England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		27th April 2006

The Claim and the hearing

1. The Claimant, Mrs Cox, seeks declaratory and other relief arising from what her counsel, Mr Goodfellow Q.C. and Mr Horan, accurately described as a genuine but ill-advised attempt in early 2003 to settle the financial consequences of divorce without recourse to litigation or even to lawyers.
2. Mr and Mrs Cox are still married, but have separated since June 2001. Divorce proceedings were commenced in 2004. Mrs Cox's application for ancillary relief has been listed for a ten day hearing in the Family Division next June. The present action is entirely collateral to the Family Division proceedings.
3. In these proceedings the parties' main objective is to achieve clarity as to the legal effect of certain arrangements made in early 2003, for the purposes of the ancillary relief proceedings. The claim pertains principally to the effect of the apparent transfer by Mrs Cox to Mr Cox of her presumed 50% shareholding in a furniture retail company established by them, Skan Dansk Design Ltd. ("the Company"). The validity of the transfer is impugned on various grounds by Mrs Cox.
4. Until the afternoon of 27 March 2006, it was understood by the parties and their advisers that Mr and Mrs Cox were the registered holders of 5,000 ordinary shares each in the Company, at least until early 2003. That was certainly their common understanding and the basis upon which the Company's accounts had been drawn up and annual returns made to Companies House for many years, as explained by Mr Cox in his third witness statement. Moreover, it was and remains their common intention that each should continue to be a director of the Company, although only until July 2006 in the case of Mrs Cox. It was then discovered that the Register of Members was missing. In his third witness statement Mr Cox states that he does not recall having seen the register. He does not know whether it ever existed or ever had an entry made on it. Mrs Cox remains the Company secretary and her recollection is the same.
5. It is open to the parties to apply to the Court to reconstitute the Register in order to show the past and existing membership of the Company. They resolved to postpone doing so until after the Court's determination of the effect of certain arrangements, made in January and February 2003 ("the early 2003 arrangements"). In particular, the Court has to decide whether the effect of those arrangements was that Mrs Cox transferred her shares to Mr Cox. An application on behalf of both parties was made for an order that the Company be joined as Second Defendant to the present proceedings. I ordered accordingly. The application was supported by Mr Prakash Vora who has occupied the position of finance director of the Company since September 2004.
6. At the hearing before me the issues for resolution were identified and there was a considerable degree of consensus as to the correct analyses. No evidence was called. I was invited to read five witness statements relating to substantive issues (two by each of Mr Cox and Mrs Cox and one by Mr Vora) by way of background only. I was referred to only a few other documents. While I have read the statements of case, it was submitted that they the positions reflected therein had shifted to such an extent that they were no longer helpful. Allegations made by Mrs Cox against Mr Cox of misrepresentation and undue influence were dropped. I was invited to focus on the detailed skeleton arguments. These raised several additional issues to those raised in the statements of case. There was an intensive two day period of oral submissions by reference to the skeleton arguments and relevant authorities. Several points were developed further orally. I am grateful to counsel for the clarity and succinctness of their expositions.

The facts

7. After their separation in May 2001, Mr Cox continued to reside in the former matrimonial home in Benfleet, Essex ("the first house"), which was owned in joint names. It has since been sold. Mrs Cox moved to another house in South Benfleet, Essex ("the second house"). The second house and a warehouse ("the warehouse") were also held in their joint names and remain so. Both Mr and Mrs Cox are experienced and successful in business. The Company has prospered and grown. Its net assets have steadily increased in value over the years. Balance sheets included within its audited financial statements show net assets as of 31 July in each year of increasing amounts: £775,961 (2000), £892,153 (2001), £1,334,645 (2002), £1,465,819 (2003) and £1,626,179 (2004). Draft financial statements for the year ended 31 July 2005 show net assets of £2,190,225 as of that date. Management accounts for the 6 months ended 31 January 2006 show net assets of £2,543,357 as of that date. Since the separation, Mrs Cox has bought and continues to run her own fashion company.
8. Towards the end of 2002, Mr Brian Moss ("Mr Moss") assumed what was described as the role of "honest broker" to assist Mr and Mrs Cox to reach agreement as to the financial terms on which they would separate permanently. Mr Moss is a chartered accountant and a long-standing accountancy, business and tax adviser to Mr and Mrs Cox. At the time, Mr Moss was a consultant to MWS, a firm of accountants, which acted as the Company's auditors and accountants and of which he was a former partner.
9. Discussions took place between Mrs Cox and Mr Moss. In her first witness statement she relates that Mr Moss advised her that there would be significant Capital Gain Tax ("CGT") implications if she were not to transfer her shares in the Company to Mr Cox by 31 January 2003. He advised that CGT would not be payable if the transfer were effected before that date and were disclosed in her tax return which was due to be submitted on the same date. He explained that this was because she and Mr Cox had been living together during the tax year covered by the return, the year ended 5 April 2002. In broad terms, Mr Moss advised that she should transfer her shares to Mr Cox before 31 January 2003 and that there should be balancing arrangements so as to achieve an equal division of assets. The proposed arrangements included Mr Cox also acquiring Mrs Cox's interest in the first house. In return, she would acquire his interest in the warehouse and the second house, be paid a lump sum by him and be paid an increased salary by the Company over five years. However, although Mrs Cox remained a director of the Company, there was no question of her working for it. She had ceased to carry out any substantial work for the Company in June 2001.
10. As explained in her first witness statement, Mrs Cox was concerned as to the value of the Company. Eventually and after considerable discussion, she agreed in principle with the figure of nearly £3.2m suggested by Mr Moss. She then wrote a memorandum summarising the basis for a divorce settlement reflecting an equal division of assets. It sets out the genesis of the arrangements subsequently made. Handwritten at the top of the document are the words, "Given to Brian Moss: 27^th of Jan 03. Settlement based on following figures". There is a list of various assets with values ascribed thereto: shares in the Company (£3,719,000), the warehouse (£900,000), the second house (£625,000), the first house (£700,000) and two cars (in fact owned at the time by the Company), a Mercedes (£42,000) and a Lexus (£10,000) The total (£5,999,000) is divided in two, in order to arrive at Mrs Cox's share, £2,998,000. There then follows an explanation of how Mrs Cox should realize her share. To the values of the warehouse (£900,000) and the second house (£625,000) there is added a "lump sum" of £600,000, to achieve a total of £2,125,000. The difference between that total (£2,125,000) and her share (£2,998,000) constitutes a "remainder" of £873,000, net of tax and national insurance ("NI"). This was to be paid (by the Company), by way of an annual salary, net of tax and NI, of £201,000 per annum for three years and £135,000 per annum for two years. There are two annotations. The first states the instalments by which the annual salary would be payable. The second indicates that the figures were subject to valuation of the first house and the warehouse so that "if value changes from above, figures to be adjusted accordingly."
11. On Thursday, 30 January 2003 Mrs Cox had a meeting at Mr Moss's office. She took with her two documents which she had prepared. The first is entitled "Divorce Settlement" and the second entitled "EMPLOYMENT CONTRACT TO BE DRAWN UP FOR:" I shall refer to the first document as the "Divorce Settlement document" and the second as the "Employment Terms document". Each document records that it was prepared on 30 January 2003. At the same meeting, Mrs Cox signed and dated two other documents, a share transfer form and her tax return. These had been prepared by Mr Moss.
12. In the share transfer form, Mrs Cox is named as the registered holder of 5,000 £1 ordinary shares in the Company and Mr Cox as the transferee. She signed the form in a box with the inscription: "I/We hereby transfer the above security out of the name(s) aforesaid to the person(s) named below". The date given is 25 March 2002. In the tax return Mrs Cox's agent is described as MWS and in the "white box" for insertion of additional information, appears the statement: "On 25^th March 2002 I gifted 5,000 ordinary shares in [the Company] to my husband" (my underlining). The tax return is dated 30 January 2003.
13. In her second witness statement, Mrs Cox explains the purpose of the Divorce Settlement document and Employment Terms document: "When I went to Brian Moss's offices on Thursday 30^th January 2003, I had taken the copies of the Divorce Settlement and the Employment Terms because I had made it quite clear to Brian Moss that there was no question of me transferring my shares to Dennis without agreement as to what I would get in return. The reason why I had prepared the terms of the Divorce Settlement and the Employment Terms was because I wanted a written record [of] what had been agreed because I certainly intended that what had been agreed would be binding on all concerned. Although Dennis and I were working together to find an acceptable compromise, I was not willing to lose control over something as important as my 50% shareholding on terms which allowed Dennis or the Company to change their mind as to what I was to receive. I had prepared the Employment Terms on a separate sheet as the basis upon which the Company would pay me. By having the Employment Terms signed by Dennis, I thought that there would be a [sic] written evidence that both Dennis and the Company had agreed to pay me. The amounts the Company was to pay me were fixed, the only effect of the subsequent valuations of the warehouse and [the second house] would be on the amount of the lump sum Dennis would pay me" (paragraph. 8).
14. She also states that after she had given Mr Moss the signed share transfer form and tax return, as well as the Divorce Settlement document and the Employment Terms document, Mr Moss shook her hand and said: "It's all done now. Go away and relax."
15. The Divorce Settlement document deals with several matters. First it lists the following:

"Warehouse	£900,000	Subject to valuation
Lump Sum	£600, 000
[Second house]	£625, 000	[first house] present value set at £700,000 (subject to valuation)
Total:	£2,125,000

"

16. Other matters are addressed in the document. They include maintenance for the children "to be agreed", the purchase by Mrs Cox of the Lexus car from the Company "at fair market value (on settlement date)", Mrs Cox's "perks with Dansk to cease when divorce settlement has been finalized" and first payment of £201,000 net of tax and NI to Mrs Cox by the Company. Also addressed is responsibility for various liabilities. The penultimate paragraph contemplates a "settlement date" and Mrs Cox ceasing to be liable for certain liabilities "once settlement has been finalized."
17. The Employment Terms document is shorter. It simply states that the sum of £873,000 is to be paid as specified and that at the end of July 2006 Mrs Cox would resign as a director of the Company. The specified manner of payment is £201,000 per annum for three years and £135,000 per annum for two years, net of tax and NI. It provides for the first £201,000 to be paid on 1 February 2003, the second in July 2003 and the third by monthly instalments from August 2003 to July 2004, and £135,000 per annum for two years to be paid monthly.
18. The Employment Terms document is signed by Mr Cox, witnessed and dated 3 February 2003 (a Monday), as also is one version of the Divorce Settlement document. Handwritten on the top of the latter is "Copy for Alice". Mr Cox went into Mr Moss's office on 3 February to sign the documents and they were collected on the same day by Mrs Cox. I have a second version of the Divorce Settlement document which is unsigned and undated. Handwritten on the top of it is "Copy for Dennis". This would appear to be the version retained by Mr Cox.
19. In his first witness statement Mr Cox describes the circumstances in which he came to sign the Divorce Settlement document (the first version) and the Employment Terms document. He takes issue with the description (in the Particulars of Claim) of Mr Moss as his agent: "I certainly did not understand him to be acting as my agent, or in any way acting on my instructions or on my behalf His role was … to act as an honest broker. I did not give him any instructions" (paragraph 26).
20. He continues:

"On 30 January 2003 my wife faxed me her proposals…

The proposals did not come as any great surprise to me, since the basic principle of any suggestion was always going to be a 50/50 split in the assets and so the only questions were the values to be attached to the various assets and which ones she wanted to have transferred to her.

As it happened, I had little difficulty agreeing in principle to the proposal that she set out in her 30 January fax. I did not consider myself to be entering into a contract in those terms or in any way becoming bound irrevocably by them I was simply indicating my agreement in principle to outline settlement terms. Although I was not 100% happy with the proposals, I was prepared to accept them in order to move matters forward" (paragraphs 31-33)

"I also expected (and as far as I am aware Alice expected as well) that we would each go to solicitors to get a formal detailed and binding contract drawn up which would give effect to those outline terms which we had agreed. I passed the terms which we had agreed to my solicitor …I believe that she passed a copy also to her solicitors …I had expected them together to produce a formal and binding contract giving effect to those terms. However, that did not happen in the end." (paragraph 35)

"It would not have been possible to enter into a binding and detailed arrangement along the lines set out in the 30 January fax, in any event. That would have required my wife and I to agree the precise valuations of the various assets. That simply was not possible at that stage. We did not have proper valuations. At that stage all we had were the estimates arrived at between my wife and Mr Moss. For me, those appeared for the first time in my wife's proposals on 30 January 2003. Before receiving those, I did not discuss the valuations with either her or Mr Moss. In that situation I did not want to commit myself to those very rough provisional valuations. I believe that my wife must have felt the same." (paragraph 37).

21. In the same witness statement, he explains that he saw the proposal for the Company to make payments to Mrs Cox as part of the settlement terms. He appreciated that it was not intended that she should work full time in the Company's business any more, although it was intended that she should remain a director. He saw no problem in the Company making the payments, since both he and his wife were the only shareholders and the Company was amply solvent with large sums in distributable profits. Mrs Cox was anxious that she be paid by way of salary rather than any other form of payment from the Company, since she wished to make payments into the Company's pension fund. As Mr Cox perceived the situation, it was a matter of indifference how Mrs Cox was paid by the Company: "it was in effect my money that she was going to be paid" (paragraph 41).
22. Mrs Cox prepared a note dated 23 August 2003, updating the Divorce Settlement document in various respects ("the August 2003 note"). It takes account of valuations obtained in the meantime for the warehouse of £750,000 (down from £900,000) and for the second house of £700,000 (up from £625,000) and provides for an increased lump sum payment of £637,500 (up from £600,000) by Mr Cox to Mrs Cox so as to maintain her 50% share of the matrimonial assets, as earlier calculated. The salary to be paid by the Company to her was to remain the same, £873,000. The August 2003 note also provides, "Alice to have an employment contract from Dansk, as Director and Company Secretary up to Aug. 2006".
23. In his first witness statement Mr Cox invokes the August 2003 note as further demonstrating that the original January 2003 arrangements were "very much provisional". In the same statement he maintains that he did not regard the Company as legally obliged to pay remuneration to Mrs Cox on the terms set out in what he calls "the January 2003 proposal", i.e. the terms contained in the Employment Terms document. He continues, "I did not regard even myself as legally bound by that proposal; and the Company was not even a party to it. However, I had agreed to the proposal in principle in good faith and I was perfectly content to procure that the Company make the proposed payments" (paragraph 61). He asserts that the payments to Mrs Cox were not payments for the shares, but rather "were part of the overall package set out in the proposals under which the assets were to be split between us" (paragraph 64).
24. In her two statements, Mrs Cox refers to the Employment Terms document as an agreement with the Company, reflecting her perception of the document. Payments were made to her by the Company totalling £603,000, essentially as provided for in that document between February 2003 and July 2004 inclusive. £201,000 was paid on 27 February 2003, £201,000 on 4 August 2003, £16,750 on 28 August 2003 and the same amount every month thereafter up to and including July 2004. She explains, "To my mind, it shows that the Company was performing its side of the agreement even though no formal employment contract had been drawn and the values of the Warehouse and [the second property] had not been agreed" (second statement, paragraph 10).
25. In September 2003, Mr Cox paid Mrs Cox £300,000. In his first statement, he explains that was made as an "advance in order to allow her to purchase a new business, again without there being any binding settlement agreement between us. It was entirely fair that my wife should ask for an advance for that purpose, after having transferred her shares in the Company to me" (paragraph 53). This was to enable her to purchase a fashion company.
26. The payments made by way of salaries after January 2003 to Mr and Mrs Cox represented a substantial increase on previous salary payments, as apparent from a schedule of monthly payments exhibited to Mr Cox's second witness statement. The schedule shows the payments gross, the amounts of tax and NI deducted and the payments made net of tax and NI. The net amounts in the case of Mrs Cox correspond to the payments to her provided for in the Employment Terms document. In her case, the last payment shown as made is a net payment of £16,750 on 31 July 2004. Monthly gross payments shown as made to Mr and Mrs Cox in the year ended 31 July 2002 total £80,000 each. For the year ended 31 July 2003, the gross totals are £720,856 for Mr Cox and £717,259 for Mrs Cox. These annual totals comprise payments for the first six months of £6,666 per month and then two much larger payments in February and July 2003. The two payments are £334,021 and £346,835 gross (each £201,000 net) in the case of Mr Cox and £334,056 and £343,203 (each £201,000 net) in the case of Mrs Cox. For the year ended 31 July 2004, the gross payments total £332,978 in the case of Mr Cox and £335,336 in the case of Mrs Cox, in each case comprising monthly payments of roughly the same order. For the year ended 31 July 2005, the gross payments total £196,417 in the case of Mr Cox. No payments to Mrs Cox are shown for that year.
27. In his witness statements, Mr Cox disputes that the payments to him were made for the purpose of "allowing me to pay my wife for the shares which she gifted to me in January 2003" (second statement, paragraph 4). Rather they were "genuine payment for my work as an employee and executive director of the Company. I was (and remain) its Managing Director, working full-time for the Company" (first statement, paragraph 65). He specifically disputes that the two large payments made to him in February and July 2003 were made with the intention of putting him in funds to pay Mrs Cox a lump sum in the region of £600,000, which in the event has not been paid or the £300,000 actually paid at the end of August 2003. In his second statement he states that "the reason that my salary payments increased in parallel to the payments to Alice was really just that it seemed to me that Alice should not be paid more as a non-executive director than I was being paid as the Company 's managing director"(paragraph 11). He explains that the lump sum of £600,000 has not been paid. As to the £300,000, the request was not made to him for the sum until the end of July 2003 and he only decided to pay it towards the end of August 2003. At the time there was a considerable amount of goodwill between them and it was paid in anticipation of it being taken into account in a future settlement. He reduced his own salary in November 2004 for two reasons. First, he did not see the need to "peg" his salary to that of Mrs Cox as she was then no longer in receipt of any salary. Secondly, he had been advised to reduce it.
28. Payments by the Company to Mrs Cox ceased after July 2004. Mr Cox explains that this was occasioned by advice given to him by new solicitors instructed by him, Wollastons. The advice was to the effect that the payments by the Company to Mrs Cox constituted unlawful financial assistance in breach of section 151 of the Companies Act 1985. Wollastons wrote accordingly to Mrs Cox's then solicitors by letter dated 24 August 2004.
29. The view taken by Wollastons was confirmed to Mrs Cox by new accountants instructed by her, Barnes Roffe LLP. Nor was this disputed at the hearing before me, although differing submissions were made as to the precise basis of the contravention of section 151. By letter dated 5 July 2005, Barnes Roffe on behalf of Mrs Cox wrote to the Inland Revenue properly making full disclosure of the position and correcting statements made in Mrs Cox's 2001/2 tax return. In the letter they explain that, contrary to what was stated in the "white space" box in the tax return, the actual transfer of shares was made on 30 January 2003 and not 25 March 2002 and that "it is difficult to ascribe the word 'gift' to the transaction as Mrs Cox anticipated receiving value in connection with her transfer of the Shares". They go on to explain that, while at face value there appeared to have been a disposal of the shares by Mrs Cox in the tax year ended 5 April 2003, which was not declared in her tax return for that year, the disposal was void and that Mrs Cox was taking legal advice.

The broad issues

30. The starting gun for the present action was the assertion of contravention of the unlawful financial assistance prohibition in section 151 of the Companies Act. As the case has developed through skeleton and oral arguments, however, grape shots of legal missiles supported by a plethora of authorities, have been fired to impugn the validity of the relevant arrangements. Distilled to their core, there are two broad issues. First, were the early 2003 arrangements so flawed as to fail to achieve what they purported to do? Secondly, if so, what are the consequences in terms of the disposition of assets and liabilities?

Directors of the Company

31. In the absence of the Register of Members, it unclear whether Mr and Mrs Cox have ever been registered as members. If they have not been, unless one or both of them were appointed by the formation agent shareholders or any previous registered shareholders as a director, they may not validly have been appointed directors. Nevertheless, each has occupied and continues to occupy the position of a director of the Company. That satisfies the definition of "director" in section 741(1) of the Companies Act 1985. The same applies to Mr Vora since his appointment as finance director in September 2004.

Characterisation issues

32. Two issues of characterisation arise in relation to the early 2003 arrangements. First, did they involve one or two agreements? Secondly, was there a gift of her shares by Mrs Cox to Mr Cox? The first issue matters in deciding whether the arrangements gave rise to one or more legally binding contracts.

(1) The Divorce Agreement and the Employment Agreement

33. The early 2003 arrangements involved three persons, Mr Cox, Mrs Cox and the Company. On one view, the arrangements give rise to a single agreement between the three. On another view, the arrangements gave rise to two separate agreements. The first was an agreement made between Mr and Mrs Cox on the terms of the Divorce Settlement document and which I shall call "the Divorce Agreement". The second was an agreement made between the Company and Mrs Cox on the terms of the Employment Terms document and which I shall call "the Employment Agreement". I adopt the terms "the Divorce Agreement" and "the Employment Agreement" as intentionally neutral terms on the issue whether or not either constitutes a legally binding contract.
34. Both Mr Goodfellow and Mr Thompson submitted that the second view represents the correct characterisation of the early 2003 arrangements. The fact of two separate documents favours that characterisation. I do not regard that alone as decisive. My analysis is that Mr and Mrs Cox reached an agreement themselves in their personal capacities and assumed capacities as shareholders of the Company. The substance of the agreement was that they, in their capacities as shareholders and directors of the Company, would procure that it would continue to employ Mrs Cox as a director at the salary and until the date stated in the Employment Terms document. That document then constitutes or evidences what was an agreement (if legally binding) varying an existing but informal contract (there does not appear to have been any formal employment contract) between the Company and Mrs Cox. The variation was made on behalf of the Company by Mr Cox as its managing director. It would be artificial to regard the Company as being party to the other arrangements which related to Mr and Mrs Cox in their personal capacities.

(2) No gift

35. The tax return signed by Mrs Cox on 31 January 2003 described Mrs Cox as having made a gift of her shares to Mr Cox. She also signed a share transfer form on the same date. Nevertheless, the nature of the transfer and her intention must be objectively assessed. The statement in the tax return is but one factor to take into account. The transfer was not by way of gift. That was not her intention. As she understood the position, she was to receive in return valuable consideration reflecting an equal division of her and her husband's assets. The conclusion that there was no gift is not negated by the fact that the early 2003 arrangements may or may not have given rise to a legally binding contract or contracts.

The Divorce Agreement: no contractual intention and uncertain

36. As to the Divorce Agreement, it was impugned on the ground that, as apparent from the Divorce Settlement document, it lacked certain essential characteristics for a legally binding contract. First, it was said that it was not the parties' intention, objectively assessed, that the agreement should amount to a legally binding contract. Secondly, it was contended that the agreement was too uncertain to amount to a legally binding contract. I was reminded of relevant principles, including as distilled in Pagnan v Feed Products [1987] 2 Lloyd's Rep 601 in the judgments of Bingham J. at first instance (at 610-611) and of Lloyd L.J. on appeal (at 619).
37. I agree that for both those reasons that the Divorce Agreement did not amount to a legally binding contract. Lack of contractual intention is indicated by the following factors. The Divorce Agreement document (in both versions) is in the form of a memorandum or, at best a heads of agreement. It contemplates future settlement and agreement on various matters, as noted in paragraph 16 above. Important elements remained to be resolved. These included the children's maintenance "to be agreed" and the amount of the lump sum to be paid by Mr Cox to Mrs Cox. Its amount depended in turn upon valuations to be obtained in respect of first house and the warehouse. The date on which those properties were to be valued was not specified. I take note of the fact that, as pointed out by Mr Goodfellow, there was no agreed procedure (nor, I add, any agreed basis) for valuing the shares, although I should not have regarded that fact alone as sufficient to negative a contractual intention.
38. Whether the Divorce Agreement amounted to a legally binding contract falls to be assessed on the date it was made. Mr Thompson nevertheless observed that some corroboration that it was not so intended is apparent from the fact that changes to the terms were made in August 2003 when the parties agreed to the revision of the balancing lump sum, in the light of valuations of the properties obtained in the meantime. Even then, finalisation of the parties' financial affairs in the future was contemplated, as apparent from the August note.
39. Secondly, I hold that that Divorce Agreement (as well as the August 2003 revision) was too uncertain and incomplete to amount to a legally binding contract. The amounts of children's maintenance and the lump sum remained to be resolved. Also no date was set for the anticipated valuations or final settlement. In sum, I agree with the submission that in essence it was "an agreement to agree".
40. The Employment Terms document is lean for an employment contract. Its title anticipates a future employment contract. On the other hand, its terms although limited are precise. Moreover, it addresses the issue of payment in the immediate future until the end of July 2006. Against the background of Mr and Mrs Cox being existing directors of the Company and the discussions between them at the time, I conclude that the signature of Employment Terms document by Mr Cox on 3 February 2003 (although the date does not appear on the document) would have resulted in a legally binding contract varying an existing employment contract between the Company and Mrs Cox and in the terms stated in the document, but for the contravention of section 151 of the Companies Act. It would not have been impugnable on the grounds of lack of contractual intention or uncertainty.

The Divorce Agreement: not converted into order of court

41. An agreement between the parties for the purpose of resolving finally between themselves their financial affairs upon divorce would not have amounted to a contract enforceable at law. This is because an order of the court is required to achieve that purpose: see Xydhias v. Xydhias [1999] 2 All ER 386, especially at 394e to 396b per Thorpe L.J. Hence, if the Divorce Agreement were otherwise a legally binding contract, it would be impugnable on this ground, which I shall call the "Xydhias flaw".

The Divorce Agreement: the section 2 issue

42. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides, so far as relevant:

"Contracts for sale etc of land to be made in writing

(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.

(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.

(4) …

(5) …nothing in this section affects the creation or operation of resulting, implied or constructive trusts.

(6) In this section-

'disposition' has the same meaning as in the Law of Property Act 1925;

'interest in land' means any estate, interest or charge in or over land or in or over the proceeds of sale of land"

43. Mr Goodfellow submitted that, even if the Divorce Agreement were otherwise a legally binding contract, it was impugnable as contravening section 2. Thus, he submitted, it was a "contract for the disposition of an interest in land". It provided for the disposition of Mrs Cox's interest in the first house to Mr Cox and for the disposition of Mr Cox's interest in the second house and the warehouse to Mrs Cox. It was recorded in two documents or two versions of a document. One was signed by Mr Cox alone (the "Copy for Alice" version) but the other was not signed by either Mr or Mrs Cox (the "Copy for Dennis" version). He submitted that the agreement accordingly contravened subsection (3). He further submitted that the agreement contravened subsection (1) in that it did not set out all the terms expressly agreed. It was deficient in that it did not say that Mr Cox and Mrs Cox would transfer his or her interest in relevant properties to the other or when.
44. I should have accepted these submissions if the Divorce Agreement were properly to be characterised as a "contract for the disposition of an interest in land". However, as apparent from the following passage from the judgment of Thorpe L.J in Xydhias v. Xydhias [1999] 2 All ER 386 at 396j-397a (with which Mummery and Stuart-Smith LJJ. agreed), the agreement is not to be characterised as such:

"...this point too is settled by a proper analysis of the nature and effect of an agreement to compromise ancillary relief proceedings. The agreement, if concluded, is not one for the disposition of an interest in land but an agreement as to the terms which the parties themselves considered fair, with the object of avoiding the expense and stress of a contested hearing. One of the terms of the agreement may be that the husband will submit to a transfer of property order in respect of the final matrimonial home. Such an order, once made, would require the husband's signature to a transfer. But if he declines to sign the document the district judge will sign in his stead."

No interest in shares passed

45. In the event, I hold that the Divorce Agreement did not amount to a legally binding contract as there was no contractual intention and it was subject to the Xydhias flaw. It was ineffective to transfer any interest in Mrs Cox's shares to Mr Cox. As to the share transfer form, its signature by Mrs Cox and provision to Mr Cox must be assessed in the context of the Divorce Agreement, which in the event was not legally binding. It did not have any independent effectiveness to transfer any interest in Mrs Cox's shares to Mr Cox.

Companies Act 1985 section 151: unlawful financial assistance

46. These sections are contained in Chapter VI of the Companies Act 1985, which pertain to financial assistance by a company for acquisition of its own shares. The chapter comprises sections 151 to 158 of the Act, but only sections 151-153 needed to be considered.
47. Section 151 provides:-

"(1) Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.

(2) Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.

(3) If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both."

48. The distinction between the first two subsections is that the first prohibits preacquisition assistance whereas the second subsection prohibits post-acquisition assistance.
49. Definitions relevant to Chapter VI are contained in section 152. The definition of "financial assistance" comprises various alternatives, but I need mention only that in section 152(l)(a)(iv): "any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets."
50. The parties do not dispute that the salary payments to Mrs Cox constituted, for the most part, unlawful financial assistance by the Company and contravened section 151. I agree. Both Mr and Mrs Cox were unaware of this fact until so advised. They had no intention of contravening any company legislation. Mr Goodfellow contended that the payments amounted to pre-acquisition financial assistance. Mr Thompson did not oppose that contention in principle, but his preferred analysis was that it was postacquisition assistance. Mr Goodfellow also contended that the salary payments to Mr Cox after the January arrangements also amounted to unlawful financial assistance. This was disputed by Mr Thompson.
51. As to Mrs Cox, she has been a director of the Company since 1990, as stated by Mr Cox in his third witness statement. While she has played no active part in the Company since soon after the separation, she has remained a director. One consequence is that she remains subject to the liabilities of a director. For the year ended 31 July 2002, she was paid a gross salary of £80,000 and she continued to receive gross payments of £6,667 a month until February 2003. It seems a fair inference on the evidence before me that she would have continued to be a director of the Company until at least the end of July 2003 and would have continued to receive payments at that monthly rate, even if the early 2003 arrangements had not been made. Accordingly, the element of actual payments made to Mrs Cox in the 14 month period from February 2003 to July 2004, comprising monthly payments at the rate of £6,667 gross, did not amount to unlawful financial assistance. Such payments were unrelated to any proposed or actual acquisition of shares. They amounted to a gross total of £93,338 out of total actual payments of £1,012,596 gross (£603,000 net).
52. The balance of salary payments made by the Company to Mrs Cox, £919,258 (£1,012,596 less £93,338) amounted to unlawful financial assistance by way of preacquisition assistance. It was "other financial assistance" of a kind described in section 1 52(l)(a)(iv). The effect of such assistance was to reduce the net assets of the Company and to a material extent. That is clear from a comparison of the excess gross salary payments made, £919,258, with the net assets of the Company as apparent from its balance sheets. They were £1,334,645 as of 31 July 2002, £1,465,819 as of 31 July 2003 and £1,626,179 as of 31 July 2004. The financial assistance was related (indirectly if not directly) to Mr Cox's proposed acquisition of Mrs Cox's shares. In the event Mr Cox has yet to acquire them. Accordingly no question of post-acquisition assistance arises.
53. Mr Goodfellow sought to argue that Mr Cox's increased salary payments after January 2003 also amounted to the giving of financial assistance by the Company for the purpose of his acquisition of Mrs Cox's shares. Mr Thompson disputed this on various grounds. It is sufficient for me to state that I am satisfied, on the material to which my attention was drawn, that the relevant salary payments made by the Company to Mr Cox were not for the purpose of his assumed acquisition of Mrs Cox's shares. After June 2001, he was running the company without the assistance of Mrs Cox, it was prospering and he was entitled to reward himself with an increased salary for his efforts. No doubt the increase in salary would have aided him to fund the envisaged lump sum payment (which has still to be made) to Mrs Cox and so to progress the proposed divorce arrangements, including the acquisition of Mrs Cox's shares. That consideration, however, falls short of demonstrating that his increased salary was for the purpose of acquiring those shares.

Liability for contravention of section 151

54. In procuring the Company to make salary payments to Mrs Cox, which amounted to unlawful financial assistance, both Mr and Mrs Cox as directors acted in breach of their duties to the Company as directors, in particular their fiduciary duties. They are liable to the Company accordingly, unless the Company is prepared to release them from their liability. Mrs Cox is also, as recipient of the excess salary payments, liable to the Company as a constructive trustee.

Effect of contravention of section 151

55. There cannot be any dispute that, given that the salary payments to Mrs Cox amounted to unlawful financial assistance, the Employment Agreement pursuant to which such payments were made was rendered unenforceable: see Brady v Brady [1989] 1 A.C. 755. The payments made under that Agreement to the extent that they exceeded the amount of £93,338 (as explained in paragraph 51 above) were not lawfully made and should be restored to the Company.

Companies Act 1985 section 311: remuneration paid net of tax

56. This section provides:

"(1) It is not lawful for a company to pay a director remuneration (whether as director or otherwise) free of income tax, or otherwise calculated by reference to or varying with the amount of his income tax, or to or with any rate of income tax.

(2) Any provision contained in a company's articles, or in any contract, or in any resolution of a company or a company's directors, for payment to a director of remuneration as above mentioned has effect as if it provided for payment, as a gross sum subject to income tax, of the net sum for which it actually provides".

57. Net of tax salary payments were made by the Company to both Mr and Mrs Cox. This contravened section 3 11(1). Again, in procuring the Company to make salary payments net of tax, both Mr and Mrs Cox as directors acted in breach of their duties to the Company as directors. They are also liable as constructive trustees for the respective payments received by them. My attention was drawn to the issue raised in Buckley on the Companies Acts (15^th ed.) at paragraph 311.9 as to what funds are lost to the company so as to be received in trust for it, if a payment is made in breach of section 311. One view is that it is the whole payment made in breach of the section. The alternative view is that it is the element of it which represents a sum which should have been deducted as income tax. I prefer the first view expressed by the editors of Buckley. Thus the unlawfulness expressed in subsection (1) pertains to the whole remuneration paid. Nevertheless, the effect of subsection (2) is to modify the terms of a contract providing for a payment to be made and to entitle the director to counterclaim accordingly.

Release from liability

58. It was submitted that, notwithstanding the liability of Mr and Mrs Cox as directors and Mrs Cox as constructive trustee, to make good to the Company the excess salary payments to Mrs Cox as a consequence of the Company's contravention of section 151, it is open to the Company, if it so wishes, to release them from liability. I was referred to passages in Chapter 17 of Gore-Browne on Companies (45^th ed.) and to the judgment of Sir Andrew Morritt V-C in Bowthorpe Holdings Ltd, v. Hills [2003] 1 BCLC 226, especially at 24 1-2 and Buckley (op. cit.) at paragraph 151.32. I accept that it is open to a company, by its shareholders acting unanimously, to release a director from liability for breach of duty, provided that the release does not jeopardise the solvency of the company or cause loss to creditors and that there is no sufficient public policy objection to the graft of such release.
59. On the evidence before me, the release of Mr and Mrs Cox from liability as directors and Mrs Cox from liability as constructive trustee, arising from the Company's contravention of section 151, would not jeopardise the solvency of the Company or cause loss to creditors. The Company is amply solvent and is likely to remain so, notwithstanding such release, for the foreseeable future. This is apparent from the witness statement of Mr Vora. He refers therein to the Company having net assets, on a going concern basis, as noted in paragraph 7 above. He states that he knows of no serious threat to the Company's financial position or its profitability or its ability to continue as a going concern. Its net profit before tax over the 12 month period to July 2005 was nearly £900,000 and for the six months to the end of January 2006 it was nearly £450,000.
60. Nor is there a sufficient public policy objection to the Company releasing Mr and Mrs Cox from liability. There is no public policy consideration underlying section 151 that would preclude the Company, acting by all its members, from resolving to release Mr and Mrs Cox from liability. I am fortified in my conclusion by the view of the editors of Buckley (op. cit) at paragraph 151.32 that a company in general meeting can release or compromise a claim for breach of section 151. I am further fortified that by the fact that David Richards J. appears to have been of the same view in granting relief in Baker v Potter [2004] EWHC 1422 (Ch) (see at paragraph 123). He granted specific performance of a contract for the sale of shares on condition that the company release any claims that it might have against the recipients of payments from the company that had been made as payment for the shares.
61. Even if, contrary my earlier conclusion, the increased salary payments to Mr Cox constituted unlawful assistance provided by the Company, for which Mr and Mrs Cox as directors are liable to the Company and for which Mr Cox is liable as constructive trustee, I should conclude that it is open to the Company, if it so wishes, to release them from liability.
62. I similarly conclude that it is open to the Company to release Mr and Mrs Cox from liability as directors and as constructive trustees, arising from the Company's contravention of section 311. In particular there is nothing in the public policy reflected in section 151 that would preclude the Company, acting by all its members, from resolving to release them from liability. Section 311 would appear to be included in the Companies Act not to protect the Revenue but in order to ensure transparency. I am fortified in my conclusion by the view expressed by the editors of Buckley (op. cit) at paragraph 311.4: "The object of the provision is to ensure that the amount of directors' remuneration can easily be ascertained and appreciated. However, there are other disclosure provisions which have this object; the continued need for CA 1985, s. 311 is therefore doubtful. CA 1985, s. 311 is not needed to prevent tax avoidance by a company and its directors, because it has long been established that any sum paid by an employer to meet tax liabilities of an employee constitutes emoluments of that employee."

Generally

63. Various other points were argued before me, which it would have been necessary to resolve had I come to different conclusions. In the event, they need not be considered.
64. In summary, I conclude that the early 2003 arrangements were ineffective to transfer any interest in Mrs Cox's shares to Mr Cox. Further, the Company may, by the unanimous consent of its shareholders, release Mr and Mrs Cox from their liabilities arising from the contravention by the Company of sections 151 and 311 of the Companies Act 1985.