England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY

		24 October 2005

Introduction

1. This is a claim by Julie Anne Burnside ("Mrs Burnside") for an order under section 359 of the Companies Act restoring her name to the register of members of R.E.S. Teesdale Scaffolding Limited ("RESTS") in respect of 500 shares of £1.

2. It will be necessary to consider the facts in more detail later in this judgment. For the purpose of the introduction the core facts can be stated quite shortly.

3. RESTS was incorporated in March 1992. There were 2 shareholders and directors - Mrs Burnside and Keith Davison ("Mr Davison"). Each held 50 shares. They were also the sole directors. The Articles of Association incorporate Table A. However Article 8 of Table A is extended by Article 3 to give RESTS a lien on shares registered in the name of a member under liability to RESTS for all moneys presently payable to RESTS.

4. The parties appear to have fallen out in June 1995. In August 1995 Mr Davison purported to dismiss Mrs Burnside for gross misconduct. At a meeting of directors (not attended by Mrs Burnside) held on 10^th July 1996 Mr Davison purported to pass a resolution removing Mrs Burnside from the Board. It does not appear that she had any notice that the resolution would be passed.

5. In November 1996 both Mrs Burnside and Mr Davison subscribed for a further 450 shares. Shortly afterwards a resolution to increase the authorised share capital to £50,000 failed as the meeting was inquorate.

6. On 12^th December 1996 Mr Davison transferred 2 of his shares to the company secretary - Mr Radigan. At a further meeting held on 3^rd January 1997 Mr Davison used his casting vote to procure that the resolution to increase the share capital passed.

7. On 31^st January 1997 29,000 further shares were offered to the shareholders on a pro rata basis. Mrs Burnside did not subscribe with the result that they were all allotted to Mr Davison and Mr Radigan.

8. Sometime in 1997 Inland Revenue commenced an investigation into the affairs of RESTS. There were – in particular – allegations that moneys were not properly treated for tax purposes. In particular it was alleged that there had been cash payments directly to the directors (including Mrs Burnside), payments for holidays by the directors and cash payments made to contractors or purported contractors of the Company. The investigation lasted for 5 years. Initially Mrs Burnside was included in the negotiations. However after April 1998 Mrs Burnside was not part of the negotiations involving RESTS although she did retain an accountant - Mr Lithgo – to act on her behalf. She thus took no part in the negotiations resulting in a settlement in 2002.

9. The tax investigation was compromised in 2002. Some additional tax was payable. It was part of the compromise that RESTS set up a loan account in the name of Mrs Burnside in the sum of £38,242. As already noted Mrs Burnside was not party to the compromise. She was not consulted in relation to it. She does not agree with it. She does not accept that she is personally liable for any of the additional tax that RESTS had to pay.

10. On 12^th June 2002 Thorp Parker on behalf of RESTS wrote to Mrs Burnside demanding repayment of £38,242 in respect of her overdrawn loan account by 30^th June 2002. The letter stated that if payment was not made by that date RESTS would exercise its lien over her 500 shares in the Company in partial satisfaction of the debt. The letter concluded by saying that she would be informed of the sale price and balance due to her. It was understood that the consideration would be £500.

11. On 25^th June 2002 Merritt & Co on behalf of Mrs Burnside wrote to Thorp Parker in effect asking for more time to respond to their letter. The letter fell on deaf ears. On 2^nd July 2002 in purported exercise of the lien Mr Davison on behalf of RESTS purported to transfer Mrs Burnside's shareholding to himself for the consideration of £500. On 3^rd July 2002 Thorp Parker wrote to Merritt & Co informing them that the lien had been exercised, and that Mrs Burnside's residual indebtedness had been reduced by £500 to £37,742.00.

12. Mrs Burnside now seeks to have the transfer set aside. When she is restored to the register it is her intention to apply to the Court under section 459 of the 1985 Act on the grounds that her interests have been unfairly prejudiced. Amongst other allegations she contends that the allotment of the additional 29,000 ordinary shares at a time when she was not in a position to subscribe for them amounted to unfairly prejudicial conduct.

13. She has a number of criticisms of the transfer:

    1. She contends that the lien was not exercisable.

2. She does not accept that there was a valid decision of the Board to exercise the lien. Any such decision was unreasonable and not in the interests of the Company.

3. In any event there was a clear conflict of interest by Mr Davison.

14. Mr Davison contends that there was a clear liability of Mrs Burnside to RESTS. In the course of the case he accepted that it was not for £38,242 but he contended that the liability was substantial. As a matter of construction the lien was exercisable in relation to any liability of Mrs Burnside to the Company. He denied that the decision to increase the share capital was motivated by an intention to dilute Mrs Burnside's interest in RESTS. He said the decision was taken for valid commercial reasons. He says as the lien was exercisable there was a valid exercise of the lien. He denied that he was motivated by a personal desire to prevent Mrs Burnside from exercising her rights as a shareholder. He made the point that at the time the lien was exercised Mrs Burnside was a minority shareholder in a private company holding only 1.67% of the share capital. He did not market her shares because no-one else would have bought them. He was in fact advised that they were valueless. He agreed to pay the par value. He further points to the delay by Mrs Burnside in complaining about the share allotment. He says in those circumstances it is unlikely that she would be able to obtain any relief.

    1. Representation

15. Mrs Burnside was represented by Mr Peter Cherry of Counsel; Mr Davison and RESTS by Mr Hugh Jory. Both Counsel produced full and helpful skeleton arguments and chronology. I am most grateful to them.

    2. Witnesses

16. Only Mrs Burnside and Mr Davison gave evidence at the trial. Both were cross-examined for the best part of a day. I was however provided with reports from the 2 accountants who were instructed in the Inland Revenue enquiry - Mr Lithgo and Mr Barber. Neither were called to give evidence and comparatively little of their reports were referred to in the course of the trial.

    3. The Facts

3.1 Background

17. RESTS was set up as a joint venture between Mrs Burnside and Mr Davison in early 1992. Both had previously been employed by Teesdale Scaffold Hire and Sale (Middlesbrough) Limited which had gone into Receivership. Mrs Burnside had been branch Manager of the Middlesbrough branch for about 10 years. Mr Davison was sales manager and quality control manager for 4 branches. He was however based at the Middlesbrough premises in Skippers Lane Industrial Estate, Middlesbrough.

18. According to Mrs Burnside both contributed £10,000 to the capital of the business. They acquired the stock from the receiver for £10,000 and were allowed to take the customer base with them. Mrs Burnside describes this as a very good buy because the stock was worth about £100,000.

19. In his witness statement Mr Davison suggested that he had invested £45,000 and that Mrs Burnside had invested less than £10,000. However in cross-examination he readily accepted that he removed £35,000 of the £45,000 he had initially invested in the summer of 1992 and used it to purchase land from which RESTS subsequently traded. He also agreed that Mrs Burnside may well have invested the £10,000 she said she had.

20. As already noted Mr Davison acquired land at South Bank Road, Middlesbrough. He paid £90,000 for this land. He used the £35,000 he had withdrawn from RESTS and borrowed the balance from the bank. The bank have the security of the land and of Mr Davison's home. RESTS have traded from part of the land since it was acquired and have paid rent to Mr Davison.

21. As already noted Mr Davison and Mrs Burnside were equal shareholders in RESTS. Initially they had 50 shares. They were also co-directors. There were 2 areas of the business – hiring and contracts. According to Mrs Burnside she was responsible for the hiring – which she described as the core business. She made the point that many of the clients came from the previous business. Mr Davison was responsible for the contracts. These tended to be of higher value because they involved the installation of the scaffolding by RESTS' employees. In the early stages Mrs Burnside was also involved in the book-keeping. As the business expanded an employee – Mrs Godley took over the book-keeping.

22. Between 1992 and 1995 Mrs Burnside and Mr Davison took an equal salary from the business. On any view it was modest – only £100 per week.

    3.2 The Articles

23. The Articles for the most part incorporated Table A of the Schedule to the Companies (Tables A to F) Regulations 1985. There were a number of amendments to Table A. For the purpose of this case the 2 most important articles are Article 3 and Table A Clause 9

    Article 3

    The lien conferred by Clause 8 in Table A shall attach also to fully paid up shares, and the Company shall have a first and paramount lien on all shares, whether fully paid or not, standing registered in the name of any person indebted or under any liability to the Company whether he shall be the sole registered shareholder thereof … for all moneys presently payable by him … to the Company. Clause 8 in Table A shall be modified accordingly.

    Table A Clause 9

    The company may sell in such manner as the directors determine any shares on which the Company has a lien if a sum on which the lien exists is presently payable and is not paid within 14 clear days after notice has been given to the holder of the share … demanding payment and stating that if the notice is not complied with the shares may be sold.

    3.3 Trading

24. The business appears to have been relatively successful. The early accounts have not been included in the bundle. However the accounts for the years ending 30^th March 1994 and 30^th March 1995 give an idea of the level of trading:

    	1995	1994
    Turnover	784,761	342,806
    Cost of Sales	509,088	167,776
    Gross Profit	275,673	175,030
    Administrative Expenses	134,091	113,687
    Operating Profit	146,885	61,583
    Profit after Tax	105,804	43,296
    Extraordinary Item	(149,242)
    Dividends		23,250
    Retained Profit/(Loss)	(43,438)	20,046

25. It will be seen that turnover and post tax profits increased significantly between 1994 and 1995. A Dividend was paid in 1994 but not in 1995. The only reason for the apparent loss in 1995 was the Extraordinary item of £149,242. This is covered in Note 13 and arises wholly out of the dispute between Mrs Burnside and Mr Davison which had by then arisen. Mr Davison chose to write down the value of the scaffolding and other fixed assets from the values in the accounts which had been agreed the previous year. Whether this write down gives a true and fair view of RESTS' financial position is not something I can comment on. To the untutored eye it looks highly artificial at a time when Mr Davison was in dispute with Mrs Burnside.

    3.4 The Partnership Agreement.

26. A curious feature of the case is the existence of a partnership agreement between Mrs Burnside and Mr Davison. In the end it is probable that nothing turns on it but it revealed another conflict of evidence between them.

27. It is common ground that at some time a short document was prepared on Mr Davison's instructions headed Partnership Agreement. There is a dispute as to when this was - Mrs Burnside thinks it was at the end of 1992. Mr Davison thinks it was 1994. It is not necessary to refer to the terms in any detail. It was designed to provide a formula for valuing the shares in the event of illness death sale of shares or a deterioration in the partnership. It is not necessary to go into detail.

28. Mr Davison suggests that he discussed it with Mrs Burnside and gave her a signed copy. He says she refused point blank to sign it. Thus it as never agreed.

29. Mrs Burnside says she took the signed copy and said she would discuss it with her husband. She subsequently agreed its terms and signed it. She told Mr Davison she had signed it but cannot now remember if he had a signed copy. In any event she kept the copy she signed and has produced it.

30. There is a second unsigned version of the document. This version is similar but not identical to the signed version. It contains a formula to cover the situation when either Mrs Burnside or Mr Davison divorce or separate.

31. Although Mr Davison described the agreement as not being agreed it is curious that he should have a kept a copy (of the second version). Furthermore in minutes of a meeting dated 19^th June 1995 Mr Davison expressly refers to the partnership agreement as being "agreed".

    3.5 The breakdown of the relations between Mrs Burnside and Mr Davison and the meetings at Punch Robson

32. It is common ground that the relationship between the parties began to break down in April 1995. According Mr Davison it was becoming obvious from April 1995 that Mrs Burnside was taking money from RESTS. He asserts in his witness statement (paragraph 6) that he started an investigation in June and made enquiries of a number of employees. He says that there was clear proof that Mrs Burnside had taken for herself significant sums of money from the Company. He says he confronted her and she admitted she had taken some funds.

33. When he gave evidence he said that he started his enquiries started in April. He made the point that he was not an accountant and could not work computers. His enquiries were to consult the other employees and to look at the petty cash book.

34. There is in the bundle a document headed "Minutes of Directors Meeting held on 12^th June 1995". It includes the following:

    JB ADMITTED THAT SHE DID LIE TO KD AND THAT SHE WAS TAKING MONEY BUT SUGGESTED THAT IT WAS NOT MUCH AND NOT WORTH MENTIONING

35. Mrs Burnside only remembered the meeting vaguely. She was deeply suspicious of the minutes and made the point that Mr Davison regularly created documents tailored to his purposes. She agreed that there was a discussion about telling lies but said that was about her matrimonial difficulties. She did not admit taking money from RESTS. She did not say it was not worth mentioning.

36. The note goes on to suggest various solutions to the problem such as one partner buying the other out or voluntary liquidation. It suggests that RESTS was worth about £300,000 including the land and that the purchase price to buy each other out would be £125,000.

37. There were further meetings on 16^th and 19^th June 1995. The file note of the 19^th June 1995 suggests that RESTS will be sold to the highest bidder with completion on 1^st August 1995.

38. There were a number of meetings at the end of June and beginning of July 2005 at the offices of Punch Robson – the solicitors acting for RESTS. Mrs Burnside thinks there were 2 meetings; Mr Davison thinks there may have been more.

39. Minutes have been provided for a meeting on 3^rd July 1995. By that time Mr Davison had offered Mrs Burnside £140,000 for her shares payable over 9 years and required a restrictive covenant against trading in competition for 2 years. Mrs Burnside was not willing to accept.

40. The negotiations moved on. Mr Davison then offered £125,000 payable immediately i.e. within 1 or 2 weeks). Mrs Burnside took independent accountancy advice. She was told that the offer was fair. She decided to accept it. The terms of the agreement are set out in Punch Robson's file note for 6^th July 1995. In any event when he gave evidence Mr Davison eventually accepted that Mrs Burnside could be right about this. As that document makes clear the agreement was on a "subject to contract" basis and not enforceable.

41. Following the meeting Mrs Burnside resigned as Secretary of RESTS. She ceased to work for RESTS on the basis that she would be paid out within a short time. It appears however that her salary continued.

    3.6 The dismissal of Mrs Burnside

42. On 11^th July 1995 Mr Davison caused RESTS to repay to Mrs Burnside her loan account of £14,575. They were both advised by Punch Robson that the moneys belonged to Mrs Burnside and should be repaid. According to Mr Davison he had no idea at that time how much money Mrs Burnside had taken and thus there could be no question of any set off.

43. Mr Davison continued his investigations until the end of July. In his witness statement he says that it had revealed to him that Mrs Burnside had misappropriated in excess of £100,000. When he gave evidence it became clear that his investigations were in fact not extensive. He looked through the wages of the employees. He knew that the average wage was about £200. If anyone had been paid more he assumed it was money stolen by Mrs Burnside. Similarly he found some petty cash withdrawals that he could not understand.. He assumed they were monies stolen by Mrs Burnside. He made no notes of his findings. Furthermore he does not now have a list or any means of explaining what he found.

44. In any event he summoned Mrs Burnside to a meeting on 2^nd August 1995. The meeting was short. He dismissed her as a director employee for taking money. According to Mr Davison Mrs Burnside was not given an opportunity to provide an explanation. According to Mrs Burnside she denied improper behaviour. She said that all moneys had been used for legitimate business expenses or with his approval.

45. On 2^nd August Mr Davison wrote to Mrs Burnside confirming the dismissal. The letter makes a general allegation that Mr Davison has been improperly taking money from RESTS. It gives no particulars. Some time later Mr Davison phoned Mrs Burnside and informed her that he was not going ahead with the contract to purchase her shares. There was some suggestion that he would go ahead at a price of £80,000. Mrs Burnside did not accept this and said she would take legal advice.

46. In about September 1995 Mrs Burnside consulted solicitors - Merritt & Co of Yarm. Merritt & Co complained of the dismissal and threatened proceedings under section 459 of the Companies Act 1985. No such proceedings have been taken.

47. In about September 1995 Mr Davison complained to the police about what he alleged were serious irregularities in the books of the Company caused by Mrs Burnside. The letter provided no particulars. The police appear to have investigated the complaint in some detail. Certainly they interviewed both Mrs Burnside, Mr Davison and some of the suppliers in respect of which complaint was made. Mrs Burnside denied responsibility and made a number of counter allegations against Mr Davison. Eventually the police took no proceedings against either Mrs Burnside or Mr Davison.

    3.7 Removal of Mrs Burnside as a Director

48. I have already summarised salient features of the 1995 accounts. They were prepared and signed by the auditors and Mr Davison on 19^th December 1995. On 28^th December 1995 a copy of the accounts was sent to Mrs Burnside for approval. The original meeting to approve the accounts was due to take place on 10^th January 1996.

49. Merritt & Co raised a number of queries to the accounts. These were answered by the Company Secretary. One point made was that the threat of winding up contained in Merritt & Co's letter of 11^th October had caused them to re-assess the values of the fixed assets. Accordingly they had included the extraordinary item of £149,242 so as to reflect the liquidation value of the assets rather than any other value.

50. It is not wholly clear what meetings were held between January and July 1996. During the course of the trial minutes were produced of meetings on 10^th January and 16^th February 1996 that were not attended by Mrs Burnside.

51. The accounts were eventually considered at a board meeting on 10^th July 1996. Mrs Burnside did not attend the meeting but had requested an adjournment. At that meeting Mr Davison decided (without any notice to Mrs Burnside) to invoke Clause 81(e) of Table A and to resolve that her office as director had been vacated.

52. On 25^th July 1996 Thorp Parker informed Merritt & Co of the result of the meeting. Merritt & Co protested by letter dated 26^th July 1996 but again no proceedings were instituted by Mrs Burnside.

53. On the face of it there were a number of serious irregularities with the resolution on 10^th July 2006. On 26^th July 1995 and 2^nd August 1996 Mr Ivanec of Merritt & Co wrote expressing the view that the removal was clandestine and invalid. No other legal steps were taken to challenge the removal. Mr Cherry expressly said that he was not now seeking to claim it was invalid.

    3.8 1996 Trading

54. In paragraph 10 of his witness statement Mr Davison presents a gloomy picture of RESTS's financial position. He describes the position as being precarious. He says that the Company only remained solvent because of his continued commitment by financial support. He introduced further loans into his loan account. He describes the Company as insolvent.

55. The 1996 accounts present a different picture. Turnover increased to £826,798. Costs of sales were £544,362 making a gross profit of £282,436. Expenses had gone up. A substantial reason for this was the increase in Mr Davison's salary from £5,000 to £52,474. Furthermore the rent payable to Mr Davison in respect of the occupation of the land by the Company was increased from £9,750 to £15,750.Mr Davison did loan some of this increased salary to the Company.

    3.9 Increase in share capital.

56. On 2^nd November 1996 Mr Davison wrote to Mrs Burnside with a proposal to increase the share capital to £50,000. The letter sought to justify the increase in share capital because he had recently received a call from a national organisation who informed him that his credit rating was very low due to the fact that the issued share capital was so small. He therefore invited Mrs Burnside to subscribe for a further 450 shares and sent out a notice for an EGM to approve an increase in the share capital by £49,000.

57. When he gave evidence Mr Davison told me that his concern about the level of share capital arose as early as 1993. He was not sure that he discussed it with Mrs Burnside. In any event he became concerned that there were areas where RESTS could not tender either as contractor or subcontractor. He gave as examples Corus, ICI, and Tarmac.

58. He was unable to provide any detailed explanation as to why he picked the figure of £50,000. He said he took advice from both lawyers and accountants but that they did not give a figure. They told him to increase the capital "by a fair quantity – a large amount". None of this advice was supported by any documents and is not mentioned in Mr Davison's witness statement. Furthermore there is no evidence that Corus. ICI or the other companies had any specific minimum figure for scaffolding subcontractors.

59. He expressly denied that the figure was chosen as a figure beyond Mrs Burnside's means. He was aware that she had the benefit of legal aid. He was, of course, also aware that she had received nothing for her interest in RESTS. He took the view that as she still had a BMW with personalised number plates she would have sufficient means

60. Both Mrs Burnside and Mr Davison duly subscribed for the additional 450 shares. In evidence Mrs Burnside said she could afford the £450 required and was advised to take up the allotment.

61. On 25^th November 1996 Mr Ivanec attended the EGM on behalf of Mrs Burnside. It only lasted 4 minutes. During that time Mr Ivanec asked a number of pertinent questions. Mr Davison repeated that clients had stated that shareholder's stake in the Company was small. He refused to give details of the clients concerned on the grounds of commerciality. Mr Ivanec left the meeting before a vote could be taken. The resolution could not be put as the meeting was inquorate.

62. On 12^th December 1996 Mr Davison transferred 2 shares to the Company Secretary - Mr Radigan. On 16^th December 1996 notices were sent out for a further EGM to increase the capital to £50,000. On 17^th December 1996 Mr Ivanec wrote objecting to the resolution. He made the point that no valid commercial purpose had been established and asserted that it was motivated by a desire to dilute Mrs Burnside's shareholding.

63. The meeting was duly held on 3^rd January 1997. It was attended by Mr Burnside on his wife's behalf. Mrs Burnside's evidence was that she was intimidated by Mr Davison and could not be in the same room as him. This seems borne out. The minutes of the meeting show the nature of the discussion. Mr Davison said that he did not intend to dilute Mrs Burnside's holding. He made the point that it was not intended to issue all the new shares at once – only sufficient to satisfy the requirements of potential customers. Mr Burnside voted against the resolution. However Mr Davison was Chairman and had the casting vote. Thus he was able to secure that the resolution was passed.

64. Within about 2 weeks the Company sent to Mrs Burnside a notice inviting her to apply for 14,500 new shares in RESTS. The effect of the allotment was to increase the issued capital to £30,000. Mrs Burnside was not in a financial position to apply for her share. Contrary to what was said at the meeting there is no evidence of any customer requiring such a large increase. In any event Merritt & Co wrote protesting on 24^th of January 1997. The letter made the point that Mr Davison was well aware that Mrs Burnside did not have ready access to the necessary capital to take up the allotment and that this was a blatant attempt to dilute Mrs Burnside's shareholding. On 3^rd February 1997 Thorp Parker replied by denying that Mr Davison was aware of Mrs Burnside's financial position.

65. Mrs Burnside did not take up her allotment. Mr Davison and Mr Radigan took up theirs. Subsequently they subscribed for the shares that Mrs Burnside had not taken up. Thus, by March 1997 the shareholding of RESTS was as follows:

    Mrs Burnside	500
    Mr Davison	29,382
    Mr Radigan	118

66. As Mr Cherry pointed out the effect of the allotment was to reduce her shareholding from 50% to 1.67%.

67. Despite the protest by Merritt & Co no proceedings were issued by Merritt & Co either under section 459 of the Companies Act 1985 or otherwise. When asked for the reason that no proceedings were issued Mrs Burnside made the point that she was at all times acting on advice. Furthermore by the beginning of 1997 she was involved in an Inland Revenue Investigation and she was advised not to take proceedings till the result was known. Mr Davison was asked a similar question as to why he did not pursue Mrs Burnside in relation to what he alleged were misappropriations by her. He also said he wanted to await the result of the Inland Revenue investigation.

    3.10 The Inland Revenue Investigation

68. It is not wholly clear when the investigation commenced. The investigation involved allegations that both Mrs Burnside and Mr Davison had included as expenses of RESTS moneys which ought properly to have been their own personal expenditure. It also involved allegations in relations to other expenses which had been improperly brought into the accounts.

69. Mr Davison and RESTS instructed Mr Barber of Vantis Walker to act for them in the enquiry. Mrs Burnside instructed Mr Lithgo of Walkers to act for her. Both Mr Lithgo and Mr Barber have produced reports for the Court. I was not invited to read the reports in any detail.

70. By March 1998 Inland Revenue felt in a position to make proposals for settlement. At that stage the proposal involved (244) increasing Mrs Burnside's loan account by £30,120 and Mr Davison's loan account by £31,680.

71. On 24^th April 1998 Mr Lithgo spoke (246) to the Inspector - Mr Smith. Mr Smith had discovered that Mrs Burnside was no longer a director and had not been a director for some time. He therefore said he could not negotiate with Mrs Burnside on behalf of the Company and did not wish to proceed with those issues any further. Mr Lithgo pointed out that Mrs Burnside did not accept that she had received funds or withdrawn cash. Mr Smith said he would not get involved in an internal dispute between shareholders. In the event Mr Smith indicated that he would negotiate with the Company's authorised representatives.

72. Thereafter Mrs Burnside was not involved with negotiations on behalf of the Company. She did, however, continue to instruct Mr Lithgo in relation to the investigation. In paragraph 38 of his report Mr Lithgo says that he was not aware that the proposals for settlement changed. Had he known about them he would have opposed them.

73. The Inland Revenue investigation finally compromised on 12^th April 2002. RESTS agreed to pay £23,500 in respect of duties penalties and interest in respect of the years from 1993 to 1996. The settlement involved adjustments to the loan accounts of both Mr Davison and Mrs Burnside. Mr Davison's loan account was reduced by £14,961; Mrs Burnside's by £38,242. Mrs Burnside took no part in the final negotiations. She has at all times disputed that she owed any moneys to RESTS and/or that she has withdrawn moneys from RESTS without Mr Davison's consent. Mr Davison was fully aware of her position and that she did not consent to the adjustment of her loan account.

74. Mr Davison now accepts that at least one item in the £38,242 is wrong. The schedule (284) shows that it includes an item for a rally car shell in the sum of £563 should have been debited to his loan account rather than that of Mrs Burnside.

75. Although Mr Davison accepted that his loan account fell to be debited he blamed the whole of the problem on Mrs Burnside. He sought to suggest that he was wholly unaware that items of expenditure which were paid for by the Company were not debited to his loan account. He made the point that it was Mrs Burnside who was responsible for the book-keeping.

    3.11 The exercise of the lien

76. On 12^th June 2002 Thorp Parker wrote to Mrs Burnside in the following terms:

    We … demand payment of the sum of £38,242 due by you to the Company in respect of the extent to which you are overdrawn on your loan account. You will be aware of the situation with the Inland Revenue investigation and of your indebtedness to the Company. Please accept this letter as formal demand for payment by the 30^th June 2002. In the event that payment is not received by that date in full, our clients will exercise their lien on your shareholding in the Company of 500 £1 ordinary shares in the capital of the Company in partial satisfaction of the debt. You will subsequent to the sale of those shares be notified of the sale price and the balance due to you. It is understood at this stage that the consideration will be £500.

77. When asked about this letter Mr Davison said that he was fully aware at the time the debt was disputed. He said that there was no doubt that she had a deficit to the Company. He was not aware at that time of the item in relation to the car shell. The figure of £500 referred to in the letter was based on advice from the Company's accountants. He said that he had been advised that the shares in fact were of no value but that it was proper to pay at least the par value for them.

78. When asked why he did not take steps to realise the liability by action prior to 2002 he said that did not do so because of the Inland Revenue investigation.

79. Mrs Burnside said she did not receive the letter till 19^th June 2002. She forwarded it to Merritt & Co. Some solicitors might have advised Mrs Burnside to take immediate steps to prevent the exercise of the lien. Instead they wrote to Thorp Parker indicating that the partner concerned was on holiday and asked them to hold off any action till he returned the week commencing 1^st July 2002.

80. The request fell on deaf ears. On 2^nd July 2002 Mr Davison "as transferor" signed a transfer form transferring the 500 shares to him. The document records the consideration as being £500.

81. When asked about the transfer Mr Davison said that he probably had a board meeting. He agreed that there were no minutes. It was suggested that the purpose of the action was to stifle a complaint about the dilution of her shareholding. Mr Davison denied this. He agreed that he did not market the shares. He said he offered them to Mr Radigan who did not want them. There is no documentary evidence of this. There is no documentary evidence of any act by the Company authorising Mr Davison to execute the transfer on behalf of Mrs Burnside.

82. Thus – by skilful use of his powers as Managing Director and casting vote as Chairman - Mr Davison has managed to acquire Mrs Burnside's 50% shareholding in the Company which he valued at £125,000 without paying her one penny for it.

    4. Liability.

83. As already noted the letter of demand asserted that Mrs Burnside was indebted to RESTS in the sum of £38,242. Mrs Burnside denied any liability to RESTS. The nature of her case was that both she and Mr Davison had personal expenses paid for RESTS. She asserted that in the main she had consented to Mr Davison's conduct and Mr Davison had consented to her conduct. She also accepted that some payments had been made in cash or in exchange for payment of other liabilities. She contended that all such payments were in respect of proper expenses of RESTS with the result that she was under no liability to RESTS.

84. As I have said no attempt was made by RESTS to recover the £38,242 before June 2002 – nearly 7 years after Mrs Burnside left RESTS. Furthermore there were no pleaded particulars of how the £38,242 was made up. The expert report of Mr Lithgo shows that there would be considerable difficulty in doing so. Mr Jory did not attempt to justify a liability of £38,242 or anything like it and thus it is not necessary for me to consider Mr Lithgo's points.

85. Mr Jory did however rely on a number of items that were considered during the course of the Inland Revenue investigation. It is thus necessary to look at each of them.

    4.1 False Invoices - £4,639

86. Mr Jory started by referring the Court to a letter from Mr Lithgo to Mr Barber dated 5^th February 2002 (281). In that letter Mr Lithgo acknowledged that £4,639 was withdrawn from the business by Mrs Burnside for her benefit by means of false invoices.

87. Mrs Burnside made the point that Mr Davison had during the early years put a large number of his own personal expenses through the Company. She made the point that he was a keen rally driver and had put a number of his rally expenses through the Company. She pointed to a rally car shell for £4,700 put through as a trailer, and £5,000 for an engine. She also made the point that he had had a patio door for his own house at a cost of over £1,000 put through the books. She said that she had discussions with Mr Davison and that he had said to her that if she had ever wanted to put any of her expenditure through the Company she was to bring it in. She said that the items in respect of which complaint was now made were all items brought in on that basis with Mr Davison's consent.

88. When he gave evidence Mr Davison accepted that the rally car shell and the engine had been put through the Company's books. He also accepted that the cost of the materials for the patio doors had been paid for by the Company. He suggested that he was unaware that it had not been debited to his loan account and blamed Mrs Burnside for the accounting error. He also agreed that there was a conversation along the lines suggested by Mrs Burnside in relation to the Company paying for items of her personal expenditure. He said that he made it clear that each such item required his express approval.

89. I have to confess that I find it impossible to accept that Mr Davison was innocent of his participation in the tax fraud. I find it incredible to believe that he was unaware that his rallying activities were not being paid for by the Company. I simply do not accept that he was unaware that it was not being debited to his loan account. Why would the invoice have described it as "a trailer"? Why would he have had the conversation with Mrs Burnside that he admits took place if he had not known what was going on?

    The kitchen - £3,268

90. Mrs Burnside believes that the major item in the £4,639 contained in the letter of 5^th February 2002 was the cost of a kitchen at her house. An invoice was produced to the court in the sum of £3,268 plus VAT. She accepted that the Company had paid for this and that it ought to have been included as a benefit in kind to her. She said that Mr Davison expressly approved it.

91. When Mr Davison gave evidence he did not think that the cost of the kitchen was included in the £4,639. He was however unable to give a detailed breakdown of the £4,639 so as to prove that it was not so included. He did however accept that he knew all about the kitchen and that he had approved the transaction.

    The 3 piece suite - £625 and £375

92. There are 2 invoices dated September 1994 totalling £1,000 from Walter Baker Ltd. The invoices purport to be for Carpet and Office Furniture but were in fact for a 3 piece suite and a bureau for Mrs Burnside's home.

93. Mrs Burnside said that the 3 piece suite and bureau was bought in accordance with the general arrangement to which I have already referred. She made the point that she discussed it with Mr Davison about 2 weeks before she got the 3 piece suite. She said there was an arrangement whereby she would bring her old sofa into the office. In the event she did not do this.

94. When Mr Davison gave evidence he agreed about the general discussion but contended that he had no prior knowledge of the acquisition of the 3 piece suite. He said that the false invoices had been discovered by the police in the course of their investigation. The result came as a complete surprise to him. He made the point that Mrs Burnside had had a kitchen and thus did not need the 3 piece suite as well.

    RedCat Printing - £277

95. In January 1995 Mrs Burnside's father acquired a Company – JRS Tube Straightening Services. That company instructed RedCat Printing to carry out printing of business cards and the like. 3 invoices totalling £277.31 were paid on Mrs Burnside's authority by the Company.

96. Mrs Burnside agreed that the invoices had been paid but contended that JRS had performed services for them. Tube straightening was a service required by RESTS as from time to time its scaffold poles became bent. She said her father had often performed services for the Company. It assisted his initial cash flow for her to pay this invoice and for him to provide the service later. That is what happened. He often worked again for RESTS. Subsequently his work was invoiced and paid for.

97. When he gave evidence Mr Davison accepted that JRS ad done work for the Company and had invoiced for it. He was not able to say whether Mrs Burnside's allegation was true or not.

    Season Ticket - £152 x 2

98. In 1994 and 1995 a season ticket for Middlesbrough football club's home matches could be obtained for the remarkably cheap price of £152. In each of those years a ticket was paid for RESTS. It was bought in the name of Mr Burnside – a keen Middlesbrough supporter.

99. Mrs Burnside made the point that it was common practice in the previous company to acquire such a ticket. She made the point that although it was in her husband's name it was used occasionally by other members of staff. She asserted that it was kept in a drawer in her office and that Mr Davison knew about it and approved of it.

100. Mr Davison said he had no interest in football – although he acknowledged that RESTS provided scaffolding to the Club. He said he had no knowledge about it and was not consulted before it was bought.

     Vision Express - £117

101. Sometime in 1994/1995 Mrs Burnside caused the Company to pay £117 in respect of a bill from Vision Express in respect of her mother's glasses. Her mother had performed baby sitting services enabling her to work.

102. According to Mrs Burnside Mrs Godley told her that Mr Davison had put the cost of his glasses through the Company and suggested that she did the same with her mother's. She agreed that she did not tell Mr Davison but said that Mrs Godley said that she had.

103. Mr Davison denied that he knew about the glasses. He said that he would have had no problem with such a small item if he had been asked but he was not.

     G Bishoprigg - £900

104. Mrs Burnside's brother worked for RESTS until the beginning of 1995 when he left to join her father's new company. Included in the bundle is a letter from Mr Lithgo to Mr Smith dated June 2000 which includes a schedule (268). This suggests that Mrs Burnside admits that her brother was paid £900 on one occasion. The note says "Not sure of date or why assumed each year".

105. When she gave evidence Mrs Burnside was not in a position to give clear evidence about this payment. It was, of course made over 10 years ago and Mrs Burnside does not have access to the books. She said it may have been for work carried out on behalf of the business. She could not now remember. Later it was suggested to Mr Davison that it was payment in lieu of notice. In any event she expressly denied that she had stolen money from the Company to give to him.

106. When Mr Davison gave evidence he produced no documents in relation to this item. He suggested that it referred to a period after her brother had left the employment of RESTS and thus there could be no liability. He said that Mr Bishoprigg would not have been entitled to any payment in lieu of notice.

     5. Assessment of the evidence

107. I have set out the rival contentions above. In order to resolve the case it is necessary to resolve the conflicts of evidence I have identified.

108. I have to confess that I was not impressed with Mr Davison as a witness. There were a number of reasons for this. His evidence in respect of the partnership agreement was unconvincing in the light of the document at page 178. Why would he refer to the terms as being agreed in that document if they were not? There were a number of respects in which his witness statement was to my mind seriously misleading. Thus his evidence about the initial deposit and the financial insolvency of RESTS both presented a completely false picture of the true position. Another example was the suggestion that Mrs Burnside had removed at least £100,000 in cash. In fact putting the case at its highest the sums were far less than that. In reality Mr Davison had no hard evidence in relation to any items

109. He was in any event involved in quite serious dishonest tax evasion involving false invoices. As already noted I was wholly unconvinced by his suggestion that he did not appreciate what was going on. If he did not know what was going on why did he agree that Mrs Burnside could put her kitchen through the books of the Company? Why was the rally car described as a trailer? The accounts were in fact prepared by the Company accountants and were expressly approved by Mr Davison.

110. I also felt I could not rely on the contents of documents produced by Mr Davison. A good example of this was the minutes of the meeting of 3^rd January 1997. The Minutes record that Mr Davison only intended to issue sufficient shares to satisfy the requirements of potential customers. Yet within a matter of days Mr Davison had issued an allotment of 29,000 shares. There was absolutely no evidence that any customer required such a large increase in share capital. I thought there was considerable force in Mrs Burnside's comment that Mr Davison drafted documents to suit his purpose rather than to record events as they occurred.

111. I also felt that I had to be cautious in respect of Mrs Burnside's evidence. There was, of course, less material in relation to Mrs Burnside as she had not been the person instigating the acts which led to the reduction of her share capital and the exercise of the lien. She was, however, also involved in the dishonest tax fraud. She was quite prepared for false invoices to be put through the books of RESTS.

112. Thus I was in the position that I could not rely on the evidence of either Mrs Burnside or Mr Davison as being honest. Furthermore as most of the events took place 10 or more years ago their evidence was not particularly reliable.

     6. Findings in relation to Mr Davison's motives

6.1 The increase in share capital

113. Whilst the question of obtaining contracts with companies such as ICI and Chorus may have been a factor in the decision to increase the issued capital by £29,000 it was in my view a very minor factor. The main factor was an attempt by Mr Davison to dilute Mrs Burnside's interest in the Company.

114. There is no evidence that the companies required so large an increase. Furthermore I do not accept for one moment that Mr Davison did not appreciate that Mrs Burnside was unlikely to be able to find the £14,500 required of her. He knew she had been dismissed from RESTS. He knew that he had failed to pay her a penny in respect of her interest in RESTS. He knew she had the benefit of legal aid. He knew that RESTS had ceased to pay any dividends in respect of Mrs Burnside's shares.

115. I accordingly find that Mr Davison's motive in relation to the increase in share capital was to dilute the value of Mrs Burnside's shareholding.

     6.2 Mr Davison's motives in relation to the exercise of the lien

116. Equally I am satisfied that Mr Davison's principal motive in deciding to exercise the lien was to extinguish Mrs Burnside's shareholding so as to prevent her seeking to challenge the dilution of her shareholding. He knew perfectly well that Mrs Burnside was not party to the settlement with the Inland Revenue. He knew that she did not accept that she was liable to the Company. He had made no attempt to enforce the Company's rights in the 7 years since she had left.

117. His actions in demanding payment of the full disputed sum within 21 days coupled with the threat to transfer the shares for £500 demonstrate what in my view his real motive was. Furthermore this was re-enforced by his refusal to grant Merritt & Co any extension to the very short time limit granted.

     7. Findings in relation to the liability of Mrs Burnside to RESTS

7.1 The kitchen

118. In the light of Mr Davison's admission that he agreed to this item it is plain that Mrs Burnside is not liable to RESTS in respect of it. As was pointed out the fact that I should have been treated differently for tax purposes does not mean that RESTS is entitled to be reimbursed for it.

     7.2 The 3 piece suite

119. I prefer the evidence of Mrs Burnside to that of Mr Davison on this issue. I think that Mr Davison did know about it. It follows there is no liability.

     7.3 RedCat Printing

120. The only issue is whether JRS did in fact provide any consideration for the invoices. Mrs Burnside says they did. Mr Davison is unable to say they did not. No documents have been produced that shed any light on the position. Everything happened more than 10 years ago. In my view RESTS have not established that no consideration was provided. The claim fails.

     7.4 G Bishoprigg

121. The evidence in relation to this claim is wholly unsatisfactory. The letter from Mr Lithgo is, of course, some evidence against Mrs Burnside. It is, however, by no means conclusive. No documents of any description have been produced in support of the claim. The relevant events took place over 10 years ago. No claim was made by the Company for that 10 year period. Mr Davison's evidence was unreliable for the reasons I have given. Mrs Burnside's evidence is not a great deal better in that she has given inconsistent explanations in relation to it.

122. In all the circumstances I have come to the conclusion that RESTS and Mr Davison have not established on balance of probabilities that Mrs Burnside improperly withdrew the £900 in respect of her brother's wages.

     Vision Express and the Season Ticket

123. These are very small claims – totalling £421. I confess I did not find Mrs Burnside's evidence in relation to the Season Ticket very satisfactory and on balance I am prepared to accept Mr Davison's evidence that he did not know about it. Equally I accept that he did not know about the glasses.

124. That is not the end of the matter. As Mr Davison accepted there was an arrangement between him and Mrs Burnside which permitted them to charge items of personal expenditure to the Company. Whilst I accept that for large items the consent of the other director was required it seems to me to be well arguable that no such express consent was needed for small items such as those with which I am now concerned. After all it seems that Mr Davison put the cost of his glasses through the books.

125. Be that as it may I am prepared to assume without deciding that the consent of Mr Davison was required even for such small items. In those circumstances RESTS would have established a liability of £421.

     Conclusion

126. In the result, therefore, rather than establishing a liability to RESTS in a sum in excess of £100,000 as suggested in Mr Davison's witness statement or £38,242 as set out in the letter of demand dated 12^th June 2002 Mr Davison has (on my assumption) established a liability in the modest sum of £421.

     8. Exercise of the lien

127. In the course of his submissions Mr Jory helpfully drew to my attention part of the judgment of Scrutton LJ in Albemarle Supply v Hind^[1]

     It was next said that the lien for repairs was lost inasmuch as it was originally claimed for a larger amount and a different cause than the right one. I have considered the numerous authorities cited, and in my view the law stands as follows: A person claiming a lien must either claim it for a definite amount, or give the owner particulars from which he himself can calculate the amount for which a lien is due. The owner must then in the absence of express agreement tender an amount covering the lien really existing. If he does not, unless excused, he has no answer to a claim of lien. He may be excused from tendering (1.) if he has no knowledge or means of knowledge of the right amount; (2.) if the person claiming the lien for a wrong cause or amount makes it clear that he will not release the goods unless his full claim is satisfied, and that claim is wrongful. The fact that the claim is made for more than the right amount does not matter unless the claimant gives no particulars from which the right amount can be calculated, or makes it clear that he insists on the full amount of the right claimed: see Scarfe v. Morgan (1); Dirks v. Richards (2); Huth & Co. v. Lamport (3), per Lord Esher; and Rumsey v. North Eastern Ry. (4), per Erle C.J. and Willes J.

128. It is to be noted that the letter of 12^th June 2002 gave no particulars of how the amount of £38,242 was calculated. It was for a sum grossly in excess of that due. Furthermore Mr Davison's attitude in response to the letter of 25^th June 2002 is to my mind an indication that he would not take less than the full amount. Mr Jory submitted that Mrs Burnside had the means to calculate the right amount. I do not accept that argument. Although she was involved in the initial negotiations with the Inland Revenue, she was not party to the discussions when the final figures were agreed. She did not agree them.

129. In my view there is all the difference in the world between a demand for £38,242 and one for £421. I am in the circumstances satisfied that the demand was excessive and invalid.

130. In the course of his submissions Mr Cherry referred me to a passage in the judgment of John Randall QC in Hunter v Senate Support Services Ltd^[2]. It is a long passage and I will not repeat it. Not only must a director act in good faith in the interests of the Company but he must also act reasonably (in the Wednesbury sense). He must not act with improper motives and must not take into account irrelevant considerations.

131. In my view for the reasons already given Mr Davison did not act in good faith in the interests of RESTS when he purported to exercise the lien in July 2002. He was motivated by the desire to remove any possible claim by Mrs Burnside in respect of her shares.

132. In Medforth v Blake^[3] Scott LJ summarised the law relating to mortgagees in the following way:

     In Yorkshire Bank plc v Hall [1999] 1 All ER 879 at 893 Robert Walker LJ reviewed a mortgagee's duty to his mortgagor. He referred to China and South Sea Bank Ltd v Tan [1989] 3 All ER 839, [1990] 1 AC 536, National Bank of Greece SA v Pinios Shipping Co No 1, The Maira [1990] 1 All ER 78, [1990] 1 AC 637 and the Downsview Nominees case and then said:

     'Those cases together establish or reaffirm that a mortgagee's duty to the mortgagor or to a surety depend partly on the express terms on which the transaction was agreed and partly on duties (some general and some particular) which equity imposes for the protection of the mortgagor and the surety. The mortgagee's duty is not a duty imposed under the tort of negligence, nor are contractual duties to be implied. The general duty (owed both to subsequent incumbrancers and to the mortgagor) is for the mortgagee to use his powers only for proper purposes and to act in good faith … The specific duties arise if the mortgagee exercises his express or statutory powers … If he exercises his power to take possession, he becomes liable to account on a strict basis (which is why mortgagees and debenture holders operate by appointing receivers whenever they can). If he exercises his power of sale, he must take reasonable care to obtain a proper price'.

133. For the reasons already given Mr Davison was not acting with a proper motive or in good faith when he purported to transfer the shares to himself on 2^nd July 2002. He did not market the shares and any valuation he may have taken completely ignored any rights that Mrs Burnside as a shareholder may have had in respect of his earlier misconduct.

134. Accordingly the exercise of the lien is impeachable. Mr Jory suggested that it was voidable and that I should not avoid because of the long period over which Mrs Burnside failed to take court proceedings. He drew my attention to the decision of Peter Gibson J in Re DR Chemicals^[4]. I was wholly unconvinced by the submission. Arguments in relation to that case will have to wait for the application that Mrs Burnside will make under section 459. As at present advised I am far from convinced that the Court will be prevented from restoring to Mrs Burnside the share of RESTS that is rightfully hers.

135. In my view the appropriate order is to set aside the transfer of 2^nd July 2002 and to restore Mrs Burnside to the register of members.

     JOHN BEHRENS

     Tuesday 13 December 2005

Note 1   [1928] 1 KB 307, 318    [Back]

Note 2   [2004] EWHC 1085 (Ch) at paragraphs 165 - 190    [Back]

Note 3   [1999] 3 AER 97    [Back]

Note 4   [1989] 5 BCC 40    [Back]