England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts Of Justice Strand, London
		10 July 2009

Mark Cawson QC

(A) Introduction

1. By an Ordinary Application dated 27 September 2007, Mark John Wilson ("Mr Wilson"), the liquidator of Oxford Pharmaceuticals Limited ("OPL"), and OPL seek the following relief against Masters International Limited ("MIL") and Dr Zulfikar Masters ("Dr Masters") (together "the Respondents"), namely:

1.1 A Declaration that payments made by OPL to MIL in the period 28 December 2000 - 6 July 2001 were preferences pursuant to S239 of the Insolvency Act 1986 ("the 1986 Act"). The payments in question total £700,000 and were made on 28 December 2000 (£250,000), 6 April 2001 (£200,000), and 26 April 2001 (£250,000).

1.2 An Order that MIL makes full repayment of the above payments.

1.3 An Order pursuant to S212 (misfeasance) and/or S239(3) and/or S241(1) and/or S241(2) of the 1986 Act that Dr Masters be required jointly and severally with MIL to make repayment of the above payments.

1.4 A Declaration that four payments made between 1 October 2001 and 26 November 2001 by OPL to MIL and totalling £115,000 were void pursuant to S127 of the 1986 Act.

1.5 An Order that MIL make full repayment to OPL of these latter payments; and

1.6 An Order pursuant to S212 of the 1986 Act that Dr Masters be required jointly and severally with MIL to make repayment of these later payments.

2. A claim for repayment of the sum of £90,135 alleged to have been overpaid by OPL to MIL is no longer pursued.

(B) Representation

3. Mr Peter Shaw appeared for Mr Wilson and OPL and Mr Daniel Margolin appeared for MIL and Dr Masters. I am grateful to them for their helpful written and oral submissions.

(C) Witnesses

4. Four witnesses gave evidence, namely:

4.1 Mr Wilson, who made Witness Statements dated 18 December 2007 and 30 March 2009.

4.2 Dr Masters, who made Witness Statements dated 25 February 2009, 13 May 2009 and 19 May 2009.

4.3 Robin Duncan ("Mr Duncan") who was called on behalf of the Respondents and who made Witness Statements dated 25 February 2009 and 13 May 2009.

4.4 Patrick Fitzpatrick ("Mr Fitzpatrick") who was also called on behalf of the Respondents and who made a Witness Statement dated 20 May 2009.

5. Mr Duncan is a Chartered Accountant who began to work for MIL in 1999, and who still works as a consultant for MIL and other companies controlled by Dr Masters.
6. Mr Fitzpatrick worked for Barclays Bank plc ("the Bank") until September/October 2001. At all relevant times prior thereto, he performed a relationship management role on behalf of the Bank with MIL and OPL.
7. Dr Masters' second and third Witness Statements, Mr Duncan's second Witness Statement and Mr Fitzpatrick's Witness Statement were admitted with my permission during the course of the trial after I had, on the first day of the trial (18 May 2009) refused to grant an adjournment on MIL's and Dr Masters' application. After this further evidence had been admitted, I did not gain the impression that an adjournment would have enabled these witnesses to adduce further evidence of assistance going beyond that in fact given.

(D) Factual Background

(i) MIL and OPL

8. MIL was incorporated on 17 October 1984 and distributes pharmaceuticals from the UK worldwide, but principally to the Caribbean and the Middle East. At all relevant times, the directors of MIL have been Dr Masters, Dr Masters' wife (Zabeen Masters) ("Mrs Masters"), Suzad Masters and Ashok Kumar ("Mr Kumar"). Dr and Mrs Masters have, between them, at all relevant times, held 99% of the issued share capital of MIL.
9. OPL was incorporated on 15 June 1994. It was Dr Masters' evidence that OPL was incorporated with a view to supplying the NHS and others in the UK with pharmaceuticals that were not otherwise available in the UK. At all relevant times prior to it being wound up on 19 December 2001, Dr Masters was the sole director of OPL and the entire issued share capital was held byMIL.
10. OPL had what were essentially two lines of activity:

10.1 Firstly, in 1996 an opportunity was identified for the distribution of a natural skin cancer treatment provided by Curaderm International AVV ("Curaderm"), a company incorporated in the Netherlands Antilles, known as Curaderm Cream or BEC-5 ("the Cream"). On 1 August 1996, OPL entered into a distribution agreement with Curaderm ("the Curaderm Distribution Agreement") for the distribution of the Cream. Prior to the Cream being licensed for use in the UK, and other markets, the Cream required to undergo what has been described as a "complex suite of regulatory approvals" by the Medicines Control Agency, including clinical trials with patients; a process that involved considerable upfront cost. Unfortunately the process took considerably longer than anticipated, and turned out to be considerably more costly than anticipated. It was Dr Masters' evidence that the cost was in excess of £2m, although it is fair to say that it is not obvious from the accounts of either OPL or MIL how expenses of this amount are reflected therein. The costs in question, which I nevertheless accept were significant, were funded out of monies advanced to OPL by MIL (having largely been advanced by the Bank to MIL) and, to a lesser extent, by direct advances from the Bank.

10.2 In 1997 the opportunity arose to distribute a product known as Bismuth and Indoform Paraffin Paste ("BIPP") belonging to Trinity Pharmaceuticals ("Trinity"). There is an inconsistency between Dr Masters' evidence and that of Mr Duncan as to how the opportunity was taken up. Mr Duncan's evidence, which I prefer, ties in better with the documentation and what subsequently occurred and was to the effect that MIL acquired the relevant rights from Trinity for £650,000, and that MIL allowed OPL to exploit the right in return for payment of an annual management charge of £130,000 payable over 5 years, with a loan being obtained from the Bank to assist in funding the £650,000.

(ii) Banking Facilities

11. Both MIL and OPL obtained banking facilities from Barclays. The documentation shows the granting of a term loan of £180,000 to OPL in late 1997 and that by, September 2000, OPL enjoyed an overdraft facility of £25,000, as well as continuing to owe approximately £70,000 under the term loan. The documentation further shows that MIL enjoyed facilities of £600,000, temporarily increased to £650,000 until 30 November 2000, as well as various ancillary facilities explained by Mr Fitzpatrick in evidence. The facilities provided by the Bank to MIL and OPL were secured by a cross- guarantee and debenture entered into by each of OPL and MIL dated 18 September 1999 ("the Cross-Guarantee and Debenture"), and the provision by Dr and Mrs Masters of unlimited guarantees to the Bank for the liabilities of OPL and MIL.

(iii) 1999 Accounts

12. OPL's accounts for the year ended 31 December 1999 showed net liabilities of £530,691, of which £501,543 represented monies owed by OPL to MIL. The accounts noted, as did those for the following year ended 31 December 2000, that they had been "prepared on the going concern basis as the ultimate parent undertaking [ie MIL] has agreed to provide financial support to the company for a period of a least 12 months from the signing of the financial statements".

(iv) Agreement with Loxias

13. It was the Respondents' evidence, which I accept, that by mid 2000 it had become clear that the costs incurred in relation to the Cream had become prohibitively high, and that OPL and MIL could not afford to continue to sustain them. Consequently, on 30 June 2000, OPL entered into an option agreement with an Australian entity controlled by one Scott Tyne ("Mr Tyne"), namely Loxias Technologies Pty Limited ("Loxias"), for the sale to Loxias of information relating to the Cream, including clinical trial results, expert opinions etc., at a price of £500,000 payable by two instalments of £250,000 each payable on 31 December 2000 and 31 March 2001. The option was exercised by Loxias on 15 July 2000, but pursuant to a "Novation Deed" dated 17 March 2001, between Loxias (1), Glycomed Sciences Limited ("Glycomed") (2), OPL (3) and MIL (4), Loxias assigned its option rights to Glycomed, a company in which Dr Masters had become a director and minority shareholder.
14. In his original Witness Statement, Dr Masters suggested that the price of £500,000 agreed with Loxias was significantly reduced as a result of a late discovery that the Cream did not have the benefit of patent rights that Dr Masters said he was led by Curaderm to believe that it did have prior to the entry into the Curaderm Distribution Agreement. However, under cross- examination, Dr Masters was taken to an email dated 16 April 2001 attaching draft paragraphs of a Witness Statement that he had sent to his then solicitors, Herbert Smith, in the context of proceedings commenced by Curaderm against OPL that I refer to below. In evidence, Dr Masters broadly confirmed the contents of these draft paragraphs, and reference is made therein to Mr Tyne having informed Dr Masters about the patent position in a telephone call in August 2000, i.e. after the purchase price of £500,000 had been agreed.
15. By this time, August 2000, Dr Masters had been in communication with Curaderm with regard to an extension of the Curaderm Distribution Agreement. In paragraph 135 of the draft paragraphs that I have referred to, Dr Masters refers to Mr Tyne stating that he intended to finalise (through Glycomed) the development and commercialisation of the Cream without the involvement of those behind Curaderm, and to Mr Tyne asking Dr Masters whether he would be prepared to "assist with this endeavour". The impression that I gained was that this was the genesis of Dr Masters' involvement in Glycomed.
16. Dr Masters accepted in evidence that it was this approach from Mr Tyne that led to Dr Masters and Mr Tyne agreeing (albeit that Dr Masters' signature is missing from the copy made available) to a so described "Assignment of Interests" dated 18 August 2000. Dr Masters was somewhat coy when questioned as to the detail of this and sought to suggest a lack of knowledge thereof. However, this document envisaged OPL and Loxias assigning their various rights and information in respect of the Cream to a purchaser that would pay a cash consideration to OPL and Loxias for the same.
17. As to the motivation behind the sale to Loxias so as to raise £500,000, in an interview with Mr Wilson's representatives on 31 January 2002, Dr Masters is recorded as having explained that the reason for entering into the Option Agreement was "... that OPL was bringing down [MIL] and the Bank were laying on the pressure to [MIL] in connection with the loan they had taken for OPL". During the course of an interview with Mr Wilson's representative on 13 September 2005, Dr Masters is recorded as having stated that, "I sold in 1999/2000 because I was running out of money". In a letter to Herbert Smith dated 19 October 2001, Dr Masters commented that: "The shortage of funds was not only holding back the project but also was jeopardising the trading of Masters to the extent that both companies could be lost. We were forced to part with the information for meagre consideration in order to preserve the trading of both the companies and repay our bankers. It was a prudent and responsible decision made at the time and under very difficult circumstances". In a letter dated 19 October 2001 to Carl Salans, one of the arbitrators appointed in connection with the dispute with Curaderm referred to below, Dr Masters commented that the sale was "in order to overcome a very serious shortage of funds in the company. A shortage of funds was not only holding back the project but was also jeopardising the trading and the company could have been lost".
18. It was put to Dr Masters under cross-examination, that the prime objective was to save MIL. However, Dr Masters was adamant that at least at that stage his concern was the preservation of both OPL and MIL "for ever".

(v) Dispute with Curaderm

19. On 13 September 2000, Curaderm wrote to Dr Masters referring to OPL's request for an extension of the Curaderm Distribution Agreement, and referring to the fact that on 4 August 2000 Curaderm had sent out a "Curaderm International Addendum IV (Contract Extension)" for signature. Curaderm enquired as to whether OPL wished to extend the contract. In response, by a letter dated 10 October 2000, Dr Masters replied to Curaderm alleging misrepresentation on the part of Curaderm in relation to patent rights made prior to OPL's entry into the Curaderm Distribution Agreement. By a subsequent letter dated 19 October 2000, Dr Masters purported to rescind the Curaderm Distribution Agreement on the grounds of misrepresentation. By letter of the same date, Joelson Wilson, solicitors acting for Curaderm, wrote to OPL alleging various breaches of the Distribution Agreement, and intimating a potential claim of damages of approximately US$7,000,000. This was followed by a further letter from Joelson Wilson dated 20 December 2000. Curaderm subsequently issued proceedings that were served on OPL on 10 April 2001. Dr Masters was cross-examined at some length as to his perception of the merits of Curaderm's claim, and of OPL's own claim in misrepresentation. His response was that he, and thus effectively OPL, had perceived that OPL had a 50:50 chance of success. This broadly ties in with what is reflected in the contemporaneous documentation.

(vi) Payments to MIL between December 2000 and April 2001

20. The first tranche of consideration was paid by Loxias to OPL on 28 December 2001, and immediately paid over to MIL. This reduced the then overdrawn balance on MIL's account with the Bank, with other items the same day, from £504,480.54 to £253,083.41. However, by 9 January 2001, the overdraft had increased once more to £508,994.43 after MIL had made certain payments.
21. OPL's accounts for the year ended 31 December 2000, as signed off on 26 July 2001, reflected the payment of the £250,000 on 28 December 200, and that a further £250,000 was due. As work and expenditure on the Cream was not reflected as an asset in OPL's balance sheet, the sale price of £500,000 was taken to profit, thus reducing the deficiency of £550,891 as at 31 December 1999 to £120,198, notwithstanding that OPL had made a trading loss. Note 16 to the accounts, under the heading "Related Party Transactions", referred to the fact that £412,652 was due to MIL as against £501,543 due as at the previous year end, i.e. a net reduction of £88,891. This net reduction of £88,891 is less than the £250,000 paid on 28 December 2000 and is reflective of the fact that there were other ongoing inter-company dealings. Note 16 to the accounts made specific reference to the following transactions between OPL and MIL, namely recharges of administration expenses of £156,074, a management charge levied by MIL of £130,000 (see paragraph 10.2 above), sales of £10,240 and purchases of £16,780.
22. On 6 April 2001, OPL transferred £200,000 to MIL. The immediate effect of this was to reduce MIL's then overdrawn balance on its account with the Bank of £377,351.
23. On 26 April 2001, OPL received the balance of the purchase price (£250,000) from Loxias/Glycomed which was immediately transferred to MIL's bank account . The immediate effect of this was to replace MIL's then overdrawn balance on its account with the Bank of £128,404.67 with a credit balance.

(vii) Renegotiation of Banking Facilities/Approach of the Bank

24. Between April and May 2001 OPL and MIL negotiated revised facilities with the Bank. A letter from the Bank (Mr Fitzpatrick) to Mr Duncan dated 9 May 2001 refers to the new facilities having been agreed following the receipt by it of £500,000 from the sale of rights in relation to the Cream. This letter and facility letters dated 10 May 2001 refer to MIL's reduced overdraft facility of £500,000 plus ancillary facilities, and to OPL's existing term loan of £86,000 being repaid, and to a new overdraft facility of £50,000.
25. Whilst the Cross-Guarantee and Debenture remained in place, Dr and Mrs Masters were no longer required to provide unlimited guarantees, but, instead, Dr Masters was required to provide a guarantee limited to £250,000 in respect of MIL, and a guarantee limited to £80,000 in respect of OPL. It is clear that the Bank primarily looked by way of security to MIL's and OPL's book debts. The facility letters provided for a "Debenture formula", namely that OPL and MIL would "ensure that the overdraft in the company's books will at all times be covered 2 times by the aggregate volume of book debts". The previous formula had been 1½ times the aggregate value of book debts.
26. It was Dr Masters' evidence in his first Witness Statement as maintained under cross-examination that the Bank put pressure on OPL to pay the £500,000 proceeds of sale over to MIL so that MIL could reduce its indebtedness to the Bank, and that the Bank even instructed OPL to so apply the monies. However, this evidence, whilst consistent with what Dr Masters is recorded as having told Mr Wilson's representatives on 31 January 2002, does not rest so easily with Dr Masters' inability during his meeting with Mr Wilson's representatives on 13 September 2005 to recall whether the Bank had exerted such pressure, and the absence of any reference to pressure of this kind in MIL's and Dr Masters' Defence. Further, apart from one internal Bank reference to the overdraft being exceeded, there is no further documentary evidence suggesting that the Bank did put overt pressure on OPL of the kind suggested by Dr Masters.
27. However, the evidence of Mr Fitzpatrick, who I found to be a good and reliable witness, and which evidence is on this point broadly consistent with that of Mr Duncan, is helpful as to the Bank's state of mind and approach to OPL's and MIL's borrowings.
28. The Bank certainly viewed the two companies very much as one. Mr Fitzpatrick described the accounts as well run accounts in respect of which the companies strove to, and broadly did, keep within agreed facilities notwithstanding the financial pressures resulting from OPL's involvement in seeking licensing approval for the Cream, and the delays in bringing the Cream to market. Mr Fitzpatrick referred to the fact that MIL had initially been "marked" at £500,000, and that the increase in its overdraft to the levels of indebtedness at the end of 2000 was seen very much as a temporary phenomenon in respect of which Mr Fitzpatrick became increasingly "uncomfortable". I was left in no doubt that Dr Masters and Mr Duncan became aware of this unease on the part of Mr Fitzpatrick, and through him the Bank, and that this was a significant factor playing on Dr Masters' mind in his decision to cause OPL to enter into the Option Agreement with Loxias. Further, Mr Fitzpatrick was clear that when he was informed of the agreement with Loxias, he would, given the way he expressed the Bank's unease, have left Dr Masters and Mr Duncan in no doubt that the Bank wanted a substantial reduction in the overall indebtedness to the Bank on the back of the monies coming in, or as Mr Fitzpatrick put it, that the Bank wanted "a big slug".
29. As to the revised facilities and the reduction in the security provided personally by Dr and Mrs Masters, Mr Fitzpatrick commented that this would have been part of the negotiations or "haggle" between Dr Masters and the Bank and that this, i.e. the reduction of the exposure of Dr Masters and his wife, had been "on his[ie Dr Masters'] agenda for years".
30. Mr Fitzpatrick said that he knew nothing, prior to his departure from the Bank in September or October 2001, of the dispute with Curaderm, or of the dispute with ICE Healthcare Limited ("ICE") and the Winding Up petition presented by ICE on 5 July 2001 referred to below.

(viii) June 2001 Management Accounts

31. Management Accounts of OPL for the period to 6 June 2001, apparently printed off on 10 July 2001, show the inter-company debt to MIL standing at £143,813.64 as against £412,000 as at 31 December 2000. It should be noted that on 16 May 2001, MIL had paid £36,000 to OPL to assist it in repaying to the Bank its loan.
32. The management accounts appear to show trade creditors of £107,469.89 as against £79,000 as at 31 December 2000, and a current year loss of £11,744.36.

(ix) Curaderm Arbitration

33. As to the dispute with Curaderm, Curaderm having commenced proceedings against OPL, on 24 April 2001 OPL applied to restrain the proceedings in reliance upon an arbitration provision in the Curaderm Distribution Agreement. On 17 July 2001, Curaderm served notice of arbitration. Directions were given by the appointed arbitrators on 11 October 2001, but on 19 October 2001, Herbert Smith notified the arbitrators that they were no longer instructed. In a letter to Mr Wilson dated 9 January 2002, Herbert Smith confirmed that they ceased to act for OPL on 16 October 2001. Dr Masters' evidence was that he had sought to raise funds from the Bank to defend the Curaderm claim, but had been unable to do so and so then disinstructed Herbert Smith. On 22 November 2001, the arbitrators ordered OPL to pay their fees of US$45,000 and Curaderm's costs of £45,000. Thereafter Curaderm sought to resurrect the stayed proceedings, but the proceedings were overtaken by the liquidation of OPL.

(x) ICE

34. In the meantime, a dispute had arisen between OPL and ICE. ICE claimed to be due £141,811.47 in respect of unpaid invoices for 3,500 packs of Oxymetholone tablets and interest. On 11 May 2001, ICE gave what it described as "final notice" in respect thereof, threatening to refer the matter to lawyers and/or a debt collection agency, but not at that stage the presentation of a winding up petition.
35. On 16 May 2001, Mr Duncan replied having, he said, discussed the matter with OPL's management team. The essence of Mr Duncan's response was that the relevant order had been cancelled due to ICE's failure to supply in accordance with OPL's customers' requirements, and that only a limited quantity of sub-standard tablets had been supplied, in short that the invoices were disputed.
36. On 26 June 2001, ICE threatened, for the first time, the presentation of a winding up petition and, on 5 July 2001, ICE proceeded to present a petition based upon the non-payment of the invoices.
37. OPL instructed Herbert Smith to deal with the petition. In an email dated 10 July 2001 Nicholas Peacock ("Mr Peacock") of Herbert Smith wrote to Counsel instructed, Nigel Dougherty, informing him that: "The client has queried whether it should oppose the winding up at all (unrelated issues might make it a good time for a clean break)".
38. An attendance note made by Mr Peacock dated 11 July 2001 records him being informed by Mr Duncan that Mr Duncan had spoken to Mr Tyne, and recalls that Mr Tyne favoured allowing OPL to be wound up as "he believes this will provide a means of making Curaderm open negotiations with Glycomed".
39. In the event, and at least for the time being, the petition was resisted. On 23 July 2001 an application was issued to restrain advertisement and to strike out the petition on the basis that the relevant debt was disputed in good faith and on substantial grounds. The application was supported by Witness Statements from Mr Duncan (dated 20 July 2001) and from Mr Kumar (dated 25 July 2001), and in due course by a second Witness Statement from Mr Kumar (dated 7 August 2001). I do not have the materials before me to reach anything approaching a conclusive view as to the underlying dispute, and it is not suggested that I should attempt to do so. However, the impression that I get is that there were good grounds to oppose the petition on the grounds that the petition debt was disputed in good faith and on substantial grounds, and this was certainly the view of Herbert Smith and Nigel Dougherty at the time as evidenced by a letter from Herbert Smith to OPL dated 16 July 2001.
40. Undertakings were given in the meantime by ICE not to advertise the petition, and on 9 August 2001, Etherton J adjourned the application to be heard by order with a date in late November 2001 being fixed for the hearing thereof.
41. In emails dated 18 July 2001, Mr Peacock drew the attention of Mr Duncan and Mr Kumar to S127 of the 1986 Act, and the significance of making an application to validate dispositions by OPL pending the hearing of the strike out application in late November 2001. It is clear from an email to Dr Masters dated 25 July 2001 that Mr Peacock had raised with Dr Masters the question of an application under S127. Despite this, no such application was made.
42. On 25 July 2001, Dr Masters emailed Mr Peacock referring to a meeting the previous day, and to the decision taken thereat to "defend OPL so as to buy Glycomed time". Dr Masters later continued in the same email: "I have to say that one of the things Scott [Tyne] and I discussed yesterday was the cost/benefit outcome of defending OPL against ICE and there comes a time when the director of OPL has to take a view in stemming the bleed, regardless of the consequences to any third parties, in this case Glycomed … ".
43. The context of Dr Masters' email is, in part, explained by a letter he wrote to Herbert Smith on 19 October 2001 in which he referred to a telephone conversation with Mr Peacock on 19 July 2001 when he had indicated that he wanted to minimise costs, and suggested that "we stop all activity and let ICE do their worst", but to it being decided to defer matters pending a meeting the following Tuesday. Dr Masters then referred to a meeting the following Tuesday (24 July 2001), and to Herbert Smith indicating thereat that only limited costs would be incurred prior to the hearing of the application. Dr Masters then complained in the letter that Herbert Smith had "in the ensuing days … managed to rack up a further £20,596.99 on the matter".
44. On 10 September 2001, Herbert Smith wrote to Dr Masters in the following terms: "As you know, work on the application to strike out the winding up petition served on you and on Oxford has been halted on the instructions of Ashok Kumar since the hearing on 9 August 2001".
45. Under cross-examination, Dr Masters suggested that Mr Kumar had taken the decision to abandon resistance to the winding up petition on his own, without reference to him. Dr Masters observed that at the time he was spending considerable time abroad, leaving matters to Mr Kumar. When challenged as to this, Dr Masters, according to my note, somewhat oddly, commented that: "we did not have telephones in those days". Mr Margolin suggests that Dr Masters may have referred to "email" rather than "telephones", but unfortunately no transcript is available to check the point.
46. However, whether Dr Masters referred to "telephones" or "email", I regret to say that I found Dr Masters' evidence as to this unsatisfactory. The evidence as a whole points very much to Dr Masters being the directing mind of OPL and MIL, and I do not accept that Mr Kumar would have made such a fundamental decision on his own without reference to Dr Masters. In 2001, despite what I understand to have been Dr Masters' suggestion to the contrary, and even if Dr Masters did refer to or intend to refer to "email", there would have been no difficulty in Mr Kumar keeping in touch with Dr Masters by telephone, and vice versa. Further, when cross-examined about whether his decisions taken in respect of the conduct of the petition were driven by what were perceived to be in the best interest of Glycomed rather than OPL, Dr Masters responded that he could not remember. Again, despite the passage of time, I did not find these answers convincing, although I do observe that Mr Duncan, when asked as to this responded that he did not recall Glycomed being any part of the decision making process, and that the petition was defended because there was a defence to it.
47. The overall impression that I was left with was that it was rightly perceived that there was a good defence to the petition on the basis that there was a substantial dispute as to the debt which could be advanced in good faith, but that the decision was taken no later than 19 October 2001 that the petition would not be further resisted. As I have mentioned, Herbert Smith were instructed on 9 August 2001 not to carry on further work in relation to the petition, but I am not satisfied that, at least at that stage, a final decision had been taken to let the petition take its course come what may and that it was a combination of factors, including the perceived interest of Glycomed, the costs of defending the Curaderm arbitration and the petition, and an inability to raise further funds, which led to the effective abandonment of opposition to the petition, and the Curaderm arbitration by mid October 2001 at the latest.

(xi) Payments to MIL - October and November 2001

48. It was against the background of the above that OPL made the payments to MIL that are said to be void pursuant to S127 of the 1986 Act, namely £50,000 on 1 October 2001, £20,000 on 12 October 2001, £20,000 on 5 November 2001 and £25,000 on 26 November 2001.

(xii) Liquidation of OPL

49. OPL failed to attend the hearing on 27 November 2001 of the application to strike out the petition, and, as a result, Anthony Mann QC, sitting as a Judge of the High Court, dismissed the application. A Winding Up Order followed as a matter of course on the return day of the petition on 19 December 2001.
50. A statement of affairs of OPL based upon information provided by Dr Masters in a Questionnaire dated 12 February 2002 shows an estimated deficiency of £386,883. This includes amongst trade and expense creditors (totalling £454,687), MIL (£196,658), ICE (£130,000), and Curaderm in a sum of only £71,133 relating to the legal costs of the arbitration. A revised statement of affairs prepared by Mr Wilson showing claims actually received shows a deficiency of £3,742,259, creditors being shown as including trade and expense (£78,216), Curaderm (£3,504,506), ICE (£147,815) and MIL (£77,499). A revised version of the latter taking into account realisations reduces the deficiency to £3,707,294 and shows a breakdown of Curaderm's claim as damages (£3,448,989), arbitration fees (£31,041) and arbitration costs (£41,113).
51. Mr Wilson has neither accepted nor rejected the proof submitted by Curaderm and ICE. His pragmatic reason for not doing so is that unless the present claim is successful then there will be insufficient funds within the liquidation of OPL to fund any defence of an appeal against the rejection of any proof, and possibly also the costs of fully investigating the controversial proofs. It is common ground that there are not the materials before me to enable me to determine the merits of Curaderm's and ICE's claims, and I understand it to be agreed that I should not attempt to do so.
52. A further point to note in Mr Wilson's revised statements of affairs is that the outstanding indebtedness to the Bank (£17,947), secured by the Cross-Guarantee and Debenture, was wholly satisfied out of realisations of both cash and stock, which totalled £83,623.
53. Mr Duncan's second Witness Statement was principally devoted to seeking to show that MIL had paid off a number of trade creditors following the liquidation of OPL. I am satisfied that a number of creditors totalling £6,477.93 as referred to in paragraph 7 of the statement were paid off by MIL, most probably in order that MIL could continue the trading relationship with them. However, I am not satisfied on the evidence that any further creditors were paid off, or that the payment off of such other creditors as may have been paid off makes any material difference to the outcome of the present case, given that a significant number of creditors (even apart from ICE and Curaderm in respect of the claims that remain in issue) remain.

(xiii) Dealings with MIL, 2001

54. MIL's accounts for the year ended 31 December 2001 are important as reflecting the net effect of transactions between MIL and OPL over the previous year up to OPL entering the liquidation. These accounts record administration expenses levied by MIL on OPL at £42,979, sales to OPL of £23,652, and sales by OPL to MIL of £40,488, i.e. a net supply by MIL to OPL of £26,213.
55. These accounts also show a reduction in the balance due from OPL to MIL from £412,652 as at 31 December 2000 to £71,499 as at 31 December 2001, i.e. a net reduction of £335,153.

(xiv) Proceedings

56. The present proceedings were commenced on 25 September 2007, although Mr Wilson's first statement in support of the Ordinary Application was not made until 19 December 2007. This was nearly 6 years after OPL went into liquidation, nearly 3 years after Mr Wilson had entered into a conditional fee agreement with his solicitors in January 2005, and 2 years after Mr Wilson's representatives had last met with Dr Masters on 13 September 2005. This does give rise to potential limitation and laches issues that I consider below. In addition, I am conscious of the effect that delay can potentially have on memories and recollection, and I have sought to take this into account in assessing the evidence, having due regard to where the onus of proof lies in respect of the various issues that arise.

(E) The Claim Advanced

(i) Payments by OPL to MIL in December 2000 and April 2001

57. Mr Wilson seeks to attack the payments made by OPL to MIL on 28 December 2000 (£250,000), 6 April 2001 (£200,000) and 26 April 2001 (£250,000), giving credit only for the sum of £36,000 paid by MIL in reduction of OPL's indebtedness to the Bank on 16 May 2001.
58. Mr Wilson alleges that the three payments each constituted a preference of both MIL and Dr Masters within the meaning of S239 of the 1986 Act. Mr Wilson thus seeks relief in the form of repayment of the relevant monies by way of application of S239(3) and 241(1) against MIL and Dr Masters. Alternatively, it is Mr Wilson's case that even if the relevant payments did not constitute a preference of Dr Masters, relief ought to be granted against him by application of S239(3) and S241(1) and (2), as a third party who has received benefit from the payments.
59. S239 of the 1986 Act provides as follows:

"239 Preferences (England and Wales)

(1) This section applies as does section 238.

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

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

(4) For the purposes of this section and section 241, a company gives a preference to a person if -

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

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

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

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

(7) The fact that something has been done in pursuance of the order of a court does not, without more, prevent the doing or suffering of that thing from constituting the giving of a preference."

60. S241 of the 1986 Act provides, so far as is relevant, as follows:

"241 Orders under ss. 238, 239

(1) Without prejudice to the generality of sections 238(3) and 239(3), an order under either of those sections with respect to a transaction or preference entered into or given by a company may (subject to the next subsection) -

(a) require any property transferred as part of the transaction, or in connection with the giving of the preference, to be vested in the company,

(b) require any property to be so vested if it represents in any person's hands the application either of the proceeds of sale of property so transferred or of money so transferred,

(c) release or discharge (in whole or in part) any security given by the company,

(d) require any person to pay, in respect of benefits received by him from the company, such sums to the office-holder as the court may direct,

(e) provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction, or by the giving of the preference, to be under such new or revived obligations to that person as the court thinks appropriate,

(f) provide for security to be provided for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property and for the security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction or by the giving of the preference, and

(g) provide for the extent to which any person whose property is vested by the order in the company, or on whom obligations are imposed by the order, is to be able to prove in the winding up of the company for debts or other liabilities which arose from, or were released or discharged (in whole or in part) under or by, the transaction or the giving of the preference.

(2) An order under section 238 or 239 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the company in question entered into the transaction or (as the case may be) the person to whom the preference was given; but such an order -

(a) shall not prejudice any interest in property which was acquired from a person other than the company and was acquired [in good faith and for value], or prejudice any interest deriving from such an interest, and

(b) shall not require a person who received a benefit from the transaction or preference [in good faith and for value]to pay a sum to the office-holder, except where that person was a party to the transaction or the payment is to be in respect of a preference given to that person at a time when he was a creditor of the company."

61. It is common ground that the three payments:

61.1 Did, as a matter of fact, prefer MIL within the meaning of S239(4);

61.2 Were made at a "relevant time" within the meaning of S239(2) and S240 (on the basis that they were paid within 2 years of the "onset of insolvency" - being the relevant time as MIL was "connected" with OPL); and

61.3 Were made at a time when OPL was unable to pay its debts within the meaning of S123 (being balance sheet insolvent at least).

62. However, there are issues between the parties as follows:

62.1 As to whether the three payments constituted a preference in fact of Dr Masters;

62.2 As to whether the requirements of S239(5) of the 1986 Act were satisfied, namely that in making the payments, OPL (i.e. in effect Dr Masters as its directing mind) was influenced by a desire to put either MIL or Dr Masters (if relevant subject to paragraph 62.1 above) in the event of an insolvent liquidation into a position better than that which it would have been in had the payments not been made;

62.3 As to whether, even if Dr Masters was not preferred, but only MIL was, a remedy lies against Dr Masters having regard to the provisions of S241(1) and/or (2) and the ability of the Court to make orders against third parties.

63. It is common ground that as MIL and Dr Masters were "connected" with the company, it is to be presumed that MIL and Dr Masters were influenced by the desire referred to in paragraph 62.2 above, the burden being on them to show otherwise.
64. The alternative case advanced against Dr Masters in respect of these payments is that in causing OPL to make the relevant payments, he acted in breach of his fiduciary duties to OPL as set out in paragraph 57 of the Points of Claim, namely a duty to act in good faith in the interests of the company; a duty to act for a proper purpose; a duty not to allow his personal interests to conflict with those of the company; and a duty when OPL was insolvent to act having regard to the interests of creditors as a whole. Damages for breach of fiduciary duty are sought in the amount paid away, giving credit only for the £36,000 referred to in paragraph 57 above.
65. As to the alternative breach of fiduciary claim, apart from the issue as to whether Dr Masters is liable for breach of fiduciary duty, issues arise as to the availability of relief under S1157 of the Companies Act 2006 ("the 2006 Act"), and as to whether Dr Masters is entitled to rely upon limitation and/or laches defences.

(ii) Payments by OPL to MIL in October and November 2001

66. These payments, totalling £115,000 were made whilst the winding up petition that led to the winding up of OPL was on foot. The payments were thus void pursuant to S127 of the 1986 Act unless validated. The onus was thus upon MIL to persuade the Court that the payments should be validated pursuant to S127. During the course of the trial Mr Margolin on behalf of MIL and Dr Masters realistically accepted the difficulty of the task and indicated that MIL would not pursue its claim to have the payments validated. This would have involved demonstrating the payments were for the benefit of OPL and its creditors, and the task was in my judgment an impossible one given how late in the day the payments were made. Thus MIL is liable to repay the £115,000.
67. As to Dr Masters, it is Mr Wilson's case that Dr Masters caused the payments to be made in breach of his fiduciary duties. As to this, essentially the same issues broadly arise as in the case of the alleged preferential payments as identified in paragraphs 64 and 65 above.

(iii) Further Issue in relation to Remedy

68. Mr Margolin on behalf of MIL and Dr Masters points out that if the Curaderm and ICE claims, and in particular the Curaderm claim for substantial loss of profits, are not good claims, and their proofs ought to be dealt with accordingly, then the deficiency is likely to be substantially less than the sums that Mr Wilson on behalf of OPL seeks to recover. This could potentially lead to the result that MIL and/or Dr Masters could be liable to pay monies over to Mr Wilson only for a substantial proportion to become repayable to MIL in the liquidation of OPL by way of dividend.

(F) Alleged Preference

(i) Preference in Fact of Dr Masters

69. Mr Shaw sought during the course of his submissions to suggest that Dr Masters was preferred in fact in a number of different ways, namely as a guarantor of the liabilities of MIL to the Bank, as a guarantor of the liabilities of OPL to the Bank, and as a shareholder in MIL, although the Points of Claim rely solely on the assertion in paragraph 51 that Dr Masters had been preferred in fact because "… the making of the Preferential Payments reduced MIL's debt to the Bank and thereby Dr Masters' exposure pursuant to his personal guarantee". Mr Shaw's point is that there was a preference in fact for the purposes of S239(4) if Dr Masters was a surety for liabilities of OPL, which he was in respect of OPL's indebtedness to the Bank, and if as a result of the payments in question he was placed in a better position than he otherwise would have been in the event of an insolvent liquidation, whether or not the improvement in position arose in his capacity as guarantor for OPL or otherwise - such as, as a guarantor for MIL or as a shareholder of MIL.
70. I was referred to no authority for this proposition, and I do not consider it to be correct. As I read S239, it is concerned with creditors and guarantors, and about setting aside preferences where a company has done something or caused something to be done which puts one of the company's creditors or a surety or guarantor for any of the company's debts of liabilities in a better position as creditor or surety/guarantor (as appropriate). Whilst on a literal construction of S239(4) it might be open to the construction contended for by Mr Shaw, I consider that very much clearer wording would be required for S239 to be construed as having the effect contended for, otherwise S239 could operate to require a person to disgorge a benefit obtained in some other capacity from the mere accident of them being a surety or guarantor, and even though the benefit obtained has nothing to do with their status as surety or guarantor and they have not been benefited in that latter capacity.
71. Consequently, I consider that I am solely concerned with whether the effect of the payments complained of was to benefit Dr Masters in his capacity as a surety or guarantor for the liabilities of OPL.
72. As to whether Dr Masters was so benefited, it is necessary to consider the effect of the relevant payments in the context of the Cross-Guarantee and Debenture. The payments were each made by OPL to MIL. On one view the payments cannot have amounted to a preference of Dr Masters as surety or guarantor for OPL's liabilities to the Bank as the payments in themselves had no effect on Dr Masters's position as surety or guarantor, unlike, say, a payment by OPL to the Bank in reduction of OPL's liability to the Bank. However, even if it is permissible to have regard to the fact that the monies were paid to MIL with a view to MIL using the same to reduce its liabilities to the Bank and ultimately renegotiating new facilities for both MIL and OPL, there is, as I see it, still no sufficient benefit to Dr Masters. The effect of the payment to the Bank served to reduce MIL's liability to the Bank, and consequently Dr Masters and OPL's exposure to the Bank as surety or guarantor for the liabilities of MIL, and thus Dr Masters' exposure as surety or guarantor for OPL's own liabilities.
73. However, in the event of a hypothetical liquidation at any relevant time, the Bank was, in fact, and as evidenced by the accounts and the actual realisations on the liquidation of OPL, fully covered by the book debts and stock secured by the Cross-Guarantee and Debenture. Consequently, Dr Masters was, in fact, in no different position than he would have been vis à vis the Bank even if no payments had been made, cf. the analysis of Lewison J in Re Hawkes Hill Publishing Company Limited [2007] BPIR 1305 at paragraph 31.
74. Consequently I find that there was no preference in fact of Dr Masters.

(ii) Desire to Prefer

75. The meaning of "desire" was explained by Millet J in Re MC Bacon [1990] BCC 78 at 87 as follows:

"It is no longer necessary to establish a dominant intention to prefer. It is sufficient that the decision was influenced by the requisite desire. That is the first change. The second is that it is no longer sufficient to establish an intention to prefer. There must be a desire to produce the effect mentioned in the subsection.

This second change is made necessary by the first, for without it, it would be virtually impossible to uphold the validity of a security taken in exchange for the injection of fresh funds into a company in financial difficulties. A man is taken to intend the necessary consequences of his actions, so that an intention to grant a security to a creditor necessarily involves an intention to prefer that creditor in the event of insolvency. The need to establish that such intention was dominant was essential under the old law to prevent perfectly proper transactions from being struck down. With the abolition of that requirement intention could remain the relevant test. Desire has been substituted. That is a very different matter. Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.

It is not, however, sufficient to establish a desire to make the payment or grant the security which it is sought to avoid. There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor's position in the event of an insolvent liquidation. A man is not to be taken as desiring all the necessary consequences of his action. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages. It will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditors' position in the event of its own insolvent liquidation.

There is, of course, no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case just as the dominant intention could be inferred under the old law. But the mere presence of the requisite desire will not be sufficient by itself, it must have influenced the decision to enter into the transaction. It was submitted on behalf of the Bank that it must have been the factor which "tipped the scales". I disagree. That is not what sub-s (5) says; it requires only that the desire should have influenced the decision. That requirement is satisfied if it was one of the factors which operated on the minds of those who made the decision. It need not have been the only factor or even the decisive one. In my judgment, it is not necessary to prove that, if the requisite desire had not been present, the company would have entered into the transaction. That would be too high a test."

76. As I have said, it is common ground that the onus is on MIL and Dr Masters to rebut the presumption that OPL was, in making any of the payments, influenced by a desire to better the position of MIL in the event of an insolvent liquidation. In practical terms, this involves MIL and Dr Masters satisfying me on to the balance of probabilities that OPL was acting solely by reference to proper commercial considerations in making the payments, and that a desire (i.e. a subjective wish) to better the position of MIL in the event of an insolvent liquidation did not operate on the directing mind or minds of OPL, i.e. Dr Masters, at all - cf. Wills v. Corfe Joinery Limited [1977] BCC 511 at 516 - 517 per Lloyd J, and Re Conegrade [2003] BPIR 358 at 373 - 374 per Lloyd J.
77. The case advanced against MIL and Dr Masters is that the relevant payments were made to MIL in part repayment of the indebtedness of OPL to MIL as part of a conscious or deliberate policy of ensuring that OPL's assets, and in particular the proceeds of sale received from the sale of information relating to the Cream, were applied to improve the position of MIL and that of Dr Masters to the effective detriment of OPL and its creditors - see e.g. paragraph 24 of Mr Shaw's Skeleton Argument.
78. On the other hand, it was MIL's and Dr Masters' case that the payments were made because the Bank put OPL under pressure to make the payments to MIL so that it could reduce its liabilities to the Bank with a view to regularising the position with the Bank, ultimately through the agreement of new facilities, with a view to securing the survival of both MIL and OPL, with MIL continuing to support OPL, following the difficulties that both companies had got into given the expenditure incurred seeking to obtain the requisite approvals for the Cream, and the contribution that MIL had made towards the same using monies borrowed from the Bank. It was pointed out to me that apart from the venture involving the Cream, there was the other side of OPL's business involving the distribution of BIPP, which remained viable.
79. On the back of this case as so advanced by MIL and Dr Masters, it was Dr Masters' evidence (see e.g. paragraph 85 of his first Witness Statement) that in causing OPL to make the relevant payments, he (and thus OPL) did not have in mind at all any desire to improve the position of MIL, or indeed anybody else, in the event of the insolvent liquidation of OPL. If I accept this evidence, then the presumption against MIL and Dr Master will have been rebutted.
80. As against the case so advanced by MIL and OPL, Mr Shaw, on behalf of Mr Wilson, submitted that I should treat Dr Masters as an unreliable witness, and that the evidence pointed firmly, albeit inferentially, to OPL having a desire to improve MIL, and through MIL, Dr Masters. The matters that Mr Shaw pointed to included the following:

80.1 The financial difficulties caused by the high levels of expenditure in seeking to bring the Cream to market, as reflected in Dr Masters' own observations as referred to in paragraph 17 above;

80.2 The fact of OPL's balance sheet insolvency; and

80.3 The fact that by late 2000 the dispute with Curaderm was warming up, and Curaderm was, by October 2000, threatening a multi-million pound claim against OPL which Dr Masters, on his own evidence, perceived had a 50:50 prospect of success.

81. As to Dr Masters' reliability as a witness. I have myself in paragraph 46 above identified certain unsatisfactory features about his evidence, albeit going to a different issue. There were other aspects of his evidence that left me with real concerns as to his general credibility as a witness, even giving him credit for the passage of time since the material events took place, including, in particular:

81.1 His evidence as to actual Bank pressure and that the Bank had insisted that the proceeds of sale of the information relating to the Cream be used to reduce MIL's liability to the Bank, when the documentary evidence and the evidence of Mr Fitzpatrick pointed to less overt pressure being asserted by the Bank and against the Bank having so insisted.

81.2 His evidence in his first Witness Statement, contradicted by earlier documentary evidence referred to above, that the purchase price for the sale of this information relating to the Cream was reduced from £5m to £0.5m as a result of the discovery of difficulties in relation to patent rights; and

81.3 His evidence that the Bank was kept informed about the winding up petition, which cannot have been right in the light of Mr Fitzpatrick's evidence, and would almost certainly have led to the Bank freezing OPL's accounts.

82. My conclusions on the issues of desire to prefer are as follows:

82.1 I do not accept that the sale of the information relating to the Cream was, in itself, part of a deliberate policy to realise the assets of OPL so that the position of MIL and/or Dr Masters could be improved to the detriment of OPL. I am satisfied that by mid 2000 the point had been reached at which it was appreciated by Dr Masters that the costs associated with the Cream and the liabilities of OPL to MIL and the Bank, and of MIL to the Bank representing monies advanced to MIL by the Bank, were threatening the future of both OPL and MIL and that something had to be done to stabilise the position. Further, whilst I consider that Dr Masters overstates the extent to which the Bank might have placed overt pressure on OPL and MIL, I am satisfied from the evidence of Mr Duncan and Mr Fitzpatrick, that OPL and MIL took the matter of keeping within bank facilities seriously, and that the Bank, through Mr Fitzpatrick, did make it clear that the Bank was concerned as to the level of borrowing, and that the increase in bank facilities that had been granted to fund the expenses in relationship to the Cream could not be continued, and thus that the Bank did press for a substantial reduction in the overdrafts that could only be achieved by a realisation of assets by OPL.

82.2 However, although the sale of the information relating to the Cream and the negotiation of new banking facilities for both MIL and OPL was seen as a way of securing the trading future of both companies, including the BIPP side of OPL's business, and although I am satisfied that ICE was not perceived as a real problem until, at the earliest, ICE's letter dated 11 May 2001, I am satisfied that by April 2001, if not earlier, OPL/Dr Masters was aware and perceived that the claims made by Curaderm represented a serious risk to the future viability of OPL. There had by April 2001 been extensive correspondence with Curaderm's solicitors, and Curaderm had commenced proceedings seeking damages of in excess of US$5m which Mr Duncan perceived had a 50:50 prospect of success or failure.

82.3 It is also a material factor that OPL was balance sheet insolvent at all relevant times, although I do take into account that, subject to stabilising its own position, it was open to MIL to support OPL. Whilst issues may have arisen in relation to the letter of support given for the purposes of signing off the accounts of OPL for the year ended 31 December 2000 in July 2001, there is, to my mind no real doubt as to MIL's commitment at least prior to the presentation of the winding up petition by ICE.

82.4 Despite my reservations as to the reliability of Dr Masters' own evidence, I am just persuaded by Dr Masters', Mr Duncan's and Mr Fitzpatrick's evidence going to the commercial purpose behind the payment and by the fact that at that stage the Curaderm dispute, whilst the subject matter of correspondence, was at a fairly early stage, that the presumption of desire to prefer has been rebutted in relation to the first payment made to MIL on 28 December 2000. I am thus satisfied on the balance of probabilities that the sole influencing factor in making this payment was to regularise the position with the Bank, and stabilise the position of both companies, and that OPL was not, at that stage, influenced by a desire to better the position of MIL (or Dr Masters) in the event of an insolvent liquidation, cf. the facts of Re Fairway Magazine Limited [1993] BCLC 643 as considered by Mummery J at 649j-650c.

82.5 However, by April 2001, the position in relation to Curaderm had become that much more serious, and there had been more of an opportunity to reflect on the merits of Curaderm's claims. Consequently, by that stage, as I have said, it must have been perceived that the claims made by Curaderm represented a very serious risk to the future viability of OPL, and I find it difficult to accept that a desire to improve the position of MIL (or Dr Masters) in the event of a liquidation of OPL did not operate in some way in influencing the decision to make the payments absent very persuasive and reliable evidence to the contrary. Although touching on a different point, Mr Fitzpatrick's evidence that it had been on Dr Masters' "agenda" for some time to procure a reduction in his own and his wife's guarantee exposure in respect of OPL does provide some evidence that Dr Masters was a man who thought tactically about the consequences of failure.

82.6 Against this background MIL and Dr Masters have failed to persuade me that, in relation to the payments made on 6 April 2001 and 26 April 2001, a desire to better the position of MIL (and Dr Masters) in the event of an insolvent liquidation, was not at least an influencing factor in deciding to make the payments at that time. My finding to this effect may have been different had I had confidence in the general reliability of Dr Masters' evidence, even giving him credit for the passage of time. However, as I have said, I do not have that confidence.

82.7 I thus consider that the two payments totalling £450,000 were paid as preferences of MIL within the meaning of S239 of the 1986 Act, and that the requirements of that section, including S239(5) are satisfied in relation to those payments.

(iii) Remedy and Liability of Dr Masters under S239 and/or S241(1) and/or (2)

83. S239(3) requires me to make such Order as I think fit to restore the position to what it would have been if OPL had not preferred MIL by making the payments totalling £450,000 to it. S241(1) sets out a number of ways by which that might be achieved, although the wide discretion does, at least in theory, extend to making no order at all - see Re Paramount Airways Limited (In Administration) [1993] Ch 223 at 229 per Nicholls VC.
84. It is correct that S241(2) does specifically envisage the making of orders against third parties (i.e. parties that were not in fact preferred themselves). However, as I see it, the Court could only properly exercise its discretion against such a third party if the order was required as part of the process of restoring the position of the company to what it would otherwise have been, and the third party was in possession of assets applied in making the preference or, at least, had otherwise personally benefited in monetary terms from the payment in some direct and tangible way, cf. Re Sonatacus Limited [2007] BCC 186, to which I was referred, where the third party company had actually received the monies paid by way of preference.
85. Where the preference amounts, as it did here, to the payment of a sum of money to a creditor, then the obvious starting point to any relief is, as I see it, that the recipient creditor should be ordered to repay the relevant monies. In my judgment, the appropriate order to make in the circumstances of the present case, subject to the question of deductions that I consider below, is that MIL should repay the £450,000 to OPL. The monies not having been paid on by MIL to Dr Masters, I do not consider it appropriate to make an order against him for the purposes of restoring the position of OPL. He may have received some incidental benefit as a shareholder in MIL, but it does not seem to me that the making of an order against Dr Masters is either necessary or appropriate for the purposes of achieving a result required to be achieved by S289(3). If, which I do not consider to be the case, I have any discretion to grant relief against Dr Masters in these circumstances, I exercise my discretion against doing so given, in particular, the remedy that exists against MIL and the incidental nature of any benefit that Dr Masters might have gained.
86. I turn then to consider the question of deductions. The aim of the exercise provided for by S239(3) is to restore the position of OPL to what it would have been but for the giving of the preference. It does seem to me that if the preference had not been given, then MIL would not have paid the £36,000 referred to in paragraph 31 that was applied in reducing OPL's own indebtedness to the Bank in which the Bank was, as evidenced by the realisations on liquidation, fully secured without having to call on the guarantee provided by MIL by the Cross-Guarantee and Indemnity. One way of viewing this payment is as a partial repayment by MIL of the £450,000 paid to it, cf. Goode, Principles of Corporate Insolvency Law, Third Edition at 11.86. As a matter of principle, and for the purposes of achieving the exercise provided for by S239(3), I consider that credit should certainly be given for the £36,000.
87. It is clear from the evidence that a form of running account operated between OPL and MIL, and that MIL did give other credits to OPL. As referred to in paragraph 43 above, as at 31 December 2000 the indebtedness of OPL to MIL was £412,652, and this decreased to £77,499 by 31 December 2001, i.e. a difference of £335,153. £115,000 of this is accounted for by the payments which it is now conceded are vulnerable pursuant to S127 of the 1986 Act, leaving a balance of £220,153. This would suggest that during 2000 there were further net credits given to OPL by MIL of £193,847 over and above the £36,000 ((£450,000 + £115,000) - (£335,153 + £36,000) = £193,847).
88. Whilst the two impugned payments of £250,000 and £200,000 were separate and distinct payments, it is, in my judgment, difficult to say that they were not bound up in the other transactions between the parties throughout 2001 that led to MIL's position being improved by a net £335,153, of which £115,000 is accounted for by the payments made contrary to S127 of the 1986 Act, which will be dealt with by way of other relief. This would leave a net balance of £220,153.
89. It is thus arguable that to award more than £220,153 under this head would do more than restore the position of OPL to what it would have been but for the preference, and provide ordinary unsecured creditors with a windfall. The approach of the Australian Courts is to look at the overall effect of the transactions in such a situation - see Goode (supra) at 11-86 referring to Ferrier v. Civil Aviation Authority [1995] 127 ALR 472. I consider that this is, in principle, the correct approach in the circumstances of the present case.
90. In my draft judgment circulated on 25 June 2009, I indicated that, in the circumstances, it was open to me, in the exercise of my discretion under S239(3) and s241(1), and in seeking as best I could to achieve the result anticipated by S239(3) without providing the unsecured creditors of OPL with a windfall, to cap the award against MIL under S239 at £220,153 calculated as above. In a letter dated 29 June 2009 written in response to the draft judgment, Mr Shaw, on behalf of Mr Wilson, invites me to reconsider this approach on the basis that the transactions that would be brought into account for the purposes of the above exercise would include transactions that occurred after the presentation the winding up petition by ICE, including management fees charged by MIL totalling £59,159.33, and payments made by MIL to OPL's suppliers totalling £103,049.33. Approaches of this kind after circulation of a draft judgment are generally to be deprecated - Egan v Motor Services (Bath) Ltd [2008] 1 WLR 1589, at paragraphs 49-51. However, this issue in relation to deductions was not fully ventilated during the course of argument, and I am satisfied that Mr Shaw was perfectly entitled to write to me in the terms that he did, and that the circumstances do fall within the examples of exceptional circumstance identified in Egan at paragraph 51. I therefore accede to Mr Shaw's suggestion that I should reconsider the point in relation to deductions in so far as concerns the impact of transactions that occurred after the presentation of the winding up petition. As Mr Shaw correctly anticipates, I consider it appropriate to have the benefit not only of his own submissions on the point, but also those of Mr Margolin before deciding it, and I will hear argument on the point following the hand down of this Judgment.

(G) Alleged Misfeasance on the Part of Dr Masters in respect of the Payments Alleged to Amount to Preferences

(i) Liability

91. The fiduciary duties relied upon, and which it is said that Dr Masters breached, are set out in paragraph 64 above. The case advanced by Mr Shaw on behalf of Mr Wilson is neatly articulated in paragraph 114 of his Skeleton Argument as follows:

"The Preferential Payments and the Void Dispositions were both positive breaches of Dr Masters' fiduciary duties to the Company. They were not payments bona [fide] in the interest of the Company and nor were they for the benefit of the Company. Furthermore, the making of the payments were for the personal advantage of Dr Masters as outlined above. All of the payments being made at a time when the Company was insolvent, the matter has to be looked at from the point of view of creditors as a whole."

92. We are here concerned with the law prior to the adoption of a statutory code in respect of directors' duties in Chapter 2 of Part 10 of the Companies Act 2006. A couple of initial points should be noted:

92.1 The duty to act in good faith and in the best interests of the company is more correctly expressed as a duty imposed on directors to act "bona fide in what they consider - not what the Court may consider - is in the interests of the company" … Re Smith & Fawcett Limited [1942] Ch 304, at 306 per Lord Green MR.

92.2 It is indeed right that where a company is insolvent, as at all relevant times OPL was, the interests of creditors displace those of members, such that the creditors' interests are paramount - see e.g. West Mercia Safetywear Limited v. Dodd [1988] BCLC 250 at 252 - 253, and Re MDA Investments Limited [2005] BCC 783 at paragraph 70. The fiduciary duty referred to in paragraph 92.1 above is thus qualified such that the "interests of the company" are to be equated primarily with the interests of creditors.

93. Mr Shaw places reliance upon West Mercia Safetywear Limited v. Dodd (supra), a case in which causing a company to make a fraudulent preference under S320 of the Companies Act 1948 was held to amount to a breach of fiduciary duty and misfeasance. However, the key to liability under S320 was not that a desire to prefer was an influencing factor, but rather that the predominant motive had been to prefer. Further, in Re Brian D Pierson (Contractors) Limited [2001] BCLC 275 at 296f - g and 299a - d, Hazel Williamson QC, sitting as a Deputy Judge of the High Court, rightly in my judgment, rejected a submission based on West Mercia Safetywear v. Dodd that it followed that the causing of a preference in itself amounted to misfeasance. In Re Brian D Pierson (Contractors) Limited, Hazel Williamson QC also pointed out that:-

93.1 West Mercia Safetywear v. Dodd involved a specific finding that there had been a conscious application of the company's funds for the known purpose of preferring the directors' own interests, or those of their associates; and

93.2 A claim for misfeasance depends upon positive proof, and thus that a significant additional burden is placed upon the liquidator where a preference has been established by application of the relevant burden of proof under S239(6).

94. I am not satisfied that a case of misfeasance is made out against Dr Masters in respect of the April 2001 payments in the circumstances of the present case. As I have found, the primary motive for making the payments was part of the process of stabilising the two companies (OPL and MIL) with a view to them both continuing to trade with the support of the Bank, as ultimately given expression through the new facilities negotiated with the Bank, for the ultimate benefit of OPL's creditors as a whole, and in particular its trade creditors. By application of the statutory presumption under S239(6), I have held that MIL and Dr Masters have failed to rebut the presumption that OPL was influenced in making the payments by a desire to improve the position of MIL in the event of an insolvent liquidation, but it does not follow from this that a case of breach of fiduciary duty is made out. In reaching the above view, I have taken into account the state of the Curaderm claim and Dr Masters' perceptions as to the merits thereof as at April 2001. However, I am not satisfied that at the time the relevant payments was made, Dr Masters did not hold a reasonable belief that OPL could overcome its difficulties, including those presented by the Curaderm claim, with the support of MIL and the Bank provided that new facilities could be agreed with the Bank, as they were, following the making of the relevant payments so as to enable MIL to reduce its indebtedness to the Bank.
95. I thus reject the claim in misfeasance based upon the payments that I have held to have been preferences.

(ii) S1157, Limitation and Laches Defences

96. Given my findings on liability, it is not strictly necessary for me to deal with these defences. However, I will briefly do so.
97. Had I found that Dr Masters had acted in breach of fiduciary duty, then I would have been unlikely to have granted relief under S1157 of the Companies Act 2006 as it would have been part of my finding that he had acted unreasonably in causing the payments to have been made, and this would have precluded relief under S1157 because Dr Masters would then have failed to satisfy me that he had acted "honestly and reasonably" and that he "ought fairly to be excused" from liability.
98. As to limitation, I am satisfied on the authority of Re Pantone 485 Limited, Miller v. Bain [2002] 1 BCLC 266, that the relevant claim falls within S21(1)(b) of the Limitation Act 1980, such that no limitation period is applicable on the basis that if I had found against Dr Masters, then it would have been an essential part of my finding that Dr Masters had, as a fiduciary, used his beneficiary's money to confer a benefit on a company he controlled such that he was, in substance, denying OPL's title to the money for his own purposes so as to amount to a conversion of OPL's money for his own use, cf. Re Pantone 485 Limited (supra) at paragraph 44.
99. The defence of laches involves proof of a substantial lapse of time coupled with the existence of circumstances which make it inequitable to enforce the claim - see Snell's Equity, 31^st Edition at 5-19. There were unfortunate and regrettable delays in the bringing of the present claim. Whilst I am satisfied that this has caused inconvenience to MIL and Dr Masters, I am not satisfied that they have been materially prejudiced in advancing such defences as have been open to them even having regard to difficulties in getting hold of all the Bank's contemporaneous documentation and obtaining a statement from Mr Fitzpatrick's successor, a Mr Cassidy. Consequently I am not satisfied that the circumstances are such as to render it inequitable for Mr Wilson and OPL to pursue a claim in misfeasance against Dr Masters.
100. In short, I do not consider that any of these defences would have avoided liability. However, as I have found, liability in misfeasance in relation to the two payments that I have held did constitute preferences has not been made out against Dr Masters.

(H) Remedy against under S127 of the 1986 Act

101. MIL and Dr Masters no longer pursue their informal application for the Court to ratify the relevant payments under the power do so under S127. The relevant payments are therefore to be treated as void and recoverable by OPL against the recipient, MIL. Mr Wilson and OPL are therefore entitled to an order for the repayment of the total sum of £115,000.

(I) Alleged Misfeasance on the Part of Dr Masters in respect of the Payments Declared to be Void pursuant to S127 of the 1986 Act

(i) Liability

102. The circumstances as to the payment of these sums are, in my judgment, very different to those in which the payments were made in April 2001. Most importantly:

102.1 ICE had presented a winding up petition and no application had been made at the time for an order prospectively validating the payments, notwithstanding that Herbert Smith had advised as to the significance and effect of S127.

102.2 Herbert Smith had, at about the time of the first hearing of OPL's application to strike out the petition in August 2001, been instructed to do no further work in relation to the petition.

102.3 By mid October 2001, OPL had formally disinstructed Herbert Smith in relation to both ICE's petition and the arbitration with Curaderm. Whilst two of the payments just predated those steps, I have neither seen nor heard any evidence to suggest that there was, at the time the payments were made, any reasonable expectation that OPL would avoid going into liquidation. Indeed, I find that the likelihood is that the decision had been taken to let OPL go some time before the payments were made.

102.4 It goes without saying that the commercial considerations relied upon by MIL and Dr Masters to support the April 2001 payments had long since gone.

103. In these circumstances, and having regard to the considerations discussed in paragraphs 91 to 93 above, I am satisfied that Dr Masters cannot have believed that the payments in question were in the interests of the company or the general body of its creditors, or were being made for the proper corporate purposes of OPL. Consequently, I find that Dr Masters did act in breach of his fiduciary duties as a director of OPL, in causing the payments to be made, and that he is liable pursuant to S212 of the 1986 Act to contribute to the assets of OPL in the sum of £115,000, subject only to the potential defences that I next consider.

(ii) S1157 Limitation and Laches Defences

104. I do not consider that Dr Masters is entitled to rely upon a defence under S1157 of the Companies Act 2006 because I do not consider that it can be said that in causing relevant payments to be made he acted "honestly and reasonably" such that he ought to be excused.
105. As I see it, no limitation point arises because the payments were made within 6 years of the commencement of proceedings in September 2007. In any event, S21(1)(b) of the Limitation Act 1980 would apply - see Re Pantone 485 Limited (supra) discussed in paragraph 98 above.
106. A defence of laches is unsustainable for the same reasons as set out in paragraph 99 above.

(J) Mr Margolin's Further Point as to Remedy

107. I return now to the potential unfairness identified by Mr Margolin and referred to in paragraph 68 above.
108. I appreciate the difficulty identified by Mr Margolin, but there is something of a chicken and an egg about it, in that without knowing that he is in funds, Mr Wilson cannot continue dealing with the process of Curaderm's and ICE's proofs. In these circumstances, it does seem to me that there is no reason in principle why MIL and Dr Masters should not be required to satisfy the judgment against them.
109. Whilst I would be happy to hear further arguments on the point, my initial view is that, apart from any other objections, a stay would only be appropriate in these circumstances if security were provided for the whole or a substantial part of the judgment debt.
110. On the other hand, it does seem to me that it may be appropriate for me to direct that MIL should, itself, be entitled to prove, in addition to its existing proof, for the judgment debt, a solution applied in West Mercia Safetywear Limited v. Dodd (supra) at page 35.

(K) Conclusion

111. Subject to the considerations in paragraphs 107 to 110 above, I find as follows, namely that:

111.1 The payments made on 6 April 2001 (£200,000) and 26 April 2001 (£250,000) by OPL to MIL, but not that made on 28 December 2001 (£250,000), were preferences of MIL within the meaning of S239 of the 1986 Act;

111.2 The order to be make against MIL pursuant to S239(3) and S241(1) of the 1986 Act should give credit to MIL, as against the sum of £450,000 that would otherwise be payable, for the sum of £36,000 referred to in paragraph 31 above. It may be that further deductions should be taken into account in view of the matters referred to in paragraphs 87 to 90 above. I will hear further argument as to the extent to which, if at all, any further deductions should be brought into account at a hearing to be listed to take place following the hand down of this Judgment;

111.3 The claim against Dr Masters under S239 and S241, and for misfeasance based upon the payments referred to in paragraph 111.1 above, ought to be dismissed;

111.4 Mr Wilson/OPL are entitled to recover the further sum against MIL of £115,000 on the basis that the four payments totalling that sum made by OPL to MIL in October and November 2001 were void pursuant to S127 of the 1986 Act;

111.5 Dr Masters acted in breach of his fiduciary duties in causing OPL to make the payments referred to in paragraph 111.4, and is liable to contribute the sum of £115,000 to the assets of OPL pursuant to S212 of the 1986 Act accordingly.

112. After the hand down of this Judgment, I will, to the extent that there has been no agreement as to these matters, hear argument as to the deduction point referred to in paragraphs 87 to 89 above, any further argument arising out of the matters referred to in paragraphs 107 to 110, and argument as to interest and costs.