BA franchise became unconditional the second time around.
39. In addition, a defence of acquiescence is pleaded based on the Claimants'conduct during the 1997 share issue and a subsequent rights issue in September 2001, when they chose not to take up their rights. There is also a Limitation Act defence to the effect that the cause of action for breach of fiduciary duty became statute barred in February 2003, more than six years before these proceedings were commenced in October of that year.

The Disputed Facts

40. The events leading up to the execution of the voting agreement and the subsequent share issue in February 1997 need to be analysed in relation to three issues: (i) whether the voting agreement imposed on Guernroy fiduciary duties of the kind alleged; (ii) whether and to what extent the claimants were deliberately deprived of a proper opportunity to subscribe for shares and (iii) whether given such an opportunity they would in fact have subscribed for shares. It will also be necessary to consider the alleged acquiescence of the claimants in the events of February 1997, which turns on the same issues of the state of their knowledge at the relevant time.
41. As already indicated, the BMed venture began in 1994 and seems largely to have been the idea of Mr Nadim Lababidi and his son Salah, who were involved in running the family travel business in Beirut. The initial capital of £5m was subscribed on the basis of an expectation that the airline would be able to take advantage of passengers from the US and possibly Latin America who wished to fly on to Beirut via London and in the early stages in September 1994, when Lord Hesketh was approached to be chairman of the company, Salah Lababidi was apparently optimistic of being able to secure passenger sharing arrangements with some major US carriers. According to Mr Saunders, who joined the company in November 1994 as its financial controller and is now its acting CEO, the initial business plan was for the company to operate a single aircraft on the London to Beirut route, generating a post tax profit of £227k in the first year of operations, rising to a post tax profit of £1.2m in its second year. The reality was rather different. The company commenced operations on 28 October 1994 and had to use some £1.5m of its cash reserves by 31 October, reflecting a loss of some £950k. A further £950k was lost by December that year.
42. Mr Said had known Lord Hesketh and recommended him as a suitable chairman for the company. He describes Lord Hesketh in his witness statement as a friend and someone who was well known in the aviation industry. He accepted the chairmanship in September 2004, but insisted that he be joined on the board by Mr Burnside (who had previous experience in the aviation business) and Mr Elliott, whom he describes as having had prior experience of working in the Levant. He regarded the existing Chief Executive, Mr Hugh Parry, as not being up to the job and he secured his replacement with Mr Hetherington (who had been at Kenya Airways and prior to that at BA), who took over as CEO in April 1995.
43. For Nadim and Salah Lababidi there is little doubt that the airline provided a useful and potentially valuable source of income for the family business, Pan Asiatic travel, based in Beirut, which acted as BMed's GSA in the Lebanon. Dr Tabbara, through Al-Kareem, set up a GSA for BMed in Jordan. This is said to have been done out of a desire to assist the airline to operate to Amman rather than with any great expectation of profitability and I am prepared to accept that this may have been so, although in proceedings pending in Jordan, between Al-Kareem and BMed a claim for as much as £7,751,000 in lost profits has been made following the termination of the GSA by BA with the coming into effect of the franchise.
44. One important issue in this case is the relationship between Dr Tabbara, Mr Kaddoura and Nadim Lababidi. Dr Tabbara describes Mr Lababidi in his witness statement as an old school friend and later a business associate. There is no doubt that at the time when he was approached by Mr Lababidi to invest in BMed in 1994, they were on good terms. In 1995 he set up some kind of partnership with Mr Lababidi under which they were to combine their travel businesses with a view to exploiting the BMed connection. This relationship broke down in June 1998 and was terminated and there is now litigation between them in relation to monies which Dr Tabbara says that he lent Mr Lababidi in order to pay off his creditors and which has not been either used for that purpose, or repaid. But all the indications are that during most (if not all) of the period with which I am concerned, they remained on cordial terms and had a common interest in the success of BMed.
45. Although this dispute has now reduced itself through the machinery of litigation to issues such as the existence or not of a fiduciary relationship between Guernroy and the Claimants, it is very much concerned with the personalities of the principal participants. A striking piece of evidence, not challenged, was the account given by Lord Hesketh of board meetings prior to the changes which took place in July 1996. He speaks in his witness statement of board meetings descending into chaos with each shareholder member bringing his own separate agenda to the debate. There was also what he describes as naivety on the part of Dr Tabbara and Mr Lababidi and Mr Kaddoura in relation to business plans for the airline. They would suggest the acquisition of larger aircraft and the extension of the route network to places like New York and Montreal, when the one plane which BMed was operating was flying almost empty to Beirut. Although charming and well intentioned, he regarded the shareholders as unable to run a company operating an airline business and it was this which led him to press very strongly for the appointment of a wholly professional board. Mr Said was in some ways the outsider in the original group of investors. He had known Mr Lababidi since the 1980s and said he was someone whom he respected. He also knew Mr Safadi, but he had not met either Dr Tabbara or Mr Kaddoura before and they were, therefore, something of an unknown quantity to him. This was a relatively minor investment by Mr Said, and he obtained most of his information about the company through Mr Heard, who was appointed by Guernroy as its director on the board. Mr Heard provided Mr Said with regular and quite detailed reports about what happened at board and other meetings, and after attending the inaugural shareholders' meeting on 28 September 1994, he sent a memorandum to Mr Said explaining what had occurred. This memorandum is useful because it confirms that Mr Said's decision to invest, although prompted by Mr Lababidi, was influenced to a large extent by his understanding that Schroder Asseily were to invest in the project as well as acting as the company's financial advisers. This, in fact, turned out not to be the case, but Mr Shafic Ali, a director of Schroder Asseily, attended subsequent board meetings by invitation.
46. Mr Heard's memorandum also contains a brief description of some of the other board members. He states that he liked Mr Lababidi and Mr Romero, but thought that Dr Tabbara could be a problem. He is described as liking the sound of his own voice rather too much. There was no real cross-examination directed to this assessment, but it does, I think, tie in with Lord Hesketh's conclusion that many of the shareholder directors (and Dr Tabbara was certainly not alone in this) obviously had their own views about how the company should be run and were not afraid to express them.
47. In March 1995, the CAA required BMed to raise additional capital of £1.5m. By then the company had accumulated losses of £2.5m and was still flying with only an average load of 25%. Schroder Asseily advised the board that if the company was to continue to operate it would need additional funds of between £1.5 and 2.5m. In a note to Mr Said, Mr Heard reported on the divide within the board, between those (principally Dr Tabbara) who wished to expand and those (who included Mr Heard) who wished to concentrate in the first place on making the existing service profitable. This more conservative approach was championed by Lord Hesketh, Mr Burnside and Mr Elliott, whilst Dr Tabbara was supported by Mr Kaddoura and Mr Didisian and to a lesser extent by Nadim Lababidi. But at a board meeting on 23 March 1995, Lord Hesketh secured the agreement of the board to pursuing his preferred strategy of concentrating on routes to the Middle East. To accommodate Dr Tabbara's wish to look beyond this, a sub-committee was set up comprising Dr Tabbara, Mr Hetherington, Mr Parry, Mr Kamal and Mr Lababidi to consider what the company's medium and long-term strategy should be.
48. The immediate concern was to raise the £1.5m required by the CAA. Schroder Asseily advised that the money should be raised by a 3:10 rights issue which took place on 10 May. It was designed to raise £1.425m and all the shareholders except Hachma UK (Mr Didizian), Mr Parry and Mr Romero participated. HII and HOL later took up Hachma UK's rights at a cost of some £142,500. It is, however, clear that Mr Said was by now concerned about the future direction of the company. He wrote to Lord Hesketh on 26 April describing the cash injection of £1.5m as no more than a "quick fix" and expressed doubts as to whether it would see the company through to profitability. It was, at this stage, that he raised the need for the board to be re-structured. The present board was, he said, no more than a forum for shareholders to discuss their personal views on the airline and its future.
49. In May 1995 the CAA required a further capital injection of £600,000. This was provided by a subordinated convertible loan from the shareholders with the exception of Hachma UK and Mr Kaddoura and all the participating shareholders took up both their own share of the loans and their maximum share of the unallocated portion left as a result of the non-participation of Hachma UK and Mr Kaddoura. Dr Tabbara would have been willing to take up the whole of the unallocated portion if allowed to do so. Mr Heard alerted Mr Said to this in a memorandum of 27 June. His expressed preference was for Guernroy and the other major shareholders to maintain what he described as a level footing in terms of their shareholdings, but the feeling in the company was, he said, that Dr Tabbara's ultimate aim was to gain control. Doubtless prompted by this, Guernroy decided to take up its share of the unallocated portion of the loan. Mr Heard was asked in cross-examination about this memorandum and about his views of Dr Tabbara. He said that he found Dr Tabbara difficult to deal with at meetings because he would not listen and that he came to be cautious about him. That said, there was at this stage, nothing which can be said to have amounted to a power struggle between the shareholders. Mr Kaddoura was either unable or unwilling to commit further monies to the company and seems to have taken a largely passive role. Dr Tabbara by contrast, was obviously both keen and willing to invest, but was unrealistically optimistic as to what the company was capable of achieving in the short term.
50. Mr Said was prepared to keep faith with the project, but could see that a fairly radical re-organisation of the management of the company was a pre-requisite to any further expansion. There is no evidence that he desired at this stage to exclude Dr Tabbara, or to take over. On the contrary, his preferred position was to retain the original balance of shareholdings, but to place the management of the company into the hands of professionals. The real difference between Mr Said and the Claimants lay in their views as to what the strategy of the company should be and as a necessary part of this, as to how it should be funded. Mr Said's view was that any further investment had to be on terms which reflected the current worth of the company. This was first raised in his letter to Lord Hesketh on 26 April before the May rights issue took place. His evidence in cross-examination (which I accept) was that he had concluded that the company needed a lot of money in the foreseeable future and was likely to have to look to outside investors. This was confirmed when Mr Hetherington produced the three year business plan in July 1995, which envisaged further investment of up to £15m. To attract outside investors shares would have to be issued at a price which represented the market value of what they were buying. He also accepted, however, that it would be unfair to existing shareholders for new shares to be issued at below market value, because this would lead to the unfair dilution in value of their existing holdings.
51. The price at which shares are issued is of course a matter for the board acting on proper advice, including valuation advice, and one of the issues raised in relation to the 6 February 1997 share issue is whether the issue price of 20p (although authorised by the articles of association) was a proper price at which to allot the shares. But dilution did become a second major issue between Mr Said and other shareholders including the claimants, until it was resolved by the changes to the capital structure of the company made in July 1996.
52. Tensions also began to emerge between Dr Tabbara and the existing management of the company. At the meeting held on 28 July to discuss the draft business plan, Ali Tabbara on behalf of HII and HOL, made it clear that they were not willing to inject further funds for the expansion envisaged in the plan, which suggested commencing seven flights per week to destinations in Saudi Arabia and four per week to Kuwait using two additional leased airbus aircraft. Lord Hesketh himself, described the plan as very high risk and said that it could have incurred substantial losses. Even as contemplated by the plan, the operation would not become profitable until its third year and would require expenditure of some £8m in the meantime. Mr Heard sent a memorandum to Mr Said on 15 August suggesting that Guernroy should decline to invest in any expansion of the company until the existing routes had become profitable. Even then there should be no further investment unless institutional shareholders had been found. Guernroy should not in any event acquire more than 20% of the company. In his closing submissions, Mr Steinfeld said that something obviously did change in late 1996, which led to Guernroy acquiring over 50% of the company. This was not done as a favour to help the other shareholders, but because it was by then an investment opportunity which was too good to miss. It is not, however, suggested that there was any sign of this back in 1995. On 25 September, Lord Hesketh wrote to all the shareholders setting out the three options available to them. They were: (a) the controlled closure of the business; (b) the adoption of a radically different approach to the existing business to control losses on the current routes; and (c) the expansion of the business to include flights to Saudi Arabia and Kuwait. He expressed a preference for option (c). This would, he said, necessitate investment from institutional sources and therefore the revision of the existing shareholders' agreement. It did also, of course, bring into sharp focus the changes to the board and the capital structure of the company sought by Mr Said.
53. The debate about the issue price of further shares in the company was intensified by the demand from the CAA in October 1995 for the injection of an additional £1m by mid December. Mr Said wrote to Lord Hesketh on 17 October saying that he was impressed with the progress made by Mr Hetherington, but was unwilling to support expansion into Saudi Arabia and Kuwait. His original decision to invest was, he said, based upon a belief that the London to Beirut service could be operated profitably. He reiterated his demand for a professional board and for the removal of the restrictions on the issue of shares contained in the articles and the shareholders' agreement. If the existing shareholders wanted to pursue a different agenda, then Guernroy was, he said, willing to sell its shares at an appropriate price and to bow out.
54. The attitude of the other shareholders at this time can be seen in their replies to Lord Hesketh. Mr Kaddoura supported option (b). He wanted to maximise revenues but to minimise costs. Lord Hesketh had circulated Mr Said's letter of 17 October to the other shareholders, but it is unclear whether Mr Kaddoura had seen it. Mr Lababidi had, however, read it and supported Mr Said's demand for a professional board. He was in favour of the idea of some route expansion, but considered that the plan to fly to Saudi Arabia and Kuwait required more study. On 7 November, Mr Lababidi wrote to Mr Said enclosing the memorandum which (according to his letter) he and most of the other Beirut shareholders were willing to sign. It is not entirely clear who drafted the memorandum. Mr Heard denied that it was drafted and sent by Mr Said, but he was not shown his later file note of 9 January 1996, which seems to refer to Mr Said's conditions being circulated in a draft memorandum to shareholders. Nothing, however, really turns on this because the letter sent by Mr Lababidi was clearly an attempt to formulate in a document the changes asked for by Mr Said with certain modifications acceptable to the Beirut shareholders. The changes contemplated in the memorandum included a new seven man board, with only two shareholder representatives; the retirement of both Mr Parry and Mr Romero; and the removal of the right of shareholders with more than 8½% of the A shares to nominate a director to the board. However, the Beirut shareholders were not prepared to agree to a reduction in the value or issue price of the shares because (according to Mr Lababidi's letter) the company had assets which would justify the existing par value of £1. Dr Tabbara said in evidence that he believed that this was the true value of the company and that he saw no need to dilute it. Outside investors were not required. The existing shareholders could give BMed any financial support it needed.
55. On 13 December 1995 the board met and decided to call an EGM to enable the shareholders to decide what action was to be taken in order to raise the £1m required by the CAA. In a letter to shareholders of 23 November, Lord Hesketh made it clear that any of the possible financing options was likely to involve the removal of the requirement to issue shares in the ratio of 1 A share to 2499 B shares and the increase in the authorised share capital of the company. Mr Heard was able to report to Mr Said on 14 December that Mr Lababidi and the other Beirut shareholders were now in agreement on the need to make changes to the board, but were still not prepared to accept the idea of diluting the share value. Mr Kaddoura was said to have been particularly forthright in his objection to this proposal and this is, of course, consistent with his having failed to participate in the June subordinated loan and the fact that he also failed to take up his rights in the rights issue, which ultimately took place on 31 January 1996. Dilution is only of concern to an existing shareholder if he fails to take up rights at the diluted price.
56. Mr Kaddoura accepted in cross-examination that he did not intend to subscribe for any new shares in order to provide the additional £1m, because he had concerns about the management of BMed. He was concerned about the absence of any projected profitability for the company in the near future. At the same time, he did not want the new shares to be issued at a lower price which would dilute in value (and not merely in percentage terms) the shares he already held. As early as this time, he would have been prepared to sell his shares if an attractive offer was made. Looked at in selfish terms, his position was understandable even if short-sighted. I am not satisfied (despite Dr Tabbara's assertions to the contrary) that the company could have continued to finance its operations solely from contributions by existing shareholders if it was to contemplate a significant expansion in his business. Both Mr Didisian and Mr Kaddoura had ceased to invest and this left Guernroy and the Halton companies as the principal shareholders and sources of finance. Mr Said was certainly not prepared to acquire further shares for Guernroy at £1 per share and there would clearly have been limits to Dr Tabbara's willingness to continue to inject very large sums of money into a company which was unlikely in the short or even medium term to produce any real return. Outside investment was likely to be a necessity if significant amounts of new capital had to be provided in the future. Mr Kaddoura's view was, however, an obstacle to the re-structuring of the company and Mr Heard referred in his memorandum of 14 December to a sense of paralysis being likely to prevail amongst shareholders so long as Mr Kaddoura remained one of them. In the end, of course, these problems were resolved in July 1996, but according to Mr Heard, it was a long and painful process.
57. The EGM took place on 15 December. Various special resolutions were proposed in the notice convening the meeting, the substance of which was to remove the requirement for the issue of shares in the 1: 2499 A to B share ratio and to increase the authorised share capital of the company to £20m. At the meeting, the resolutions were defeated. Dr Tabbara voted against the resolutions and held a proxy from Mr Lababidi which he also used to vote against. Guernroy and Mr Safadi voted in favour of the resolutions. This left the company without any obvious means of raising the £1m finance by the now extended deadline of 31 January 1996. On 19 December, Mr Lababidi wrote to Mr Said in an attempt to present the views of himself and Dr Tabbara. In the letter he repeated their willingness to alter the composition of the board to a smaller more professional unit, but was unwilling to agree to the board having what he described as open authority to determine the price at which shares should be issued. Dilution would be acceptable if conditions required it, subject to it being "minimal, reasonable and fair in percentage and with the approval of the shareholders". His suggestion for the forthcoming increase in capital was to offer shares to the existing shareholders at par and if necessary, to new outside investors at the same price.
58. After various further exchanges of correspondence, the adjourned EGM took place on 9 January 1996. The only resolutions tabled were for the increase of the authorised share capital and it was resolved to increase it from £7,925,100 to £8,600,100, but in the existing ratio of 1 A share to 2499 B shares. There appears still to have been stalemate in relation to the abolition of these restrictions and the reduction in the par value of the shares. Dr Tabbara wished to see an increase in the authorised share capital to £14m, but Guernroy was unwilling to agree to this unless the other changes proposed by Mr Said were implemented. As I have already indicated, all the shareholders except Hachma UK and Mr Kaddoura, took up their share of the rights and HII and HOL also took their share of the unsubscribed portion. Guernroy decided not to take up its share of the unallocated rights and this provoked a further exchange of correspondence between Mr Said and Dr Tabbara about the price at which the shares should be issued. Mr Kaddoura was asked in cross-examination why he did not subscribe. He said that there was nothing encouraging in this period and the company was always making losses. But he had, he said, not given up all interest.
59. Following the January rights issue, steps were taken to draft the documents necessary to give effect to the constitutional changes which Mr Said was pressing for. BMed's Solicitors, Messrs Harbottle & Lewis, were instructed to draft changes to the articles of association and the 1994 shareholders' agreement necessary to achieve a reduction in the size of the board, the removal of the 8.5% shareholding entitlement to appoint a director and the removal of the requirement to issue shares in the 1 A : 2499 B ratio. It seems that by now some of the heat had gone out of the debate about these changes and Mr Heard described the board meeting held on 26 February 1996 as one of the most civilised he had attended. Dr Tabbara and Mr Lababidi now seemed reconciled to these changes to the articles and to the shareholders' agreement, but that of course still left the question of share value to be resolved. Dr Tabbara remained opposed to any reduction in the share price. At the same time, the company continued to lose money at an alarming rate. It suffered a trading loss of £429k in February 1996 and had only about £1m in free cash as at the end of that month.
60. This rather bleak picture was, however, offset by one piece of news, which was the suggestion made to Lord Hesketh of a possible BA franchise. The news was reported by Mr Heard to Mr Said in early April, but according to Lord Hesketh, was kept from Dr Tabbara and Mr Kaddoura until the July presentation, for what Lord Hesketh described as reasons of confidentiality. He said that both Dr Tabbara and Mr Kaddoura (unlike Mr Said) were conflicted parties, because they had commercial interests in the form of the GSAs and (in the case of Mr Kaddoura) the Coral Beach Hotel, which were opposed to or inconsistent with the franchise. The BA franchise (as in fact it turned out) was likely to bring these arrangements to an end. I did not find Lord Hesketh's explanation about these potential conflicts to be wholly convincing and I suspect that what he really anticipated was that Mr Kaddoura and Dr Tabbara might be hostile to the proposal. It does, however, seem that a meeting took place with Lord Hesketh and Mr Hetherington on 29 May, which Mr Said and Farouk Kamal attended and Mr Heard's understanding was that Mr Kamal represented the other Beirut shareholders.
61. It is clear from the note which Mr Heard sent to Mr Said on 1 May, that he believed that a BA franchise could be what he described as, the salvation of BMed. But for the reasons just given, he was unsure what the reaction of either Mr Lababidi or Dr Tabbara would be. By early May the CAA had imposed a new requirement that BMed should raise a further £2m of new capital, with the first £1m being found by 31 May. The company's financial position was critical and at a board meeting on 7 May, Mr Hetherington produced estimated cash positions at 31 May and 30 June of 472k and £102k respectively. Unless the new capital could be found, it was agreed that the company would have to cease trading and be wound up.
62. An interesting piece of evidence is a letter which Mr Parry sent to Dr Tabbara on 9 May. A meeting of shareholders had been called for 10 May to discuss a possible rights issue in order to fund the additional capital requirement by 31 May. Mr Parry's letter was an attempt to dissuade Dr Tabbara from going ahead with what he described as "your proposal" for the Beirut shareholders not to attend the shareholders' meeting. Dr Tabbara said that he had never seen this letter and did not know what it was referring to. But none of the Beirut shareholders, including the Claimants, attended that meeting. Instead, they instructed Mr Kamal to represent them and wrote to Lord Hesketh, pledging their continued financial support for the airline "in pro rata" with the other participating shareholders. Mr Kamal, they said, was authorised to agree to a "fair principle of dilution" and to the appointment of a professional board approved by a simple majority of shareholders. He was also authorised to agree to the valuation of BMed as a going concern, taking into account its air traffic rights, the value of its Heathrow slots, its market share reputation and goodwill.
63. This letter, therefore, indicated that the Beirut shareholders were prepared to agree to the abolition of the reserved rights of shareholders to appoint members to the board and to some measure of dilution in the value of the shares, subject to a valuation of the company as a going concern. The board was told on 14 May that sufficient progress had been made at the 10 May shareholders' meeting to propose a rights issue under which shares would be issued in units of £1000, representing a discount of 60% over the £2,500 price required under the articles. However, the reference to the Beirut shareholders being prepared to accept a fair principle of dilution was a clear reflection of the fact that they had misgivings about what Mr Said had proposed. Mr Lababidi said he felt at the time that the reduction of the par value of shares to below £1 each was unfair and he referred to it as a conspiracy. A good deal of the argument centred on what the rival parties considered BMed to be worth. The Beirut shareholders clearly thought that items such as the Heathrow landing slots were extremely valuable, but Mr Said took, I think, a more pessimistic view of the company's overall worth. The proposed rights issue equates to a value for the company of some £4m. This was put forward by the board (on the advice of Schroder Asseily) as what amounted to a compromise to keep shareholders united and to allow the additional £2m required by the CAA to be raised. But Mr Said was unconvinced. He wrote to Lord Hesketh on 15 May saying that Schroder Asseily had been unable to confirm that the valuation of the company (enshrined in the proposed share rights issue) represented current market value. In the circumstances, Guernroy was not willing to participate. Lord Hesketh referred Mr Said's letter to Schroder Asseily. Mr Shafic Ali responded that without an agreed business plan it was impossible to value the company on a going concern basis.
64. By the end of May (at the meeting of 29 May I have already referred to) Mr Kamal reported to Lord Hesketh and Mr Said that he believed that all the Beirut shareholders would now sign the documents necessary to give effect to the changes to the articles and to the shareholders' agreement. Mr Said said that Guernroy would participate in the rights issue if these changes were agreed to, but would not subscribe for shares in excess of its current holding of 20%. On 31 May Dr Tabbara, Salah Lababidi and Mr Didisian wrote to Lord Hesketh to say that they were prepared to assist in the raising of the £2m, but had not yet agreed on the precise mechanism for doing so. In view of the urgency of the situation, they were prepared to offer a convertible subordinated loan of £1m by not later than 5 June and to agree to the amendment of the articles as per their letter to Lord Hesketh of 11 May. This offer was discussed at a board meeting on 31 May when details were requested of the proposed terms of the loan. In the meantime, an EGM was to be called for 7 June to discuss the proposed changes to the articles and the terms of the rights issue.
65. It was put to Dr Tabbara in cross-examination, that the offer of the subordinated loan amounted to an attempt by him to move the goalposts. Whether or not this is an accurate metaphor, there was clearly a reluctance by him, and I think by at least Mr Kaddoura and Mr Lababidi, at this time, to agree to changes which included the dilution of the share value. Although willing to abolish the different classes of shares and the link between A and B shares, he wished to maintain the par value of £1 for the A shares and at a meeting on 6 June he said that he hoped to be able to raise fresh capital from investors at par. There was, therefore, a clear divide between Dr Tabbara and Guernroy on the question of dilution, which Mr Heard said in evidence that he found very irritating. Dr Tabbara had appeared to support the constitutional changes proposed, but then to have altered his position. By the time of the EGM on 7 June Guernroy, Mr Safadi and Mr Lababidi had signed up to the alterations to the articles, but neither Dr Tabbara nor Mr Kaddoura had done so. It was, therefore, deadlocked, and without the changes being agreed, the rights issue could not proceed.
66. Mr Heard said that Mr Said and Guernroy were getting increasingly frustrated with the Beirut shareholders. A number of meetings took place, chaired by Lord Hesketh and attended by Mr Heard, Mr Kamal and Dr Tabbara and by about 13 June agreement had been reached to abandon the right of major shareholders to nominate a director to the board; to reduce the board to seven members and for the injection of some £772,955 by way of a shareholder's loan. Dr Tabbara had indicated that he would be introducing new investors by 30 September 1996, who would invest £2m at par, and the interim loan would be paid from those funds. If this new capital failed to emerge, then the £772,955 would be converted into shares at a 60% discount on the existing par value of £1: i.e. 40p. There was, therefore, to be dilution to that extent.
67. As already indicated, BMed's immediate need for capital was met by the subordinated convertible loan. For the reasons already stated, Mr Kaddoura did not participate. There were, however, other problems about putting into effect the changes under discussion. Lord Hesketh wrote to all the shareholders on 18 July about the apparent disagreement between Mr Lababidi and Dr Tabbara on the one hand and Guernroy on the other, about the composition of the board. Mr Lababidi and Dr Tabbara still favoured a board which substantially represented the shareholders. Lord Hesketh told the shareholders that unless there was a successful completion of the EGM (by which he meant that all the changes to the constitution of the company and its board were agreed) he would have no choice but to resign. Although I am satisfied that this was a genuine rather than an empty threat, it was obviously part of a concerted push by Lord Hesketh with the approval and support of Guernroy to achieve a resolution of these issues. To this end, Mr Said sent a letter to Lord Hesketh on 22 July saying that unless the changes were agreed at the forthcoming EGM on 23 July, Guernroy would withdraw its support from the airline.
68. As already summarised earlier in paragraph 17, the EGM approved changes to the capital structure of the company by the creation of ordinary shares of 20p each to be issued at the discretion of the board subject to the pre-emption rights of shareholders, which were spelt out in the new articles of association. The changes to the board were also agreed and the shareholder directors all resigned, leaving in place a largely professional board with Mr Kamal as a shareholders' representative. In his witness statement, Dr Tabbara says that many shareholders (including Halton) were not happy with the proposed changes and that the alteration in the composition of the board was agreed to because it was said to be a pre-condition of any BA franchise and because of the threat by Lord Hesketh and Mr Hetherington to leave if the changes were not agreed. The shareholders were, therefore, given no realistic option but to accept. Lord Hesketh's evidence is that Mr Lababidi and Dr Tabbara were certainly not happy about the changes, but he ascribed this to their opposition to the BA franchise caused by the likely loss of the GSAs. He said that he believes there was some kind of scuffle in the corridor involving Mr Lababidi and Dr Tabbara, but is not sure exactly what happened. The minutes of the EGM are a fairly anodyne record of the resolutions being passed and the minutes of the board meeting simply record that there was considerable discussion about the proposed franchise agreement. There is, however, a contemporaneous note of the meeting by Mr Martin Richer, the Company Secretary, which refers to Dr Tabbara querying why it was not possible to stick to the seven man board agreed at the earlier meeting and to Lord Hesketh saying that it was essential that he should be the arbiter of who was appointed to the board. Mr Lababidi said that Lord Hesketh indicated that he wished to choose the board, in order to assist the negotiations with BA. He said that he was thrilled at the prospect of the BA franchise, but that Dr Tabbara did not want it. This may, of course, explain the reason for the scuffle which Lord Hesketh believes occurred between them.
69. Apart from the changes to the composition of the board, the principal change agreed to at the EGM was the reduction in the share price to 20p. Mr Lababidi said in cross-examination that they had no choice but to agree to this if the company was to survive. It was essential if outside investors were to be found. He said that he and the other shareholders understood what the effect of lowering the share price would be and it was put to him and he accepted, that it would be unfair to existing shareholders to have new shares issued at this price unless they were given a full and proper opportunity to participate. Dr Tabbara's evidence, on this point was, however, very different. He does not deal with the reduction of the share value in his witness statement, but he was asked about it in cross-examination. He said that his understanding was that A and B shares had to be issued together and that even after 23 July, there had to be an issue of one ordinary share of 20p and one deferred share of 80p. When the terms of the resolution were put to him, which of course make it clear that ordinary shares could be issued without deferred shares, he said that the meeting did not go into detail and that all his subsequent correspondence refers to shares being issued at £1 par. Dr Tabbara is a highly experienced accountant and this evidence either shows that he did not bother to study the detail of what was proposed, or is untrue. I do not believe that Dr Tabbara misunderstood the effect of the resolutions which were passed at the EGM. The detail of these changes had been debated for same time and were a matter of keen interest to him. I got the distinct impression that this was a defensive answer given during cross-examination, which is completely at odds with the other evidence.
70. For the BA franchise to proceed, it was necessary to raise £5.5m in new equity. Schroder Asseily were instructed at the 23 July board meeting to look for potential investors and at the same time, work proceeded upon agreeing the terms of the proposed franchise agreement. On 9 August the Beirut shareholders, including the Halton companies, Mr Kaddoura, and Salah Lababidi, wrote to Lord Hesketh saying that whilst the BA franchise remained in principle acceptable to them, certain provisions discussed at the EGM needed to be changed. It is not entirely clear what these were, but Mr Said thought that Mr Nadim Lababidi and Dr Tabbara wished to obtain some concession about the GSAs. Dr Tabbara denied that this was what Mr Lababidi was referring to, but in a later letter to Mr Lababidi of 22 August, Mr Hetherington refers to various discussions with him about the franchise, as a result of which it was agreed that Pan Asiatic Travel's status as a GSA would remain until it concluded what is referred to as a satisfactory agreement with BA and Mr Lababidi would continue as BMed's senior executive representative in the Lebanon. What I think is clear is that the Beirut shareholders (perhaps for different reasons) were only reluctant subscribers to the BA franchise. As I have already mentioned, Dr Tabbara said that they really had no option but to agree to it given the parlous state of the airline. It was clearly, however, something which they regarded as a last resort, rather than a primary objective and I think that Lord Hesketh may be right in saying that it represented a loss of control of a venture which had been started very much as a local enterprise and which now faced being effectively taken over by BMed's main competitor.
71. At this time (in August 1996) Dr Tabbara also identified Prince Waleed as a possible investor. It was said that he might invest up to £10m for a one third shareholding, but Mr Heard on behalf of Guernroy, was still anxious to press ahead with the BA franchise and could not see how the company could be an attractive investment for Prince Waleed without the franchise in place. This was an entirely accurate prediction, because when Prince Waleed subsequently instructed Messrs Arthur D Little to carry out an investigation into and an assessment of the company as a possible investment, they reported that it was important that the BA franchise should be implemented, so as to make the airline's future more secure and profitable. Mr Said, in his witness statement said (in paragraph 38) that Prince Waleed was spoken of as an alternative to the BA franchise. When asked about this, he said that the information came from Mr Heard. Under cross-examination Mr Said, I think, accepted that his statement is incorrect and I am not persuaded that the introduction of Prince Waleed was necessarily an attempt by Dr Tabbara to retain control of the airline or to free it from the BA franchise. Although it will be clear from later events, that an investment by Prince Waleed did appear to be a possible means of replacing the existing management of the company, its main attraction to Dr Tabbara at this time was I think that it might provide the company with considerable capital whilst maintaining existing share values.
72. In the end the Beirut shareholders agreed to back the BA franchise and wrote to Lord Hesketh on 23 August to give him authority to conclude the agreement. The franchise agreement was signed on 28 August and BA made a press announcement the following day. It was an express term of the agreement that investors should have subscribed for non-redeemable equity share capital of not less than £3m by no later than 11 October and have contracted with investors for them to subscribe a further £2.5m of new equity by no later than 15 November. Schroder Asseily's announcement on 2 September that they could not assist in raising finance for a private placement of shares caused an obvious problem. Other brokers were suggested, but as Mr Heard said in a memorandum to Mr Said on 4 September, time was short and "and I fear if rapid progress is not made, they will look to the existing shareholders for further support".
73. This reference by Mr Heard, to a fear that the company would look to existing shareholders as the source of investment, is an indication that Mr Said and through him, Guernroy, were certainly not looking to increase their investment in BMed at this time, even with the prospect of a BA franchise in place. The fear was also realised because on 4 September Lord Hesketh wrote to all the shareholders the first of the various letters which have caused controversy in this case. In it, he explained that Schroder Asseily had become unwilling to handle the placement and as a result, the only course of action open to the company in order to raise the funds necessary for the franchise agreement, was to seek the active support of existing shareholders. It was not considered to be either feasible or sensible to approach other placement institutions in the UK. The letter then concluded with these paragraphs:

"This leaves the only other avenue of finance to be from the existing shareholders or other parties known to them personally. In the event that the finances come from investors other than the existing Shareholders this must be agreed by the 30th September as British Airways must be given ten days' advance notice.

As the future of the company is dependent upon these additional funds and as we now have the company in a position where it can be profitable under the new franchise agreement, I would ask all Shareholders to contact me as soon as possible to make their views known with regard to all the above."

74. No response was received to this letter from the Halton companies or from Mr Kaddoura, nor was there any response from Guernroy. Dr Tabbara now accepts that he probably received the letter by fax (although that is denied in the Reply) and a copy has been disclosed by the Claimants, but his evidence is that he has no real recollection of it. In cross-examination he said that it was not a formal invitation to subscribe and he did not, therefore, feel he needed to respond to it. He was busy at the time finding investors and the board knew that whenever asked to subscribe in the past, the Halton companies had done so. Mr Kaddoura's position is much the same. He believes that he received the letter, but cannot now recall why he did not respond to it. He was aware of the need to increase the capital of BMed, but would have expected to receive a formal invitation to subscribe.
75. None of the recipients seem to have regarded this letter as an offer from the company to take up shares as part of the new share issue required under the terms of the franchise and in my judgment that is not surprising. Lord Hesketh was asking the shareholders to indicate what their views were in relation to his statement that the new equity was likely to have to be raised from existing shareholders. This is clear, both from the terms of the letter itself, and from the minutes of the board meeting held on 11 September at which he reported that he had sent a letter to shareholders inviting comments on the board's view that they were the most appropriate sources of the £7.5m required by the company by 11 October. He accepted that if the money was to be raised from shareholders, there would have to be a rights issue at which time the terms of the invitation to subscribe could be set out. What he wanted to know at the beginning of September was whether there was support for seeking to raise the money in this way. The failure of the Halton companies and of Mr Kaddoura to respond cannot therefore be taken as a refusal to invest but, equally, their failure to respond to Lord Hesketh was not encouraging. It is, I think, significant that Guernroy also failed to respond. Mr Heard said that this was because Mr Said did not wish to increase Guernroy's investment in the company. He actually wanted outside investors to come in. This was confirmed by Mr Said, who said he was waiting to see what the Beirut shareholders (who together held the majority of the BMed shares) wanted to do. Guernroy was certainly not prepared to take the lead. Lord Hesketh was asked by Mr Steinfeld why the board did not sanction a rights issue. He gave a number of rather obscure explanations for this, but it seems to me that the most obvious factor which probably influenced the board was the absence of any real response to the letter of 4 September.
76. One other possibility canvassed at the 11 September board meeting was to contact what were described as "certain present shareholders" who might be prepared to invest further. Lord Hesketh I think accepted that this was a reference to Guernroy and possibly Mr Safadi, but it does not seem to have been pursued. The absence of any response from shareholders to Lord Hesketh's letter of 4 September led the Board to consider an offer of finance from GE Capital Europe. They had been introduced as a possible investor by BA, but as I mentioned earlier, the proposed investment was to be on what Lord Hesketh described as onerous terms. GE Capital was to be issued with £5.5m of redeemable preference shares repayable in years 3,4 or 5. The deal was also dependent on BA providing a loan of £2m to satisfy the CAA requirement for additional funding. In a memo to Mr Said of 24 September, Mr Heard referred to GE Capital's proposals in unenthusiastic terms, but noted that it might be sensible to pursue it in the absence of any other serious expressions of interest. In fact, some expression of interest was received by the board only two days later, when Mr Tabbara wrote offering to provide a subordinated convertible loan of £2m on behalf of a number of unnamed investors at an issue price of £1 per share. It was to be a condition of the offer that all existing subordinated convertible loans should be repaid but even on this basis, the offer was worth about £600k to the company. Lord Hesketh and the board seem to have more or less dismissed the offer. Lord Hesketh says in his witness statement that it was not a real offer of funding at all because of the condition requiring repayment of the existing borrowings, but that is clearly an over statement. Mr Saunders says that the real problem with the offer was that the repayment of existing loans was unlikely to have been acceptable to the CAA, but could not really explain why no mention of it was made at the subsequent 8 October board meeting. The documents show that that matter was passed to Mr Hetherington, who contacted Harbottle & Lewis for advice about what would be involved in giving effect to Dr Tabbara's proposal. They advised him on 26 September, that if the existing loans had to be repaid by the end of the month, it could jeopardise the franchise agreement which stipulated that the loans should not become repayable on or before 1 October. But this was simply a matter of timing and it is not clear precisely why Mr Hetherington decided not to take Dr Tabbara's offer further. The offer is, of course, relied upon as further evidence of the Halton companies' willingness to invest at this time. Both Mr Saunders and Lord Hesketh referred to there being doubts as to whether the unnamed investors would come up with the money. For whatever reason, it was taken no further.
77. The difficulties faced by the board were compounded shortly afterwards by the news that BA had declined to participate in the finance proposals put forward by GE Capital. Although the possibility of GE Capital investing continued for some time later, it eventually came to nothing and the focus inevitably turned on the existing shareholders. At about this time, on 10 October, Dr Tabbara produced a letter signed by a Mr Magdy Zeid, purportedly on behalf of himself and other unnamed Egyptian investors, offering to apply for three million ordinary shares at the price of £1 per share. Although the authenticity of this letter was not challenged, no evidence was called by the Claimants to indicate the basis and circumstances in which this offer came to be made and the reasons why Mr Zeid was prepared to offer the old par value of shares which could now be issued at as little as 20p. The letter is also interesting, because it indicates that despite his evidence that he somehow thought that each 20p ordinary share had to be issued with an 80p deferred share, it was made clear to Mr Zeid (presumably by Dr Tabbara) that the ordinary shares could be purchased separately.
78. Lord Hesketh's evidence to me was that faced with the BA franchise and having agreed to changes in the articles and in the composition of the board, Dr Tabbara had really decided not to put any more of his own money into BMed, but to seek investment from third parties who might obviate the need for the BA franchise. Dr Tabbara was certainly cross-examined to the effect that he had an alternative agenda of in effect spiking the BA franchise and possibly displacing the existing management by bringing in a major new investor such as Prince Waleed, but Lord Hesketh had not looked at the Arthur D. Little report when he prepared his witness statement and it is difficult, as I have explained, to imagine that any investment by Prince Waleed would be forthcoming in the absence of the franchise. That said, Dr Tabbara was singularly unable to provide any real explanation as to why he was either unwilling or unable to subscribe for part of the new equity required under the franchise whilst putting forward alternative investors such as Prince Waleed and Mr Zeid. His suggestion that he had not received a formal offer to subscribe and did not know the terms proposed is unrealistic in the light of the offers he did make to provide a loan and the very specific terms offered by, for example, Mr Zeid. Mr Lababidi said in evidence that he had discussed the matter with Dr Tabbara both before and after the failure of the first franchise and that Dr Tabbara made it clear that he did not wish to participate because he was unsure whether BMed would make money. His family was also against it. The meetings at which Dr Tabbara is said to have made these statements are not referred to at all in Mr Lababidi's witness statement and he had no precise recollection of when they took place. He said that although Dr Tabbara was concerned about dilution, he had to accept it because liquidation was the alternative.
79. If this evidence is correct, it of course explains why Dr Tabbara did not offer to subscribe shares through the Halton companies and is, of course, highly relevant to the question of causation. In considering this evidence I have, however, had to take into account the highly unfavourable impression which Mr Lababidi made upon me as a witness. He seemed to me to be evasive and either unwilling or unable to answer the most straightforward of questions. He was almost desperate to justify to Mr Said his past opposition to the changes made in July 1996 and his reaction to the 6 February 1997 share issue, which I will come to. I do not, therefore, regard Mr Lababidi as a wholly reliable witness. In relation, however, to certain matters, there is other contemporaneous evidence which assists the Court to form a picture of what was going on at the time. On 13 October 1996 Mr Lababidi wrote to Mr Said a long letter seeking to explain his position. He accused the management of Lord Hesketh and Mr Hetherington of extravagance and recklessness in relation to the use of the company's funds, and of their having snatched the company from the shareholders on the pretext that the owners of the company must not interfere in its management. Now, he said, "those who snatch the company have been snatched by the British Airways Corporation". He went on to commend the BA franchise but to assert that it had been achieved due to the quality of BMed's service rather than as a result of the skill of the management. On the contrary, they were not proposing to run the franchise in the best interests of BMed and risked losing the company and its valuable assets, including the Heathrow slots. In paragraph 6 of his letter he said this:

"Furthermore we must insist that even if this capital were found, we must not give in to this management that will finish it just as it finished the capital that preceded it. This company cannot succeed without a serious and capable management that has considerable financial experience (the estimated study with the attached figures) that is able to reduce the cost that is the sole reason for the success of airline companies and the success of this company."

It seems to me more than likely that this view was shared by the other Beirut shareholders.

80. Under the franchise agreement, the first £3m of the £5.5m new equity had to be in place by 11 October. By this date the funds had not been raised and on 14 October at a shareholders' meeting attended by Dr Tabbara and Mr Said, Lord Hesketh said that BA was close to terminating the franchise agreement and would do so unless most of the £5.5m had been raised by 16 October. As I mentioned earlier, some discussions were still taking place with GE Capital, but the meeting is recorded as having agreed that it was not reasonable to assume that any funds from new shareholders would be received by 15 October. Attention then turned to the existing shareholders. Guernroy (through Mr Said) and Mr Safadi both said that they would be prepared to invest £500k on the original GE Capital terms, which of course included the reinstatement of the BA loan. Dr Tabbara was asked if he was prepared to make such an investment but said he would give it consideration. He wanted to study the final GE Capital terms.
81. It is obvious that by 14 October matters were at a critical stage for the company. Unless the new capital could be raised almost at once, the franchise was likely to disappear and the company would then be looking at insolvency. It must have been obvious to anyone that a failure to respond positively would amount to a refusal. It is, I think, significant that Dr Tabbara did not at this meeting seek to promote Mr Zeid's offer as a solution, or to offer to invest himself through the Halton companies. When asked about this, he could not recall or explain why Mr Zeid's offer had not been mentioned. He said that he had not made any offer to subscribe because the company lacked a business plan. Later in his evidence he said that he had not had an opportunity to consider the GE Capital terms and that he wanted to know the details before committing himself. There was clearly an element of prevarication at this time on the part of Dr Tabbara. He must have been aware that nothing short of an offer to invest would assist the company in preserving the franchise. I am afraid that I was left with the distinct impression by his evidence that he had decided not to invest, despite the possible consequence for BMed, and was simply looking for an excuse. I also believe that the failure to repeat either his own earlier offer of finance or that of Mr Zeid is only explicable on the basis that neither of them remained (if they ever were) serious offers to subscribe.
82. This is, I think, confirmed by a letter sent to Lord Hesketh on 15 October by Dr Tabbara (on behalf of HOL and HII), Mr Kaddoura, Salah Lababidi and Hachma UK, which picks up many of the criticisms of Mr Hetherington and the current management contained in Mr Nadim Lababidi's letter of 13 October. It says that the promotion of Mr Hetherington to CEO was not justified or acceptable and that the financial results of the company were alarming with costs increasing over budget. In relation to the BA franchise, the letter states that the Beirut shareholders have what are described as basic concerns about the ability of the management to make a commercial success of the franchise and that the loan arrangements with GE Capital were not satisfactory and needed revision. In the circumstances, this amounted to a rejection by the shareholders of the BA franchise. Any remaining hope that it would be preserved using finance from GE Capital was dispelled on 16 October, when BA said that it would not provide a loan as part of the financing arrangements as BMed would be unable to offer any real security.
83. This news was relayed to shareholders by Lord Hesketh on 17 October. They were told that the only hope of saving the franchise was for the existing shareholders to put up the funds and that a shareholder meeting would take place the following day to discuss this. If the franchise failed, the Directors would have to consider whether any insolvency procedures were necessary. There is no note of the shareholders' meeting. Mr Said was in New York at the time, but the Beirut shareholders came to London and had dinner together. Mr Lababidi's recollection is that most, if not all of them, were present. He said that they all felt anxious about the situation because of the threat of liquidation or administration which could follow. Notwithstanding this, there was no offer to invest and on 19 October, BA issued a press statement announcing that the conditions of the franchise had not been satisfied and that BA would continue to operate the routes itself.
84. In paragraph 31 of his witness statement, Dr Tabbara said that he was surprised to see a reference in Lord Hesketh's letter of 17 October to the possibility of administration or liquidation, because he and the other shareholders and third parties were prepared to invest further in the company. I do not accept this evidence. It is clear that none of the Beirut shareholders, including HII, HOL and Mr Kaddoura, were willing at the time to provide the capital needed to implement the first franchise. This was I think, due to a breakdown of trust between them and the management of the company, coupled with a hope or expectation on the part of Dr Tabbara that he could persuade Prince Waleed to make a major investment in the company. He had been informed by Arthur D Little on 14 October that Prince Waleed was seriously considering an investment in BMed and had commissioned them to produce a comprehensive review of the company's business, which would be ready by 25 October for the Prince to study. Even if this involved the re-institution of the BA franchise, it could also include the removal and replacement of the existing management and this seems to have been the primary objective of the Beirut shareholders at this time. On 18 October, Salah Lababidi wrote an extremely emotional letter to Mr Said complaining that Mr Hetherington and Lord Hesketh had stolen the company and that BA was not to be trusted. The following extract conveys the sense of the letter:

"My personal experience with British Mediterranean Airways was coincidental but beautiful because I witnessed creation at its birth. As a baby taken away from its mother, it is indeed painful to see Hesketh and Hethrington (sic) steal this child, promising it wealth and happiness, and saying 'we know what we're doing, we're going to make you rich'. The devils indeed and without a doubt not to be trusted especially as they emphasize the urgency of the situation.

The truth is we ran into something blindly that Hesketh and Hethrington (sic) have declared confidential all this time and only now, as we near operation, we begin to witness the true face of British Airways. A company, which like the British Empire of late, ruthlessly takes over the land and begins a legacy of slavery, torture and dictatorship. Several books have been written about how the British ruthlessly divided and conquered, Richard Branson wrote one such book on British Airways. British Airways currently deal with 50 agents in Lebanon and if they continue in their path they will control the market through these agents"

Whatever the facts may be, a rotten game is being played on us and we, the shareholders, who were once united are being taken for a ride. We must regroup and take the company over again, and only then should we negotiate with British Airways who without a doubt will continue to seek a deal.

British Airways have pulled out of their deal with Middle East Airlines. Middle East Airlines, which is furious with British Airways for suddenly abandoning them, will I'm sure, out of pride, be willing to make a deal with us. With Middle East Airlines as our ally, we can joint venture a daily route between London and Beirut and maximize our profits. Should they be stopped from buying up British Mediterranean Airways, British Airways will no longer have any commercial strength in Lebanon making us the strongest carrier between London and Beirut, and giving us supreme control over this market with the ability to promote growth to the region. The company now, with an honest management, more than ever has the opportunity to continue onto profitability and at the same time continue an honest effort in promoting this region. The opportunity for British Airways to franchise with us will be more than ever an option, but under our conditions."

85. Mr Nadim Lababidi said that this letter also represented his own views at the time and those of Dr Tabbara and Mr Kaddoura. I accept this evidence. The Beirut shareholders clearly felt that they had lost control of the company to people whom they did not trust and believed that they could have done better themselves. In these circumstances, it is no surprise that Lord Hesketh was unable to raise from them the capital necessary to support the BA franchise and my own assessment is that Dr Tabbara and the other Beirut shareholders were prepared to play a rather longer game, in the hope that Prince Waleed or another major investor could be persuaded to intervene on their behalf.
86. However, with the franchise gone, the threat of insolvency loomed and on 18 October, whilst in London, Dr Tabbara instructed Messrs Watson, Farley & Williams, on behalf of HII, HOL, Hachma UK, Mr Kaddoura and Salah Lababidi. Mr Kaddoura said that he was willing to allow Watson, Farley & Williams to be instructed on his behalf if Dr Tabbara paid the costs. The firm wrote to the directors of BMed on 21 October. They referred to the possibility of the directors instituting some form of insolvency proceedings following the termination of the franchise agreement and then said this:

"We are instructed that the immediate cashflow problems can be cured by a cash injection of £1,000,000 into the Company. We are further instructed that the sum of £1,000,000 will be made available to the Company before the end of October, 1996 by our clients. These cleared funds will be provided to the Company in the event that a new major investor or a group of investors is or are not forthcoming by the end of this month.

We are instructed by our clients that these actions will enable a review of the business of the Company to be carried out and a survival plan put in place. Such a survival plan may require the resignation of members of the existing Board of Directors of the Company in order to be effective. We are advised by our clients that they have identified suitable individuals to join the Board of Directors and would welcome the opportunity to discuss the necessary changes and the resignation of the existing Board Members in due course."

The letter concluded by asking the directors to give Watson, Farley & Williams notice of any application to the Court which they might decide to make.

87. Dr Tabbara confirmed that the investor referred to was Prince Waleed and also possibly Mr Zeid. The latter can, I think, be discounted. He denied that this was intended to be an alternative to the franchise. The idea was, he said, to give the company the funding necessary to enhance the value of their shareholdings. It is, I think, clear if one reads this letter against the background of the earlier correspondence from Nadim and Salah Lababidi, that the Beirut shareholders did see Prince Waleed as not only providing the company with new capital, but also as the means of ridding them of the management whom they regarded as having in effect taken their company away. Whether attempts were made to revive the BA franchise or to pursue some other route, would be a matter for the new investor. On the basis of what Arthur D Little had told Dr Tabbara, a decision would be made by Prince Waleed by the end of October. The letter from Watson, Farley & Williams was therefore intended to buy time and I regard the reference to Dr Tabbara and the Beirut shareholders providing the £1m even if the outside investors chose not to proceed, as an assurance which was by no means certain to be honoured. The primary objective was to keep the company in operation until Prince Waleed had decided whether or not to invest.
88. On 23 October Messrs Harbottle & Lewis replied to Watson, Farley & Williams asking for details of the terms upon which the £1m was to be provided by their clients and expressing some doubts as to whether the monies would be forthcoming. Watson, Farley & Williams were asked to respond with the information by 5.00 p.m. on 24 October. By then, however, there was a new development. Mr Said says that soon after the failure of the first franchise, he was approached by Nadim Lababidi and Mr Kamal, who asked him to help them to save the company. Mr Lababidi said that none of the Beirut shareholders was prepared to come up with the money necessary. Mr Said said that he told them that he was not prepared to put more money into the company as it stood, and that he favoured an orderly liquidation. When asked to assist in keeping the company in business, he told Mr Lababidi that there would have to be an end to the dispute and delays by shareholders in making decisions and a cessation of their attacks on Mr Hetherington and the management. Guernroy would also have to be in charge. According to his witness statement it was then that Mr Lababidi offered him what he described as carte blanche to take the steps necessary to save the company and to re-instate the franchise. Mr Said said that he wanted this in writing and that he then instructed SJ Berwin to prepare what became the voting agreement.
89. The account of this meeting contained in Mr Said's witness statement accords with what Mr Lababidi says in paragraph 7 of his own witness statement. The request for voting control came from Mr Said as a condition of his assistance, so that he could present this to Mr Ayling of BA as an answer to any objection based on the difficulties of obtaining co-operation from the various shareholders. In cross-examination, Mr Lababidi said he was really given no option by Mr Said. When he got the voting agreement he was told Mr Said wanted it signed, or the company would be liquidated. The shareholders either had to sign or agree to close down the airline. Dr Tabbara was still trying to raise money through Prince Waleed, but in the end nothing came of this.
90. When Mr Said was asked about these events in cross-examination, he denied that the voting agreement was his idea. He said that it came from Mr Lababidi, but that he readily accepted it and when it was mentioned to Mr Ayling, it became a BA requirement as well. Although it probably does not matter who first suggested the mechanism of giving Guernroy control of the shares, I am inclined to believe that the idea came from Mr Said as his interpretation of what was necessary to restore order amongst the shareholders and to convince BA that any new franchise agreement would be financially supported. I accept Mr Said's evidence that Guernroy was at this time reconciled to the failure and liquidation of the company and was not seeking to revive it. What is important to bear in mind, is that Guernroy was being asked to take on the burden of raising the finance for any new BA franchise. There was no certainty that all of the money could be raised, either from existing shareholders or outside investors and so the basis on which Mr Said was approached, was that the existing shareholders were unlikely to be able to provide the finance themselves. In these circumstances, Guernroy was being asked in fact to underwrite the share issue and it is hardly surprising that Mr Said was only prepared to do that on terms that Guernroy was given complete control. The issue as to whether or not the voting agreement gave rise to fiduciary duties has, in my judgment, to be examined in this context.
91. It looks as if the voting agreement was drafted and circulated by SJ Berwin on 22 October. It is a complicated document and Mr Steinfeld submitted that this indicated that it had been under preparation for some time prior to 22 October. But privilege has not been waived in respect of the instructions given to S.J. Berwin and there is no evidence as to precisely when or how these solicitors were instructed. Lord Hesketh's evidence (which was not challenged) is that he had attempted to keep discussions with BA alive between 19 and 22 October and had met Mr Ayling to see if there was any possibility of restoring the franchise agreement. Mr Ayling, he said, was troubled by the hostility of BA shareholders towards BA and said that there had been trouble in Beirut in relation to the GSAs. It is not, therefore, at all surprising that when Lord Hesketh met Mr Ayling with Mr Said on 22 October, he was encouraged to be told that Mr Said believed that he could obtain the agreement of the other shareholders to give Guernroy the control of their voting rights for the duration of any new franchise. Mr Said had prepared a note of points to make to Mr Ayling at the meeting. These included a statement that the shareholders were strongly committed to the continuation of the airline and its expansion and supported the franchise agreement. Although this may have been true of Nadim and Salah Lababidi by this time, Dr Tabbara had given Mr Said no such assurance and Mr Said admitted that he was at least guilty of some exaggeration in what he told Mr Ayling. The other important point he made at this meeting was that Guernroy might be prepared to underwrite the deal, subject to his seeing the final terms of any franchise agreement. Given that the first franchise had failed because of the company's inability to raise the £5.5m, this was an important issue. He had to offer Mr Ayling some guarantee that the funds would be provided and this became the basis of the franchise discussion and agreement.
92. The next step was to obtain the signatures of the shareholders to the voting agreement. Mr Heard faxed copies of the agreement to each of the shareholders on 22 October, under cover of a memorandum which he had prepared. The memorandum stated that its purpose was to confirm the terms upon which Guernroy was willing to proceed further with negotiations "to re-finance the company". It was uncertain whether GE Capital would wish to participate. There are then the paragraphs already quoted earlier in paragraph 24 of this judgment. Apart from the undertaking to offer shares to existing shareholders, these paragraphs of the memorandum do make it clear in terms that the voting agreement was a requirement of Guernroy. The shareholders were told that for the arrangements to take effect Guernroy had to have their unconditional and irrevocable approval of the agreement by 17.30 p.m. London time on 23 October.
93. Dr Tabbara makes no reference at all to the covering letter in his first witness statement. What he does say, is that he was eager for the BA franchise to succeed and signed the voting agreement on or about 24 October because he was told by either Nadim Lababidi or Mr Hetherington, that it was a condition of BA being prepared to re-instate the franchise. He did not, however, understand that by entering into the agreement he was giving Guernroy power to waive the pre-emption rights contained in article 5.3, or to permit Guernroy to issue and allot shares to what he describes as the friends and business associates of Mr Said. However, in a later witness statement made on 5 April 2005, he says that he has been referred to the covering memorandum and that he must have relied upon its contents and in particular, upon the undertaking by Guernroy to ensure that all existing shareholders would be given the opportunity to participate pari passu in the share issue. When asked about this, he said that he had not noticed the memorandum at the time when disclosure was given and that when he saw it later, it reminded him of why he signed the voting agreement. A little later in his evidence he said that he thought he might have relied on it.
94. I find much of this evidence confused and unconvincing, and I do not accept it. Although the undertaking (if that is what it was) may have given shareholders like Dr Tabbara some comfort, it was not, in my judgment, the reason why they decided to sign up. It is important to remember that the invitation to revive the BA franchise came not from Guernroy, but from the Beirut shareholders such as Mr Lababidi, who seemed to have realised that without the franchise the company was probably doomed. Dr Tabbara was prepared to go along with this, at least once it became clear that Prince Waleed was not going to invest. If Mr Heard's memorandum had any influence at all on the shareholders' decision to sign the voting agreement, it was almost certainly because it was made clear that Guernroy was not willing to assist in re-financing the company on any other terms and BA had made the voting agreement a condition of the renewal of the franchise. This was, of course, the evidence of Dr Tabbara contained in his first witness statement. When asked in re-examination to say where his understanding that Guernroy would not use the powers in the voting agreement to waive the pre-emption rights came from, he said that he did not know. This is hardly evidence to support a case that the voting agreement was signed in reliance on the collateral undertaking.
95. Mr Kaddoura also made a witness statement on 5 April 2005, which is almost identical in terms to that of Dr Tabbara. I regard it as of no real evidential value. It has obviously been prepared to support the claimants' case about the collateral undertaking and shows no sign of being anything but a carbon copy of Dr Tabbara's own witness statement of the same date. Mr Kaddoura, like Dr Tabbara, said in his first witness statement that the voting agreement was not intended to allow Guernroy to deprive him of his pre-emption rights. But in cross-examination he said he had no difficulty about signing the voting agreement because it was said to be a prerequisite to the renewal of the BA franchise. BMed would be in a difficult financial position until the franchise was in place. He said that he did not discuss the voting agreement with Mr Said or Mr Heard, and that his understanding of the agreement was based on his own reading of it, which again does not support what is set out in his recent third witness statement about the undertaking. Moreover, he did not make any effort to subscribe or indicate an intention to do so.
96. The question whether the voting agreement or the collateral undertaking created a fiduciary obligation in respect of the powers contained in the agreement, is a question of law which I will come to later. What, however, is clear, is that Guernroy through Mr Said and Mr Heard did not in express terms agree to do anything more than to attempt to revive the BA franchise and so far as necessary, to underwrite the share issue. The voting agreement was required as a term imposed by Guernroy for its participation and set out the powers which Guernroy required to enable it to raise the finance necessary for the franchise to take effect. It was, therefore, deliberately drafted in the widest possible terms and the covering memorandum refers to Guernroy being given "a full authority". The terms were not the subject of any negotiation. Both Mr Heard and Mr Said were asked about the relationship between Guernroy and the other shareholders in relation to this. Mr Heard was inclined to accept that there were probably some limits to the way in which Guernroy could exercise its powers under the agreement. It could not do so, he said, solely to benefit itself and could not prefer the interests of one shareholder over another. It had a duty to act honestly and fairly to the granting shareholders. Mr Said was asked whether Guernroy was given the powers he asked for because the shareholders trusted him. He was not prepared to accept this. He said they wanted Guernroy to raise the money and he would, of course, and did act honourably and fairly. Guernroy could not act dishonestly under the agreement, but subject to that limitation, it could raise funds in any way it chose. He was later asked whether he understood what a fiduciary obligation was. He said (presumably having discussed the matter with his lawyers on numerous occasions) that it meant an obligation to act in good faith and that he was under an obligation to act honourably and in the best interests of all the shareholders. It is, of course, tempting to single out admissions made by Mr Heard and Mr Said as to the duties which they think the voting agreement may have imposed on them. But Mr Steinfeld very properly did not put these at the forefront of his submissions. He recognised that ex post facto opinions about the law by witnesses of fact involved in the litigation are necessarily influenced by subsequent thoughts and events and do not in the end assist me unless they amount to evidence of what was actually agreed at the time. The question whether the voting agreement imposed a fiduciary duty and of what kind is, as I have said, one of law for me. Although Mr Heard and Mr Said were asked about and volunteered their own view about the duties which they may have been under, there is no evidence that they were asked to consider these issues at the time, or that they expressly agreed that Guernroy would act as a fiduciary agent in relation to the raising of the funds. Neither Dr Tabbara nor Mr Kaddoura went so far as to suggest that there was ever any agreement or acceptance by Guernroy of such a liability.
97. The period from 21 to 31 October was one of considerable tension, in which a great deal of brinkmanship was exercised. Dr Tabbara and the other Beirut shareholders had instructed Watson, Farley & Williams to challenge the right of the directors to place the company into liquidation or administration and Guernroy, through Mr Said, was making it clear that any assistance in raising the finance for a new franchise would require the shareholders to sign up to the voting agreement. At a board meeting held on the afternoon of 23 October, it seemed far from certain that Dr Tabbara would in fact sign the voting agreement on behalf of HII and HOL and after the board re-convened at 5.35 p.m., it was told that Dr Tabbara had indicated to Mr Kamal he was not willing to sign. The deadline set by Guernroy for the signing of the voting agreement had already passed without all the voting agreements being signed. Mr Said, therefore, informed Mr Ayling on 23 October that he had failed to raise the necessary finance and withdrew Guernroy's offer of financial support.
98. Dr Tabbara in fact seems to have signed the voting agreement on or about 24 October, but he remained in touch with Prince Waleed through Mr Richard Bond of ADL. On 25 October he wrote to Prince Waleed informing him that the BA franchise was likely to be revived and that the amount of the investment required from Prince Waleed would be £7.5m : the whole of the amount required both by the CAA and under the BA franchise. An investment by Prince Waleed was obviously still under consideration, because ADL had informed Mr Hetherington that if Prince Waleed decided to invest, he would commit £1m by 30 October together with £5.5m to provide the capital for the BA franchise. This, of course, confirms that the continuation of the franchise would have been part of any investment decision by the Prince. The involvement of Prince Waleed had, of course, become of critical importance to the Beirut shareholders by now, because Guernroy had withdrawn its offer of support on 23 October, after the deadline for the voting agreement had passed. Without the Prince's investment, the franchise could not go ahead and the liquidation of the company was inevitable.
99. On 27 October Mr Lababidi faxed a letter to Mr Said, requesting a letter of authority to negotiate an agreement on behalf of all shareholders in what he described as a last attempt to rescue what remained of the company. Mr Lababidi said that this was to assist him in some negotiations he was conducting with Virgin Atlantic Airlines for the sale of BMed. He had already received a power of attorney from Mr Kaddoura, Hachma UK and Salah Lababidi, authorising him to sell their shares. On 29 October ADL informed Mr Hetherington that Prince Waleed had decided not to proceed, due to what were described as "shareholder difficulties". A copy of the ADL report, which was provided to Prince Waleed, has been disclosed. This recommended an investment in the airline, subject to the resolution of what is referred to as the shareholders' squabble and the company guaranteeing that the BA franchise would be implemented. One page of the report attempts to summarise the reasons for the failure of the first BA franchise. It states that the conditions for the franchise were not met due to internal squabbles between shareholders. One group of shareholders led by Mr Said offered to invest £5.5m, provided another group (led by Dr Tabbara and Mr Lababidi) ceded control of the Board. This offer was not accepted, in anticipation of an offer from Prince Waleed to help Dr Tabbara and Mr Lababidi maintain control.
100. It is, I think, almost common ground, that this is an extremely inaccurate account of the reasons why the first franchise failed, even though it was put to Dr Tabbara by Mr Girolami as a summary of what in fact occurred. It really confuses the failure to obtain the necessary investment for the first franchise with some of the events surrounding the negotiations for the second franchise. Neither Mr Bond, nor anyone else from ADL was called to give evidence and none of the witnesses I heard from admitted to being the source of the facts contained in the report. It was put to Mr Heard by Mr Steinfeld that he deliberately fed Mr Bond with this information in an attempt to dissuade Prince Waleed from investing. He denied that and there is no other evidence to support that allegation. Mr Said's evidence is that he would, in fact, have welcomed investment from the Prince. What is, however, clear is that by the end of October Prince Waleed was out of the picture and Dr Tabbara's attempts to persuade him to underwrite the BA franchise had failed. Mr Said was asked why he did not contact Prince Waleed to tell him that there were now no shareholder difficulties following the execution of the voting agreement. He said that Dr Tabbara should have done this himself, because Prince Waleed was his contact and that the reference to shareholder difficulties may in fact have been an excuse. In the end, no one took the matter any further and the company was therefore left with no alternative to either allowing Guernroy to proceed with raising funds under the terms of the voting agreement, or the sale or winding up of the company.
101. On 29 October BA offered to finance what was described as an orderly liquidation of BMed. The board met on 30 October to consider the BA offer and a potential offer from Virgin Atlantic to buy the company. The existing BA offer was, as I have said, designed to provide for the closure of the company. Virgin's offer held out some prospect of the airline continuing, although it is not certain in what form. The principal advantage, however, of the Virgin offer was that it gave the board a means of encouraging BA to improve its own offer and on 31 October BA tabled a revised offer which effectively re-instated the franchise, conditionally on BMed raising £5.5m in new capital. No date was fixed for this at the time, but the draft franchise agreement included a provisional date of 30 November 1996.
102. The Board decided to accept the revised BA offer. Lord Hesketh wrote to Mr Ayling on 1 November saying that the acceptance of the offer had the unanimous support of all the shareholders and that arrangements had been made to ensure that the support remained in place throughout the franchise. This was, of course, a reference to the voting agreement. He was, he said, confident that the finance would be raised in a timely and efficient manner. Lord Hesketh was able to write a letter in these terms because he had been told by Mr Said that Guernroy would now go ahead with the financing of the franchise and that all the voting agreements had been signed. A copy was faxed to Mr Ayling on 1 November. At the same time, the Board received a letter from Watson, Farley & Williams, stating that in the light of the agreement to secure the future of the company the earlier threats of litigation were withdrawn.
103. From the beginning of November Guernroy began to take steps to raise the necessary finance. There was an immediate need for money in order to meet a lease payment on 6 November and Mr Said arranged for Guernroy to lend £700,000 to the company interest free, on terms that it would be repayable on 1 December 1996. As part of the same arrangement, Guernroy was to be granted the warrants by the company to subscribe for 27.5m new ordinary shares at a price of 20p, which was the minimum price at which shares could be issued under the revised articles. The board agreed to accept the loan and to issue the warrants at a meeting held on 5 November. One of the criticisms directed to the 6 February 1997 share issue is that the issue price of 20p undervalued the company and had not been based on proper professional advice. Lord Hesketh said that the company needed to raise finance for the franchise and was prepared to accept the terms put to him by Guernroy. The board did not seek or obtain valuation advice on which to base the issue price because they thought (and were probably right to think) that the company was insolvent. Although the Heathrow slots had some value, it varied hugely and depended on a purchaser being able to secure their transfer.
104. The Claimants rely on a memorandum sent by Mr Heard to Mr Nabil Naaman, who was Mr Said's Treasurer, on 4 November, which sets out the terms proposed by Guernroy for the £700,000 loan including the issue of the warrants of 20p. In that memorandum Mr Heard says this :

"You will appreciate that as these are warrants there is no obligation for Guernroy to take up all or any of them but if it did then the £700,000 received from repayment of the loan could be used for that purpose. In addition, if the BMed shares prove to be worth more than 20p in December –when hopefully the BA franchise will be in place – then the warrants could be sold to other investors at a premium."

Mr Said said that this was not copied to or discussed with him, but that he felt 20p was the right price. He understood and believed it had been suggested by Schroder Asseily, but did not know the basis of their recommendation. He said that there was not in any case, any question of his seeking to dispose of the warrants at a profit to investors and we know that the warrants in fact expired before the shares could be issued and that the shares were issued to investors in February 1997 at the same issue price of 20p. He was not, he said, trying to hide anything and indeed on 5 November, Mr Heard wrote to Mr Lababidi setting out the terms of the £700,000 loan including the 20p share warrant price.

105. Mr Heard said that he had discussed the share warrants with Mr Ali of Schroder Asseily, who had a copy of BMed's business plan. His evidence was that the BA franchise was not certain to be profitable, but that it was at least theoretically possible that the shares could be worth more in December once the franchise had become unconditional. I am bound to say that I found Mr Heard's evidence on this point to be defensive and less than convincing. At one point in his evidence in cross-examination he went so far as to suggest that the value of the shares could have increased by December, due to unforeseen events such as a peace treaty between Israel and Syria. It seems to me almost obvious from the terms of his memorandum to Mr Naaman, that what he was saying was that it was possible that with the franchise in place the shares could increase in value. Although not a certainty, everyone including Mr Heard, saw the franchise as a possible way out of the company's financial plight and the way to future profitability. Mr Heard was inclined to portray this as more remote than I think it was. But it is also wrong to exaggerate what was being said in the memorandum. The shares, if issued at 20p, were obviously heavily discounted when compared with the earlier issue price of £1 and it was obvious that if things went well, they might increase in value. Mr Heard was, I think, saying no more than that.
106. Mr Ali accepted in cross-examination, that he had no real experience of dealing with airlines at Schroder Asseily before he came to advise BMed and was certainly not a valuer. He was, I think, strongly influenced by the fact that the par value of the ordinary shares had been reduced to 20p in July 1996, and by the very tight time-scale in which he had to operate. The company needed the £700k loan almost immediately. Mr Said did not, he said, insist on an issue price of 20p per share, but was at the same time prepared to put up the £700k and to agree to Guernroy underwriting the raising of the £5.5m. He said that he suggested that the company issue warrants at 20p per share because he believed the shares were not worth more than their nominal value. Although ADL had valued the slots at up to £22m, he regarded this as unrealistic. He said he made a valuation based on the existing business plan which produced a figure of less than 20p per share and therefore, opted for the minimum price permissible under the articles. It was a back of the envelope calculation and he was unable to give precise details of how it was reached. He said that he took a profit figure of £3m per annum and deducted carried interest, leaving a figure of £1.8m after tax. Using a multiple of 12, this produced a value of £22m which equated to 13.36p per share.
107. In the absence of any expert valuation evidence, I am not in the position to judge whether looked at in early November the 20p was or was not a figure which corresponded to the true worth of the company. If anything turned on it, I would be inclined to the view that Mr Ali was principally influenced by the nominal value of the ordinary shares and took the view that there was nothing to justify disposing of the warrants at a premium. But the warrants were not exercised and if valuation is at all material, then it only becomes material as of 6 February 1997 when the shares came to be issued. It was, of course, pursued in relation to the memorandum of 4 November, as support for the Claimants' case, that Guernroy set out from the start to obtain control of the company and to confer a benefit on Mr Said's friends and associates to the exclusion of the Claimants and other existing shareholders. But it is not pleaded that as part of that design the shares were knowingly under valued and there is no evidence to support this. Nor is it alleged that the terms on which the warrants were issued by the board was the result of some kind of plan or conspiracy between Mr Said and the directors of BMed. All that is alleged is that the Claimants were not told that the 20p had not been the subject of a professional valuation and the shares could therefore be worth significantly more than that. I shall come to this when I consider the invitation to subscribe which Guernroy says it gave to the Claimants and to the other shareholders.
108. On the same day, Mr Heard also sent a memorandum to Mr Said explaining the terms of the £700k loan. This memorandum contains no reference to the 20p being a heavily discounted price, or to the possibility of the share warrants being disposed of at a profit. What it does say is that on the assumption that all warrants are exercised and the 27.5m shares issued at 20p, the "new" shareholders would end up with 71.4% of the company for the £5.5m subscribed and the "old" shareholders, including Guernroy, would hold the remaining 28.6%. It was not put to Mr Heard that this memorandum was in some way concocted to conceal Guernroy's true intentions and it is inconsistent with any suggestion that a plan existed at this time for Guernroy to take up a significant part of the new share issue. It does, however, make the assumption that the existing shareholders (including Guernroy) would not subscribe. Notwithstanding this, Mr Heard faxed a letter to Mr Lababidi on 5 November, informing him about the Guernroy loan and the issue of the share warrants. The letter sets out what was proposed in these terms:

"Whilst interest free the loan would be secured on the company's assets and would be repayable in a single tranche on 2^nd December 1996. After discussion with Schroder Asseily, we are proposing that warrants should be attached to the loan so that Guernroy – or new investors identified by any of us – can subscribe for up to 27,500,000 new shares at a price of 20p per share. You and all the other existing shareholders would of course be encouraged to participate alongside the new investors and on the same terms.

You will appreciate that at this price those providing the £5.5million of new capital (27.5 million x 20p = £5.5 million) will control something like 71.4% of the company and the existing shareholders (whose investment would be worth a notional £2.2 million) would control the remaining 28.6%.

At Wafic's request, I should be grateful if you would just confirm that you (and the shareholders you represent) are content to see this financing proceed on the above terms."

109. Mr Said saw this letter in draft. It was sent to Mr Lababidi alone, but with, it is said, an expectation that the other shareholders would see it. Mr Said said that Mr Lababidi was the Beirut shareholder who always came to see him and whom he understood represented the others. Mr Ali Tabbara also worked in the same office in Beirut. This is reflected in the letter, which asks Mr Lababidi to confirm that he and the shareholders he represents are content to see the financing proceed on this basis. The letter therefore intended to make it clear to the Beirut shareholders what the terms of the subscription were to be, but also repeated the assurance given earlier in Mr Heard's letter of 22 October that they would be allowed to participate. Dr Tabbara says in his witness statement that Mr Lababidi did not represent the Halton companies and that he never saw the letters. Although the letter forms part of the Claimants' disclosure, he says that he believes Mr Lababidi provided the two copies of the letter to his lawyers. One of them has written in Arabic on the top the words "to be delivered to Mr Tabbara". Dr Tabbara says that if he had known about the issue of the warrants at 20p Halton would certainly have wanted to take its pro-rata share.
110. Dr Tabbara was, of course, challenged about this. He said the Arabic writing was not his (which I accept) and that had he received the letter he would have contacted either Mr Heard or Mr Said. But by then, of course, Dr Tabbara did know that Guernroy was proposing to raise the finance for the BA franchise and had signed the voting agreement for that purpose. It is also apparent from his letter to Prince Waleed of 25 October that he knew agreement was likely to be reached for the revival of the franchise. Mr Kamal was at the board meeting on 5 November which approved the issue of the share warrants. He says in his witness statement that neither Dr Tabbara nor Mr Kaddoura were interested in investing further in the company after July 1996 and that Dr Tabbara knew that the BA franchise agreement had been completed.
111. Mr Lababidi was not entirely happy about the 20p price. He spoke to Mr Heard by telephone on 6 November but recognised that the matter was in Guernroy's hands and that as far as he was concerned, Guernroy should press ahead to raise the £5.5m on the terms approved by the board. Despite what Mr Lababidi says in his witness statement, this was I think an expression of his personal opinion rather than that of the shareholders generally, and there is no evidence that he contacted Dr Tabbara and Mr Kaddoura before speaking to Mr Heard. Mr Heard's evidence was that he took Mr Lababidi to be speaking for himself and although Mr Lababidi suggested otherwise in cross-examination, I do not accept that evidence.
112. Although 30 November remained a target date for raising the finance, it was not yet a condition as such of the franchise because the negotiations with BA were continuing on various aspects of the agreement and BA had yet to complete its audit of BMed. This, in fact, remained the position throughout November and into December. On 8 November at a board meeting, Mr Hetherington said that no date for the completion of the funding had been agreed with BA although he assumed it would be 30 November. BA also understood that no investor would complete an investment until the franchise had become unconditional. What they were looking for was firm commitments of finance subject to that being achieved. Mr Heard is recorded as having told the meeting that Guernroy intended to encourage existing shareholders to take up warrants and that he would be writing to them. Even on the basis of a provisional deadline of 30 November, one would have expected Mr Heard to write to shareholders fairly promptly after the meeting and Lord Hesketh said that he certainly expected him to do so. But in fact no letter was sent until 29 November. Mr Heard gave a number of reasons for the delay. He said that there were continuing negotiations with GE Capital, which if successful, might have removed the need for any of the shareholders to invest. There were also intense negotiations to be concluded with BA on the terms of the franchise. He agreed that it would have been better to have sent out the letter sooner and thought he may have waited too long.
113. The delay is, I think, striking and I am afraid to say that I did not find Mr Heard's explanation for it given in cross-examination, to be totally convincing. In his witness statement he says that by the end of November, Schroder Asseily, who were assisting Guernroy to find investors, had identified Mr Abela and Mr Bassatne. Guernroy and Lord Hesketh had also indicated that they were willing to invest. However, Mr Said was keen to give existing shareholders an opportunity to participate and in response to this, Mr Heard suggested writing to shareholders after a meeting with Scroder Asseily on 28 November, by which time they would have the updated position on fundraising and the progress of the negotiations on the BA franchise. This is confirmed by a memorandum which Mr Heard sent to Mr Said on 28 November, in which he suggested that the letter which Mr Said wanted to be sent, would be best dispatched after the 28 November meeting. His memo goes on to advise Mr Said that they should resist pressure for Guernroy to underwrite the whole issue. It does, therefore, look as if Mr Heard had really abandoned any idea by now of obtaining finance from the existing shareholders, apart from Guernroy, but that Mr Said was anxious to at least give them some opportunity of doing so. The timing was, however, down to Mr Heard.
114. On 14 November, the management of BMed produced two three year plans, based on the use of two or three aircraft. The plan based on two aircraft indicated a net profit of £263k in the first year to 31 October 1997 rising to £2.4m in the third year to 31 October 1999, whilst the plan based on three aircraft forecast a net loss of £493k at the end of the first year rising to a net profit of £3.072m in the year ending 31 October 1999. Mr Said was rather dismissive of these figures in evidence. He said that he did not base any investment decision on them, because management profit forecasts were notoriously over optimistic. In fact, it took five years for BMed to make any money. The plans were, however, sent to Mr Heard, Mr Ali and Lord Hesketh by Mr Hetherington and were also submitted to Messrs Arthur Andersen, who were asked to check whether the calculations on which they were based (rather than the assumptions) were sound.
115. By 18 November there were two other developments in relation to finding investors. Lord Hesketh wrote to Mr Said on 18 November, saying that he was now in the position to invest £250k of his own, within the timescale required, and would be able to commit a further £750k by 1 May 1997. His evidence in his witness statement was that he decided to invest because he believed the company would succeed with the franchise and he wanted to encourage others to do so. At the same time, a revised proposal was received from GE Capital which repeated the requirement that BA should participate by way of loan. This was ruled out as unacceptable to BA and really ended any possibility of investment by GE Capital after this time.
116. The meeting at Schroder Asseily took place at 4.00 p.m. on 28 November and was attended by Mr Said and Mr Heard and representatives of SJ Berwin and Arthur Andersen. Mr Jeremy Schrire of SJ Berwin told the meeting that the franchise agreement was a balanced document and had been well negotiated. One issue on the documentation concerned an option agreement which BA wished the shareholders to enter into. This gave BA the right to acquire their shares in BMed in certain circumstances of default under the franchise. Mr Said was to write to the shareholders telling them that Guernroy intended to sign the option agreement on behalf of each of the shareholders and inviting them to approve this. The letter was to be sent the following day. Lord Hesketh in his witness statement said that Mr Said indicated that the letter would include an invitation to shareholders to subscribe. There is nothing in the note of the meeting which supports this, but it is clear from Mr Heard's memorandum of 28 November, which I have already referred to, that Mr Said did want to do this and the letter was therefore used as an opportunity to raise both issues.
117. Mr David Jardine of Arthur Andersen said that his firm had been through the three year business plan and could identify no apparent gaps in the cashflow. The assumptions in respect of cashflow were in fact conservative by between £80 and £200k. The meeting then turned to the question of fundraising. Mr Saunders who was at the meeting, said that it was not the main purpose of the meeting to discuss fundraising, but Mr Said gave an update of the position. The note records that firm commitments had by then been received from Guernroy (£2m), Lord Hesketh (£1m part deferred), Mr Abela (£1m) and Mr Bassatne (£500k). Mr Said also offered to offer a loan of up to £500k to any existing shareholder who wanted to invest. He said that he thought Mr Safadi could also be persuaded to invest up to £500k.
118. Mr Heard prepared a draft letter to be sent to the shareholders which was then considered and revised by Mr Said. After explaining that BMed was close to finalising the terms of the franchise, the draft letter continued as follows

"With advice and assistance from Schroder Asseily, Guernroy is proposing to syndicate an offer of these warrants. The new shares are being offered at a price of 20p per share, which obviously represents a significant discount to earlier equity issues.

My strong preference is for the existing BMed shareholders to participate in this issue to the fullest extent possible. I believe the pricing is attractive and certainly Guernroy will be taking up a significant number of shares if the balance of the issue is successfully placed.

Time is, however, short and I should be grateful if you would advise George Asseily or Shafic Ali of your interest in the issue by the close of business on Friday 29 November.

We have all suffered through our support for BMed during its start-up phase and through helping Nadim fulfil his dream. Now is the time to convert the dream into reality and I believe we can do so profitably. I therefore urge you to join me in supporting the issue."

119. This draft letter was subject to a number of revisions. The first two of the paragraphs quoted above were retained, but the remaining two paragraphs appear in the letter as sent in the following form:

"Time is, however, short and we should be grateful if you would advise Schroder Asseily in writing of your interest in the issue by the close of business on Friday 29^th November, specifying the number of shares you will take up. Payment in full for those shares will then be required with value no later than 6^th December 1996.

It has been a struggle for us all to help BMed during its start-up phase but we believe that with the franchise, there is a chance to bring the business into profit and perhaps to recover some or all of the original investment. We would therefore urge you to avoid dilution and to join us in supporting this issue."

The letter then continues by emphasising the requirement for the option agreement and asking the shareholders to sign the consent contained at the foot of the letter indicating that they were agreeable to Guernroy signing the agreement option on their behalf.

120. A number of criticisms are made about this letter. The first and perhaps most obvious is its timing. It was sent by fax to shareholders using a list of numbers kept by Mr Heard. In the case of Mr Kaddoura the fax was sent to the Coral Beach Hotel. The letter, as originally sent, had some typographical errors and a corrected version of the letter was sent out the same afternoon. Even if the faxes reached their intended recipients immediately upon transmission, they had no more than a few hours in which to respond in order to meet the deadline of close of business on that day. Mr Safadi replied complaining he had been given less than four hours in which to make a decision and that he could not understand the urgency. He also complained about the lack of information. He was clearly right to do so. No sensible justification has been given by Mr Heard for the short deadline and Mr Said did not attempt to defend it.
121. Allied to the point about timing is the criticism of the term about payment. As I have already indicated, BA was not seeking anything more than firm commitments of finance prior to the franchise becoming unconditional. The 29 November letter, however, required payment by 6 December, a condition not imposed on any of the other investors referred to at the 28 November meeting at Schroder Asseily. Again, there has been no satisfactory explanation for this.
122. But Mr Steinfeld's criticisms go a long way beyond these questions of timing and payment. The Claimants' case is that they were not given any proper opportunity to invest and that a proper opportunity would have included the disclosure of the profit forecast contained in the three year business plan and the confirmation about the calculations provided by Arthur Andersen. It is also said that Lord Hesketh's intention to invest should have been disclosed, because it would have indicated to shareholders that the management of the company had confidence in the franchise and the future of the company. As it was, the letter of 29 November contained none of this information and in fact offered a much more guarded endorsement of the future ("perhaps to recover some or all of the original investment") than the first draft ("now is the time to convert the dream into reality and I believe we can do so profitably"). He put it to Mr Said that the letter had been toned down as part of a deliberate attempt to discourage the Beirut shareholders from investing so as to allow the arrangements already made to allot the shares to Guernroy and the others to remain undisturbed.
123. As I have indicated, Mr Said did not defend the timing of the letter or the shortness of the deadline. He also accepted that there was no reason to require the shareholders actually to put up their money by 6 December, although he thought the 6 December date may have come from BMed. He said that the advice of SJ Berwin and Arthur Andersen about the franchise and the three year business plan should have been communicated. But he rejected the idea that the letter was part of some deliberate plan to deny shareholders the opportunity of participating in the share issue. He had asked for the alterations to be made in Mr Heard's draft, because he did not believe that it reflected reality. His view was that there was no guarantee of profitability, even with the franchise in place, and he thought that the shareholders needed to be told this. However inadequate the letter was, it had to be looked at in the context of the surrounding circumstances. Mr Lababidi and Mr Kamal had been kept fully informed of what was going on and he would have expected any shareholder who was genuinely interested in the possibility of investing, to have come back to Guernroy just like Mr Safadi did. In the event, none of the other Beirut shareholders did.
124. Most of the specific criticisms of the 29 November letter raised by Mr Steinfeld were effectively conceded by Mr Said, but I am not persuaded that the letter was part of a deliberate attempt by Guernroy to exclude existing shareholders from investing in the second franchise in order to allow both Guernroy and the friends and associates of Mr Said to participate. That puts the case far too high and really ignores the known facts leading up to 29 November. It is clear from the contemporaneous documents that Guernroy did not in fact want to have to subscribe for more than a 20% share of the £5.5m in its own right. I am also satisfied that whether correctly or not, Mr Said and Mr Heard (together with the Board of BMed) regarded most of the existing shareholders including the Halton companies and Mr Kaddoura, as unlikely to invest. Mr Kaddoura had not made any further investment in the company since May 1995 and on his own evidence had decided not to invest at the time of the first franchise in October. The Halton companies had been regular investors, but despite the offers of a loan earlier in 1996, Dr Tabbara had not sought to subscribe for shares at the time of the first franchise and had instead concentrated on securing investment from Prince Waleed and other investors. Since then, he had signed the voting agreement but had not made any other offer to participate. Mr Said, under cross-examination, said that quite apart from the letter of 29 November, Guernroy had made approaches to find out if the other shareholders were interested in investing and did in November 1996 offer Dr Tabbara and Mr Kaddoura an opportunity to participate pari passu. So far as that evidence relies on anything but the letter of 29 November I do not accept it. It was never suggested to Dr Tabbara and Mr Kaddoura that any other approaches were made to them at that time and the answer was, I think, given as an attempt to deflect criticisms at the 29 November letter and its timing.
125. But for all its defects, the 29^th letter cannot be ignored. It did inform any reader in clear terms, that the £5.5m required for the second franchise was in the process of being raised through the issue and syndication of warrants for shares at 20p and that this represented a significant discount on earlier equity issues. It also stated that Guernroy would take up a significant number of the shares if the balance of the issue was successfully placed. Most importantly of all, it did invite the recipient to indicate whether and if so, how many shares he required. The Claimants' case is that the timing and content of the letter were deliberately chosen to discourage the Beirut shareholders from investing. I regard this as far-fetched. The timing of the letter is far too late to have been planned in that way and Mr Safadi's letter shows that any of the shareholders who were genuinely interested in investing were at least on notice that investment was being invited, even if the deadline was too short and the information provided inadequate. They were made aware of the price of the shares and of Guernroy's intention to invest. What I think the timing and the requirement for an early commitment of finance do indicate is that Guernroy through Mr Heard did not regard itself as under any obligation to give priority to the interests of the Beirut shareholders and had as good as written them off as likely participants in the new share issue. This is clearly reflected in the fact that outside investors were already beginning to be lined up. If the Beirut shareholders were to take part, they had to respond very promptly indeed and to be prepared to come forward with their money.
126. Both Dr Tabbara and Mr Kaddoura deny receiving this letter, even in its corrected form. There is an activity report which shows that the faxed letter was received at the number used for Dr Tabbara which was 009611860016. Mr Kaddoura's letter also got to the Coral Beach Hotel. On 4 December, Mr Heard faxed the 29 November letter to the shareholders again, chasing them up for a reply and this fax was also received at the numbers used for Dr Tabbara and at the Coral Beach Hotel. Dr Tabbara says in his witness statement that the Beirut number used was one which he did not own directly and was not at his residential address. He says he was frequently away on business and did not receive either the 29 November or 4 December fax. If he had received it, HOL and HII would have wanted to subscribe for their pro-rata percentage of the shares. The absence of the information about the business plan and Lord Hesketh's investment would not, it seems, have been a discouragement. In cross-examination he said he would have got in touch and told Guernroy to get the board to issue an invitation to subscribe in accordance with article 5.3. He would also have returned the letter signed. He, therefore, accepted that the letter would have prompted a reaction from him, despite the impossible deadline and despite the absence of the information complained of, just as it did from Mr Safadi.
127. Not surprisingly, Dr Tabbara was asked about the telephone number used. He said it did not belong to him. But he was shown a letter sent to him by Mr Parry on 5 September 1996 which used that same number and more importantly, his own letter addressed from his private office to BMed on 26 September containing his offer to provide the £2m loan. The printed paper showed the 860016 number as the fax number for his private office at the foot of the letter. It also appears that the subsequent letter from Mr Heard of 8 January 1997, which I will come to shortly, was sent to the same fax number and was received by Dr Tabbara. Dr Tabbara said in answer to these points that the fax number shown on his private office notepaper was inserted by his assistant and that it was not his number. He said that the 8 January letter was handed to him by Mr Lababidi. When it was pointed out that he was still writing letters on the same notepaper with the same fax number in September 1997 he said that the number was still wrong. I am afraid that I found this evidence to be wholly unconvincing and I do not believe it. I am satisfied that the letter of 29 November like that of 8 January 1997, was sent to a fax number used (even if only on a shared basis) by Dr Tabbara's private office and that it was received at this address. I am not able to make a clear finding that Dr Tabbara saw the letter at any particular time, but I do think that it is almost inconceivable that there would have been no communication between the Beirut shareholders following the sending of the letter, which a number of them such as Mr Lababidi and Mr Safadi clearly did receive.
128. Mr Kaddoura's evidence is that he also did not receive the letter of 29 November, although he accepts it was faxed successfully to the Coral Beach Hotel. He says in his witness statement that he often received faxes at the hotel, but it is possible that the letters were either misfiled or lost. Given the obvious importance of the letter, I am doubtful about this, but on the material available, it is not possible to reject Mr Kaddoura's account.
129. On 4 December Mr Heard met Mr Lababidi and received from him copies of his letter of 29 November, signed by Mr Lababidi purportedly on behalf of the Halton companies, Mr Kaddoura and Salah Lababidi. Neither Dr Tabbara nor Mr Kaddoura expressly authorised Mr Lababidi to do this and he accepted that. In relation to Mr Kaddoura, he relied however on the power of attorney given to him in October, in order to deal with the possible sale of BMed to Virgin Atlantic. It is, however, clear that this did not give him any authority to act for Mr Kaddoura in relation to the countersigning of the letter of 29 November. It was put to Mr Lababidi that he was offered some kind of inducement to do this, but I think that the true explanation is simply that Mr Lababidi had been treated for some time as representing the Beirut shareholders and was someone with whom Mr Heard and Mr Said were able to maintain regular contact. This does not, of course, explain why Mr Heard did not insist on receiving copies signed by each of the shareholders. It was put to him that the fact that he had not received the letters back, signed by the shareholders themselves, could only indicate one of two things: either that they had not received the letters (which was not what Mr Heard believed) or that they were not prepared to authorise the signature of the option agreement. He said that he thought they did not want to co-operate and had lost interest in the company. He found it surprising that Dr Tabbara did not want to invest at 20p, but concluded that he had simply given up. My own view is that the truth about the 29 November letter lies between the two extremes put forward by the parties in these proceedings. Mr Said was anxious that the Beirut shareholders should be written to and given an opportunity to invest. But the timing was largely left to Mr Heard. The letter of 29 November was sent out very late, but was important if only because of the authorisation it sought for Guernroy to sign the option agreements. When the letters (and the chasers) remained unanswered, Mr Heard took what was for him the easier course of accepting Mr Lababidi's signature on the documents rather than chasing the shareholders themselves to sign. Both Mr Said and Mr Heard had, I think, no real expectation by then of the Beirut shareholders coming forward (except perhaps for Mr Safadi) to invest, and the acceptance of Mr Lababidi's signature to the letters was really a shortcut to obtaining what had to be in place in order to finalise the franchise arrangements. This, I think, is evident from the fact that at a board meeting of the company held on 7 December, Lord Hesketh reported on the 4 December meeting, at which he was also present, and said that Mr Lababidi had signed the 29 November letters on behalf of the four Beirut shareholders As already mentioned, the letters were sufficiently clear to have provoked an expression of interest if one really existed. But it is equally clear that neither Mr Heard or Mr Said went out of their way to check what the position of Mr Kaddoura and Dr Tabbara was. Whilst they needed their co-operation the truth, I think, is that they had really given up on the Claimants and were doing no more than was required to put the franchise in place. With the other expressions of interest in, Guernroy was by now willing, if necessary, to take up the balance of the shares itself. At the same meeting on 4 December, an update was given on fundraising and the Board was told that Lord Hesketh and Mr Abela would subscribe £1m each, Mr Bassatne and Mr Safadi £500k each and Guernroy £2m with with £500k to be held in reserve for existing shareholders. Mr Said that he offered Mr Lababidi up to a year in which to take up shares and would have been prepared to offer any of the other shareholders three months in which to do so. But there is no evidence that this offer was ever communicated.
130. By mid December the list of subscribers had still not been finally settled. Mr Abela was not certain to invest and Mr Said said that he remained unsure whether Lord Hesketh would be able to raise all of the money he needed. There was also a problem about the voting agreement. BA was insisting that all the new investors should also sign the voting agreement. By then, these included not only Lord Hesketh, Mr Abela and Mr Bassatne, but also Mr Chagoury, who was a wealthy investor and a personal friend of Mr Said. Mr Heard said that while Lord Hesketh and perhaps Mr Chagoury would be prepared to sign the agreement, it was going to be more difficult to get Mr Abela and Mr Bassatne as outside investors to do so. The other difficulty concerned the option agreement. Although Mr Lababidi had signed the letter of 29 November, it was decided on legal advice to obtain a power of attorney from each of the shareholders authorising Guernroy to sign the option agreement on their behalf. To this end, Mr Heard faxed a letter to each of the Beirut shareholders on 8 January 1997, which both Dr Tabbara and Mr Kaddoura now accept that they received. The purpose of the letter was not to solicit any investment as such, but rather to obtain an authorisation from the shareholders for Guernroy to enter into the option agreement and a deed of adherence by the shareholders to the original 1994 shareholders' agreement as amended. The real significance of the letter lies in its statement that it was hoped to sign the BA franchise by the end of the week and that the £5.5m of "new equity capital", was being raised from "new investors".
131. Both Dr Tabbara and Mr Kaddoura signed their copies of this letter and returned them to Mr Heard. In his witness statement, Dr Tabbara said that he was not concerned to read this letter, because he assumed that the money had been raised by a bank loan or similar facility. If new shares were to be issued, he would have expected to be invited to subscribe in a formal way and the absence of any such invitation led him to believe that there had not been a share issue. He therefore signed the letter. I am not convinced by this evidence. It is obvious from the letter of 8 January that the £5.5m had been raised in the form of new equity capital. That is what it says. I do not believe that Dr Tabbara would have read this and the reference to new investors without realising that there had been or was about to be a new share issue, and I regard the suggestion that he did not read the letter at all as implausible. My view about this is, of course, strengthened by my finding that he did in fact receive a copy of the 29 November letter, but even if he had not done so, the 8 January letter would have, and I think, did alert him to what was going on. The letter was returned on 13 January 1997 under cover of a personal letter to Mr Heard, which said this:

"Sometime ago, I had been promised that periodically or upon new developments taking place in the Company that I would be notified of such developments. I think lots of developments have taken place in the last three months during which I have only been requested to sign certain papers ignoring the courtesy of being kept up to date with such developments."

132. Far from indicating a total ignorance of what was going on, this letter seems to me to confirm that Dr Tabbara did recognise that there had been "developments" in the last three months and during that time, he had been requested to sign certain papers. Apart from the letter of 8 January, to which he was replying, the only other such occasions when he was asked to sign papers, was in the 29 November letter. The letter also bears a striking resemblance to one sent by Mr Lababidi on the same day. In that, Mr Lababidi said that he has spoken to most of the shareholders and that they had

"one common complaint that they having gladly and with confidence signed the mandate to Mr Wafic Said they would expect to receive some more details on what is happening."

133. Despite the second attempt to authorise Guernroy to sign the option agreement and the deed of adherence on behalf of the shareholders, BA in the end required the agreements to be signed by the shareholders personally and Lord Hesketh was despatched to Beirut to get their signatures. He left for Beirut at the end of January and at the same time, Mr Said wrote to the shareholders explaining why the option agreement had had to be revised and that it needed to be signed by each of them personally. In this letter Mr Said attempted to give the shareholders the information which Dr Tabbara had complained about not having received. He stated that negotiations with BA on the franchise were complete and that it was due to come into operation on 2 March 1997. A total of £5.5m of new equity had been raised. The deed of adherence which Lord Hesketh took to Beirut and which was signed by Dr Tabbara and Mr Kaddoura, contained details of each of the new investors.
134. Dr Tabbara said that he did not receive Mr Said's letter and only gave a cursory glance at the option agreement and deed of adherence when he signed them. He does, however, accept that he knew that the BA franchise was about to take effect. Lord Hesketh's evidence (which I prefer) is that he told Dr Tabbara that he was going to become a shareholder himself and that Dr Tabbara read the documents with some care. On 6 February 1997, Guernroy passed the special resolutions I have already referred to. Only Lord Hesketh, Mr Chagoury and Mr Bassatne invested and Guernroy ended up subscribing for £3.25m worth of shares.

Breach of Fiduciary Duty

135. The fiduciary duties pleaded and relied on in the amended Particulars of Claim relate to and are based on the voting agreement. The Claimants' case is that the agreement constituted Guernroy, the agent of the Claimants for the purpose of facilitating and (as it is put) cementing the relationship between BMed and BA. They rely on recital E to the agreement which states that:

"the parties have agreed that it is in the best interests of the Company to enter into the Franchise Agreement. The parties have further agreed that voting control of the Company should be vested in Guernroy to facilitate negotiations with British Airways and that such voting control be vested in Guernroy at all times during the duration of the Franchise Agreement."

The powers conferred on Guernroy by the Agreement relate to a number of different aspects of the franchise. Clause 1 gives to Guernroy a power of attorney with effect from completion of the franchise agreement to do any acts and execute any documents which in its absolute discretion it thinks proper to do, perform or execute in connection with BMed. This expressly includes the right to attend meetings and to exercise the voting rights of each of the granting shareholders. Clause 4 of the agreement contains the provisions about fundraising, set out in paragraph 25 of this judgment.

136. No particular facts are pleaded to support the allegation that the relationship between Guernroy and the granting shareholders was fiduciary in nature beyond the terms of the agreement itself and the covering letter of 22 October, containing what has been referred to as the collateral undertaking. In paragraph 16 of the amended Particulars of Claim it is alleged (correctly) that in exercising the powers conferred by the agreement, Guernroy acted as the agent of the Claimants and the other shareholders and as such owed to each of them the fiduciary duties relied on. These, it is said, included a duty to act in good faith; a duty to refrain from taking a secret profit or other advantage for Mr Said (or those associated with him) and a duty to ensure any new shares were offered to existing shareholders in accordance with articles 5.3 and 5.4 before being made available to other investors. The collateral undertaking is, of course, relied upon as establishing the last of these obligations.
137. For the reasons already stated, I am not at all persuaded that Dr Tabbara or Mr Kaddoura were in fact the least bit influenced by the collateral undertaking in deciding whether to execute the voting agreement. But even if it had some operative effect, it is difficult to see how an assurance that Guernroy would give the existing shareholders the opportunity to participate, could either alter the provisions of the voting agreement itself, or transform the relationship between Guernroy and the Claimants into a fiduciary one, if no such relationship already existed. The collateral undertaking was a bare promise, which indicated how Guernroy was minded to exercise its powers under Clause 4. It certainly did not promise to operate the pre-emption provisions contained in the articles and the Claimants were, of course, given an opportunity to subscribe for shares in late November and early December 1996, even if the timescale and the information provided as part of that offer, could be said to be inadequate. It is possible that a representation made by the grantee of power of attorney as to the way in which the power would be exercised might create an estoppel, but none is alleged in the present case and no reliance was established on the evidence in any event.
138. I can therefore concentrate on the central issue, which is whether the voting agreement gave rise to the fiduciary duties alleged. There are, of course, some relationships which are by their very nature recognised to be fiduciary. The relationships which conventionally exist between trustee and beneficiary, director and company, solicitor and client are well known examples. But there is no clear authority which recognises agents as having a fiduciary relationship with their principals and some clear judicial statements that they do not. In Phipps v. Boardman [1967] 2AC 46 Lord Upjohn (at page 127) analysed the question in this way:

"1. The facts and circumstances must be carefully examined to see whether in fact a purported agent and even a confidential agent is in a fiduciary relationship to his principal. It does not necessarily follow that he is in such a position (see In re Coomber).
   2. Once it is established that there is such a relationship, that relationship must be examined to see what duties are thereby imposed upon the agent, to see what is the scope and ambit of the duties charged upon him.

   3. Having defined the scope of those duties one must see whether he has committed some breach thereof and by placing himself within the scope and ambit of those duties in a position where his duty and interest may possibly conflict. It is only at this stage that any question of accountability arises.
 

 4. Finally, having established accountability it only goes so far as to render the agent accountable for profits made within the scope and ambit of his duty."

139. This approach has been followed in a number of recent cases of high authority. In Henderson v Merrett Syndicates [1995]2AC 145 ( at page206 A-D ) Lord Browne-Wilkinson said this:

"The phrase "fiduciary duties" is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case. Although, so far as I am aware, every fiduciary is under a duty not to make a profit from his position (unless such profit is authorised), the fiduciary duties owed, for example, by an express trustee are not the same as those owed by an agent. Moreover, and more relevantly, the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties. Thus, in the case of an agent employed under a contract, the scope of his fiduciary duties is determined by the terms of the underlying contract. Although an agent is, in the absence of contractual provision, in breach of his fiduciary duties if he acts for another who is in competition with his principal, if the contract under which he is acting authorises him so to do, the normal fiduciary duties are modified accordingly: see Kelly v. Cooper [1993] A.C. 205, and the cases there cited. The existence of a contract does not exclude the co-existence of concurrent fiduciary duties (indeed, the contract may well be their source); but the contract can and does modify the extent and nature of the general duty that would otherwise arise."

Similarly, in Hospital Products Ltd v United States Surgical Corporation [1984]156 CLR 41(at page 97) Mason J in the High Court of Australia said this:

"That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."

140. Mr Steinfeld accepts that if the relationship created by the voting agreement was not fiduciary in nature, or at least did not impose the fiduciary duties claimed in relation to the exercise of the powers under clause 4 of the agreement then the claim for breach of fiduciary duty must fail, even if the right view of the facts is that Guernroy through Mr Said and Mr Heard deliberately set out to exclude the Claimants from the 1997 share issue in favour of itself and others connected with Mr Said.
141. Although the amendments to the Particulars of Claim introduced a case of deliberate concealment and disloyalty, the Claimants' case is not limited to that. Alongside these amendments there remains the original plea that Guernroy failed to disclose to the Claimants and the other granting shareholders that it was proposing to use its powers to obtain shares for itself and the associates of Mr Said and Mr Steinfeld opened his submissions on breach of fiduciary duty by relying on the general principle that a fiduciary may not take a profit from his trust without the informed consent of the person to whom the fiduciary duty is owed. The application of this principle does not depend upon any finding of disloyalty or dishonesty and will apply even where the fiduciary is free from any moral blame. It is a rule of equity enforced as a necessary incident of any fiduciary relationship to ensure that the fiduciary or trustee can never be placed into a position of conflict between his duty to his principal or beneficiary and his own personal interests.
142. Therefore, even if the case on deliberate disloyalty is rejected, the Claimants submit that Guernroy was in breach of fiduciary duty by arranging through the exercise of its voting powers for shares to be issued to it and the other subscribers without first having been offered to existing shareholders in accordance with the provisions of articles 5.3 and 5.4. The operation of the pre-emption provisions would, it is said, have discharged Guernroy's obligation to obtain the Claimants' informed consent. The offer made in the letter of 29 November did not do this, either because it was not received, or because (even if received) it failed to make full disclosure of all relevant information relating to the share issue.
143. Mr Girolami made some interesting submissions as to whether the alleged fiduciary duty can properly be characterised as one not to profit, as opposed to one to give effect to the pre-emption rights. But for the reasons which I am about to come to, it is unnecessary for me to deal with that argument.
144. A general summary of the principles relied on by Mr Steinfeld can be found in the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 at page 18 where he said this:

"A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.


(In this survey I have left out of account the situation where the fiduciary deals with his principal. In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction. Even inadvertent failure to disclose will entitle the principal to rescind the transaction. The rule is the same whether the fiduciary is acting on his own behalf or on behalf of another. The principle need not be further considered because it does not arise in the present case. The mortgage advance was negotiated directly between the society and the purchasers. The defendant had nothing to do with the negotiations. He was instructed by the society to carry out on its behalf a transaction which had already been agreed.)
The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty."

145. Although in the sentence at the end of this passage Millett LJ refers to disloyalty as the touchstone of liability for breach of fiduciary duty, that statement has, in my judgment, to be read very much in the context of the allegations being made in that particular case. Mothew concerned the liability of a solicitor who failed to inform his building society client that a borrower (also his client) was in breach of its rules before releasing the mortgage advance. His defence was that this was simply an error. On this basis the Court of Appeal decided that he had an arguable defence to the claim. But negligence has never been an answer to a claim against a fiduciary in respect of an undisclosed profit. His liability to disgorge the profit depends not upon any breach of a duty of loyalty or good faith, but upon his infringement of the rule I referred to earlier, which in effect prohibits fiduciaries from taking a profit without informed consent.
146. This appears very clearly from the speeches of Lord Russell of Killowen and Lord Wright in Regal v Gulliver [1967 2AC 134. At page 144 Lord Russell of Killowen said this:

"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."

Similarly at page 154 Lord Wright said this:

"That question can be briefly stated to be whether an agent, a director, a trustee or other person in an analogous fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person. The most usual and typical case of this nature is that of principal and agent. The rule in such cases is compendiously expressed to be that an agent must account for net profits secretly (that is, without the knowledge of his principal) acquired by him in the course of his agency. The authorities show how manifold and various are the applications of the rule. It does not depend on fraud or corruption."

These principles were adopted and applied by the House of Lords in the later case of Boardman v Phipps [1967] 2AC 46.

147. Although I have rejected the case of deliberate disloyalty on the facts, the allegation of breach of fiduciary duty based on an undisclosed profit remains. It is therefore necessary to begin by considering the first and most fundamental point which is whether the voting agreement gave rise to any of the fiduciary duties alleged.
148. The Claimants approach to this question is to stress what they say are the essential features of the arrangements contained in the voting agreement: i.e. the grant to Guernroy of the voting rights belonging to the granting shareholders and the trust and confidence placed in Guernroy that the powers would be exercised in their best interests. A critical and usually determinative feature of any fiduciary relationship is the agreement of the fiduciary to act in the interests of the principal in the exercise of the power which is granted or in relation to the principal's property or business affairs. But absent express agreement to operate on these terms, it is always necessary to examine the terms of the contract between the parties in order to discover whether the powers inferred on the agent are circumscribed in this way. In a later passage in his judgment in the Hospital Products case, Mason J explains the issue in these terms:

"But entitlement to act in one's own interests is not an answer to the existence of a fiduciary relationship, if there be an obligation to act in the interests of another. It is that obligation which is the foundation of the fiduciary relationship, even if it be subject to qualifications including the qualification that in some respects the fiduciary is entitled to act by reference to his own interests. The fiduciary duty must then accommodate itself to the relationship between the parties created by their contractual arrangements. And entitlement under the contract to act in a relevant matter solely by reference to one's own interests will constitute an answer to an alleged breach of the fiduciary duty. The difficulty of deciding under the contract when the fiduciary is entitled to act in his own interests is not in itself a reason for rejecting the existence of a fiduciary relationship, though it may be an element in arriving at the conclusion that the person asserting the relationship has not established that there is any obligation to act in the interests of another."

149. Like any other exercise in construction, one has to begin with the agreement itself. It is widely drawn and it is common ground that the provisions of Clause 4 did give Guernroy the power to carry out the fundraising for the BA franchise by using the voting powers of the shareholders in the way it chose to do. This included the waiver of the pre-emption rights contained in articles 5.3 and 5.4 and the approval of the issue of shares to Guernroy, Lord Hesketh, Etan Management and Novita Limited. Under the express terms of the voting agreement Guernroy was therefore given a free hand in its choice of investors which could include itself. This is conceded. To require it to give effect to the pre-emption rights in the articles before approaching other would-be investors and to impose on it the requirements to provide the information disclosure alleged as part of that process, is therefore fundamentally to alter the express terms of the contract which the parties made. It can only be achieved in contractual terms by the implication of terms to qualify the scope of the express powers contained in clause 4. I accept, of course, that the power of attorney could only be exercised for the purposes for which it was granted: i.e. to procure the completion and subsequent operation of the franchise and the finance for BMed, which was a term of it. But Guernroy did not use its powers other than for these purposes. The essence of the complaint against it, is that it allowed itself and the other third parties it approached, to invest in the Company without giving the Claimants a prior opportunity to do so accompanied by the information about the share price, the market value of the Company and its future profitability which Guernroy possessed. But if Guernroy was not obliged even to offer the shares to existing shareholders such as the Claimants, then none of this matters.
150. The Claimants' concession that the resolutions passed on 6 February 1997 were within the terms of the power of attorney contained in the voting agreement, makes it necessary for the Claimants to resort to the surrounding circumstances in support of their construction of the deed. But that exercise is no more helpful to the Claimants. As I have mentioned earlier in this judgment, the voting agreement came into existence because Mr Said (and soon afterwards BA) required Guernroy to be given voting control of the Company for all purposes connected with the franchise. Guernroy (through Mr Said) was only prepared to underwrite the franchise on these terms and was being asked to give to BA what amounted in commercial terms, to a guarantee that the £5.5 would be raised. To characterise these arrangements as a form of trust or undertaking by Guernroy to exercise the voting rights for the benefit of the Claimants and other shareholders, simply fails to recognise the commercial realities involved. Guernroy demanded control of the voting rights on the terms of the voting agreement as the price for its financial support and it received this in my judgment on the express terms of the voting agreement and on no other terms. Its only obligation to shareholders was to attempt to procure the funding necessary for the franchise. But the means it used to achieve this was a matter for Guernroy. I do not accept that Guernroy was under any fiduciary obligation not to issue shares to itself or to an associate of Mr Said without the consent of the Claimants. Against the troubled background of relations between the parties, it seems to me almost impossible to assume that Guernroy should be taken as having agreed to an implied restriction of that kind. Mr Said asked to be given carte blanche and that is what in terms Guernroy received. To superimpose on this a radically different set of obligations would be quite inconsistent with the relevant circumstances in which the voting agreement came to be made, as reflected in the terms of the agreement itself.
151. Viewed in this light, the events surrounding 6 February 1997 share issue are readily explicable and do not justify the claims which have been made. The breaches of fiduciary duty complained of are attributed in the amended Particulars of Claim to a deliberate scheme on the part of Guernroy to discourage the Claimants from investing in order to favour itself and the friends and associates of Mr Said. For the reasons already stated in my review of the evidence, I do not accept that Guernroy deliberately sought to exclude any interest or participation from existing shareholders in the way that the case has been pleaded. But I do accept that Mr Heard and Mr Said had lost patience with the Beirut shareholders, due to what they saw (whether rightly or wrongly) as their inability to make important business decisions as and when these were required and on a proper commercial footing. They saw the Claimants and the other shareholders as unable to agree on what they regarded as the obvious strategy for the future of the airline: the franchise with BA. They regarded Dr Tabbara in particular, as obstructive and difficult to deal with. It is, of course, unrealistic to regard Mr Said's renewed support for the airline in October 1996 as purely altruistic. It seems obvious to me, that he and Mr Heard would have wanted to be satisfied that the franchise gave BMed a realistic prospect of returning to profitability in the future and to be sure that the offer price for the new shares reflected the degree of risk involved. But once these criteria had been met so as to persuade Mr Said and Guernroy to proceed, their primary and only immediate concern was to raise the money. I take the view, that although Mr Said was anxious to give the existing shareholders an opportunity to participate, he was not prepared either to wait around, or to invest much faith in their responding positively to his offer. One can regard the short notice and the failure to follow up the absence of a reply as negligent or worse, if the starting point is to assume that Guernroy was principally concerned to safeguard the interests of the existing shareholders. As I have indicated, there was certainly no real effort made to ensure that the faxes had been received and that the Claimants and the others were fully aware of what was going on.
152. Guernroy certainly did not keep the interests of the Claimants in the forefront of its mind, or have them as its primary concern. The truth, however, is that Guernroy (through Mr Heard and Mr Said) did not regard itself as being under any duty of care to the Claimants, or as acting as their agents on terms which required it to put their interests before its own commercial considerations. It did not, therefore, behave like a fiduciary or trustee, because it was not one. It decided to canvas investment from parties with whom it preferred to deal and in my judgment, it was free and entitled to take that course.
153. My conclusion that the voting agreement imposed no fiduciary duties on Guernroy in relation to the selection of investors and the subsequent issue of shares is sufficient to decide the action in favour of the Defendant. This makes it strictly unnecessary for me to deal with the remaining issues of causation, acquiescence and limitation, but I propose to set out some brief conclusions on each of these matters.
154. Causation

Guernroy's case is that none of the Claimants would in fact have chosen to take up shares in February 1997 even if they had been offered the shares in accordance with the pre-emption rights contained in the articles. Guernroy's alleged breach of duty has not therefore occasioned them any loss. I shall deal with this factual issue in a moment, but there is the prior question of whether this is relevant to the breaches of duty alleged. The principal allegation is that Guernroy was not entitled to use its voting powers under the agreement in order to issue shares to itself and to Mr Said's associate without first giving the Claimants an opportunity to make a fully informed decision whether or not to invest. Guernroy's failure to provide this opportunity is characterised as the making of a secret profit without the Claimants' informed consent. Where the breach of duty alleged involves the appropriation of trust property, or the use of the trust property or powers in order to confer a personal advantage or benefit, it is usually unnecessary to prove anything more than that informed consent was not given. The liability of the fiduciary is to account for the profit he has made. It would therefore have been open to the Claimants to argue that the issue of whether they would have taken up the shares under the pre-emption rights if offered was irrelevant. All that was relevant was that they were never given a fully informed opportunity to make that decision.

155. If that is the right way of characterising the alleged breach of duty, then there seems to me to be much to be said for this argument. The principal's claim to the secret profit is essentially a restitutionary one to recover the benefit which the fiduciary has obtained by virtue of his trust. It is not a claim for any form of consequential loss occasioned to the principal as a result of the breach. If the Claimant wants damages for the consequences to him of being deprived of the opportunity of subscribing for shares, then the usual rules of causation will apply: see Swindle v Harrison [1997] 4AER 705 per Hobhouse LJ at p726 b-c. In Boardman v Phipps (supra) the remedy granted against the solicitor to a trust who had acquired shares without the informed consent of the beneficiary was a declaration that he held a proportion of the shares on trust for the beneficiary and must account for any profits.
156. But there is the Defendant's argument that this is not a correct characterisation of the breach relied on and that what the Claimants are in substance complaining of is the failure of Guernroy to operate the pre-emption provisions in the articles. If this is right then issues of causation do arise. If it is necessary for the Claimant's to prove that they would have taken up the shares, then I am not satisfied that they would have done so. Mr Kaddoura had not invested in BMed since May 1995. He accepted in evidence that he found nothing encouraging about the company to cause him to invest and was concerned about its losses. He did not respond to Lord Hesketh's of 4 September1996 and declined to invest at the time of the first franchise in October. He made no response to the letter of 8 January 1997 when it was sent to him other than to countersign it, even if he did not receive that of 29 November 1996. He has participated in these proceedings only on the basis that Dr Tabbara is responsible for his costs and he agreed to be included in the group of shareholders who instructed Messrs Watson Farley Williams after the first franchise had collapsed, also on the basis that Dr Tabbara paid their fees.
157. There is also evidence ( which is consistent with his professed lack of interest in BMed as an investment) that in 1996 and 1997 he attempted to sell his shares. My view is that by then he had ceased to be either willing (and possible able) to invest further monies in the company and that he would not have responded positively to any invitation from Guernroy had it been made in accordance with the articles of association. He has participated in these proceedings at Dr Tabbara's expense more or less as a make-weight.
158. The position of the Halton companies is more problematical. It is clear that until 1996 they were enthusiastic investors in BMed but by the time of the first franchise Dr Tabbara was obviously looking for outside investment as a means of preventing dilution of the share price and of assisting him in his disagreements with the BMed board. When none of this materialised he ceased to take a positive role. He failed ultimately to support the first franchise with any personal investment and even on his own case (which is that he did not receive Mr Heard's letters of 29 November and 4 December 1996) he made no attempt to keep in touch with what was happening to the company, even though he knew that a second franchise was under negotiation.
159. Like Mr Kaddoura, he made no response to Lord Hesketh's letter of 4 September of 1996 nor to that of Mr Heard of 29 November, which I am satisfied that he received. He was anxious to stress that he would have jumped at the chance to invest at 20p per share, but the share price is in a sense misleading. An offer of shares under the articles would have entitled each of the existing shareholders to subscribe for shares on a pro rata basis. Regardless of the share price, this would have called for the Halton companies to contribute a substantial percentage of £5.5m. For whatever reason Dr Tabbara was not willing to do this. He had already passed over the opportunity of subscribing in October 1996 and there is nothing to suggest that his attitude thereafter changed. Whatever may be the position about receipt of the 29 November letter, he did receive the letter of 8 January 1997 and was subsequently visited by Lord Hesketh in Beirut. I am satisfied that he was aware that new capital was being raised for BMed, but chose not to take part.

Acquiesence

160. The allegation raised in paragraph 69 of the Defence is that the Claimants acquiesced or concurred in the alleged breaches of fiduciary duty at the time of the breaches and are now debarred from seeking relief in respect of them. This appears to be a defence of laches based on knowledge and subsequent inaction. It is not a plea of estoppel, which would require evidence that Guernroy had in some material way changed its position in reliance on the Claimants' lack of action.
161. Laches can be a bar to equitable relief and there is evidence of knowledge that Guernroy was seeking new capital investment in February 1997. But my own view is that the passage of time in itself ought not to bar a remedy if the other conditions for relief are satisfied.

Limitation

162. The breach of fiduciary duty is alleged to have occurred in February 1997. If a six year period of limitation applies it would have expired in February 2003. The proceedings did not commence until October that year. The Claimants rely upon s. 21(1) (b) of the Limitation Act 1980 which provides as follows:

"1)   No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

(a)   ... ... ... ...

(b)   to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use."

163. Unless the claim fall within this sub-section, it will have been subject to a six year limitation period: see s.21(3). The claim would therefore be statute-barred unless the Claimants can rely on s.32 (1) (b) to postpone the running of time. In Paragon Finance plc v DB Thakerar & Co [1999] 1 AER 400 the Court of Appeal on an application for permission to amend came to consider whether a cause of action for breach of fiduciary duty fell within s.21(1)(b). Under the Limitation Act, the expressions "trust" and "trustee" have the same meanings as in the Trustee Act 1925 (see s.38) which include an implied or constructive trust. The question which therefore arose was whether s.21(1)(b) included all species of constructive trust and trustee or some more limited class. Millett LJ (at p.408) answered that question in these terms:

"Before 1890, when the Trustee Act 1888 came into operation, a claim against an express trustee was never barred by lapse of time. The Court of Chancery had developed the rule that, in the absence of laches or acquiescence, such a trustee was accountable without limit of time. The rule was confirmed by s 25(3) of the Supreme Court of Judicature Act 1873, which provided that no claim by a cestui que trust against his trustee for any property held on an express trust, or in respect of any breach of such trust, should be held to be barred by any statute of limitation.
The explanation for the rule was that the possession of an express trustee is never in virtue of any right of his own but is taken from the first for and on behalf of the beneficiaries. His possession was consequently treated as the possession of the beneficiaries, with the result that time did not run in his favour against them: see the classic judgment of Lord Redesdale in Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at 633–634.
The rule did not depend upon the nature of the trustee's appointment, and it was applied to trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves. Such persons are properly described as constructive trustees.
  Regrettably, however, the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.
   A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well-known examples of such a constructive trust are McCormick v Grogan (1869) LR 4 HL 82 (a case of a secret trust) and Rochefoucald v Boustead [1897] 1 Ch 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1952] 2 All ER 951, [1953] Ch 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.
   The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions 'constructive trust' and 'constructive trustee' are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are 'nothing more than a formula for equitable relief': Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 at 1097, [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J."

164. In the present case Guernroy seems to me to fall within the second of Millett LJ's two categories. Although Guernroy was on the Claimants' case a fiduciary, its liability to account for the shares it received as a constructive trustee is based on the breach of fiduciary duty it is said to have committed. Prior to that date, the shares had not been issued and were not held by Guernroy in any capacity at all. On the Claimants' case it acquired the shares through its own breach of duty in circumstances which give rise to what amounts to a remedial constructive trust. The case can be distinguished from the position of (eg) a director of a company who controls the property of the company and owes pre-existing duties to the company in respect of it: see JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162. Guernroy owed no duties to anyone in respect of the unissued share capital of BMed. The company issued the shares in return for the issue price which was paid. The Claimants' case is that the acquisition of the shares constituted a breach of duty to the existing shareholders, but it is not alleged that Guernroy in any sense held the unissued shares for the Claimants prior to the alleged breach. The most that can be said is that it owed fiduciary duties to the Claimants in respect of the voting powers and that it is through the alleged misuse of those powers that the shares have been acquired. In my judgment, this brings the case within class 2: see Gwembe Valley Development Co. Ltd v Koshy [2004] 1 BCLC 131 at p.165 g-i.
165. The claim is therefore statute barred unless reliance can be placed on s.32 of the Limitation Act, which so far as material provides as follows:

"(1)   Subject to [subsections (3) and (4A)] below, where in the case of any action for which a period of limitation is prescribed by this Act, either—

(a)   the action is based upon the fraud of the defendant; or

(b)   any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or

(c)   the action is for relief from the consequences of a mistake;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

References in this subsection to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent.

(2)  For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty."

166. The burden is on the Claimants to establish that a relevant fact has been concealed. For the reasons already given, I am satisfied that the Claimants' had material in the form of the 8 January 1997 letter to indicate to them that shares were about to be issued without the pre-emption rights having been exercised and that they were therefore on notice of a prospective breach of duty. In the case of the Halton companies, Dr Tabbara had also received the letter of 29 November. In these circumstances, there is no basis in my judgment for the application of s.32.

Conclusions

167. The action will therefore be dismissed. In the absence of agreement I will hear counsel on the question of costs and on any other matters consequential on this judgment.