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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Sattar v Sattar & Anor [2009] EWHC 289 (Ch) (20 February 2009)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2009/289.html
Cite as: [2009] EWHC 289 (Ch)
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| Naeem Sattar |
Claimant |
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| - and - |
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| Bashir Sattar Strangewood Limited |
Defendants |
____________________
Mr Graeme McPherson QC (instructed by Herbert Smith LLP) for the First Defendant
Hearing date: 4/2/09
____________________
Crown Copyright ©
- I have two applications before me, one made by the Claimant and one by the First Defendant. They both relate to the implementation of a Tomlin Order made by Norris J on 7 February 2008 ("the Order") and the settlement agreement dated 6 February 2008 appended to it ("the Agreement"). The applications raised certain common issues.
- The background to this case is a dispute between two brothers in respect of a family company, the Second Defendant (Strangewood Limited - "the Company"), of which they each own fifty per cent. The Company carries on a business selling electrical goods. The Claimant is Naeem Sattar (whom I will call "Naeem"), who is the younger brother. Although some years previously involved in the management of the business of the Company, he no longer is. The First Defendant is Bashir Sattar ("Bashir"), the older brother, who is now the sole director of the Company and runs its business.
- The brothers also jointly own a residential property at 117 Totteridge Lane, London N20. This is principally a residence for Bashir and his family, but for a period Bashir and Naeem each bore fifty per cent of the mortgage payments in respect of it, which were met by payments by the Company which then charged them to the brothers in their respective shares. In Naeem's case, this was achieved by the Company recording his share of each payment as a debit on his loan account with the Company.
- Unfortunately, the brothers fell out. They decided they should separate out their affairs. Naeem proposed that they should sell the business and divide the proceeds and claimed Bashir had agreed to that in 2003. Naeem claimed that there was a revised agreement in 2005 which provided that Bashir should buy out Naeem's interest in the Company, failing which the Company should be sold. Naeem claimed that Bashir failed to co-operate to implement those agreements and he brought proceedings against Bashir claiming an order for sale of the Company. Bashir in those proceedings put the alleged agreements in issue and denied Naeem's claim for an order for sale of the Company. In the same proceedings, the Company counterclaimed for repayment of mortgage sums in relation to 117 Totteridge Lane debited to Naeem's loan account with the Company. Naeem's case on that was that he had instructed Bashir to stop such debits after a certain date and that the Company had no right to debit his account with such amounts after that date. The Company and Bashir denied Naeem had the right to end such debits.
- These claims and counterclaims were due to come on for trial in February 2008. At the door of the court the parties entered into the Agreement, which was then annexed to the Order. The present applications are made under the permission to apply set out in paragraph 2 of that Order in routine terms (i.e. that the parties have permission to apply to the Court for the purpose of carrying the terms of the Agreement into effect).
- Both brothers and the Company were parties to the Agreement. It contained the following terms:
- In relation to clause 5, it is relevant to note that there are two routes which can lead to the mechanism in clause 5 coming into operation. The first route arises if Bashir failed to pay the Settlement Sum in payment for Naeem's shares under clauses 1 and 3 of the Agreement. In that case, in circumstances set out in clause 4, Naeem would be entitled to enter judgment in the sum of the outstanding amount of the Settlement Sum. Clause 5 would then fall to be operated as an enforcement mechanism to realise assets to satisfy Bashir's obligation to pay the Settlement Sum to Naeem. In such a case, the parties contemplated that clause 5 should apply in circumstances where the sale of the business might have to be forced on Bashir against his will. This is reflected in the facts that clause 5 essentially provides for Naeem to implement and control the sale of the Company (see in particular clauses 5(a) and (b)) and that the clause 5 mechanism can lead to a sale contrary to Bashir's wishes (see clause 5(e)).
- The second route for clause 5 to come into effect is via clause 7. If Bashir informs Naeem that he does not wish to purchase Naeem's shares and £250,000 is paid, then the Company is to be sold under the mechanism in clause 5 leading to a result in which the proceeds are shared by the brothers. On the facts of this case, clause 5 came to apply by virtue of this second route.
- The common parts of the applications before me concern the implementation of clause 5 governing the process for sale of the Company. In addition, Naeem seeks relief concerning debits on his loan account with the Company. The first aspect of this relates to the way in which Naeem's loan account with the Company was treated as at 6 February 2008, the date of the Agreement. Naeem says that the debit balance on that loan account should have been set at nil on that date, by virtue of clause 11 of the Agreement. The second aspect of this part of the case relates to the way in which the £250,000 payment under clause 7 was made and accounted for.
- On 16 March 2008, in accordance with the terms of clause 7 of the Agreement, Bashir sent Naeem a letter in these terms:
- Naeem responded by letter of 17 March 2008, in which he said, "I can confirm £250,000 was received into my account from [the Company] on your behalf." He also said:
- It is common ground on the evidence that the payment of £250,000 which had been made to Naeem on that date had been made by the Company out of Company funds. Bashir had procured the Company to make that payment. After the payment was made, it emerged that the Company had then debited that amount to Naeem's loan account (i.e. it had treated the payment as a loan to Naeem). Naeem objects to this method of accounting for the payment. Bashir's case is that resolution of this matter does not fall within the scope of the permission to apply set out in paragraph (2) of the Order. He also submits that this treatment of the £250,000 payment in the Company's books was properly in accordance with accounting advice and in accordance with the rights and obligations of the parties under the Agreement. Naeem submits, however, that the £250,000 paid under clause 7 should have been paid by Bashir personally, not by the Company, and that therefore the proper accounting treatment in the Company's books was that the sum should have been entered as a debit in relation Bashir's loan account, rather than in relation to Naeem's loan account.
- Bashir responded to Naeem's letter on 17 March as follows:
- Naeem responded by a further letter, sent the same day, in which he said:
- In the flurry of correspondence on 17 March Bashir responded with a further letter, as follows:
- Naeem responded by a further letter of 17 March, which included the following:
- It appears from this exchange of letters that Bashir and Naeem both understood that Naeem was entitled to approach the President of the ICAEW for appointment of corporate advisers (clause 5(a)) and that there was a measure of uncertainty about the extent to which the Company was required to be involved in setting the process under clause 5 in motion.
- On 19 May the President of the ICAEW appointed Stephen Harris of Mazars LLP ("Mazars"), an accountancy firm, as corporate adviser to determine matters relating to the dispute in relation to the sale of the Company.
- On 21 May there was a meeting between Bashir, Naeem and Mr Harris to discuss Mazars' role and information provided and to be provided to them. It appears that there was again some uncertainty about how the rather unusual arrangements in clause 5 of the Agreement should be carried into effect. The note records that Mr Harris indicated that he believed that all three parties (that is to say Naeem, Bashir and the Company) would be the client, but that he would seek legal clarification from his legal department on that.
- On 23 May Mazars sent Naeem, Bashir and the Company a draft letter of engagement for Mazars for them to sign in a form with spaces for signature by Naeem "for himself", by Bashir "for himself" and by Bashir "for and on behalf of [the Company]". This presumably reflected Mazars' then view that it was appropriate for each of Naeem, Bashir and the Company to be the client and, on the basis that they were all to sign, presumably reflected a view that since Bashir was the sole director of the Company, he would be the natural signatory for the Company.
- It transpired, however, that Bashir was not happy with the terms of the letter. The letter provided for a commitment fee of £45,000 plus VAT to be paid on the signing of the letter and then a retainer fee of £15,000 plus VAT per month, and continuing for six months. Bashir sent an e-mail dated 4 June to Naeem saying that he was concerned about the level of the fees and wanting clarification what the Company would be receiving in return for paying them.
- Bashir engaged Messrs Herbert Smith as solicitors to act for him in relation to matters arising out of the Agreement. Naeem engaged Messrs Taylor Wessing to act for him. Herbert Smith wrote to Taylor Wessing on 16 May to indicate that they were acting for Bashir. Taylor Wessing replied by letter of 30 May. In that letter Taylor Wessing stated, inter alia, "We understand that your client is responsible for agreeing Mazars' terms of engagement, but that he has not yet done so". It appears from this that Taylor Wessing were assuming at this stage that it was Bashir's responsibility to agree Mazars' terms of engagement on behalf of the Company.
- Further draft engagement letters were produced by Mazars with a space for Bashir to sign on behalf of the Company as well as for himself, with space for Naeem to sign for himself. Bashir did not sign these draft engagement letters. Instead, he continued a correspondence with Mazars and Naeem querying the terms set out in the draft letters.
- On 13 June Naeem wrote to Bashir to complain that the information requested by Mazars on 21 May had not been supplied, despite an extension of the time for it to be supplied to 13 June. Naeem also stated, "I now put you on notice that you must agree with me Mazars' terms of engagement by close of business today together with a complete supply of information requested by Mazars". He said that if Bashir did not comply, his actions would be judged to be obstructive and in breach of his obligations under the Settlement Agreement.
- On 15 June 2008 Naeem e-mailed Mr Harris to say that he had had no response from Bashir. He continued:
- On 16 June Mr Harris sent Naeem a draft engagement letter providing for Naeem to sign as agent on behalf of the Company. Mr Harris pointed out that this drew on the fact that the Agreement gave Naeem agent status for the Company. The engagement letter had been amended, to take account of some of Bashir's concerns, so as only at this stage to cover the preparation of the information memorandum for a sale of the Company. Mr Harris continued:
- On 18 June Mr Harris sent a final version of the engagement letter to Naeem for signature by him on behalf of the Company. He indicated that he would need a copy of Bashir's passport and a utility bill as documentation relevant for anti-money laundering controls, in light of the fact that Bashir was a 50% shareholder in the Company. Naeem forwarded the final engagement letter and Mazars' request to Bashir the same day. Naeem signed the engagement letter that day on behalf of himself and also on behalf of the Company as its agent.
- On 12 September, after further requests for information and meetings, Mazars sent Bashir a written request for management information relating to the Company required for the preparation of the information memorandum. The letter attached a schedule setting out the detailed information required. That schedule is now appended to the application notice issued by Naeem seeking disclosure of those documents, since Bashir did not comply with the request.
- Naeem issued his application notice on 2 October. The order sought under that application notice deals with matters under three headings, First, the notice seeks an order requiring the Company to pay Mazars the sum of £26,437.50 in part satisfaction of an invoice from Mazars dated 8 September 2008 in respect of its fees due under the engagement letter as a commitment fee payable in advance. The draft order also seeks an order that the Company should pay a second sum of £26,437.50 within 14 days of completion of the information memorandum in accordance with the terms of the engagement letter. Bashir disputes both these orders on the grounds that he denies that Naeem had authority on behalf of the Company to enter into the engagement agreement with Mazars for the Company. Secondly, the notice seeks orders requiring Bashir and the Company to provide to Mazars all the documents and information requested by Mazars in the schedule attached to their letter of 12 September. Bashir does not dispute the relevance of this information but he does dispute his obligation to provide it in advance of proper engagement of Mazars. So the issue here runs together with the first point, concerning Naeem's authority to engage Mazars on behalf of the Company. (I should add that Naeem's application notice also sought an order requiring Bashir to procure that Naeem and Mazars are given full and unfettered access to all management information of the Company; but in light of indications from me that that seemed too wide and too unspecific, Naeem did not press for such an order at the hearing). Thirdly, Naeem's application notice seeks an order that the Company should correct its loan account with Naeem so as (i) to record a nil balance as at 6 February 2008, to reflect paragraph 11 of the Agreement, and (ii) to delete or cancel out an entry dated 14 March 2008 recording a debit of £250,000 to Naeem's loan account "to be repaid on sale of company". Naeem's case is that that entry reflected improper accounting treatment by the Company (as procured by Bashir) in respect of the payment of £250,000 under clause 7 of the Agreement (see paragraph [12] above). In relation to this third category of claim concerning Naeem's loan account Bashir contends, first, that these are matters which fall outside the scope of paragraph 2 of the Order and, secondly, and in any event, that there is no proper basis for the making of such orders on the merits of the case.
- On 6 November Bashir issued his own application notice. It seeks declaratory relief in his favour in relation to the first issue (the authority issue) and the second issue (concerning the provision of information).
- I deal with the issues which arise between the parties under these three heads.
- Bashir submits that the Agreement does not provide for Naeem to have authority to engage Mazars as corporate advisers for the Company. He contends that a letter of engagement binding the Company to pay Mazars' fees could only be signed by himself, as director of the Company. Naeem, on the other hand, submits that clause 5 of the Agreement provides authority from the Company for him to act as agent on its behalf in engaging Mazars to act.
- In my judgment, Naeem's submission is correct, for the following reasons:
- Finally, I turn to points made by each side by reference to what they said was the factual matrix within which the Agreement fell to be construed. Mr Collins, for Naeem, submitted that the relevant factual matrix was given by Naeem's pleaded case in the proceedings which were compromised by the Agreement and the Order: see paragraph [4] above. In those proceedings, Naeem claimed that he was entitled to an order for the Company to be sold. Bashir resisted this claim. Mr Collins argued that this background supported Naeem's submissions on the interpretation of clause 5. In effect, it was a factual context which served to emphasise the point made in paragraph [33(4)] above regarding the "hostile" circumstances in which the parties contemplated that clause 5 might operate. I agree that there is some force in this, and regard this factual background as further supporting the view I have come to above as to the correct interpretation of clause 5.
- Mr McPherson, for Bashir, sought to rely upon what happened after the making of the Agreement as indicating what the parties' intentions were regarding the proper interpretation of clause 5. I do not accept these submissions, for three reasons.
- First, in my judgment these were not matters which could properly be prayed in aid to establish the true objective construction of clause 5. It was common ground that the general rule is that the parties' conduct after the making of a contract cannot be taken into account to indicate what its true meaning is, judged on an objective standard: see e.g. James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572; Chitty on Contracts, 13th ed., vol. 1, para. 12-126. A party's later conduct might indicate what that party's own subjective understanding was of what had been agreed. However, as a matter of principle, the meaning of a contract is not given by reference to the parties' subjective understandings (even if, as it so happens, they might coincide) but by the objective interpretation which the court gives to the words used in their factual and legal context. Conduct of a party after the making of the contract does not provide relevant factual context to explicate the meaning with which the parties used the words at the time they made the contract.
- Despite this, Mr McPherson submitted that there was now an exception to that general rule given by the judgment of the Court of Appeal in HLB Kidsons v Lloyd's Underwriters subscribing to Lloyd's policy No. 621/PK1D00101 [2008] EWCA Civ 1206, at [28]-[29]. In that case, in construing the terms of insurance policies written in the Lloyd's market, counsel submitted that the court should have regard to the post-contract conduct of persons acting for the parties. However, he did so on a very particular basis which has no application in the current context. The submission made was that the conduct of those persons was relevant because "… the reaction of professional people in the industry at the time was relevant to the objective question of construction of the documents in issue albeit that was ultimately for the judge to decide" ([29]). It does not appear from the judgment that the Court of Appeal actually endorsed this submission – certainly at paragraph [29] the Court merely recited it. But in any event, the post-contract conduct in question in that case was conduct of professionals in a particular, well-defined market operating on the basis of special terms and understandings. The submission was that conduct of particular individuals who were experienced participants in that market could be taken to be an indication of the objective meaning which the market would itself attribute to the language used in that particular market context. Even if such an approach were endorsed as correct, that would not indicate that any wider departure from the general rule referred to in paragraph [36] above should be made. By contrast, in the present case the Agreement was a one-off settlement agreement not made in any specific or defined market context, and not involving professionals with professional expertise in acting in such a market. In my judgment, therefore, the passages from Kidsons relied on by Mr McPherson do not assist Bashir.
- Secondly, and in any event, the post-contract conduct of the parties in this case does not provide any unequivocal indication that the parties understood the meaning of clause 5 in respect of the engagement of corporate advisers by the Company in any particular sense different from the objective interpretation which I have concluded clause 5 bears. The position created by clause 5 was somewhat unusual, in that it contemplated that the Company was to be bound by the actions of someone (Naeem) who was not a director or employee but was designated as having authority to act for it, whilst at the same time there was in place a director (Bashir) who was not referred to as having authority to act but who was also to be personally bound by the outcome of the procedure set out in clause 5. In that context, I think it is unsurprising that at the outset – when it was not thought that there would be any difficulty in getting agreement from Naeem and Bashir - Mazars thought (and Naeem did not argue to the contrary and appeared to accept) that the sensible course would be to seek confirmation of their engagement from all three parties, and that Bashir should give authority on behalf of the Company as its director: see paragraphs [19] ff above. Engagement of Mazars in this way would have obviated any possible argument which might emerge about the lawfulness of what had been done. But I do not think that this indicates that Naeem understood, if he thought about it in any depth, that the only way in which Mazars could be engaged was by Bashir signing the engagement letter for the Company. On the contrary, once problems emerged in the engagement process, Naeem's conduct showed reasonably promptly that he thought he was entitled to act alone on behalf of the Company to engage Mazars: see paragraphs [25]-[27] above.
- Thirdly, and again in any event, even if Naeem's post-contract conduct were relevant and even if more could be read into it in line with Mr McPherson's submission, I do not consider that this would be a matter of such significance as could possibly outweigh the points made in paragraphs [33]-[34] above regarding the true interpretation of clause 5.
- The main point made by Bashir was that since (on his case) Mazars had not been properly engaged by the Company, no obligation could have arisen to supply the information sought by Mazars. He did not seek to suggest that the information sought by Mazars and now sought on the present application by Naeem was unreasonably extensive.
- As I have determined the authority point against Bashir and have found that Mazars had been properly engaged, Bashir's objection to the provision of this information falls away. Accordingly, Naeem is entitled to an order that Bashir procures the Company to provide the information sought.
- I would add that Naeem has a separate right under clause 5(c) to receive management information, since under the scheme of clause 5 he has a role distinct from that of Mazars. He is responsible for giving instructions to the corporate advisers, and therefore has a requirement to be provided with management information about the Company in order to enable him to fulfil that role. Since his right to receive such information is directed to enabling him to instruct corporate advisers in an efficient and effective way it is not, in my judgment, a right dependent upon the prior engagement of corporate advisers. Therefore, even if I were wrong in my conclusion on the authority point, I would still consider that Naeem is entitled to an order for provision of the materials sought.
- The first matter which arises under this heading relates to the operation of clause 11 of the Agreement. It is common ground that by that provision Naeem was entitled to have the sum shown as due to the Company under his loan account with the Company as at 6 February 2008 set aside. In my view, the clear intention and natural meaning of clause 11 in the context in which the Agreement was made were that the sum shown as due as a debt from Naeem to the Company should simply be cancelled.
- However, Bashir arranged instead for the Company to declare a dividend to Naeem in a sum equivalent to the amount of the debt and to have the loan amount cancelled by setting off that dividend against the debt. If this was a process which was, for some reason, of benefit to the Company and which produced the result required by clause 11 with no additional detriment to Naeem, I think it could have represented satisfactory compliance with clause 11. But that was not the case. The declaration of the dividend in favour of Naeem may well give rise to a tax liability on his part. At the very least it has created significant uncertainty in that regard. The Company has itself issued him with a tax voucher. In those circumstances, I consider that Naeem is entitled to insist upon compliance with clause 11 in accordance with its plain and natural meaning, and to call for simple cancellation of the debt recorded as at 6 February 2008.
- Bashir submitted that this was not a matter which fell within paragraph 2 of the Order. I disagree. In my judgment, the correct implementation of clause 11 of the Agreement falls clearly within the scope of the Order such that the court has jurisdiction under it to make the further order in this regard sought by Naeem on this application.
- The second matter which arises under this heading relates to the payment of £250,000 made to Naeem's account on 16 March 2008 under clause 7 of the Agreement: see paragraph [12] above. Bashir procured the Company to make that payment. Naeem understood that the payment came from the Company's account, but thought it was made by the Company on behalf of Bashir (i.e. by the Company treating the payment as a loan to Bashir). However, it has since emerged that Bashir procured the Company to make the payment, but to treat it as a loan to Naeem. Accordingly, there has been no debit to Bashir's loan account with the Company, but a debit of £250,000 under Naeem's loan account with the Company.
- Bashir contends that this is proper compliance with clause 7(2) of the Agreement, since he says that the parties' intention was that the £250,000 should be received as an advance by Naeem of the proceeds of sale of the Company, to be repaid by him to the Company once it was sold. I do not accept this. In my judgment, the proper treatment of this payment should have been as Naeem submits, for the following reasons:
- Bashir submitted that this also was not a matter which fell within paragraph 2 of Order. Again, I disagree. In my judgment, the correct implementation of clause 7 of the Agreement falls clearly within the scope of the Order such that the court has jurisdiction under it to make the further order in this regard sought by Naeem on this application. Moreover, it is necessary for the court to rule on the true position, where there is no dispute on the facts as to what has occurred, in order for the proper basis for valuation of the Company in the sale process under clause 5 to be established at this stage. This is a matter which requires to be resolved in order for the terms of the Agreement to be properly carried into effect.
- For the reasons given above, I conclude that judgment should be given in favour of Naeem on each of the points which arise for decision.
Mr Justice Sales:
Introduction
The Agreement
"1. BS [i.e. Bashir] agrees to purchase or procure the purchase of NS's [i.e. Naeem's] 29,500 shares in the Company (the "Shares") for the sum of £2 million (the "Settlement Sum"). …
3. The Settlement Sum is payable as follows:
(a) On or by 16th March 2008, BS shall pay or procure the payment of the sum of £250,000 by telegraphic transfer into NS's Natwest Bank Account at [details set out] ("the Account");
(b) On or by 30th April 2008 BS shall pay or procure the payment of the sum of £1,250,000 by telegraphic transfer into the Account;
(c) On or by 31st January 2009 BS shall pay or procure the payment of the sum of £500,000 by telegraphic transfer into the Account.
4. In the event that BS should fail to pay or procure the payment of either (a) by 30th April 2008 the sum of £1,500,000, being the total of the sums set out in paragraphs 3(a) and (b) above or (b) by 31st January 2009 the sum set out in paragraph 3(c) above then the balance of the Settlement Sum which is outstanding as of that date (the "Debt") shall become due and payable in full by BS to NS and NS shall be entitled to enter judgment (the "Judgment") against BS in the sum of the Debt upon giving seven days written notice to BS.
5. In the event that NS should enter Judgment against BS, NS and BS agree that the Company shall be sold on the following terms:
(a) On the application of NS, the President of the Institute of Chartered Accountants of England and Wales ("ICAEW") will appoint corporate advisers to assist in the sale of the Company (the "Advisers").
(b) NS shall be engaged by the Company as a consultant to instruct and assist the Advisers. NS shall act in the joint interest of BS and NS on matters relating to the sale of the Company and NS's decision on such matters shall be final, save for matters set out in paragraph (e) below. In consideration of NS's work, the Company shall pay to NS a monthly consultancy fee in the sum of £5,000 per calendar month ("NS's Fee"). NS's Fee shall be payable in arrears on the first day of each calendar month.
(c) Provided that nothing in this paragraph requires BS to act in breach of his fiduciary duty to the Company BS and NS agree to co-operate fully with the sale of the Company, including taking all actions as are required of them both by the Advisers either in BS's capacity as director or their capacities as shareholders of the Company. BS will ensure that the Advisers and NS are given full and unfettered access to all management information.
(d) NS will copy to BS all communications with the Advisers and NS will invite BS to attend all meetings in relation to the sale of the Company. Further NS will provide reports on the progress of the sale of the Company (the "Sale") to BS on a bi-weekly basis.
(e) The Advisers will recommend potential purchasers to NS and BS. Each purchaser will put forward an offer to buy the Company (an "Offer"). In the event that NS and BS cannot agree whether to accept or reject an Offer, then the Advisers shall decide whether or not that Offer should be accepted. The Advisers decision shall be final and binding on NS and BS.
(f) The monies resulting from the sale of the Company, less the Advisers fees and other legal and professional fees connected with the Sale and after settling any outstanding liabilities of the Company, shall be known as the "Proceeds".
(g) NS shall be entitled to apply the Proceeds against the Judgment. Any balance remaining after the Judgment has been satisfied (up to the same amount as the Settlement Sum i.e. £2 million) shall be paid to BS. Any further balance remaining shall be divided equally between BS and NS. …
7. NS and BS agree that in the event that by 16th March 2008 (1) BS informs NS in writing that BS does not wish to purchase the Shares and (2) NS has received the sum of £250,000 by telegraphic transfer into the Account; then
(a) the Company shall be sold in accordance with the provisions set out in paragraph 5(a) – (f) above; and
(b) the Proceeds shall be divided equally between NS and BS save that NS shall account to BS for the monies received by NS in accordance with paragraph 7 above.
(c) Should BS exercise his rights under this paragraph then paragraphs 1, 3, 4 and 6 of this Agreement shall no longer apply or be enforceable. …
11. The terms set out in this Settlement Agreement are in full and final satisfaction of the Disputes and of all and any claims of whatever nature whether known or unknown between NS, BS and the Company."
The factual position after the Agreement was made
"I refer to the settlement agreement dated 6th February 2008 signed by us both and in particular clause 7.
I confirm I shall not be purchasing or procuring the purchase of the shares as set out in clause (1) of this agreement.
In accordance with clause 3(a) you will have by now received the sum of £250,000 by telegraphic transfer. Please confirm the same in writing.
Can you also confirm that you will now apply to the ICAEW for corporate advisors to be appointed to assist in the sale of the Company?"
"Application to President of ICAEW
By now you would have received the Guidance Notes and application form which were respectively emailed and faxed to you earlier this morning. Please ensure that you sign the signature page and send this with a cheque for £1175.00 made out to "The Institute of Chartered Accountants" to me today. …
Board Resolution
I will need a copy of an appropriate board resolution regarding the company sale, my engagement as consultant and the process of appointment of the advisors."
"Application to President of ICAEW
OK.
Board Resolution
Can you confirm if this is required at this stage and if so the appropriate wording."
"Thank you for your two letters sent earlier today. I am unable to produce the wordings for the Board resolution so please produce something appropriate and let me have a copy when we next meet. The ICAEW have requested "brief particulars of the dispute" which is contained in the additional information form. As explained, this is so as to assist them with their choice of candidate."
"I refer to your third letter.
It would be helpful if you could answer my question. You are the "Consultant".
Do we need a board resolution now? If you do not know and cannot find out I will await the appointment of advisors who will be able to advise on this matter."
He also made certain suggestions in relation to the appointment by the President of the ICAEW.
"… Having considered your views, I do not agree with your suggestions and the application to the President of the ICAEW shall go out as per my fax to you earlier today. My decision in this respect is final. …
I have made a simple request to you for an appropriate board resolution with reference to (1) My appointment as Consultant (2) The process of appointing corporate advisors and (3) The sale of the Company. As the only Director of the Company you do not need to take advice on whether board resolutions are required or not. These are part of your responsibilities in your capacity as Director. As these actions have now been agreed by you on behalf of the Company it is necessary for these resolutions to be entered into the Companies [sic] records and I would be grateful to receive a copy."
"Please could you now issue to me a letter of engagement covering scope of work up to the preparation and delivery of the [information memorandum]. You will need to state your attendance to the business premises (giving dates) to access management information.
Please email to me as early as possible and also to David Greig of Taylor Wessing. I will then send a covering letter to Bashir with a copy of the signed letter and informing him of your engagement and attendance to access [management information]."
At this stage, therefore, it appeared that Naeem's patience had run out and he was proposing that Mazars should accept engagement under a letter in which he, Naeem, signed for the Company. He did not copy this communication to Bashir.
"We are advised that your instruction as agent for the company would be appropriate and, in accordance with the terms of the engagement, the initial invoice would be addressed to the company and require settlement."
The authority issue
(1) Clause 5 appears to me to be intended to lay out a comprehensive code concerning how the process of sale of the Company is to be effected. It is common ground that under clause 5(a) Naeem has the right to commence the procedure provided for in clause 5, by seeking the appointment of corporate advisers by the President of the ICAEW. Once corporate advisers are appointed by the President, it is clear that the whole procedural mechanism under the remainder of clause 5 is intended to be carried into effect. That intention would be subverted if the appointed corporate advisers were not engaged on proper terms as to their remuneration. It is common ground that they should be engaged by the Company to act and that the Company should bear the cost of their fees. The only issue is as to who has authority on behalf of the Company so to engage them. Clause 5 contemplates that it is Naeem who is responsible for running the sale process. He is responsible for initiating the process (sub-clause (a)), for instructing the corporate advisers (sub-clause (b)) and for copying communications with the advisers to Bashir (which pre-supposes that Naeem, not Bashir, is responsible for running the sale process) (sub-clause (d)). By contrast, clause 5 makes no provision reserving any right to Bashir to withhold his consent or to withhold the authority of the Company in relation to the appointment, engagement and the giving of instructions to the advisers. Nor does clause 5 provide for Bashir to have responsibility for those matters. Within the scheme of clause 5, therefore, since Naeem is intended to be responsible for running the sale process, the parties clearly intended that he should have the authority necessary to carry it into effect. In my view, that authority includes authority on behalf of the Company to engage the advisers upon reasonable terms, including terms as to payment;
(2) In my view, the word "instruct" in clause 5(b) naturally extends to cover agreeing the terms of engagement with the corporate advisers. The word "instruct" is commonly used to refer to the engagement of professional advisers (one instructs solicitors, for example). Moreover, within the scheme of clause 5, "instruct" is the only verb apt to cover the process of engagement of the corporate advisers, which indicates that this aspect of the word's meaning was intended to apply. Bashir submitted that the drafters of the Agreement must have intended a significant distinction to be created in clause 5(b) by using the word "engaged" in relation to the engagement of Naeem, but the word "instruct" in relation to what Naeem is authorised to do in respect of the corporate advisers. He suggested that this showed that the word "instruct" did not cover the process of engagement. I do not accept this. I do not think that on an objective interpretation of the sub-clause the parties intended any such subtle distinction to be made. In any event, the role of Naeem was to include (but in my judgment was not limited to) giving instructions to the corporate advisers as their work progressed, so the use of the word "instruct" to cover both the process of engagement and the giving of instructions appears apt, by contrast with the use of the word "engaged" in relation to the Company's engagement of Naeem, which refers solely to the original act of engagement. In addition, the use of the word "instruct" to cover engagement is natural in the case of professional advisers (such as the corporate advisers to which the sub-clause refers) but less so in relation to others (such as an individual like Naeem), so the word "engaged" appears more appropriate in his case. The fact that the word "engaged" is used in relation to Naeem does not indicate that the natural ambit and meaning of the word "instruct" in this context was intended to be reduced and cut back;
(3) The points made above are reinforced by the fact that, after the original engagement of corporate advisers is effected, Naeem clearly has authority under clause 5(b) to give them instructions what to do. If, during the process of examination of the business of the Company, it appeared that additional work was required by the corporate advisers Naeem would have authority from the Company to instruct them to do that work. They would then become entitled, as against the Company, to be paid any reasonable fees for such work. Since Naeem is clearly intended to have authority to commit the Company to payment of the corporate advisers' fees in this way, there seems to be no indication in clause 5 that his authority should not also extend to cover the initial process of engagement. It is difficult to see why any different principle should apply as between these cases. Indeed, in principle, at the outset Naeem could simply have instructed corporate advisers to carry out the work contemplated by clause 5 without a distinct negotiation about their remuneration, and if they proceeded to do that work they would have had a valid claim against the Company for all their reasonable fees in respect of it. That being so, there is no indication in clause 5 that a different process of authorisation was to apply if, as it happened, a prior process of negotiation of their reasonable fees took place. On the contrary, all this suggests that the parties intended that Naeem should have authority from the Company to engage the corporate advisers on its behalf, the process of engagement being covered by the word "instruct" in clause 5(b);
(4) As pointed out in paragraphs [7]-[8] above, under the scheme of the Agreement clause 5 may come into operation by two distinct routes. Whichever route applies, the interpretation of clause 5 is the same. It is therefore relevant to its interpretation to consider the position if the "hostile" route to the operation of clause 5 were taken, via clause 4. In such a case, Bashir would be in breach of his obligations to pay Naeem and Naeem would be entitled to enter judgment against Bashir in respect of such breach. The mechanism in clause 5 would then operate as a means of enforcement of the judgment debt for the benefit of Naeem (see clause 5(g)). In such a case, on an objective interpretation of clause 5, the parties must have intended to minimise the scope for obstructive conduct by Bashir (the party who, on this scenario, would be in breach of his obligations), including by being awkward in stipulating remuneration terms for the corporate advisers which might be unacceptable to them and thereby precipitating a long drawn out process of negotiation to delay implementation of the enforcement mechanism in the clause. This consideration again indicates that the parties intended that Naeem should have authority to ensure that the sales process under clause 5 was carried into effect, including by taking the step of engaging the corporate advisers to act, and hence indicates that the word "instruct" in clause 5(b) was intended to include this step; and
(5) Bashir suggested that the parties must be taken to have intended that he, as director of the Company, (and not Naeem) should have the authority of the Company to engage the corporate advisers because in light of the fiduciary duty which he owed the Company he would afford some additional protection for the Company in relation to the terms to be agreed with the corporate advisers. I do not accept this. In acting as agent for the Company to engage corporate advisers Naeem would owe a fiduciary duty of loyalty to the Company (see Bowstead & Reynolds on Agency, 18th ed., Articles 1 and 43) and would have an implied obligation to act with reasonable skill and care to obtain the best terms for the Company. These obligations would not be significantly different from the obligations which Bashir would owe the Company if he acted as agent on its behalf, in his capacity as director, to engage such advisers. In any event, even if there were some difference, I do not consider that this could outweigh the indications of the true interpretation of clause 5 set out above.
Extent of obligation to provide information under clause 5(c)
Transactions on Naeem's loan account with the Company
(1) Under the scheme of the Agreement, clause 7 provides Bashir with an option to avoid becoming personally liable to purchase Naeem's interest in the Company for the sums stipulated in clause 3, and to avoid the operation of clause 5 as a mechanism for enforcement of that obligation (including the provision for priority of payment to Naeem under clause 5(g)). Instead, if the payment is made under clause 7, Bashir obtains the benefit of an equal division of the proceeds of sale under clause 7(b). The availability of such an option is clearly for the benefit of Bashir, not Naeem or the Company. Clause 7(c) also describes the rights under clause 7 as Bashir's rights, which he may exercise. In that context, it seems natural to regard the sum to be paid under the opening part of clause 7 as the price of exercising the option for Bashir's benefit, and hence as a sum being payable by Bashir personally;
(2) Clause 7 provides, at sub-clause (b), for a principle of equal division between Naeem and Bashir of the proceeds of sale of the Company and that once the sale of the Company is complete Naeem shall account to Bashir for the £250,000 received by Naeem under that clause. In my view, clause 7(b) plainly contemplates that Bashir should personally, out of his own resources, have paid that sum to Naeem in the first place. It is because Bashir has personally to pay £250,000 to Naeem as an advance payment of what Naeem should receive that clause 7(b) provides that Naeem is obliged to account to Bashir for the monies he has received. It does not provide that Naeem should account to the Company for the sum so paid, as one would expect would be the case if the sum was to be treated as a loan by the Company to Naeem;
(3) Moreover, if the sum were treated as a loan by the Company to Naeem, Bashir would obtain an unfair benefit in breach of the principle of equal division of the value of the Company between them: the price for the Company would reflect a debt of £250,000 due to it from Naeem, half of the benefit of which as reflected in the price would accrue to Bashir; but at the same time Naeem would have a personal obligation at that stage to account to Bashir for £250,000. This would be commercially perverse, and could not possibly have been intended; and
(4) (As a subsidiary point) the payment of £250,000 under clause 7 corresponds as to date and amount with the payment which would be due from Bashir personally under clause 3(a) if he opted to purchase Naeem's shares. This gives the impression that Bashir was personally to pay £250,000 to Naeem on 16 March 2008, and would have the option to choose whether it be treated as first payment for the acquisition by Bashir of Naeem's shares or as payment for the right to exercise the option under clause 7. (It may be observed that in Bashir's letter of 16 March 2008 he referred to the payment as the payment under clause 3(a): see paragraph [10] above).
Conclusion