England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		29 October 2009

Mr Justice Roth :

1. The Claimant in these proceedings applies first, for summary judgment on its claim; and secondly, for summary judgment dismissing the Defendant's counterclaim, alternatively an order striking out the counterclaim under, it would appear, CPR rule 3.4(2) as disclosing no reasonable grounds of claim as a matter of law.

The Parties

2. The Claimant ("Gaetano") and the Defendant ("Obertor") are both companies incorporated in the Isle of Man. Gaetano is a subsidiary of an English company, Icegarden Limited ("Icegarden") , which in turn is wholly owned by Dunollie Limited ("Dunollie"). Obertor is a subsidiary of Brookglade Property Services Limited ("BPS"). A major shareholder in BPS and one of its directors is Mr Christopher Collins.
3. Gaetano and Obertor are each 50 per cent owners of a Portuguese company, Parque de Almancil – Investimentos e Urbanizacoes SA ("PDA"). PDA is their joint venture for the ownership and development of property at Almancil in the Algarve. The intended development is a retirement village and associated facilities, known together as "The Savannahs".

The Shareholders Agreement

4. The relationship between Gaetano and Obertor is governed by an agreement dated May 2004 but apparently entered into only on about 30 July 2004. It has been referred to throughout as "the Shareholders' Agreement" ("the SA"). Under clause 5.2 of the SA, the two directors of PDA initially appointed by Obertor were Mr Collins and a Mr Homersham, and the two directors initially appointed by Gaetano were a Mr Gudka and a Mr Lenherr. As I understand it, they remain the four directors of PDA.
5. The SA, to which PDA is also a party, is expressly governed by English law. The claim and counterclaim in these proceedings both arise under the SA and because of the way the counterclaim has been pleaded, it will be necessary to refer to many of the terms of the SA.
6. Shortly before the making of the SA, on 18 May 2004, Dunollie agreed to advance a loan to PDA of €3.5 million ("the Dunollie loan"). The terms of the Dunollie loan are governed by a loan agreement made between Dunollie and PDA, with BPS and Mr Collins as warrantors. The details of that loan agreement are not material for present purposes save to note that the final date for repayment of the Dunollie loan was on the fifth anniversary of the loan agreement, i.e. 18 May 2009. However, that loan has not been repaid.

The Claim

7. The SA is of indefinite duration without any termination provision as such. However, clause 21 of the SA is headed "Exit strategy/Deadlock". It lies at the heart of the claim in this case and it is necessary to set out almost all of it.

"21 Exit strategy/Deadlock

21.1 either of the Shareholders may at any time serve notice (a Warning Notice) that it intends to implement the deadlock procedure contemplated by this clause.

21.2 The Warning Notice will incorporate a Deadlock Option Notice which will be deemed served if no other agreement is reached by the Shareholders, prior to the expiry of the Warning Notice, on a price at which either will purchase the shares of the other or upon any other solution whereby this deadlock procedure will not be required

21.3 If the Shareholders cannot so agree within 30 days, the Shareholder which served the Warning Notice (the First Party) shall be deemed to have served, immediately following the expiry of the Warning Notice, notice in writing on the other party ("Other Party") (a Deadlock Option Notice) specifying a single price at which the First Party offers either:

(a) to sell to the other Shareholder all (but not some only) of the Shares collectively held by the First Party and/or its nominees (the "First Party Shares"); or

(b) to purchase all (but not some only) of the Shares collectively held by the other party and/or its nominees (the "Other Party Shares").

21.4 A Deadlock Option Notice shall be irrevocable.

21.5 DEADLOCK OPTION

21.5.1 The Other Party shall, within a period of thirty (30) days after receipt of a Deadlock Option Notice, at its sole option elect in writing either:

(a) to purchase, or to procure the purchase of, all of the First Party's Shares at the price stated in the Deadlock Option Notice; or

(b) to require the First Party to purchase, or to procure the purchase of, all (but not some only) of the Other Party Shares at the price stated in the Deadlock Option Notice;

21.5.2 If no election is made in writing by that Other Party within the said period of thirty (30) days after receipt of a Deadlock Option Notice, then it shall be deemed to have elected for option (a). If an election under option (a) or (b)^[1] is duly made, the parties shall be bound to complete the sale and purchase of the relevant Shares at the relevant price within Ninety (90) days after such election.

21.6 COMPLETION

21.6.1 Completion of any transfer of the Shares shall take place at the offices of the First Party when:

(a) the seller shall deliver to the purchasing party a duly executed transfer or transfer in favour of the purchasing party or as it may direct together with the relative share certificates in respect of the Shares;

(b) the purchasing party shall pay the relevant price by banker's draft for value on the completion date;

(c) the seller shall do all such other things and execute all such other documents as the purchasing party may request to give effect to the sale and purchase of the Shares;

(d) if requested by the purchasing party, the seller shall procure the resignation of all directors appointed by the seller and such resignation shall take effect without any liability on the Company for loss of office or otherwise;

(e) the seller shall repay all loans, loan capital, loans or borrowings or other indebtedness in the nature of borrowings outstanding to the Company from the seller;

…

(h) The Shareholders each hereby appoint the other as its attorney for the purpose of executing all such documents and doing all such things as may be required to give effect to the provisions of this clause 21"

8. By a letter dated 24 October 2008, Gaetano purported to serve a "Warning Notice" pursuant to clause 21.1 on Obertor. This followed an ongoing process of discussions about refinancing PDA and finding a third party that would purchase Gaetano's shareholding and repay the Dunollie loan. (There are separate provisions in the SA concerning transfer of shares to a third party.) Indeed, the letter of 24 October 2008 was not the first time the Gaetano side of the joint venture (to use a neutral expression) had sought to serve a clause 21 Warning Notice. On 26 August 2008, Dunollie had purported to serve a clause 21 notice by a letter referring to "fundamental disagreement on various issues". That letter was addressed to Mr Collins at BPS. However, neither side now contends that this was a valid notice under clause 21.1, and Gaetano accepts that to be effective a notice must be served on Obertor as the other party. This is pursuant to the provisions as to service set out in clause 18 of the SA:

"18.1 Any notice or other information required or authorised by this agreement to be given by any party to any other may be given by hand or sent by first class pre-paid post, or acknowledged electronic means to the other party at the address last provided for that type of communication."

9. Clause 18 proceeds to provide for the date on which a notice is deemed to have been given: if sent by post, this will be on the seventh day after posting (clause 18.2); and if by electronic means, it shall be on the date of transmission unless evidence is provided of transmission problems delaying delivery (clause 18.3). The date on which a Warning Notice is held to be served is potentially significant because of the 30 days deadline in clause 21.3. The communication relied on here by Gaetano, the letter of 24 October 2008, was apparently hand delivered at Obertor's registered office in the Isle of Man on 31 October 2008. It was also sent attached to an email of 26 October 2008, addressed to the partner at the solicitors acting for BPS and Obertor, and copied to, among others, Mr Collins. Although there was an earlier indication that these solicitors, in response to the 26 August 2008 letter sent to BPS, had asked that any communications should be addressed to them, it is not clear that that request was made on behalf of Obertor for the purpose of clause 18.1 and Mr de Mestre, as Counsel for Gaetano, does not seek to place much weight on the email of 26 October 2008. Accordingly, taking the hand delivery as the date of service of the 24 October letter, the 30 day period under clause 21.3 expired on 30 November 2008.
10. The letter of 24 October 2008, signed on behalf of Gaetano, comprised three numbered paragraphs, as follows:

"1. This letter is written without prejudice to the validity of the Warning Notice dated 26 August 2008 served by our parent company, Dunollie Limited, with our authority and as our agent, pursuant to clause 21 of the Shareholders Agreement and of the election made in response to that Warning Notice on behalf of Obertor Limited in Hill & Abbott's letter of 3 September 2008.

2. We hereby give you notice under clause 21 of the Shareholders Agreement of our intention to implement the deadlock procedure contemplated by the said clause 21.

3. For the purposes of the Deadlock Option Notice (as contemplated by clause 21.1 of the Shareholders Agreement) we stipulate a price of €3.95 million."

11. Obertor did not make any election under clause 21.5.1, and has refused to purchase the Gaetano shareholding. Gaetano submits this is a clear breach of the clause 21 "deadlock procedure", and that it is entitled to have its shareholding purchased by Obertor at the specified price. Accordingly, it seeks an order for specific performance and damages.

Summary judgment

12. The principles to be applied when determining a claim for summary judgment are well established and not in issue. They were helpfully summarised by Lewison J in The Federal Republic of Nigeria v Santolina Investment Corp and ors [2007] EWHC 437 (Ch) at [4]:

"i) The court must consider whether the claimant has a "realistic" as opposed to a "fanciful" prospect of success: Swain v Hillman [2001] 2 All ER 91;

ii) A "realistic" claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]

iii) In reaching its conclusion the court must not conduct a "mini-trial": Swain v Hillman

iv) This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10]

v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550;

vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63;"

I omit Lewison J's seventh guideline which concerns allegations of fraud or dishonesty since that is not relevant in this case.

The Defence

(a) Warning Notice

13. In answer to the claim against it, Obertor contends in the first place that Gaetano was not entitled to serve a "Warning Notice" at this time at all. Obertor argues that the right to serve such a notice under clause 21 arises only in two situations: (a) in the event of a material breach that is not remedied; and (b) in the event of a deadlock. Furthermore, the purported Warning Notice here was deficient, since it did not set out the basis on which it was being served: it did not warn of what had to be done prior to its expiry such that the deadlock option procedure would not kick in.
14. The reference to material breach arises because of the terms of clause 17 that provides:

"17 Breach of this agreement

17.1 If any shareholder commits any material breach of its obligations under this agreement and fails to remedy the breach (if capable of remedy) within 30 days after being given notice in writing so to do by the other Shareholder, then the defaulting shareholder can be required to transfer its shares in accordance with the provisions of clause 21 below.

17.2 Any notice given to a shareholder in breach shall be without prejudice to any other claim or action against the defaulting shareholder."

15. In argument, the parties advanced contrasting submissions as to how clause 17 should operate. Gaetano submitted that the significance of the 30 days notice in clause 17.1 is that on the expiry of that period (assuming the breach has not been remedied), the innocent party initiating the clause 21 procedure can require a sale to it by the defaulting party at the specified price: the two-way deadlock option procedure in clause 21.5 is accordingly modified to give effect to the words "the defaulting party can be required to transfer its shares" in clause 17.1. By contrast, if the innocent party served a clause 21 notice immediately after breach or before the 30 days remedy period expired, the normal provisions of the deadlock option would apply. However, this construction has the effect, as Counsel for Obertor pointed out, that after the 30 days the innocent party could mandate a transfer of shares at an absurdly low or purely nominal price, which bore no relation to their value or its loss resulting from the breach (for which its right to claim damages is in any event preserved by clause 17.2). On the other hand, Obertor submitted that clause 17 prescribed the exclusive means by which a clause 21 notice could be served in the event of material breach: such a notice could be given only after the expiry of the 30 days remedy period and brought into play all the provisions of clause 21, including the two-way deadlock option. However, although this interpretation would of course ensure that a fairer price was proposed, it is open to the objection that it gives no effect to some of the express wording in clause 17.1 and would place the innocent party, faced with a material breach, at risk of having to sell its shareholding to the defaulting party.
16. However, the case before me does not involve a material breach. Although neither of these conflicting interpretations of clause 17 produces an altogether commercially satisfactory outcome, I do not need for present purposes to determine the correct construction of that provision. The clause is of interest only because it is the sole other provision in the SA that makes reference to clause 21, and it is of relevance only insofar as it may shed light on the correct interpretation of clause 21.
17. The principles applied to the construction of a contract under English law are set out by Lord Hoffmann in ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912H-913F, with whose judgment Lords Goff, Hope and Clyde agreed. The starting point is the express wording of the provision and the meaning that it reasonably conveys. Here, clause 21.1 states that either shareholder may serve a notice that it intends to implement the deadlock procedure "at any time". I see no basis for refusing to give this expression its ordinary meaning. If the parties had intended to restrict the right to implement the procedure to a situation of deadlock or of material breach, the SA could be expected to have said so. The fact that the clause calls this a "deadlock procedure" cannot in my judgment be sufficient to impose a requirement that it can be implemented only in a situation of deadlock. Indeed, even that is not suggested by Obertor since it concedes, as it must, that the clause 21 procedure can be set in motion also in the event of material breach. I note that the heading of clause 21 is also in broader terms, being entitled "Exit strategy/Deadlock". But a more powerful consideration is that nowhere in the SA is there any definition of "deadlock" or what would constitute it. "Deadlock" is not a term of art. For a carefully specified procedure evidently designed to enable an orderly exit of one of the two parents from the joint venture, it would be a recipe for delay and dispute if the party initiating the procedure had to establish, and if disputed convince a court before obtaining relief, that the relative position of the parties had created what could properly be regarded as a "deadlock".
18. In short, Obertor's construction would not only fail to give the words "at any time" their ordinary meaning, but would give rise to commercial uncertainty as to the operation of what, having regard to its consequences, is a key provision in the SA. I am not impressed by the argument that if Gaetano is right, it would theoretically have been able to serve a clause 21 notice the day after the SA was signed. The same can be said of termination notice provisions in many long-term cooperation agreements. The fact that termination or "exit" is most unlikely the day after the agreement is signed is due to the parties' expectations at the outset of their joint venture; it does not here depend upon, still less require as commercially necessary, the importation of a restriction of the otherwise unfettered right to serve a notice under clause 21.1 "at any time". I bear in mind Lord Diplock's statement that "if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense." quoted by Lord Hoffmann in formulating his fifth principle in ICS (at 913E). But I see nothing here that makes it even arguable that Gaetano's construction of clause 21.1 "flouts business commonsense" or, in Lord Hoffmann's words, that "something must have gone wrong with the language". See also Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 3 WLR 267, per Lord Hoffmann at [25]. The fact that clause 17 may in certain circumstances cause difficulties in its interaction with clause 21.5 arises from the wording of clause 17; as discussed above, those difficulties are not removed by adopting Obertor's construction of clause 21.1. In my judgment, clause 17 does not provide any basis for distorting the ordinary meaning of clause 21.1. Accordingly, I conclude that there is no realistic defence to Gaetano's right to serve a clause 21.1 notice on 24 October 2008.
19. On that basis, I consider it unarguable that the letter of 24 October failed to constitute such a notice. Clause 21.1 entitles either shareholder to serve notice "that it intends to implement the deadlock procedure contemplated by this clause". That is precisely what paragraph 2 of the letter does. The fact that clause 21.1 applies to such a notice the appellation of "Warning Notice" cannot possibly import a contractual requirement to spell out the reason why the notice is being served. Apart from the fact that on my holding above the party serving the notice is not required to rely on any reason, the notice will in any event be "warning" that the clause 21 "deadlock procedure" is being implemented.

(b) Deadlock Option Notice

20. Clause 21.2 provides that the Warning Notice "will incorporate a Deadlock Option Notice", as to which the meaning is set out in clause 21.3. Obertor contended that the letter of 24 October 2008 failed properly to incorporate a "Deadlock Option Notice" since it specified only a price but did not set out all that is involved in the deadlock option, or the circumstances in which this price would apply under the contractual procedure. There is nothing in this point. Clause 21.3 states that the so-called "Deadlock Option Notice" has to specify a single price at which the serving party offers either to sell or buy the relevant shareholding. The 24 October letter clearly specifies a single price. The fact that it refers to clause 21.1 instead of clause 21.2 of the SA is clearly a slip that could not cause any misunderstanding and, indeed, Mr Guy as Counsel for Obertor did not take any point on this obvious error. I can see no basis whatever for finding that the incorporated "Deadlock Option Notice" was invalid because it did not set out the meaning of the notice as spelt out in the SA. Obertor and Gaetano are commercial parties, both with ready access to legal advice, and the 24 October letter specified in clear terms the one element that had to be supplied for the Deadlock Option Notice which, pursuant to the SA, is "incorporated" in the Warning Notice, i.e. the price.

(c) Alternative solution

21. Pursuant to clause 21.2, the Deadlock Option Notice will not become operative if within 30 days of service of the Warning Notice "[an]other agreement is reached by the Shareholders … upon any other solution whereby this deadlock procedure will not be required." As explained above, the deadline under the notice of 24 October is to be taken for present purposes as being 30 November 2008. Was an agreement on such an alternative solution reached by that date? Obertor submits that it was, relying on two meetings held on 14 and 28 November 2008.
22. There are contemporaneous summary notes of both of those meetings taken by Mr Colin Pardoe. The "meeting" of 14 November was in fact a telephone conference call. Nothing of relevance appears to have been resolved in that discussion save that the participants agreed to have a meeting at Mr Gudka's north London offices in an effort to "resolve all matters". They fixed that meeting for 24 November but it was delayed by a few days: hence the meeting held on 28 November in Edgware. It is on that meeting in particular that Obertor relies.
23. The meeting lasted for 4½ hours and both Mr Collins and Mr Gudka were present. Mr Gudka is one of the two directors of PDA nominated by Gaetano but he is not a director of either Gaetano or Dunollie. However, Mr Guy submitted that Mr Gudka has acted on behalf of Gaetano in the past and would have had what amounts to ostensible authority to bind it. I accept that for the purposes of this summary application that is at least arguable.
24. Both Mr Collins and Mr Gudka were of course well aware when they met on 28 November that the Warning Notice had been issued (the email attaching the notice had been copied to Mr Collins: para 9 above). It is inconceivable that they did not also appreciate that it was about to expire, bringing into operation the "irrevocable" Deadlock Option Notice and its consequent procedure. However, it is striking that the notes of the meeting of 28 November contain no reference whatever to either the Notice or the deadlock procedure. I accept, as submitted by Mr Guy, that clause 21.2 does not require that the agreement on an alternative solution whereby the deadlock procedure is not needed has to be recorded in writing, although one would have thought that for something of such importance that might be an elementary precaution. Nonetheless, to preclude the procedure taking effect, there clearly must be such an agreement, even if only oral. Yet here is a meeting at this critical time at which there is no reference to the deadlock option procedure at all. Nor is there any suggestion that this is a deficiency in Mr Pardoe's notes. In his witness statement of 14 August 2009, made in opposition to the present application, Mr Collins in his account of the meeting does not assert that there was any discussion of either the Notice or the impending deadlock procedure. His position is that the parties there agreed that he would find a replacement investor in PDA for Dunollie, which would be achieved by such a third party buying Icegarden from Dunollie (and thus acquiring Gaetano) and repaying as part of that transaction the Dunollie loan. Mr Collins says that no one at the meeting thought that the buyout of Dunollie which they discussed could be achieved within 30 days of service of the 24 October letter (which incidentally he believes expired on 28 November) and he states: "it was expressly agreed by [Mr Gudka] that the Dunollie's debt (as opposed to the exit notice) would not be enforced until May" [my emphasis]. He also says that Mr Gudka agreed that the price for Gaetano's shares under such an arrangement would remain at €2 million.
25. Mr Collins' position in his witness statement, as echoed in Obertor's submissions before me, is that it was "an inevitable consequence" of this discussion and agreement that "the parties agreed to try the "alternative solution" and to give time until May 2009 for that purpose."
26. I bear in mind that this is an application for summary judgment and that at this stage Obertor therefore only has to show an arguable case. However, applying that test, I find it quite impossible to imply from the meeting of 28 November and Mr Collins' evidence an objective "agreement" on [an]other solution for the purpose of clause 21.2. Given the absence of any express agreement that the deadlock procedure would not be required, such an agreement, in my judgment, could only be implied if what the parties expressly agreed was inconsistent with the deadlock procedure being needed. However, it seems clear that all that was agreed was that Mr Collins would proceed, or perhaps more accurately resume, his efforts to find a purchaser who would provide a comprehensive exit for the Dunollie interest in PDA, encompassing both the shares and the loan, and indeed, it seems, certain other outstanding matters. Hence the €2 million price for the shares was as part of a total package whereby, says Mr Collins, the purchaser would pay a total of €6.7 million to include also payment of claims by Mr Gudka and the other Gaetano nominated director. It is evident from the notes of the meeting, the accuracy of which has not been questioned, that it was by no means clear that Mr Collins would find such a purchaser. See for example note 4: "In the event a purchaser is found…."; and note 6: "… if a purchaser can be found…." Indeed, Mr Gudka referred expressly to the risk that no purchaser would be found since he stated that if the Dunollie loan was not repaid by May 2009 "liquidation proceedings would be commenced": note 9.
27. No doubt Mr Gudka and Dunollie, and hence it can reasonably be inferred Gaetano, would have been content if such a comprehensive solution could have been achieved. The Dunollie loan was in itself a significant debt from a company which at this stage was seriously under-funded. But the fact that the parties agreed that Mr Collins would continue to seek such an overall resolution cannot be regarded as inconsistent with the requirement on the part of Gaetano that the deadlock option procedure should take effect from the expiry of the 24 October notice. The procedure gave Obertor 30 days for its election and specified a period of 90 days thereafter for a share transfer: clause 21.5. Accordingly, at any time within this period of some four months if a purchaser willing to pay the €6.7 million referred to by Mr Collins was found, the parties could have agreed not to proceed with the share transfer inter se under clause 21 in favour of such a transaction with a third party.
28. Here, it is clear that: (a) no such purchaser existed as at the time of the 28 November meeting; and (b) there was no guarantee that such a purchaser would be found. The deadlock option procedure could operate while at the same time Mr Collins attempted, as discussed on 28 November, to find a purchaser willing to take over the shares, repay the loan and make certain other payments. Although the Deadlock Option Notice is expressed to be "irrevocable", that means only that the party giving the Notice cannot unilaterally revoke it (e.g. if the other party decides to exercise the option to buy the notifying party's shares). It does not preclude the two parties from mutually agreeing to set the Notice aside, or suspend its operation.
29. Hence in the absence of any express agreement at the 28 November meeting regarding the deadlock procedure, I do not find it arguable that the parties reached agreement on the requisite "other solution" within the terms of clause 21.2 so as to preclude the deadlock procedure from taking effect. Mr de Mestre, for Gaetano, also relied on the absence of any reference to this ground for contesting the notice in the letter from Obertor's solicitors dated 20 March 2009 and stated that it first surfaced in Obertor's pleaded Defence. Although I do not rest my conclusion on that basis, I note that in their letter of 20 March Obertor's solicitors refer to a meeting held by the parties' representatives on 9 January 2009 at which Mr Collins apparently sought withdrawal of the Notices^[2] issued by Gaetano. This contrasts with the absence of any attempt to seek withdrawal of the Notice(s) at the meeting on 28 November, which was held at a critical time in the light of the contractual machinery.

The Counterclaim

30. Obertor has pleaded a counterclaim that sets out a series of alleged breaches of the SA. As stated above, Gaetano applies for summary judgment on the counterclaim or in the alternative that it be struck out.
31. Mr de Mestre complains that since the Counterclaim first sets out a large number of terms of the SA, and then separately sets out the alleged breaches, it fails effectively to identify to which term each alleged breach relates. Obertor simply alleges (in paragraph 32) that Gaetano was in breach of each of those terms. This form of pleading is indeed unhelpful, but such deficiency could be countered by a request for further information and is not in itself a ground for summary judgment. However, it makes more involved the Court's task in considering, as I must, each of the bases on which the Counterclaim is advanced. For convenience, a copy of the Counterclaim is annexed to this judgment.
32. Paragraph 28(a) simply recites clause 2 of the SA setting out the business of PDA. That clause imposes no obligation, and therefore it cannot be said that Gaetano was in breach of it. From Mr Guy's submissions before me, it did not appear that this was really being alleged, despite the wording of paragraphs 31 and 32.
33. Paragraph 28(b) refers to clause 5.2, the obligation regarding the appointment of directors. While it also pleads an implied term, since the two directors appointed by Gaetano remain Mr Gudka and Mr Lenherr as specified in the SA, whether or not the alleged term is to be implied I do not see that any breach of it could have occurred. And from the details of alleged breaches in paragraph 31, although various allegations are levelled at Messrs Gudka and Lenherr, there is no allegation that Gaetano was wrong to have appointed them in the first place.
34. Paragraph 28(c) refers to clause 6, which provides that all cheques and bank transfers will require the signatures of two directors, one of them an appointee of Gaetano and the other an appointee of Obertor; and that all board resolutions will require a majority of 75% of the full board. The Counterclaim pleads that it is to be implied that directors would refuse to sign cheques only if that was in the interests of the company and that they would not damage the company. Clause 6 is headed "Directors Responsibilities". It obviously defines aspects of the "machinery" whereby the company would operate. But since this was an agreement to which the individual directors were not parties it clearly cannot impose obligations on the directors. No doubt the directors owe duties to the company as a matter of law, a point to which I shall return. But any breach of those duties by a director as an individual cannot possibly give rise to a breach of this clause 6 by Gaetano.
35. Paragraph 28(d) refers in detail to clause 8. That is headed "Company's obligations" and commences: "The Company undertakes with each of the Shareholders to …". There follow a series of requirements upon the company, i.e., PDA. That is hardly a promising basis on which to allege obligations upon Gaetano. But paragraph 28(d) further contends that as regards those requirements, PDA did so "by its directors as nominees for each party". If this means no more than that in complying with clause 8 PDA would act by its directors, that may be so in the sense that most acts of a company are carried out by persons that represent it. But if, as appears, it is intended to mean that each director separately assumed those obligations as agent for its appointing shareholder, that is in my judgment manifestly incorrect. Clause 8 comprises obligations owed by PDA to its shareholders. It cannot possibly be interpreted to impose obligations from one shareholder to the other.
36. Paragraph 28(e) refers to clause 9, which it is appropriate to set out in full:

"9 Shareholders obligations

9.1 Each Shareholder undertakes with each of the other parties hereto that whilst it remains a party to this agreement it will not cast any of the voting rights exercisable in respect of any of its shares, under the instruction of any other person.

9.2 Each Shareholder undertakes to use its best endeavours at all times to promote the interests, reputation and business of the Company.

9.3 The Shareholders and directors will ensure that the company operates in a solvent position at all times.

9.4 The Shareholders agree to exercise their powers in relation to the Company to procure that the Company complies with the letter and the spirit of its obligations under this agreement."

37. This clearly does impose obligations on Gaetano towards Obertor. It will therefore be necessary to consider this clause in the light of the allegations of breach.
38. Paragraph 28(f) refers to clause 15.2.1. This is a sub-paragraph of clause 15 that is significantly entitled "Restrictions on shareholder after transfer". It is appropriate to set out the full provision:

"Each shareholder agrees:

15.1 after the Transfer Date to continue to acknowledge the ownership by the Company of any Intellectual Property Rights of the Company at any time the Company may call upon it to do so;

15.2 that it will not within 18 months of the Transfer Date

15.2.1 directly or indirectly, advise, instruct, do or assist in any activity the effect of which is to the detriment of the Business

15.2.2 directly or indirectly, advise, instruct, do or assist in any activity the effect of which is to encourage any person to breach any contract between that person and the Company;

15.2.3 contact or communicate with any customer, supplier, or employee of the Company; and

15.3 that if any provision of this paragraph shall be void in any jurisdiction on account of its extent then there shall be treated as substituted for it such lesser provision as is required for it to be valid and enforceable;

15.4 that the provisions of this paragraph are fair and reasonably required for the protection of the Company."

39. The Counterclaim alleges that "by implication" each shareholder agreed to the same terms as are set out in clause 15 during the time that it was a shareholder. Although Mr Guy sought to support that contention in argument before me, I regard it as hopeless. It is in my view absolutely clear from the SA that each shareholder's obligations during the currency of its shareholding are governed by clause 9 whereas clause 15 deals with its obligations after the date of the transfer of its shares.
40. Accordingly, when one comes to the breaches of the SA alleged in paragraph 31 of the Counterclaim, they have to be assessed against the obligations in clause 9. However, each of the allegations in the various sub-paragraphs to paragraph 31 concerns actions or failures by Messrs Lenherr and Gudka. If established, they may well constitute breaches by those directors of their duties to the company. But I cannot see any basis on which it is arguable that they could be breaches by Gaetano of its obligations under clause 9. Indeed, sub-paragraph 31(f) as pleaded significantly states: "In so doing Lenherr and Gudka were acting in the interests of persons other than the Company or its shareholders" [my emphasis], although when I pointed this out to Mr Guy he said that for "shareholders" there should be substituted "Obertor".
41. Obertor's argument appears to be that because Messrs Gudka and Lenherr were appointed by Gaetano, it followed that any breach by them of their obligations to the company was to be attributed to Gaetano; and thus where they failed to promote the interests or business of the company that gave rise to a breach by Gaetano of clause 9. That seems to me a fundamental confusion of the duties of directors to their company and the obligations here set out in the SA of the parent shareholders of this joint venture to each other. The same conclusion applies to the separate obligations that form the substance of paragraphs 29-30. Obertor refers to the fiduciary duty that the directors owed to the company, along with a duty to use reasonable skill and care in carrying out their duties (as directors), but adds that such duties were also owed to "the shareholders". There is no support for such a proposition; but even if there were, it could not in itself give rise to an obligation owed by one shareholder to another.
42. It follows that the allegations of breach by Gaetano are wholly unsustainable and bound to fail. That in itself would be a sufficient basis for summary dismissal of the counterclaim. But there is a further problem. All the loss said to be caused by the various impugned acts and omissions was clearly the loss of PDA, as indeed is stated at paragraph 33. The only way in which Obertor contends that it suffered damage is by reason of its 50% shareholding and "its entitlement to the Priority Distribution": paragraph 34. Aside from the fact that Mr Guy could not point to any document where Obertor has such an entitlement to the "Priority Distribution" (which is defined in clause 2 of the SA and has an effect on the distribution of profits under clause 4.3-4.4), this claim runs straight into the prohibition on recovery of reflective loss, as authoritatively restated by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1.
43. In that case, Lord Bingham set out three propositions, as follows (at 35E-36A):

"1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. …

2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. …

3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other."

After referring to the "close scrutiny of the pleadings" which the court must make when faced with an application to strike out, Lord Bingham continued (at 36D-E):

"In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant."

44. In his speech, in a passage that has subsequently been much quoted, Lord Millett said this (at 66C-D):

"The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder's loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders."

45. Having regard to the alleged breach of fiduciary duty owed to Obertor referred to above, I should add that the rule against recovery of reflective loss applies also to a claim brought upon that basis: Gardner v Parker [2004] EWCA Civ 781, [2004] 2 BCLC 554.
46. Mr Guy sought to distinguish the present case on the basis that Obertor was claiming not as shareholder but on the basis of express contractual obligations under the SA. But in any case the shareholder must have a cause of action based on some duty owed to it. Hence in Johnson v Gore Wood, Mr Johnson's claim against the solicitors to the company in which he held the majority shareholding was not founded on his position as shareholder but on the allegation that the solicitors owed a duty to him personally, which allegation was accepted for the purposes of the defendant's application to strike out (see per Lord Bingham at 35C). Mr Guy's contention is inconsistent with Lord Bingham's third proposition. Here, the loss claimed by Obertor is manifestly not "separate and distinct" from the loss allegedly caused to PDA. It is the diminution in the value of Obertor's shareholding and an unspecified allegation of some damage in terms of repayment by PDA of what appears to be an investment or loan (since the "Priority Distribution" is on analysis not a true dividend); and both of these result purely from depletion of PDA's assets or reduction of its profits.
47. In conclusion, for all the above reasons Obertor's counterclaim is bound to fail and should be struck out.

Relief

48. In the event that it fails in resisting the claim, Obertor seeks to argue that specific performance is not an appropriate remedy. In the first place, Obertor contends that specific performance should not be awarded since in this case damages would be an adequate remedy. I do not agree. It is well-established that an obligation to transfer shares in an unquoted company is an obligation for breach of which damages are generally not an adequate remedy. See, e.g., Jones and Goodhart, Specific Performance (2^nd edn, 1996), p. 161; Spry, The Principles of Equitable Remedies (7^th edn, 2007), p. 64. Moreover, not only is there no ready market for the shares in PDA, but Gaetano's shareholding would be particularly hard to dispose of given the poor financial position of the company as shown by the 2008 accounts, wherein its liabilities significantly exceed its assets. As Mr de Mestre points out, since the contractual obligation here concerns an exit mechanism by one of the two joint venture partners, to refuse specific performance would effectively require Gaetano to remain an unwilling shareholder in PDA.
49. However, Obertor raises a further objection. Under clause 21.6.1(e), as a condition of the transfer of shares under the exit procedure, Gaetano would have to repay all loans or borrowings to the company. Obertor argues that here what would have been the salary due from PDA to Messrs Gudka and Lenherr had been, by agreement, treated as loans to each of them; and that while it was then proposed that in place of these accrued "loans" (by then in the aggregate amount of €438,000) there should be a corresponding reduction in the debt due to Dunollie (i.e., the Dunollie loan), Dunollie had not yet agreed to this. On that basis, Mr Guy sought to argue that the condition of clause 21.6.1(e) cannot be complied with.
50. However, the fundamental problem with this convoluted argument is that these loans (if they can be truly characterised as such) were not made to Gaetano but to its two nominated directors, who were clearly due their salaries in their personal capacity. Thus, I consider that clause 21.6.1(e) is not engaged in the first place. Moreover, Mr Gudka states in his 2^nd Witness Statement made on 28 August 2009 that Dunollie has in fact agreed to make a corresponding reduction in the level of the Dunollie loan. That Witness Statement was made well over a month before the hearing of this application and has not been controverted by subsequent evidence.
51. I should add that the further argument raised against specific performance, namely that specific performance is inappropriate for what is only part of a complex commercial dispute since here it will not resolve outstanding issues on the Dunollie loan, is in my judgment clearly misconceived. The SA is a distinct contract imposing express contractual rights and obligations on the joint venture partners, and the fact that other disputes may remain under separate agreements does not provide a reason why the obligations under the SA should not be enforced.
52. Therefore, I conclude that there should be an order for specific performance of the obligation to purchase the Gaetano shareholding at the specified price of €3.95 million. The draft Order before me incorporates an order that Gaetano performs the various practical steps required set out in sub-clauses 21.6.1(a), (c) and (d) but it seems to me more satisfactory if those are in the form of undertakings by Gaetano. I ask the parties to prepare an amended draft accordingly in the light of this judgment.
APPENDIX TO JUDGMENT DATED 29 OCTOBER 2009

IN THE HIGH COURT OF JUSTICE NO HC09C01415

CHANCERY DIVISION

B E T W E E N

GAETANO LIMITED

Claimant

-and- OBERTOR LIMITED

Defendant

__________________________________________ DEFENCE COUNTERCLAIM AND SET OFF __________________________________________ ___________________ DEFENCE ____________________

1. The Defendant adopts the abbreviations used in the Particulars of Claim and unless otherwise stated, references to paragraphs hereafter are references to the numbered paragraphs of the Particulars of Claim

2. Paragraphs 1-4 are admitted.

3. Paragraph 5.1 is admitted.

4. Paragraph 5.2 is admitted. As a result of clause 4.3 of the Shareholders Agreement, Obertor's shares in PDA had a greater value than the shares issued to Gaetano by the amount of the Priority Distribution which was to be 7 million euros with interest and less the deductions allowed for.

5. Paragraph 5.3 is admitted. The directors of PDA appointed by Gaetano were Manish Gudka and Mark Lenherr and they therefore owed the duties to the shareholders set out in the Counterclaim/Set Off herein.

6. Paragraph 5.4 is admitted although it is not relevant to any allegation of breach or relief claimed by Gaetano.

7. Paragraph 5.5 is admitted. As set out in paragraph 28(f) of the Set Off herein it is to be implied that the continuing obligations of the shareholders of PDA in Clause 10 after transfer of any shares in accordance were also obligations which existed during the time that they held the shares. Otherwise paragraph 5.5 is not relevant to any claim made by Gaetano.

8. Paragraphs 5.6 and 5.7 are admitted.

9. The Shareholders Agreement also contained the terms set out in the Counterclaim/Set Off herein.

10. Paragraph 6.1 is admitted. On a proper construction of the agreement a Warning Notice under Clause 21:-

a. Could only be served by virtue of Clause 17 if there had been a material breach by a shareholder of its obligations under the agreement and the shareholder alleged to be in breach had failed to remedy the breach (if capable of remedy) within 30 days after notice in writing to remedy it had been given by the other shareholder and, and in any event,

b. Must specify the complaint or complaints made and require the same to be remedied with 30 days or a reasonable period, and

c. State a date by which the Warning Notice will expire (whether 30 days or a reasonable period to remedy any breach) or any other time by which a response to the service of the Warning Notice is required, and

d. Include a Deadlock Option Notice complying with the requirements of Clause 6.2, and

e. State that the Deadlock Notice will be deemed to take effect 30 days after the date referred to in sub-paragraph 10 (c) above (date of expiry of Warning Notice).

11. If, which is denied, a Warning Notice under Clause 21 can be served without a material breach having occurred as referred to in Clause 17, the requirements set out in 10 (b)- (e) apply save that in paragraph 11(b) the Warning Notice must specify the circumstances which the shareholder serving the notice relies upon as constituting their complaints which they allege have caused a deadlock in the operation of the company (not constituting material breaches by the other shareholder). Further, in such circumstances a Warning Notice is only valid if at the time of service the parties are unable to agree on any material actions concerning the operation of PDA and sufficient particulars of the alleged deadlock are given in the Warning Notice and a reasonable time to agree to the action proposed.

12. Paragraph 6.2 is not admitted to be an accurate summary of Clause 21 and Obertor will refer to the full text of Clause 21 at trial. The effect of Clause 21 is:-

a. Not that the Warning Notice is deemed to include a Deadlock Option Notice but that a Deadlock Option Notice must be served with a Warning Notice, and

b. Such a Deadlock Option Notice will be deemed served on such date as is specified as the expiry date of the Warning Notice in the circumstances:-

i. set out in Clause 21.2 ( if there is no agreement prior to the expiry date of the Warning Notice, on a price at which either shareholder will buy the shares of the other or upon any other solution whereby the deadlock procedure will not be required), and

ii. set out in Clause 21.3 (if the shareholders cannot agree within 30 days in the terms of Clause 21.2) when the Deadlock Option Notice will be deemed served immediately following the expiry of the Warning Notice.

13. By Clause 21.3 a Deadlock Option Notice (to be incorporated in the Warning Notice) must be a notice in writing stating that it is specifying a single price at which the First Party (as therein defined) offers either:-

a. To sell to the other Shareholder all (but not some only) of the Shares collectively held by the First Party and/or its nominees (the "First Party Shares"); or

b. To purchase all (but not some only) of the Shares collectively held by the other party and/or its nominees (the "Other Party Shares").

c. For the avoidance of doubt it is asserted that a valid Deadlock Option Notice must contain the amount of the single price referred to and what it is and the text in sub-paragraph (a) and (b) above and the statement that it is intended to be a Deadlock Option Notice.

14. Paragraph 6.3 is admitted.

15. Paragraph 6.4 is admitted save that the purchase or sale as the case may be must be at the price stated in the Deadlock Option Notice.

16. Paragraphs 6.5 and 6.6 are admitted.

17. Paragraph 8 is denied. The purported exercise of the exit option in Clause 21 has not been in conformity with Clause 21 as set out in hereinafter.

18. As to paragraph 8.1, it is admitted that a letter dated 24^th October 2008 was delivered as alleged but denied that the same was a valid Warning Notice. The said letter failed to comply with the requirements set out above in that:-

a. There was no material breach by Obertor of its obligations under the Shareholder Agreement

b. There was no operational deadlock on the 24^th October 2008. For the avoidance of doubt it is not averred that there had never been operational deadlock before the 24^th October 2008 or after the expiration of 30 days. As alleged in paragraph 31 below it is alleged that there had been, and

c. The letter of the 24^th October 2008 failed to specify any material breach of Obertor's obligations, and

d. The letter of the 24^th October 2008 failed to specify any time for the remedy of any material breach of Obertor's obligations alleged, and

e. The letter of the 24^th October 2008 failed to specify any time for the resolution of any circumstances amounting to operational deadlock, and

f. The letter of the 24^th October 2008 failed to specify any date for the expiry of the warning, and

g. The letter of the 24^th October 2008 failed to include the wording needed for an Option Deadlock notice as set out in paragraph 13 above.

h. As to paragraph 8.2, it is admitted that there was no completed agreement for the purchase of Gaetano's shares in PDA but denied that there was no other mutually acceptable solution obviating the need for the use of the Clause 21 procedure. If there had been operational deadlock on the 24^th October 2008 there was an agreement as to how it was to be resolved within 30 days. The parties agreed to proceed by way of the sale to Obertor (or its nominee) of all the shares of the parent of Gaetano Icegarden Ltd ("Icegarden") and for the repayment of a loan from Dunollie Ltd (owners of Icegarden) to PDA which had been the consideration for the acquisition of the shares then held by Gaetano in PDA. Such negotiations proceeded actively after the 24^th October 2008 and were still proceeding at all material times thereafter. The material terms of the acquisition have been agreed. The transaction requires the accounts for PDA for the year ending 2008 to be agreed by Manish Gudka and Mark Lenherr who are directors appointed by Gaetano. Whilst the negotiations were continuing Gaetano and Obertor agreed to proceed with the business of PDA and the parties co-operated in doing so for a period of not less than 30 days after the 24^th October 2008. In the premises the parties had agreed not to operate the clause 21 procedure within 30 days of the 24^th October 2008.

19. Paragraph 8.3 is denied, no Deadlock Option Notice was deemed served on the 24^th November 2008 or any date; none was ever served and if a valid Deadlock Option Notice was served it was served:-

a. without a valid Warning Notice, and

b. there was thereafter an agreement between the parties to proceed by the acquisition of Icegarden as set out in paragraph 18 above as a mutually acceptable solution.

20. Paragraph 8.4 is admitted.

21. Paragraph 8.5 is denied.

22. Paragraph 9 is denied.

23. Paragraph 10 is denied.

24. As to paragraphs 12, 13, 14 and 15 Gaetano is not entitled to the orders sought or any order, alternatively no equitable relief should be granted for the reasons set out hereafter.

25. Paragraphs 13.1 and 13.2 do not contain any particulars of the interest said to be due nor the sums allegedly expended by Gaetano in its capacity as shareholder nor for management time allegedly lost or any sums claims therefore.

26. Paragraphs 14.1 and 14.2 do not contain any particulars of the losses occasioned by the retention of the shares.

27. Obertor repeats the Counterclaim and Set Off herein as if each and every allegation were set out and repeated and will set off so much as is found to be due to the Defendant as will extinguish Gaetano's claim.

_______________________________ COUNTERCLAIM AND SETOFF _______________________________

28. The following were terms of the Shareholders Agreement:-

a. By Clause 2 that the Business of PDA ("Company") was the construction of a retirement village in Portugal, the sale and management of the residential units therein, the sale and /or management of the common facilities, including a clinic, a nursing home, a shopping centre and other amenities.

b. By Clause 5.2 that each party would appoint an equal number of directors and that initially they would be, Christopher John Collins ("Collins") and David Homersham ("Homersham") appointed by Obertor and Manish Gudka ("Gudka") and Mark William Lenherr ("Lenherr") appointed by Gaetano. It is to be implied that each party would exercise its power in good faith in order to make such appointments in the interests of the Business and not to appoint any person whose reputation or activities would be harmful to the Business.

c. By Clause 6 that all PDA cheques and bank transfers would require the signature of two directors one nominated by each party and all board resolutions would require a majority of 75% of the full board. It is to be implied that directors would exercise the power to refuse to sign cheques only if it was in the interest of the Company so to do and would not damage the Company.

d. By Clause 8 that PDA (impliedly by its directors as nominees for each party) undertook with each party to:-

i. carry on the business efficiently, and

ii. ensure that any decision reasonably likely to affect the business (apart from day to day administration) is taken by the directors or the Shareholders in a general meeting, and

iii. deal at all times at in all circumstances at arms length and at the best price and most favourable terms reasonably available, and

iv. keep accurate accounts and records of the Company and the Business in accordance with UK Financial Reporting Standards (later varied to the Reporting Standards applicable to Portuguese Public Companies - as PDA became) and to make all information of every sort available to the Shareholders, in every case within a timescale available to the subject matter, and

v. prepare such accounts in respect of each accounting reference period as are required by statute and procure that such accounts are audited and submitted to the Shareholders within 3 months after the end of the accounting reference period.

e. By Clause 9 each Shareholder undertook:-

i. not to cast any of its voting rights exercisable in respect of any of its shares under the instruction of any other person, and

ii. to use its best endeavours at all times to promote the interests, reputation and business of the Company, and

iii. to exercise their powers in relation to the Company to procure that the Company complies with the letter and the spirit of its obligations under the agreement.

f. By Clause 15.2.1 each Shareholder agreed that within 18 months of transferring shares it would not directly, or indirectly, advise, instruct, do or assist in any activity the effect of which is to the detriment of the Business. By implication each Shareholder agreed to the same terms during the time that they were a Shareholder.

29. The directors appointed by Gaetano agreed with the other directors that operational responsibilities would be divided so that Gudka and Lenherr, who were partners, would have responsibility for funding including liaising with the Company's banker in Portugal and for general bookkeeping and accountancy including preparation of the accounts, cash flows, budgets and corporate compliance. Lenherr was to assist in marketing the properties (to be sold as far in advance as possible).

30. In carrying out those obligations the directors appointed by Gaetano, Gudka and Lenherr:-

a. owed a fiduciary duty to the Company and the shareholders to act in good faith in the best interests of the Company and not to act in the interest of any other person whether appointed by them or otherwise, and

b. owed a duty of care to the Company and the shareholders to use reasonable care and skill in carrying out their duties.

31. In breach of the terms of the Shareholders Agreement set out above and each of them:-

a. In or about the middle of 2006 Lenherr and Gudka negligently delayed in seeking funds the Company's bankers for infrastructure work with the result that no progress could be made with such work for a period of not less than 3 months with a loss to the Company set out below.

b. Before November 2007 Lenherr and Gudka, who were partners, engaged in negotiations for the sale of the shares in PDA to a company known as "Inland" without disclosing that they were proposing to take an interest in the Company as a result of the proposed takeover by Inland.

c. In or about November 2007:-

i. information was given to the director Collins by Pat Owens, one of the individuals who had invested in the company, Dunollie, which in turn had loaned money to PDA, that Lenherr was alleged to have engaged in dishonest activities in respect to two property deals unconnected with the Company. This information was conveyed to Gudka, and

ii. that the Company's banker would not deal with the Company if Lenherr and his partner Gudka were involved.

iii. as a result it was agreed that all parties would attempt to find replacement investors for the other Dunollie investors who were represented by Gudka and that in the meantime the business of the Company would be continued as before so as to maintain the best possible value for the Company and its shareholders.

d. In breach of that agreement Gudka from December 2007 until May 2008 refused to approve a Letter of Intent for the construction company or authorise construction works so that commencement of work was delayed by 9 months with the losses set out below.

e. In breach of that agreement Lenherr and Gudka thereafter failed to co-operate in the efficient running of the business and in particular Gudka refused to sign cheques for salaries, construction work and suppliers so that building work was delayed and sales which had been reserved were lost with the losses set out below. In particular Gudka refused to sign payment authority for the construction company Abratina in December 2008 or January 2009 so that the builder ceased work in February 2009.

f. In so doing Lenherr and Gudka were acting in the interests of persons other than the Company or its shareholders and were attempting to force a sale of the Company at a low value to nominees of their own and deprive Obertor of the benefit of its shares and its priority distribution.

g. Lenherr and Gudka failed to ensure that the Company accounts were in accordance with the Reporting Standards for Portuguese Public Companies and the same was discovered in March 2008 when KPMG reported for a potential investor that there were many deficiencies in the accounts which will cause the losses to the Company set out below.

h. As a result of the actions of Lenherr and Gudka the business of the Company has been delayed and it has lost reputation and confidence with its staff, advisers and bankers which will cause the loss set out below.

32. By reason of the above Gaetano was in breach of each of the terms of the Shareholders Agreement set out in paragraph 28-29 above and the duties set out in paragraph 30 above as if each was separately set out and alleged to have been breached.

33. By reason of the breaches of contract and duties alleged above the Company have suffered the losses set out below:-

a. Additional interest
i. 3 months delay in infrastructure work: land loan of €7 million @7.5% per annum	€131,250
ii. 9 months delay in construction work: land loan of €7.76 million @7.5% per annum	€436,500
iii. €3.5 – 4.0 million construction loan: actual interest borne	€190,830
	€758,580
b. Loss of Sales
i. €5.8m sales lost; cost in interest terms of such lost sales for say 3 years	€1,305,000
ii. likely loss of 15% on such sales	€870,000
c. Loss of interest/opportunity costs of loss of deposits included in above.
d. Assessment of possible liabilities in KPMG report	€1,000,000
e. Charges and costs in recasting the 2007 accounts	€30,000
f. Charges and costs in production of adjustment schedule to present PDA's accounts correctly to shareholders	€50,000
g. Charges and costs associated with the loss in confidence of PDA's advisers, employees, bankers and the associated delays caused,	€200,000
	_________
Total	€4,213,580
h. And continuing

34. By reason of Obertor's 50% holding in the Company and its entitlement to the Priority Distribution it has suffered loss amounting to a sum not less than the amount claimed by Gaetano in these proceedings and will seek to set off any sum found to be due to the extent that any sums due to Gaetano are extinguished and Counterclaims for damages.

35. Obertor is entitled to and claims interest pursuant to section 35A of the Supreme Court Act 1981 at such rate and for such period as the Court shall deem just.

AND THE DEFENDANT COUNTERCLAIMS FOR:

1. DAMAGES

2. INTEREST

3. COSTS

David Guy

Statement of Truth

I believe that the facts in this Defence Counterclaim and Set Off are true and I am duly authorised by the Defendant to sign this statement

Full Name: JUSTIN MARK ADAM STOCK

Signed: ……………………………… Position of Office Held: Partner

Name of Defendant's Solicitors Firm: Hill & Abbott

Hill & Abbott

Threadneedle House

9-10 Market Road

Chelmsford

Essex CM1 1XH

DX 3301 Chelmsford 1

Ref: JMS/MR/16645

Dated : 22^nd June 2009

Note 1   The original SA says “(b) or (b)” but that is clearly a typographical error.    [Back]

Note 2   The reference in the plural is doubtless because at this point Gaetano was still relying in the alternative on the letter of 26 August 2008.    [Back]