Strand, London, WC2A 2LL
B e f o r e :
sitting as a Deputy Judge of the High Court
| MAKRAM BARSOUM ESTAFNOUS
|- and -
|LONDON & LEEDS BUSINESS CENTRES LIMITED
Mr Ben Shaw (instructed by Magrath LLP) for the Defendant
Hearing dates : 6, 7 and 8 May 2009
Crown Copyright ©
Mr Christopher Nugee QC:
i) Did Mr Estafnous introduce Mr Kapoor to LLBC for the purposes of the Agreement ?
ii) Does the Agreement on its true construction cover the transaction that actually took place ?
iii) If not, was the Agreement varied to cover such a transaction ?
iv) If the Agreement was so varied, is it illegal as involving the giving of unlawful financial assistance by LLBC contrary to s. 151 of the Companies Act 1985 ?
v) Is the Agreement illegal as involving the unlawful return of capital by LLBC to its parent contrary to s. 263 of the Companies Act 1985 ?
"We Mr A Youssef Migariaf and Mr M B Estafnous, directors of both Executive Ltd and Swiss Deal Ltd, we offering the investment (REGENT HOUSE BUSINESS CENTRE) at 24/25 Nutford Place, 136-138 George Street and 112-139 Edgware Road – London W1, on very private and confidential basis not to discuss the matter with any other party.
We request in case of buying this investment that we will be retained to manage this investment."
It is then signed and dated by Mr Migariaf and Mr Estafnous. At the foot of the page is added
"I, [Bobby Kapoor] acknowledge received the information about the investment above, I will confirm your request for the secrecy and retained your companies for management the Investment. [on terms to be discussed]"
The words I have italicised are in manuscript, and this is followed by Mr Kapoor's signature.
"This letter is addressed to the Owners of the Investment No 24-25 Nutford Place"
In the body of the letter Gordons say that they act for Mr Kapoor and his group companies and that they understand that he had made an offer for the property of £19m. They add that their client has stated that the offer will stand for one week and then be withdrawn.
"As soon as we have signed this contract between them and myself and executed by your company, I will pass all the details about my client."
He stressed the urgency of the matter as the offer was only valid for 7 days.
"Our client is able to introduce to your client a party who is willing to purchase the above property at a price of 19 million pounds, subject to contract, and your client is apparently willing to sell the property at this price.
In consideration of the introduction to the interested Buyer, your client has agreed to pay our client the sum of 2 million pounds upon completion of the sale."
They then asked for a solicitors' undertaking. I infer from this letter that by the time it was written Mr Estafnous had relayed Mr Kapoor's offer of £19m to Mr Kidd (without disclosing his identity), and had obtained from Mr Kidd confirmation that the offer was acceptable and that LLBC would pay £2m commission in respect of it to Mr Estafnous; Mr Kidd had also given to Mr Estafnous the name of LLBC's solicitors. Mr Kidd's evidence was that he thought £19m was an unrealistic price ("exceptionally high and unusual"); his attitude was that if Mr Estafnous could introduce someone who could pay such an unrealistic price he was prepared to pay him an unrealistic commission, although he thought the prospects of actually having to do so were remote, describing it in oral evidence as a "fantasy".
"This is to confirm, I am MAKRAM ESTAFNOUS the director of SWISS DEAL Ltd, the following:
1 – In case of the client Mr. CHARNESH KAPOOR or his company which introduce by Mr. ANWER YOUSSEF MIGARIAF, Passport No: 500333293, succeeded in the sales of the investment 24-25 Nutford Place, 136-138 George St and 112-130 Edgware Rd, London W1,
For the sum of £19.000.000.00 (say nineteen million pound). And after I receive the commission from the vendor.
I will pay to Mr. ANWER YOUSSEF MIGARIAF the sum of £500.000 (say five hundred thousand pound) upon the completion process of this sale."
Mr Estafnous's evidence was that this was Mr Migariaf's reward for bringing Mr Kapoor to him; he said in oral evidence "Like many other people, he brings me customers, I look after them." Mr Migariaf's evidence was that he was led to believe that he was sharing a commission equally with Mr Estafnous and was annoyed to discover later that Mr Estafnous's commission was £2m not £1m. Mr Estafnous denied this, and I do not need to resolve this particular question.
"I think that in the context of my undertaking given yesterday, we have taken matters almost as far as we can without my actually knowing with which firm of lawyers I should be corresponding, or, for that matter, my clients receiving a formal subject to contract offer from an identified purchaser."
This confirms that at that date Mr Kidd did not know either Mr Kapoor's name or those of his solicitors.
(A) LLBC has agreed, subject to contract, to sell the property situate and known as 24-25 Nutford Place, 136-138 George Street and 112-130 Edgware Road, London W1 at a price of 19 million pounds, subject to the existing occupancies thereof, at a price of 19 million pounds sterling to a party (the intending Buyer) who is to be introduced to LLBC to Mr Estafnous.
(B) LLBC and Mr Estafnous wish to agree certain financial arrangements in connection with the introduction of the Intending Buyer to LLBC as set out herein.
NOW IT IS HEREBY AGREED as follows:-
1. In consideration of the introduction of the Intending Buyer to LLBC and upon the Intending Buyer (or any other party related to or associated with the Intending Buyer) completing a purchase of the Property LLBC will forthwith upon such completion pay to Mr Estafnous or as he may direct the sum of 2 million pounds sterling.
2. Further in consideration of the introduction of the intending Buyer LLBC hereby agrees as follows:-
(i) To instruct as its solicitors acting on the sale of the Property the firm of Lawrence Graham and to give that firm unconditional and irrevocable instructions to give an undertaking in the form attached (the Undertaking).
(ii) In the event that Lawrence Graham for any reason cease to act on the sale of the property, to notify Mr Estafnous thereof forthwith and to procure that such Solicitors issue an undertaking to Mr Estafnous' Solicitors in respect of the payment of 2 million pounds sterling in terms mutatis mutandis identical to the Undertaking.
3. LLBC hereby acknowledges, agrees and undertakes that on completion of the sale of the property to the Intending Buyer or any party related to or associated with that party LLBC will pay Mr Estafnous the sum of 2 million pounds sterling notwithstanding any variations in the stated purchase price."
It was signed by Mr Kidd on behalf of LLBC and by Mr Estafnous, the latter's signature being dated 30 March 2001. No copy of the Undertaking said to be attached was produced in evidence.
"Having given further consideration to the matter our client has come to the view that the only way in which he are prepared to progress the sale is if it is structured as a sale of the owning company."
They also mentioned that their client had had discussions with "your client's agent" about a redemption penalty which would be incurred on the current loan facility which their client required to be compensated for, and asked for details of any conditions that Mr Kapoor would be seeking to impose.
"Our client is prepared to consider the transaction as one of sale and purchase of the shares in the owning company but is not prepared to commit to the same until we have fully investigated the owning company ..."
They also said the contract would be subject to planning and the freeholder's consent.
"You know from the beginning the deal subject to the planning permission and of course the approval from the Portman State, you have confirmed those two conditions, the buyer as I talked to you before your travelling, he will buy the company owns the building."
The thrust of the letter was that the deal was a very good one from Mr Kidd's point of view and he should not let this opportunity slip.
SUBJECT TO CONTRACT
I received your faxes, it seems there is some confusion as to the terms, I will outline once more and perhaps you will pass this e-mail to Mr Kapoor and Gordons in order that they can also be clear as to the position.
1. We now require to sell the company, this will produce a stamp duty saving of approx pounds 800,000 to the purchaser. However with the recent movement in interest rates we will incur redemption penalties of pounds 400/500,000, this must be added to the purchase price of pounds 19 million.
2. We will sell subject to planning permission, however as approval is expected within the next 2/3 weeks it would be preferable to delay exchange until the approval document is received to avoid the uncertainty of a conditional contract.
3. We cannot sell subject to Portman Estate approval of development scheme. As you know Portman are very difficult to deal with and their consent could well take a considerable time to achieve. Conversely their consent may not be required at all as we may be able to proceed under Section 3 of the Landlord and Tenant Act, we are currently taking counsel's opinion on this point.
4. If your client wants to proceed now then he can do so subject to planning but he must deal with Portman AFTER completion he must NOT contact them now as this may prejudice our negotiations.
Mr Estafnous sent this e-mail on to Mr Kapoor on 15 June saying
"I advise you to go ahead with these people, I am absolutely sure it will be in every angle in your favour."
"Kapoor matter, I do enclose from Anwar solicitor to secure £500,000 (five hundred thousand pounds) to him. There are more papers which I show to you one day where the balance going to by clear my side. I am not greedy at all plus I will explain to you if you like more details about the construction of the deal."
(Anwar is a reference to Mr Migariaf). Miss Tozer placed some reliance on this reference to Mr Kapoor as showing that Mr Estafnous was still actively involved in April 2002 in a possible acquisition by Mr Kapoor but I think this cannot be safely inferred from what is a passing and quite cryptic comment: what it suggests is that Mr Estafnous thought Mr Kidd regarded him as greedy in the commission arrangements for Mr Kapoor, but whether this was said in the context of an ongoing matter or by reference to what had been agreed the previous year is not apparent. Mr Kidd's attitude in oral evidence was that he was not interested; if Mr Estafnous could sell for £19m, he would get his commission and what he did with it was his affair.
"The object is for our clients to acquire 24/25 Nutford Place, London W1H 5YN. We understand that there are other properties currently owned by the Company which will be transferred out of the company before the transaction can be completed."
Mr Kapoor said there were a number of reasons why the price had dropped, the main one being that he was initially led to believe the property was freehold but it was in fact a leasehold with some 60 years to run. I am not sure he is remembering this correctly as the leasehold nature of the interest would have been apparent early on (certainly before the reference to the approval from the Portman Estate) but as far as the evidence before me shows, there was no re-negotiation of the price in 2001. It is not however necessary to resolve this.
i) As I have already indicated the corporate structure before reorganisation was that 3 individuals (Mr Kidd, David Serr and Linda Serr (or Plant)) held the issued shares in Regent, which held the one issued share in LLBC, which in turn held the issued shares in Drillray.
ii) Regent also had two other wholly-owned subsidiaries, Regent Street Business Centres Limited ("RSBC") and Courtshill Limited. The latter appears to have been a subsidiary of LLBC – at any rate it was by the time of the Share Sale Agreement of 14 November 2002.
iii) A new company was inserted into the corporate structure above Regent. This appears to have been IMCO (222002) Ltd, and it was inserted by a share for share exchange so that the three individual shareholders then held shares in IMCO (222002) Ltd which held the shares in Regent.
iv) Regent then transferred its shares in LLBC to IMCO (222002) Ltd. This meant that the latter now held (i) Regent (and its subsidiary RSBC) and (ii) LLBC (and its subsidiaries Drillray and Courtshill).
v) IMCO (222002) Ltd was then put into members' voluntary liquidation. The liquidator then made a distribution under s. 110 of the Insolvency Act 1986 under which the shares in Regent and LLBC respectively were transferred to two new companies held by the individual shareholders. These were IMCO (242002) Ltd which received the shares in Regent, and IMCO (192002) Ltd which received the one share in LLBC.
vi) The individual shareholders were then in a position to sell the shares in IMCO (192002) and so pass ownership of LLBC to Mr Kapoor's company, while retaining ownership of IMCO (242002) and hence of Regent. This was done by the Share Sale Agreement of 14 November 2002 which I have already referred to under which the shareholders sold their shares in IMCO (192002) to Abbey Road.
Issue i): Did Mr Estafnous introduce Mr Kapoor as an intending purchaser of the property ?
Issue ii): Does the Agreement on its true construction cover the transaction which happened ?
"The fact that a lawyer would probably not interpret the January agreement that way because in law the sale of the property by a company is not the same thing as the sale by all the company's shareholders of their shares, is immaterial, given the genuineness of Mr Freedman's belief, shared by Mr Lewin that he had a cause of action."
This suggests that Peter Gibson LJ at any rate would not have thought the earlier agreement apt to cover a sale of shares. A similar view was taken by McNair J in Harris & Gillow v Kelly (1953) 162 EG 622. The plaintiff estate agents had a written contract entitling them to commission on the sale of a dance hall, but failed in a claim to recover commission on the sale of the shares in the company that owned the dance hall. The case is briefly reported and the terms of the contract not set out, but it appears that McNair J rejected the claim because the share transaction was a different transaction and not covered by the express terms of the contract.
"It was argued by the defendants that if the agreement was to pay commission on the sale of the assets, no commission was payable in the event which happened, which was the sale of shares. For a time I was troubled by this point, but on consideration I am of opinion that the commission agreement was wide enough to cover the sale of shares, at least in the case where the price of the shares was calculated as it was in the present case."
This is undoubtedly some support for a more liberal interpretation but the reasoning is very brief. (It also appears that an appeal was brought and settled on the basis of the Plaintiff accepting £3,000 (as opposed to £5,890 awarded him under the judgment) so the parties at any rate appear to have seen some room for doubt as to whether the judgment would have been upheld.)
"A land agent's authority is not to be construed technically and narrowly. It is a commercial document, usually drawn up by a layman and signed by a layman, without special professional advice, and it should be read in the light of common sense so as to result in common-sense justice. When Mr Anderson signed this authority he knew he had no "business" to sell in the technical sense; all he had was shares. If therefore through the introduction of the agent a purchaser had been found to whom the company had sold its business, the authority would have been read as an authority from the company (through Anderson) to sell its "business"....But if (as actually happened) the shareholders chose not to conclude the matter in this way, but to sell their shares instead, they must in my opinion themselves be liable for commission for services which resulted in them, and not their company, collecting the purchase money. It seems to me useless for Mr Anderson to say as he has attempted to say in this case: "I know that I signed an authority to sell a business. I know that the work done by the agent pursuant to this authority resulted in some sort of a "sale"; but that sale was a sale of shares, and what I specified in my authority was a sale of a business." Can it lie in his mouth, having represented that he had a business to sell, now to say by way of defence that in fact he had no business ?"
Miss Tozer said that similarly LLBC actually had no title to the land to sell as the land was vested in Drillray, and although this was not known to Mr Estafnous, it was a fact reasonably available to him as it was recorded at HM Land Registry, and the register of title, being a public document, is admissible in evidence as part of the background facts against which the contract must be construed: see Scott v Martin  1 WLR, 841 at 849H where Nourse LJ held that a planning permission was admissible to construe a conveyance. This, she said, shows that the Agreement cannot have been referring to a sale of the land as such and should therefore be construed as extending to any transaction under which the Intended Buyer acquired the ultimate beneficial ownership of the Property.
Issue iii): Was the Agreement varied ?
"informed [Mr Estafnous] that he proposed to "sell the company" rather than the interest in the property held by "the company" and requested that [Mr Estafnous] progress the revised transaction..."
"As requested by [LLBC], [Mr Estafnous] continued to progress the transaction, inter alia by forwarding that e-mail to Mr Kapoor on 15 June 2001. Accordingly [Mr Estafnous] impliedly accepted an offer made by [LLBC] in the e-mail referred to ... to vary the Agreement (if on its true construction it was necessary to do so) so that the commission referred to therein would be payable upon a sale of all of the shares, or a controlling interest in the company in which title to the property was vested, [LLBC] and/or another company which directly or indirectly owned Drillray."
Issue iv): If the Agreement was so varied, is it illegal as involving the giving of unlawful financial assistance by L&L contrary to s. 151 of the Companies Act 1985 ?
"151 Financial assistance generally prohibited
(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.
152 Definitions for this Chapter
(1) In this Chapter –
(a) 'financial assistance' means –
(i) financial assistance given by way of gift,
(ii) financial assistance given by way of guarantee, security or indemnity, other than an indemnity in respect of the indemnifier's own neglect or default, or by way of release or waiver,
(iii) financial assistance given by way of a loan or any other agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party to the agreement remains unfulfilled, or by way of the novation of, or the assignment of rights arising under, a loan or such other agreement, or
(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; …
153 Transactions not prohibited by s 151
(1) Section 151(1) does not prohibit a company from giving financial assistance for the purpose of an acquisition of shares in it or its holding company if –
(a) the company's principal purpose in giving that assistance is not to give it for the purpose of any such acquisition, or the giving of the assistance for that purpose is but an incidental part of some larger purpose of the company, and
(b) the assistance is given in good faith in the interests of the company. …"
Section 151 has now been repealed in relation to private companies but this does not affect the position here.
"for a person to be "proposing" to acquire shares he has to have formed an intention to acquire shares. It is not sufficient if he is merely considering the possibility of acquiring shares."
Reference is then made to the well-known case of Cunliffe v Goodman  2 KB 327 where Asquith LJ discussed the meaning of intention. Miss Tozer referred to the letter of 31 May 2001 from Gordons to Lawrence Graham which said that their client was prepared to consider the transaction as one of sale and purchase in the shares of the owning company "but is not prepared to commit to the same until we have fully investigated the owning company" and said that this showed that Mr Kapoor had not formed a definite intent to enter into a share sale.
i) I am satisfied that if LLBC had agreed to pay £2m this would have reduced its net assets to a material extent. Its net assets at 31 December 2001 as shown by its balance sheet were of the order of £5.5m. (In fact the question whether there has been a material reduction in the company's net assets is to be assessed by reference to its actual net assets rather than those shown in its accounts (and at the time a liability is assumed, not when it falls due): see Parlett v Guppys (Bridport) Ltd  2 BCLC 34 at 41j-42a. But the accounts sufficiently indicate the scale of LLBC's net assets for present purposes.) Miss Tozer at one stage suggested that the agreement of Abbey Road to procure the discharge of LLBC's debt to Regent (of the order of £11m) could be taken into account in assessing this question, but I do not think this is right – the question is not whether the acquisition as a whole causes a material reduction in the company's net assets but whether the financial assistance does, and in any event the accounts reveal that although the loan to Regent was duly discharged, LLBC had bank lending of over £11m at 31 December 2002, which was presumably used to discharge the debt to Regent. I therefore see no warrant for assuming that Abbey Road itself paid off LLBC's debt or that LLBC's net asset position was improved – its net assets at 31 December 2002 as shown by its accounts remained of the order of £5.2m.
ii) I am not satisfied that the defence in s. 153(1) would have been made out. If LLBC's purpose in paying the £2m had been to secure Mr Estafnous's services, I do not think this would have been but an incidental part of some larger purpose. Nor would I have been easily persuaded that it was given in good faith in the interests of LLBC.
iii) Miss Tozer submitted that if there were a breach of s. 151 it did not make the Agreement void, relying on the decision in Lawlor v Gray (unreported, 10.7.79). I disagree: Lawlor v Gray was a case where the obligation undertaken by the relevant company could be performed without any breach of the then relevant statutory prohibition. In the present case I think the applicable principle would have been the simple one that a Court will not enforce an agreement to do something in breach of a statute.
Issue v): is the Agreement illegal as involving an unlawful return of capital to its members contrary to s. 263 of the Companies Act 1985 ?
"263 Certain distributions prohibited
(1) A company shall not make a distribution except out of its profits available for the purpose.
(2) In this Part "distribution" means every description of a distribution of a company's assets to its members, whether in cash or otherwise, except distribution by way of –
(a) an issue of shares as fully or partly paid bonus shares,
(b) the redemption or purchase of any of the company's own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter VII of Part V,
(c) the reduction of share capital by extinguishing or reducing the liability of any of the members on any of the company's shares in respect of share capital not paid up, or by paying off paid up share capital, and
(d) a distribution of assets to members of the company on its winding up.
(3) For purposes of this Part, a company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution of capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.
This is subject to the provision made by sections 265 and 266 for investment and other companies.
(4) A company shall not apply an unrealised profit in paying up debentures, or any amounts unpaid on its issued shares.
(5) Where the directors of a company are, after making all reasonable enquiries, unable to determine whether a particular profit made before 22nd December 1980 is realised or unrealised, they may treat the profit as realised; and where after making such enquiries they are unable to determine whether a particular loss so made is realised or unrealised, they may treat the loss as unrealised."
i) Mr Estafnous did introduce Mr Kapoor to LLBC.
ii) The Agreement does not on its true construction require LLBC to pay commission on the completion of the transaction which took place.
iii) The Agreement was not varied.
iv) Had the Agreement been varied, I would not have found it to involve any breach of s. 151 of the Companies Act 1985.
v) Had the Agreement covered the transaction which took place, I would not have found it to involve any breach of s. 263 of the Companies Act 1985.