His Honour
Judge Stephen Davies:
Contents
Introduction
The witnesses
The “Original Loan Agreement”
The “Varied Loan Agreement”
2007
The Torex payments
The recording of the
Torex payments
The circumstances in which
the Torex payments were made
Inder’s
discovery of the Torex payments
Breach of fiduciary duty – the law
and the respective arguments
Did the other directors
know of and agree to or acquiesce in the Torex payments?
Was Jat in breach of fiduciary
duty?
Limitation
Relief under s.1157 Companies Act
2006
The appropriate remedy
Conclusions
Introduction
1. This is a derivative claim brought by the
claimant Inderjit Singh Bhullar, referred to as “Inder”, on behalf of two
limited companies, the second defendant (“BDL”) and the third defendant (“BBL”)
against his brother the first defendant Jatinder Singh Bhullar, referred to as
“Jat”. Inder sought permission to make two derivative claims but Morgan J.
granted Inder permission to bring only one of those claims, referred to as the
Torex claim and also declined to make a pre-emptive indemnity as to costs in
his favour.
2. The judgment of Morgan J. is reported at
[2015] EWHC 1943 (Ch). It begins with a summary of the significant individuals
and companies involved in this case and of the Torex claim, which I gratefully
adopt and repeat here.
“[4] This case concerns three family owned
companies. The three companies are Bhullar Bros. Limited (“BBL”), Bhullar
Developments Limited (“BDL”) and Bhullar Limited (“BL”).
[5] BBL is a private company, incorporated on 22
October 1964. At all material times, BBL has carried on the business of
property development. In addition, BBL owns 50% of the issued share capital of
Silvercrest Trading Limited.
[6] BDL is a private company, incorporated on 5
November 1998. At all material times, BDL has carried on the business of
property investment and development.
[7] BL is a private company, incorporated on 2
March 2005. BL owns all of the issued share capital of BBL and BDL.
[8] The family in question is the Bhullar family
and the members of that family relevant for present purposes are the father,
Sohan Singh Bhullar (“Sohan”), who died on 5 September 2008, the mother,
Rajinder Kaur Bhullar, (“Rajinder”) and their two sons, Inderjit Singh Bhullar
(“Inder”) and Jatinderjit Singh Bhullar (“Jat”). Satwant Kaur Sandhu, the
sister of Inder and Jat, has provided a witness statement in connection with
the present application.
[9] The 1,132 issued shares in BL are owned as
follows: Inder has 244 shares (22%), Jat has 466 shares (41%) and their mother,
Rajinder has 422 shares (37%); these percentages are stated to two significant
figures. Prior to Sohan’s death on 5 September 2008, Sohan and Rajinder held
some 57% of the shares in BL.
[10] The position as to the directorships of the
three companies is as follows:
(1) Sohan was a director of BBL, BDL and BL until
his death on 5 September 2008;
(2) Rajinder has been a director of BBL from 24
July 2007
until the present, a director of BDL from 3 August 2000 until the present and a
director of BL at all material times
until the present;
(3) Jat has been a director of BBL, BDL and BL at
all material times; and
(4) Inder was a director of BBL, BDL and BL until
he was removed from office on 28 April 2011.
The allegations of wrongdoing
[11] Inder makes a number of allegations of
wrongdoing. The allegations are directed principally against Jat. These
allegations fall into two categories. The first category concerns certain
payments to a company, Torex Developments Limited (“Torex”) and the second
category concerns the transfer to Jat of a property, referred to as Southgate
B.
[12] In June 2006, Jat acquired Torex, an off the
shelf company. At all material times, Jat has been the sole shareholder and director
of Torex. Torex commenced trading in around June 2007, carrying on the business
of property development. Inder says that Torex is therefore a direct competitor
of BBL and BDL but he does not identify any specific business activities of
Torex in relation to which a remedy is claimed. The payments made to Torex
which fall into the first category of allegations of wrongdoing are:
(1) on 24 September 2007, BBL made a payment of
£440,000 to Torex;
(2) between 24 September 2007 and 27 September
2007, BDL made 16 payments to Torex, totalling £196,000;
(3) on 21 August 2008, BDL made a payment of
£335,446.37 to Torex.
[13] Inder contends that these payments were made by
BBL or BDL, as the case may be, as gifts to Torex. Jat contends that the
payments were by way of loans and that £140,000 has been repaid to BBL (on 4
January 2008) and approximately £33,000 has been repaid to BDL (during 2009).
Inder contends that if the payments were by way of loans, then they were not
recorded in the books of BBL or BDL, were unsecured and no terms as to payment
of interest or repayment of capital were agreed. Further, BBL was borrowing
from its own bank in order to make payments to Torex. The amount still
outstanding, ignoring interest, is £798,256.37. It is also said that Torex now
has very significant debts and is likely to be unable to repay these loans, if
that is what they were. Although Inder was at the relevant times a director of
BBL and BDL he was not involved in any way with these payments to Torex. He
contends that these payments by BBL and BDL to Torex were without the approval
of the board of directors of BBL or BDL and without any approval by a
resolution of BL (as sole member of BBL and BDL) and involved breaches of
fiduciary duty by the other directors of BBL and BDL (to the extent that they
were involved), including Jat. Further, Jat did not declare his interest in
these transactions to the board of the relevant company, which at the relevant
times included Inder.
[14] …
[15] Inder contends that BBL and BDL have suffered
loss by making gifts, or unsecured and interest free loans, to Torex. …. Inder
seeks an account and inquiry in relation to the losses made by the relevant
company and/or of the profits made by Jat.”
3. By way of further introduction I record that:
(1) BDL and BBL are, for obvious reasons, parties
to the claim, but have not been represented nor taken any active part in the
claim.
(2) As Morgan J. noted later in his judgment, this
claim is part of a wider dispute between Inder on the one hand and Jat and Rajinder
on the other. Unless that overall dispute is compromised following this trial
it is highly likely that a shareholder action under s. 994 of the Companies Act
2006 will follow. Although, as Morgan J. also noted, it would have been possible
for Inder to have litigated this dispute as part of a s. 994 action, he
rejected the submission made to him by Mr Chaisty QC and Mr Grantham on behalf
of Jat that permission to bring this claim should be refused on that basis. He
said this:
“[44] In relation to Mr Chaisty’s submission that I
should refuse Inder permission to continue this derivative claim, I accept that
it would be open to Inder to bring section 994 proceedings and in the course of
those proceedings to ask the court to determine the issues raised in the
derivative claim. However, I do not accept that I should refuse permission to
Inder to pursue the derivative claim on this ground. The issues in the
derivative claim (even if one included the claim in relation to Southgate B) are
relatively narrow and self-contained. The issues in section 994 proceedings
would be significantly wider. Section 994 proceedings would be slow and
expensive if they proceeded all the way to a trial. Both parties would be very
well advised to compromise section 994 proceedings long before any such trial.
I can see that there would be a real advantage to Inder if he were able to
establish what he alleges in the derivative claim before negotiating a formal
split between himself and Jat.
[45] I am also satisfied that Inder is acting bona
fide in wishing to pursue this derivative claim. If the claim succeeds, BBL and
BDL will benefit. Inder will also benefit as a shareholder in BL, the holding
company of BBL and BDL. The fact that a successful derivative claim will also
be of benefit to Inder in negotiations with Jat as to a formal split does not
mean that a derivative claim is not bona fide on the part of Inder. I think
that it is likely that Inder’s wish to pursue a derivative claim is
significantly influenced by his hope that he will be awarded a pre-emptive
indemnity as to costs in relation to the derivative claim whereas he could not
expect such an indemnity in relation to section 994 proceedings. I will later
consider whether it is appropriate in this case to grant a pre-emptive
indemnity. However, at this stage I can say that Inder’s hope that he will be
granted such an indemnity does not mean that he is not acting bona fide in
pursuing a derivative claim.”
(3) One particular dispute which may well figure
in any s. 994 claim relates to the shareholding in BL, referred to at [9] of Morgan
J’s judgment. Inder disputes the transaction by which Rajinder transferred
Sohan’s shares from his estate to herself and Jat but not to him, but accepts
that this is not an issue for this case.
(4) The amounts advanced by BDL to Torex and
repaid by Torex, referred to at [12] and [13] of that judgment, have been
updated following further disclosure provided by Jat. Save for a minor dispute
as to one payment of £500 they are agreed.
(5) A further family member who has also now
provided a witness statement and given evidence in this case is the fourth
child and second daughter of Sohan and Rajinder, Jaswant Athwal. Both Satwant
and Jaswant married and moved to the USA, where they still live, although following
their respective marriages and moves they both remained in regular contact
with, and regularly visited, their family in Huddersfield.
(6) Sohan’s death on 5 September 2008 was due to a
brain tumour, which had been first discovered some 2 years earlier in summer 2006.
He was advised when it was discovered that it was inoperable and that his
probable life expectancy was around 18 – 24 months. Although as time went on
the tumour affected him physically it appears that his mental faculties were
unaffected until very shortly before his death. By 2006 I am quite satisfied
that the relationship between Inder and Jat, which had always been difficult,
was a poor one. The events of 2006 through to 2008 must be viewed in the
context that all members of the family were aware that once Sohan died it would
be very difficult, if not impossible, for Inder and Jat, as men then in their
40’s with their own wives and families, to work together in the family business
in co-operation without Sohan’s continued presence as family patriarch to keep
their rivalry and antagonisms in check.
4. BBL was incorporated in 1964 to run the
retail grocery business which had been carried on by Sohan and his brother
Mohan in partnership in the Huddersfield area since the 1950s. Sohan and Mohan
became the first directors. Over time BBL expanded into the acquisition of
properties in the Huddersfield area, including an investment property known as
Springbank Works. On 1 February 1995, Inder, Jat and their cousin, Kalvinder
(known as Tim) became directors of BBL. Inder had enjoyed a university
education, and appears to have concentrated on the financial side of the
business, whereas Jat, who had not, was more involved in the operational side
of the business.
5. By May 1998 relations between the respective
sides of the family had soured. Attempts were made to reach a negotiated
division of the business but failed, as a result of which Mohan and Tim brought
proceedings in the Leeds Chancery District Registry for minority shareholder
relief pursuant to what was then s. 459 Companies Act 1985. The evidence in
this case indicates that whilst Sohan and Jat were keen to compromise Inder was
determined not to do so and ultimately Sohan and Jat went along with his wishes,
apparently at the instigation of Rajinder. The trial came on before HHJ
Behrens in May 2002 and Sohan’s side of the family were successful in defeating
the s. 459 claim. However Inder and Jat’s defence failed in relation to one
discrete element of the claim and their appeal against the order was dismissed
by the Court of Appeal in March 2003 – reported as Bhullar v Bhullar
[2003] EWCA Civ 424.
6. That element of the case related to BDL,
initially known as Silvercrest Trading (GB) Limited (not to be confused with
Silvercrest Trading Limited, the scrap steel and trading subsidiary of BBL - of
which more later), which was incorporated in November 1998 by Inder and Jat to
acquire and hold as an investment for their retirement a commercial property
known as White Hall Mill which was on a site adjacent to the Springbank Works.
HHJ Behrens held, and the Court of Appeal agreed, that they had acquired this
property in breach of their fiduciary duty owed to BBL as directors of that
company. That is material for two reasons. First, because it shows that Inder
and Jat must as a result of their involvement in this case have become more
aware than most directors in their position as to the full rigour of the
fiduciary duties owed by directors to their companies. Second, because the
evidence in this case shows that Sohan was particularly infuriated to discover
that his two sons had undertaken a business venture without involving him,
contrary to what he regarded as an inviolate family principle that all business
ventures should be undertaken by all of the family or by none of them. In
order to assuage his annoyance, and as part of the restructuring entered into
to buy out the Mohan family interest in BBL and the claim in relation to White
Hall Mill, Inder and Jat agreed to and did transfer BDL into family ownership.
7. BL was incorporated in 2005 as a holding
company to acquire the shares in BBL and BDL so as to facilitate the
re-structure and buy-out of the Mohan family shares in April 2005. Its initial
directors were Sohan, Jat and Inder. Sohan held 443 shares, Rajinder held 200,
and Inder and Jat held 244 each. From the evidence I have heard in this case,
as to which there was no real dispute, although Rajinder was by no means
someone who would always do what her husband told her to do immediately and
without question, and might on occasions persuade him to change his mind,
ultimately she would follow her husband’s bidding in relation to business
decisions. Thus Sohan, with the backing of Rajinder, held a majority
controlling shareholding interest in BL.
8. The Bhullar family were accustomed to bank
with Barclays Bank, to use the professional services of Simpson Wood
accountants for accountancy work, and to use the professional services of
Baxter Caulfield solicitors for legal work. It is clear from the documents
that when they were engaged in transactions which required formal
documentation, including documentation relating to board and shareholder
meetings, such as in the context of the dispute with the other side of the
family and the restructure, that documentation would be produced by the bank or
Simpson Wood or Baxter Caulfield, and executed as required by such of the four
family members as needed to do so. Otherwise the evidence shows and I find that
decisions were not documented other than insofar as they happened to be
referred to in contemporaneous correspondence.
9. There has been some dispute as to how business
decisions were taken. I am satisfied there was no fixed pattern. What I am satisfied
about is that Sohan was old-fashioned in regarding matters of business as being
only for the men of the family. Thus although Rajinder was a shareholder in BL
she did not become a director until 2007 and only then in circumstances where –
as she said and as I am satisfied – Sohan wanted her to take his place after
his death to support Jat against Inder. I am also satisfied that whilst Sohan
might well consult Rajinder for advice before making decisions, particularly
where the decision was in part business related and in part family related, as
it would be where he would have to decide how to treat his two sons in the
context of the family business, ultimately he would expect her to go along with
his decision and she would do so.
10. As regards his sons, Sohan was also old-fashioned
in that he also expected them to accept his decisions once made. I am
satisfied that he would consult with his two sons in relation to matters of
business, and there would be discussion and sometimes disagreement between
them, but that he would expect them to accept and abide by his final decision.
I am satisfied that although Jat was always willing to do so Inder was more
independent and became increasingly prepared to refuse to back down. Both
Sohan and Inder were clearly extremely strong willed, so that the possibility
for conflict increasingly arose, especially after 2005 by which time it appears
that Inder felt that he ought to be stepping into his father’s shoes as
chairman of the family business whereas Sohan and Jat were not prepared to
allow him to do so.
11. I am satisfied that it never happened that all
four family members would hold regular meetings, whether formal or informal, to
discuss and agree business matters. I am satisfied that sometimes Sohan might
speak to Inder and Jat separately and sometimes together, and that occasionally
that might be at the family home, where at the time of the events in question
Inder and his family still lived, whereas Jat and his family lived in their own
house. I am satisfied that the men might have discussed business at the family
home over tea or lunch and that on such occasions Rajinder might be present and
participate. However I do not accept that this would have been regarded as
necessary or that it would have been common, unless it was in the context of a
part business and part family matter. I am satisfied that no-one contemplated
taking notes of these discussions or meetings. If anything was discussed or
agreed or decided upon which needed accountancy or legal input a meeting would
be arranged with Simpson Wood or with Baxter Caulfield as appropriate. If it
involved the bank it would typically be left to Inder to arrange.
12. Following the family buy out in late 2005 the
retail grocery business of BBL was sold to various third parties including the
Co-op, although BBL retained ownership of the shop premises from which the
businesses were carried on and let them out to the grocery operators. At this
stage I am satisfied that Sohan took the decision to reduce his involvement in
the family business, leaving more control to his sons. At the same time
decisions had to be taken about the direction(s) in which the family business
was to go. There were a number of commercial properties which were tenanted,
most notably the former retail premises, a shopping centre known as Salendine
Nook where the company offices were located, as well as Springbank Works and White
Hall Mill, and all these needed managing. It appears that Inder effectively
assumed this function and, much to Jat’s annoyance, started to view himself as
acting chief executive. It also appears that it was recognised to be
beneficial for tax reasons to invest the receipts from the sale of the grocery
businesses in other business ventures, and both Inder and Jat were interested
in going into residential property development. To that end, in October 2005,
BDL changed its name to its current style to reflect that decision.
13. At around the same time Inder became aware of
a business opportunity to become involved in trading in scrap metal and other
trading activities by way of a joint venture with two other men, Mr Haleem and
Mr Soni. There was considerable dispute about the precise details and
circumstances of this. It was Inder’s case and evidence that Mr Haleem was
known to Jat as well as him and that this was very much a joint decision and
always intended to be a family venture. It was Jat’s case and evidence that
Mr Haleem was Inder’s contact and Inder’s business opportunity, even though Jat
was quite interested in the opportunity because he thought that it had the
potential to be far more profitable than property development. There was also
evidence that Sohan did not like or trust Mr Haleem or Mr Soni, and nor did
Rajinder, who both thought that it was a very bad idea to go into business with
non-family members. However what cannot be disputed is that in July 2005 a
company known as Serveright Limited was incorporated, which changed its name on
23 January 2006 to Silvercrest Trading Limited (“Silvercrest”), which is around
the same time as it opened a bank account and commenced business. Its
directors were Inder, Jat, Mr Haleem and Mr Soni, all of whom were appointed,
according to such company records as there are (see D2/523) in July 2005. BBL
owned 2 of the 4 issued shares and Mr Haleem and Mr Soni 1 share each. Thus,
whilst there is a dispute about whether this reflected the position as
understood by Jat, on the face of these records and further documents to which
I shall refer later this was still very much a family business, although one in
which the family had an equal interest with the two outside parties.
14. Thus by late 2005 / early 2006 the position
was that in addition to BBL and its business interests there was BDL which
owned White Hall Mill and which was intended to be the vehicle for further
family property development, and – at least on the records - Silvercrest which
was 50% owned and controlled by BBL and which was intended to be the vehicle
for a family trading business as a joint venture with Mr Haleem and Mr Soni.
15. I must now turn to and determine the important
factual matters in dispute. As with many if not most inter-family business
disputes there are a large number of fiercely contested matters, not all of
which are directly relevant to the issues in dispute, although they could all
at one level be said to be relevant to the credibility of the various family
members who gave evidence. However many such issues are not the subject of any
contemporaneous documentation or evidence from non-family members upon whose
disinterested evidence the court can safely rely. In the circumstances and
given my assessment of the various witnesses, to which I now turn, there is
nothing to be gained and much time and effort to be lost in seeking to resolve
such matters and I therefore do not do so.
The witnesses
16. The principal witnesses are Inder and Jat.
They are both intelligent men who have, sadly, fallen out irretrievably over
the running of the family business in the years preceding and following the
death of their father. The end result is that each has become convinced that
the other is a liar who has defrauded the family business and each is so
determined to win this and any future litigation between them that they are
unable to give evidence with any real detachment. Therefore, I am unable to
accept the uncorroborated evidence of either as wholly genuine, objective or
reliable.
17. As regards Inder, he said early in
cross-examination that he had “practically 100% confidence in his recollection
of events” because he had “lived it and dreamed it all the time”. That is a
perfect description of someone who has become so identified with his case, and
so convinced that he is in the right and his brother in the wrong, and that everyone
else who does not agree with him is lying, that he is unable to distinguish
between his genuine independent recollection of the detail of events and what
he has convinced himself happened. Mr Chaisty submitted that there were many
occasions where he attempted to avoid answering difficult questions by making
long and impassioned speeches, and I agree with that criticism. Mr Chaisty
also suggested to him in cross-examination and submitted that he does not have,
and never has had, any genuine belief in this claim, which is simply: (a) a
smokescreen to divert attention from his own alleged defalcations in relation
to Silvercrest; (b) a crude attempt to exert pressure on Jat and Rajinder to
improve his position in the underlying dispute as to his overall financial
entitlement in relation to the Bhullar family business. I reject that
submission. I do not consider that this claim, and Inder’s evidence, is a
dishonest charade designed to divert attention from Silvercrest. I am
satisfied that Inder passionately believes that Jat has, in effect, stolen
monies from the family companies and ought to be forced to repay them. I do
accept that there was a strong tactical element in bringing this claim as a
separate claim which has, however, rather backfired on him due to the refusal
by Morgan J. to make a pre-emptive costs indemnity order in his favour. As he
frankly conceded in cross-examination, had he known that this was the case he
would not have issued this as a separate claim and litigated it instead as part
and parcel of a s. 994 claim. That does not, however, in any way invalidate
the claim, nor in my view does it have any particular impact on his
credibility.
18. As regards Jat, he did come across to me as a
more reasonable person in the round, but again I am satisfied that he had let
his personal feelings against Inder taint his recollection of events. Most
significantly in my view was his failure to make reference to what are now very
important elements of his case in previous correspondence and in his first witness
statement. He attempted to blame his previous solicitors for the errors and
omissions in his first witness statement. I accept that there is some
reference in his second witness statement to his first witness statement having
been prepared in a rush. However that does not in my view come anywhere close
to explaining his failure to mention these matters in his first witness
statement and he was unable to provide any sensible explanation as to how he
had come to recall these important issues to include them in his third witness
statement. He is, as I have said, an intelligent man who I am satisfied
clearly knew that this was an important issue in the case. If what he now says
happened had indeed happened then I have no doubt he would have told his
previous solicitors, who would have put it in the correspondence and witness
statements. I regret to say that I am satisfied that he has altered his
evidence once he became aware that unless he was able to give evidence to this
effect his prospects of successfully defending the case were adversely
affected. I am satisfied that he has persuaded himself that this happened
under the pressures of the litigation.
19. I am also unable to place any more weight on
the evidence of Rajinder. She has clearly sided wholeheartedly with Jat, on
the basis that this is what Sohan had done in 2007 and 2008 and would have done
had he still been alive, and I am satisfied that her evidence suffers from the
same unreliability as does that of her two sons. I am quite satisfied that she
has discussed this case extensively both with Jat and with Jat’s wife and also with
Jaswant, and that – without deliberately concocting a false story – she has
come to believe that what they all now wish had happened did happen, so that I
am unable to place any more weight on her evidence than I do on Jat’s
evidence.
20. In my view she is an intelligent woman of
strong views. At times she claimed to have an impaired recollection of events,
but it was noticeable that when she was asked a question which she knew might
be adverse to Jat’s case she very quickly gave an answer which supported his
case. As with Jat, the most significant change in her evidence was from her first
two witness statements to her third witness statement, where for the first time
she claimed to have been told by Sohan that he had told Inder of his decision
to allow Jat to borrow money for Torex, and that Inder had agreed. In her
case she did not even have the explanation available to her that her earlier
statement had been taken by Jat’s previous solicitors, since her second substantive
witness statement had been taken by Jat’s current solicitors, but still made no
mention of this. Even more remarkable was her evidence for the first time,
when pressed about this in cross-examination, that she had been in the house
when this conversation had taken place and that Sohan had told her what had
happened immediately afterwards.
21. The evidence of the sisters was also affected
by the family fall out, with Satwant rather siding with Inder and Jaswant rather
siding with Jat and Rajinder, and in my view with the reliability of both of their
evidence being skewed in consequence. I am unable to accept that either now
had any very clear or reliable recollection of events occurring in 2005 – 2008
in relation to matters of business, in which they were not directly involved
and in respect of which they had no real interest in comparison with their more
immediate personal family problems in the USA. Satwant however had limited her
evidence to an account of one family lunch in September 2007. Although I do
not accept her detailed account of that lunch as reliable, and suspect that it
emanates in large part from her subsequent discussions with Inder, I do
nonetheless accept her evidence as to the essential gist of what happened as
being consistent with my assessment of the evidence overall and my assessment
of the inherent probabilities. I found Jaswant’s evidence in relation to the
key areas of dispute to be insufficiently reliable to place any significant
weight upon. She had not limited her evidence to matters about which she could
speak directly and I am quite satisfied she had allowed herself to be used to
give detailed evidence on matters which represented her understanding of what
Jat and Rajinder’s case was, in the belief that in so doing she was supporting
her late father, rather than because she had any real recollection of events.
22. The consequence of all this is that I have had
to make findings by reference primarily to the contemporaneous documentary
evidence, by reference to the witness evidence of those other witnesses from
whom I heard and whose evidence I accept as broadly reliable, and by reference
to my assessment of the inherent plausibility of the accounts given by the
witnesses in relation to each of the important issues in dispute.
23. I heard from Stephen Newman the commercial
solicitor at Baxter Caulfield who had been involved in negotiations involving
the parties about a division of the family business in 2007. I did gain the
impression that he had little time or sympathy for Inder, perhaps not
surprisingly given Inder’s subsequent complaints against him and his firm for
continuing to act for the Bhullar companies and for Sohan, Rajinder and Jat
against him, but I did not gain the impression that this had skewed his
evidence against Inder in a material way. That said, since he had not taken a
note of the significant meetings in which he had been involved, which took
place over 9 years ago, I do not think that I can place significant weight on
the detail of his evidence where not supported by contemporaneous
correspondence or other confirmatory evidence.
24. Finally I heard from Helen Stratton, the
former bookkeeper to BBL and BDL, who came across to me as a genuine and
reliable witness. She did not seem to me to be motivated when giving evidence
by animosity against Inder, even though she had resigned as bookkeeper for BBL
– I am satisfied - because he had verbally abused her when she had refused to
provide him with documentation relating to BDL. When Inder had been asked
about this in cross-examination he gave what I regard as untrue and vindictive
evidence. That said, her oral evidence was not quite as positive as was her
evidence in her witness statement, and I do not think that I can accept her
evidence in her witness statement without question where not confirmed in her
oral evidence or otherwise consistent with other reliable evidence.
The matters in dispute
The “Original Loan Agreement”
25. Jat’s pleaded case begins with what he says
happened in October 2005. He says that there was an incident where Inder went
to his house one evening following a heated discussion and pushed him and
threatened him in front of his wife and children (referred to at trial as “the
pushing incident”). He says in his evidence that this followed an incident
earlier that year at the office, where Inder threw a bunch of keys at him,
striking him on the forehead, and used abusive language in front of several
employees (referred to at trial as “the keys incident”). He says that having
told his parents of the pushing incident there was a family meeting at the
family house the following day, which amounted to an informal meeting of the
directors and shareholders of BL, BBL and BDL. He says that Inder refused to
follow his father’s request that he apologise to Jat for the pushing incident.
He says that as a result it was agreed at that meeting by all four family
members that Inder and Jat were incapable of working together and would have to
conduct their business affairs separately. He says that it was agreed that Inder
should undertake the Silvercrest trading business and that he should undertake
the BDL property development business, with each being allowed to borrow up to
£700,000 from BBL for that purpose (referred to as the “Original Loan Agreement”).
26. What Jat did not plead, but what he says in
his third witness statement, is that it was also decided by all that this meant
that each would be entitled to retain all of the profits earned from their
respective businesses, but equally have to bear themselves any losses made by
their businesses.
27. Inder accepts that these two incidents
occurred, but not until the following year in 2006. He claims that Jat is
significantly exaggerating what happened, that at the time they were viewed as
unfortunate but not serious events, and that the relationship between the
brothers was still reasonably cordial until later in 2007. He accepts that in
2006 it was discussed and agreed that he should concentrate on the Silvercrest
business, whilst continuing to be primarily responsible for the BBL business,
and Jat on the BDL business, but that this was not in any sense a formal division
of the businesses, and there was no question of the businesses being run by
each brother solely for his own account.
28. I have heard copious evidence about these
events. In short, I accept on the balance of probabilities that the keys and
the pushing incidents did happen in 2005 rather than in 2006 and that they were
substantially as described by Jat, although I do accept that there was some
degree of exaggeration by him in his oral evidence. I also accept that this
led to a family discussion about whether it was possible for the two sons to
work closely in the same business together and a decision by Sohan that it was
not. Whilst I accept that Jat was pushing for a complete separation of
business responsibilities I do not accept that either Inder or Sohan was
willing to agree this. Instead, what was agreed at that stage was that Inder
should concentrate on BBL and Silvercrest and Jat on BDL. However I am unable
to accept Jat’s case that it was also agreed that each should be allowed to
borrow up to £700,000 from BBL or that they were to retain and be solely
responsible for the profits and losses of Silvercrest and BDL respectively. My
reasons are as follows.
29. I prefer and accept the evidence adduced by Jat
which places the pushing incident and subsequent discussion and agreement in
October 2015. I accept that Jat and Rajinder’s evidence as to the date originated
not from their own memory but from Jat’s wife’s recollection that this incident
immediately preceded a planned visit to the USA. Whilst as Ms Anderson QC submits
it is difficult to evaluate the reliability of this recollection, since Jat’s
wife was not called as a witness, the placing of the date was also confirmed by
Jaswant, who was called as a witness. Perhaps more significantly, it is also
consistent with the meeting with and the letter subsequently written by Simpson
Wood in November 2005. Inder accepted that there had been such a meeting, and
the letter to Jat refers to the “directors advising the meeting that you and
Inder wish to pursue individual business projects and are investigating how
finance can be provided for these”. Although Inder suggested that this was
just something which was discussed from time to time, and that this simply
reflected a suggestion which was not taken forwards, I do not accept that
something as significant as this would have happened – or been permitted by
Sohan to happen - without a serious triggering event such as the pushing
incident, and no other reason has been plausibly suggested.
30. Further Inder did not seem to me to have any
cogent objective basis for contending that it happened later in 2006. I also
consider it significant that he did not challenge the date either in his Reply
to Defence or in his witness evidence, only amending paragraph 9 of his third
witness statement in examination-in-chief.
31. As I have said however I do not accept that it
was clearly agreed that each brother should be solely entitled to the profits
of and be solely responsible for the losses of Silvercrest and BDL respectively.
That would have marked a radical departure from the previous approach, enforced
by Sohan, that all business ventures should be family ventures. It would also,
importantly in my view, have meant that Sohan and Rajinder would not have been
able to share in the profits of those businesses, including at that stage the
profits of BDL from its investment property at Whitehill Mill, which I am
satisfied would never have been contemplated by Sohan in particular unless
there was no alternative. It was also not what was asserted on Jat’s behalf in
the detailed pre-action protocol letter of reply sent in November 2013.
32. It is also significant that the letter from
Simpson Wood is not consistent with a firm decision having been made. It was
addressed to Jat, rather than to all three directors, and discussed a number of
options. Significantly, the first option referred to each setting up their own
limited companies, rather than using the companies which were already in
existence and on Jat’s case intended to be used, and also referred to any loan
being on commercial interest terms, but also pointing out the risk to BDL in
the event of repayment default. This is significant because it is Jat’s case
that no question of interest being charged was ever discussed or agreed, nor of
any terms for repayment, nor for example of any security being provided. The
tenor of this letter is difficult to square with Simpson Wood being instructed
to put into effect – or at least advise on the implications of – a family
decision having already been taken to use Silvercrest and BDL as the vehicle
for entirely separate business ventures. At the very least one might have
expected some reference to what was to happen to White Hall Mill as a BDL owned
investment property if that company was, effectively, to be gifted to Jat.
33. Jat’s case is also inconsistent in my view with
what actually happened subsequently. It appears that by October 2005, whilst Silvercrest
had already been set up as a joint venture between the Bhullars and Messrs
Haleem and Soni, it had not yet undertaken any business. Although Jat claims
that he did not realise he had been made a director of Silvercrest, I am unable
to accept this evidence since I do not regard him as being the sort of man who
would have signed documents such as he did in relation to Silvercrest without reading
them first at least to understand what they were and without having agreed in
advance with Sohan and Inder that he should do so. It also begs the question
why nothing was done from October 2005 to January 2006 to effect the change.
It would have been extremely simple for Jat to resign as director and for BBL
to transfer its shareholding in Silvercrest to Inder. It also begs the
question why Sohan and Jat should have been so aggrieved about Silvercrest’s
subsequent losses if they were for Inder’s account alone. Even allowing for
the risk to BBL arising out of its having guaranteed Silvercrest’s bank
borrowing it would still have been Inder, on Jat’s version of events, who would
have to make good any liability as between the family members. In my judgment
the true position is that, as Jat said in his third witness statement at
paragraphs 27 and 29,
at the time Silvercrest was regarded as a potentially very lucrative business,
and I am satisfied that neither Inder or Jat would have wanted to cede it
completely to the other.
34. Furthermore, no steps were taken to transfer
BDL into Jat’s ownership and control. Nor were loans worth up to £700,000 made
available either to Inder to use in Silvercrest or for Jat to use in BDL. Thus:
(a) As regards Silvercrest, whilst in January 2006
Baxter Caulfield was instructed to draw up a loan agreement and debenture to
formalise secured lending by BBL to Silvercrest, there is no evidence that this
proceeded or, if it did, that it related to a £700,000 loan. Instead what
happened was that in May 2006 Silvercrest obtained a £1 million facility directly
from Barclays which was guaranteed by BBL. It is unrealistic to suppose that Sohan
and Jat would have agreed to this, and that Jat would have signed the necessary
paperwork, as I am satisfied happened, if that was £300,000 more than had been
agreed, and at a time when BDL had not borrowed anything. When asked about
this in cross-examination Jat suggested that he assumed at the time that the £1
million was to be available equally for Silvercrest and BDL, but in my view
that is completely inconsistent with the Original Loan Agreement as he contends
for and also the rationale for the split.
(b) As regards BDL, Jat took no immediate or
active steps to make use of the £700,000 loan facility he alleges he had been
allowed for BDL. It was not until October 2006 that a £600,000 overdraft
facility was arranged for BDL to acquire a property known as Southgate and that
only happened to regularise a situation where funds in Silvercrest’s account
was initially used to pay for this acquisition a month earlier.
35. Whilst it would be unrealistic to have
expected that everything could or would have happened immediately following the
meeting in October 2005, the fact that the family seem to have effectively
given up on any attempt to move matters on after the letter of advice from
Simpson Wood in November 2015 is difficult to square with Jat’s case that a
clear agreement for a complete division had been agreed on the basis that
anything less than that was intolerable and unworkable.
36. In my judgment what happened was that none of
the options suggested by Simpson Wood were viewed by Sohan in particular as
being attractive or agreeable. Instead, he fell back on the less difficult and
divisive approach of a division of responsibilities as between Silvercrest and
BDL, whilst keeping both businesses, as well as BBL, within the family – albeit
as I say that Silvercrest was a family joint venture with Messrs Haleem and
Soni. Indeed the fact that what was Silvercrest Trading (GB) Limited changed
its name to BDL in October 2005 is itself inconsistent with Jat’s case;
fundamentally it makes no sense to use a family owned company with an existing
valuable investment property, re-naming it to make it clear that it is part of
the family group of companies, as a vehicle for one family member to conduct
his own separate business venture.
The “Varied Loan Agreement”
37. Jat’s pleaded case is that “in around summer
2006 Sohan, Rajinder and Jat discovered that Inder (sic) was trading at a
significant loss and that he had lost a significant part of the funds advanced
to Silvercrest by BBL: up to £100,000”, and that “Inder told Sohan that BBL
would have to pay Silvercrest sufficient monies to meet these losses”. He says
that after this there was a meeting between Sohan, Rajinder and Jat at which
they agreed that “Jat would purchase a new company outside of the Bhullar group
in order to trade separately in residential property development and that the
loan facility that was to have been made available to BDL pursuant to the Original
Loan Agreement was instead to be made to that new company and would be provided
by BBL and BDL as funds permitted”. He alleges that “Sohan then informed Inder
of that agreement and Inder agreed to and/or acquiesced in the same”. He
refers to this as the “Varied Loan Agreement”.
38. Inder does not accept any of this. He says
that he was not aware of the financial problems with Silvercrest until November
2006, and that it was not until later in 2007 that the full scale of the losses
became apparent. He says that this issue in relation to Silvercrest had
nothing to do with BDL, and was not the precursor to any agreement to allow Jat
to set up and borrow family monies for his own separate company, which simply
did not happen so far as he was concerned, and was something with which he
would never have agreed and did not agree.
39. In my judgment the evidence simply does not
support Jat’s case as regards the alleged Varied Loan Agreement.
40. Firstly, it is clear that Torex was
incorporated in May 2006 and acquired by Jat as the sole shareholder, using the
services of Baxter Caulfield for this purpose, in June 2006. He was appointed as
its sole director on 19 June 2006, when his wife was appointed its secretary,
and its name was changed to Torex on 22 June 2016. On Jat’s case, he acquired Torex
in anticipation of setting up his property development business on his own
account, independent not only of Inder but also of his parents.
41. However given the timescale as regards
Silvercrest it is difficult to see how this could have been undertaken with his
parents’ consent, let alone that of Inder, as a reaction to Silvercrest’s
financial difficulties. As explained above, Silvercrest did not obtain its overdraft
facility until early May 2006. Silvercrest’s accounts for the year ended 31
July 2006 identify current creditors of only £53,921 and net current
liabilities of only £36,885. As at the same date its current bank account was
still in the black, although it is true that: (a) it had by that stage already
received some £200,000 from BBL; (b) by the end of the following month it was
over £170,000 overdrawn. It is also true, as Mr Chaisty submits, that the
accounts for the year ended 31 July 2007 do show much more substantial current
creditors of £1,227,389 and net current liabilities of £576,298. It is also
possible, as he submits, that these losses might have been known of in the
previous year but for accounting purposes posted to the following year.
Nonetheless there is no contemporaneous evidence, either in the bank statements
or in email traffic or the like, that Silvercrest was making, or was known to
be making, substantial losses prior to mid June 2006. When Mr Chaisty asked
Jaswant to identify when Sohan became aware of Silvercrest’s losses by
reference to the time when he was diagnosed with his tumour she said he was
diagnosed in summer 2006 and became aware of Silvercrest’s losses later,
perhaps in the autumn of that year. Jat’s pleaded chronology is imprecise, however
in his third witness statement he made it quite clear (paragraphs 37-42) that
he was saying that all this happened before he set up Torex. I have no doubt
that this is because he perceives the need to justify his having set up Torex
at the time that he did. However in my judgment his case, which involves Torex
being acquired by him with his parents’ blessing, to conduct business on his
own account instead of through BDL as a family business, and as a response to
Silvercrest’s financial problems, is fatally undermined by the chronology from
the available contemporaneous documents.
42. It is of note that in his first witness
statement Jat had given a somewhat different chronology, explaining the
decision to set up Torex as being simply a response to the difficult working
relationship with Inder, and dating the discovery of the financial problems
with Silvercrest to later on, in December 2006. That first witness statement
is consistent with the detailed pre-action protocol letter of reply sent in
November 2013, which makes no reference to it being agreed that Jat could use
monies from BBL or BDL to fund Torex.
43. The other difficulty with Jat’s case is that
at the same time as he was acquiring Torex as his own company and on his case
to undertake property development independently of the family, rather than
through BDL as the family company, in actual fact instead of using Torex for
that purpose he was causing BDL to do so. Thus:
(i) On 5 June 2006 BDL secured an overdraft
facility, albeit a modest one, with Barclays. Importantly, however, this was
secured by an existing cross-guarantee and debenture given by BBL to the bank
and by an existing legal charge over White Hall Mill.
(ii) In July 2006 a property at Cumberworth was
acquired by BDL for development for around £90,000.
(iii) In September 2006 a property at Southgate was
acquired by BDL also for development but this time for around £448,000. As
explained above, the purchase price was initially taken from Silvercrest’s bank
account, and repaid by BDL in October 2006 once its £600,000 overdraft facility
from Barclays was in place.
44. When asked about this in cross-examination,
Jat’s explanation was that the properties at Cumberworth and Southgate were only
transferred to and developed by BDL because Torex was not ready to do so at the
time. However on the evidence Jat would have been in a position to cause Torex
to acquire these developments from June 2006. If the agreement had been as Jat
contends, there would have been no reason why, instead of obtaining a modest
overdraft facility for BDL in June 2006 followed by a more substantial one in
October 2006, he should not with the consent of his parents have obtained a
substantial facility for Torex in summer 2006, secured by BBL in the same way
as Silvercrest’s facility was, in accordance with the Varied Loan Agreement.
Even if Jat could possibly argue that there was insufficient time to do so
before the acquisition of Cumberworth in July 2006, there is no conceivable
explanation for his failure to do so in relation to Southgate. It is not, and
never has been, Jat’s case that whilst his parents were agreeable to his doing
this, it was stymied or blocked by Inder’s refusal to agree, which therefore
stymied Torex’s ability to obtain funding secured through BBL. There is no evidence
to support such a case, which would, of course, anyway fatally have undermined
Jat’s case that Inder agreed to or acquiesced in the Varied Loan Agreement.
45. There is evidence, both documentary (in Baxter
Caulfield’s second letter dated 6 December 2007) and in Mr Newman’s evidence that
by the time of meetings which took place in late November 2007 there was a
dispute as to what had previously been agreed, with Sohan and Jat saying that
there had been an agreement reached for a division of the business, albeit that
the precise means for doing so had not been agreed, whereas Inder was disputing
that there had been any such agreement. Whilst Jat relies on this as showing
that this was his case in December 2007, I am unable to accept either that Mr
Newman has accurately recalled precisely what Sohan and Jat were apparently
saying at the time or that their recollection of what had been agreed in
October 2005 was any more accurate than was Inder’s. Mr Newman’s recollection
is not derived either from any contemporaneous note or from what he wrote in
contemporaneous correspondence, and I am unable to accept that he has a clear
recollection in 2017 as to the detail of what was said around without prejudice
meetings held 9 years previously. Moreover, what Sohan and Jat may have said
might well in any event have been heavily influenced by their perception that
Inder had agreed to a division in principle in discussions from early 2007
onwards, which may well have been correct but did not equate to Inder having
agreed that the division could take place in advance of a final agreement being
concluded. If the Varied Loan Agreement had been made in summer 2006, and
Torex set up quite openly and disclosed to Inder, it is difficult to explain
why there is no reference at all in any correspondence to Torex from summer
2006 until March 2008, when Ford & Warren first raise the Torex payments. The
letter from Simpson Wood to Jat dated 15 January 2007, to which I refer below,
is itself inconsistent with the Varied Loan Agreement, since it makes no
reference to Torex nor does it suggest that there should be a separate company
to be solely owned by Jat and financed by BBL to enable him to pursue a
separate property development business.
46. In my judgment the true position is that in
2006 there was no such Varied Loan Agreement. Instead, the agreement reached
the previous year in relation to the division of responsibilities was proceeding
as envisaged, in that Silvercrest was set up and financed with the backing of
BBL, and was starting to trade as a (part) family owned business, and BDL was
also financed with the backing of BBL to acquire properties for redevelopment
as a family owned business. I am satisfied that Jat acquired Torex in June
2006 because it was still his ultimate intention that there should be a formal
division with his having Torex as his own property investment and development
business. It is probable, I accept, that he would have obtained Sohan’s
agreement to forming this company in anticipation of a formal division, but I
do not accept either that: (i) there was a further agreement between Sohan and
Jat under which it was agreed that Jat could borrow up to £700,000 from BBL
and/or BDL for the purposes of the Torex business; (ii) Rajinder was even informed
of the formation of Torex let alone informed about or asked to agree to any
borrowing by Torex from BBL or BDL, nor did she. I am completely satisfied
that, even if I am wrong in relation to Sohan and Rajinder, Inder was never informed
of any of this, let alone asked for his agreement to it.
2007
47. The letter of 15 January 2007 from Simpson
Wood refers to a meeting held on 11 January 2007. It would appear that only
Jat had been in attendance at the meeting, because the letter notes that the
proposals being put forward by Simpson Wood would “require authority from your
family”, which indicates that neither Sohan, Rajinder nor Inder were present. Inder
denied that he was present or involved in this, and I accept his evidence on
this point. What was being proposed by Simpson Wood was indeed a full scale
division of the family business, to be achieved by means of Jat becoming the
sole owner of BDL and Inder becoming the sole owner of Silvercrest, with White
Hall Mill being hived up from BDL into BBL (obviously, so as to remain a family
owned asset), and with BBL being owned equally by two separate companies, one
being owned by Jat and his parents and the other being owned by Inder and his
parents.
48. The letter refers to the matter as being
urgent. I am satisfied that at this stage the division was being pushed by Jat,
in circumstances where by this time it had become apparent that: (1) Silvercrest
was doing far less well than had initially been anticipated; (2) Jat was
frustrated that what he would have perceived as profitable developments at
Cumberworth and Southgate would have to be shared with Inder as well as with
his parents, as would the further developments he was contemplating, unless he
could achieve this formal division.
49. The documentary evidence shows that by May
2007 the family was sufficiently concerned about the potential losses at
Silvercrest for Baxter Caulfield to be instructed to prepare documentation to
regularise the terms of the joint venture and thus to facilitate the prospects
of securing a contribution from Mr Haleem and Mr Soni to any loss. However
these documents were not signed until August 2007. By around this time Inder
was, he accepts, coming under increasing pressure from the rest of the family
to close down Silvercrest and cut his losses, but he asked for time until the
end of the year to seek to sell the business and mitigate the losses. As part
of this strategy Inder was, I accept, spending more time on Silvercrest’s
business, including travelling to Africa, where a major part of its business
had been, at this time.
50. I am satisfied that by this stage Sohan had
lost patience with Inder, particularly because of his frustration with the
losses at Silvercrest and Inder’s insistence both that the family business had
to cover them and also that he should receive more than Jat if the business was
going to be formally divided. By this stage Sohan had also become convinced
that the family business would have to be split if it was to survive after his
death. This of course was exactly what Jat had previously argued for and I also
have no doubt that Rajinder went along with Sohan’s wishes. This growing
division between Sohan, Rajinder and Jat on the one hand and Inder on the other
may be seen in a number of events over summer 2007, such as:
(1) In March 2007, when Rajinder was made a
director of BL
and BBL. I have no doubt that this was to ensure that Sohan’s wishes could be
enforced by Rajinder siding with Jat in the event of any dispute should he suddenly
die or become incapable of acting as director.
(2) In June 2007, when BBL’s bank mandate was
changed so as to require two signatories from any one of Sohan, Rajinder and
Jat, but not Inder.
(3) In July 2007, when Jat made contact with the
bank without reference to Inder in an attempt to force a reduction in Silvercrest’s
overdraft facility.
51. It appears to be common ground that through
2007 there were a number of discussions to seek to reach agreement in relation
to a formal division. However it is also common ground that Inder was
extremely resistant to a formal division other than on terms which reflected
his view that the family business would have to cover Silvercrest’s losses and
also that he should receive some payment to reflect the loss of opportunity to
receive a share in the profits of development of BDL’s existing property
portfolio. At some stage in 2007 (the date is not recorded in contemporaneous
documentation) Sohan and Jat involved Mr Newman to see if some mutually agreeable
solution could be found, but discussions foundered because Inder was insisting
– as he conceded was probably what he said - that he should receive a £500,000
bonus as part of any agreed division, whereas neither Sohan nor Jat were
prepared to agree to this.
52. Thus Inder was, effectively, stymying both
Jat’s desire to divide the business so that he could move forwards with his
property developments and Sohan’s desire to formalise a family division whilst
he was still alive and in a position – as he believed – to force it through.
It is abundantly clear that by this time Inder was no longer prepared to accede
to Sohan’s wishes, no matter how strongly Sohan might express them. Although
the remainder of the family still appear to have respected Sohan’s ultimate
decision making authority as the head of the family, Inder was not prepared to
give way.
The Torex payments
53. It is clear from the documents that at some
stage after 15 May 2007 (the date of the annual return submitted in relation to
Torex which described it as a non-trading company) Torex began undertaking
business. Jat admits that BDL made a payment of £261.85 on behalf of Torex for
planning advice given in relation to a property known as 20 Carlton Road (also
known as Carlton House). Although Jat admits that this payment was made on 25
July 2007, in fact it would appear from the document at [C1/109] that this may
be a reference to the date of the invoice rather than the date of the cheque
payment hand written on the invoice as being 10 September 2007. That would be
consistent with the fact that, as Jat also admits, on 10 September 2007 BDL
made a payment of £540 for a survey in relation to that property. More
significantly, on 24 September 2007 there were two substantial transfers into Torex’s
business bank account with Barclays, which was only opened 4 days earlier. The
first and largest was a transfer of £440,000 from BBL to Torex. The second were
two transfers totalling £130,000 from BDL to Torex. It is common ground, and
is apparent from the bank statements, that these funds were immediately
transferred out the same day (the precise figure being £568,811.57) to enable Torex
to acquire the property at 20 Carlton Road, which by October 2007 had been made
the subject of a legal charge in Barclay’s favour to secure Torex’s borrowing
with Barclays. From that date onwards there were a series of payments made from
BDL either directly into Torex’s account or to third parties. Most of these
were made in 2007, although some were also made in 2008 as well and two in
2009. The third party payments were made to discharge liabilities of Torex
incurred in relation to its property development business. Whilst I am willing
to assume that the majority of the funds paid into Torex’s account were used
for its business purposes, in cross-examination Jat admitted that £44,000 of £50,000
transferred by BDL in November 2007 was used to enable him to acquire a motor
car, although he also said that he repaid this money to Torex.
54. The table produced in Jat’s written opening,
taken from the evidence, shows that a total of [£558,779.46 per AG]
was paid by BDL to Torex or for its benefit over the period to 31 December
2009.
(1) This includes £335,466.37 paid in August 2008
into a business premium account held by Torex, which represented the proceeds
of the sale by BDL of the Cumberworth property. In cross-examination Jat
suggested that the reason it was paid into this account was because Torex had
an interest earning premium account, whereas BDL did not. Whilst that may well
be true, the Torex bank statements indicate that within a week or so the
equivalent amount was transferred from Torex’s premium account to its current
account, and the subsequent accounts for BDL treat this as a loan from BDL to
Torex, as to which no separate terms were ever agreed. Although Ms Anderson suggested
in cross-examination that this transaction was not recorded in BDL’s nominal
activity ledger report for Torex, in fact it does appear in what is said by Jat
in his witness evidence to be such a report at [E2/251]. Whilst it does not
appear that there is a report from 2008 in the same format as the reports for
other years, I do not consider this to be suspicious. Apart from anything
else, it would appear from the correspondence between Simpson Wood and Baxter
Caulfield in March 2010, to which Jat was referred in cross-examination, that at
that time the former were treating the payment as a loan to Jat personally.
(2) Apart from one final transfer of £13,000 from
BDL to Torex in December 2009, all of the other payments made by BDL in 2008
and 2009 were to third parties for Torex’s benefit.
55. These payments include some payments only
disclosed for the first time more recently following supplemental disclosure
made by Jat in relation to Torex. There is one modest dispute as to one
payment of £500, as to which I accept Jat’s case.
56. Taking into account 4 payments made by Torex
to BDL in 2009, the net balance of payments made by BDL to Torex was
£525,428.44 [£526,028.44 per LA QC]
57. As regards the £440,000 paid by BBL to Torex,
in early January 2008, £140,000 of that was repaid to BBL, leaving a net
balance of £300,000. It is not entirely clear why this repayment was made.
Jat contends that it demonstrates that the original payment was regarded as a
loan, because he did cause Torex to make this repayment when it could afford to
do so. Inder suggests that it was necessary because without it BBL would have
exceeded its overdraft facility. That does not appear to be correct, because
it can be seen from the bank statements that the repayment caused the overdraft
to reduce from around £485,000 to around £348,000, which is less than the
£600,000 facility which it appears to have enjoyed since October 2006. In my
judgment, this does support Jat’s case that the advance was regarded as a loan
so that when in January 2008 Torex was in a position to repay part of the loan
it did so. I do however accept that Jat would have been keen not to cause the
advance from BBL to Torex to lead to a situation where BBL exceeded its
overdraft limit. It is also clearly the case that it was known that the
Bhullar companies would have to discharge a substantial tax liability at around
this time, and it is probable that this repayment was made with this purpose in
mind.
58. Thus, leaving aside any question of interest
or other items, the total amount for which Torex is indebted to BBL and BDL is
£825,428.44 [£826,028.44 per LA QC]. Jat was asked in cross-examination
about his intentions as regards these monies, given that on his case they were
loans, albeit that on his case, supported by Rajinder, these loans were made
without any specific agreement as to repayment, on the understanding that they
could and would be repaid when Jat was in a position to do so, rather than on
demand, and that there was no term as to payment of interest. In his first
witness statement made in March 2015 he had suggested that Torex might be able
to repay some £400,000 within the course of that year if it was able to dispose
of some unidentified property. However that prospect has never materialised. There
is little if any hard documentary evidence to enable any assessment to be made
as to the prospects of Torex ever being able to repay its liability to BBL or
BDL. Its most recent accounts show it to be a dormant company, and the
previous year’s accounts show no activity, modest tangible assets of around
£200,000 and negative net assets and net current assets. In the circumstances,
and based on the evidence which Jat has chosen to adduce in this case, I am
satisfied that there is no current or realistic future prospect of any
repayment of this balance being made by Torex.
59. Before considering the respective accounts as
to the circumstances in which these payments were made and the extent – if at
all – to which Inder knew of and/or consented to or acquiesced in them I should
also refer to the evidence as to how these payments were effected and recorded.
The recording of the
Torex payments
60. It is common ground that the relevant payments
were made either by CHAPS transfer by attending at the bank in person or by
telephone banking (subject to a £5,000 limit). Such payments could be
authorised by Jat alone, who would not have needed to involve Inder (nor Sohan
nor Rajinder for that matter) and nor would the bank have needed to contact
Inder to confirm that the payments were in order.
61. Both Inder and Jat had their own offices at
Salendine Nook. In autumn 2006 Helen Stratton took over from the previous
bookkeeper, known as Margaret, working for 2 days a week at Salendine Nook on a
self-employed basis as company bookkeeper for BBL and BDL. She was not
employed to undertake the bookkeeping for Silvercrest; it appears that there was
also a secretary, known as Fran, who according to Inder sometimes dealt with
the Silvercrest correspondence. Ms Stratton was given a brief induction by the
departing bookkeeper. She was told that there was a cash book into which she
had to enter all cheque payment details. Although Inder said that the cash
book ought also to have entered into it details of bank transfers or other bank
payments, and although there was evidence that the cash book did contain such
entries before Ms Stratton took over, I accept her evidence that she understood
that only cheque payment details should be entered, and that was plainly what
she in fact did whilst working for the companies. Her practice was to process
all invoices, entering the details in the cash book and preparing cheques for
payment, and leaving the cash book and prepared cheque on Inder’s desk for him
to authorise, signing the book to authorise payment and signing the cheque
accordingly, to enable her to complete the payment process on her next
attendance. Although Inder said that this was a 2 stage process, where one
director – whether he or Jat – would authorise the payment and the other would
sign the cheque, I found his explanation confused and confusing and
intrinsically unlikely, and prefer her explanation.
62. There was a dispute as to what happened to the
bank statements, which were provided weekly due – I am satisfied – to the
historically high incidence of bank transactions when BBL operated the grocery
business. Inder said that all correspondence, including bank statements, were
opened and processed by Ms Stratton, so that he did not see them on a weekly
basis, whereas in her witness statement she said that all correspondence,
including bank statements, was opened by Inder and then placed by him on her
desk for processing. She was a little more equivocal in her oral evidence and
I am satisfied that this is because the position was rather less formalised
than either suggested. By mid 2007 it appears that Jat spent most of his time
working from home, only attending the office where necessary, with the
intention – I am satisfied – of avoiding Inder as much as possible. However,
since Inder was as I have said devoting a considerable proportion of his time
on Silvercrest business, including making foreign trips, I am satisfied that by
this stage he was not a permanent presence at the office. In the circumstances
I am satisfied that there was no set pattern, and that correspondence might be
left on any one of the three respective desks, opened or unopened, and that it
might be opened and read by Inder or by Jat before being processed or it might
not. I would accept that Inder would not have felt it necessary to receive and
read the bank statements for BBL, let alone for BDL, each week.
63. The processing function involved Ms Stratton
checking the bank debit entries, so as to reconcile them against invoices and
payments. Once reconciled, she would enter the details onto the Sage office
software system which was installed onto the desktop computer which was
provided on her desk for her use. She would allocate the payments to the
relevant nominal ledger for the supplier or creditor in question. There was no
security system in place so that anyone – including Inder and Jat – could
access the computer and interrogate the Sage system. However Inder’s evidence,
which Ms Stratton did not dispute, was that his computer skills in this respect
at least were rudimentary, so that if he wanted to obtain information held on
Sage he would tend to ask her and she would provide a printout for him to
read.
64. Ms Stratton’s evidence was that she would
refer any queries over a debit entry which she did not recognise to one or
other of the directors. In this case her evidence, which I accept, was that
she had written against the relevant entry on BBL’s bank statement recording
“transfer to Torex Developments” on 24 September 2007 the words: “Jat’s new
company”. She was unable to recall when asked whether this would have been
information obtained from Inder or from Jat. Her evidence, which Inder agreed,
was that the bank statements, once the reconciliation process was completed, would
be put into files which were then stored on shelves above her desk, which was
located in an office in between the two brothers’ offices, and again to which
both brothers had unrestricted access.
65. The evidence shows that the BBL bank
statements were always addressed to the Salendine Nook address. The BDL bank
statements were also addressed to Salendine Nook until November 2007, when the
bank was instructed – by Jat or Ms Stratton at his instruction I have no doubt
– to send them to his home address instead. It follows that the payments made
from BDL to Torex before that date would have been shown on bank statements which
were sent to Salendine Nook, whereas those made after that date were shown on
bank statements which were sent to Jat’s home address. It was Jat and Ms
Stratton’s evidence that there was nothing sinister in this, simply reflecting
the fact that at that point Jat had effectively stopped working at the office
at all. Indeed Ms Stratton explained, and I accept, that in order for her to
undertake the BDL bookkeeping the bank statements were dropped off at the
offices for her to work on. Insofar as Inder suggested that the change of bank
statement address was undertaken with the deliberate motive of concealing them
from him, I reject that. If the intention had been to disguise the
transactions in issue it would have been done before the substantial
transactions of 24 September 2007, and would have had to involve BBL’s bank
statements being transferred or concealed as well.
66. I reach the same conclusion as regards the fact
that subsequently it was agreed between Jat and Ms Stratton that she should undertake
the bookkeeping for BDL from his house, using a laptop with Sage installed provided
by Jat for that purpose. In her witness statement she said this happened in
early 2008, in re-examination she said it was March 2008. I accept that it was
around that time. Ms Anderson cross-examined both Jat and Ms Stratton by
reference to a memorandum written by Jat in November 2011, where he had stated
that the BDL records had been moved to his house in “2006 or 2007”. I have no
doubt that this was written in error and may be disregarded. Insofar as there
was some suggestion that this was also a deliberate attempt to disguise these
transactions, I reject that. Indeed Ms Stratton said, and I accept, that the
BDL entries already entered onto Sage by her using the desktop computer at the
Salendine Nook offices remained on that computer, and could have been accessed
by anyone with access to the computer and with sufficient skills to do so. Whilst
the contemporaneous nominal ledger entries from September 2007 onwards have not
been disclosed, I have no doubt that they were posted by Ms Stratton to the BBL
and BDL Torex nominal ledger at the time, and that they were not in any way
concealed.
The circumstances in
which the Torex payments were made
67. Jat’s pleaded case is that the Torex payments
were made pursuant to the Original Loan Agreement and the Varied Loan
Agreement. He admits [paragraph 19.1] that he did not inform Inder of each
individual payment prior to making it.
68. In his detailed pre-action protocol letter of
reply sent in November 2013 he had said that it was Sohan’s suggestion and not
his that he should borrow money from BBL and BDL. He made no reference to
Inder having been consulted or having agreed to this.
69. In his first witness statement he repeated
(paragraph 28) that it was Sohan’s suggestion and not his that he should borrow
money from BBL and BDL. However at paragraph 30 he also said that:
“I believe that the claimant knew of these
loans at the time, although I do not claim that he agreed with them as my
mother and father did.”
In his evidence in chief he said that he
wished to alter this so that it read:
“I believe that the claimant knew of these
loans at the time and agreed.”
70. In his third witness statement he said
(paragraph 47) that he had asked his father whether he could use BBL and BDL’s
monies for Torex, that both Sohan and Rajinder had agreed to this, and that
Sohan had said he would tell Inder. In paragraph 56 he said that Sohan
subsequently confirmed to him that he had told Inder.
71. It will be apparent from this that Jat’s
evidence has altered significantly as regards these important matters.
72. I have already referred to Satwant’s
evidence. As I have said I do not accept the detail of what she said in her
witness statement, not least because the sequence of events as described in her
witness statement was contrary to the sequence as she described it under
cross-examination, and also because I do not accept it as likely that she would
now have such a detailed recollection of the lunch as she now says, but I do
accept the following account as essentially accurate. It was not challenged by
Jat, who simply said when asked in cross-examination that he could not recall
this. In September 2007 she was staying with her parents at their house on a
visit from the USA when Jat came to lunch, but Inder was not present. She was
already aware of the problems with Silvercrest by this time. Sohan told her
that the sons weren’t getting on, that he’d decided that they should do their
own projects with money from the family business, and that he was going to give
Jat money for his new business. She gained the impression that her father
wanted her to agree with the decision. She was surprised because she had
always understood the family practice to be that no-one in the family should
have their own private business, and she expressed her surprise that Inder was
not being involved in the decision. She was told by Sohan that it was his
decision. She did not challenge her father once he had said that it was his
decision. Rajinder did not say anything to contradict Sohan. Although Satwant
was not told explicitly not to inform Inder, she did not do so, fearing that to
do so would only lead to an escalation of family tensions at a time which would
upset her father when he was ill. She only told Inder about this in 2015 when
Inder asked her whether she was able to give any evidence which might support
his case and she felt that she ought to assist him in his dispute with the rest
of the family.
Inder’s
discovery of the Torex payments
73. The first documentary evidence of Inder
questioning the payments to Torex is on 27 March 2008, when Inder’s then
solicitors, Ford & Warren, instructed since December 2007, wrote to Baxter
Caulfield, who were still acting – despite Inder’s protests – for the companies
and Sohan, Rajinder and Jat. What they said, as relevant, was that whilst
Inder had been sorting out BBL’s service charge and rental accounts at Sohan’s
request he had discovered the transfer to BBL of the £140,000 - recorded on the
bank statement (by Ms Stratton, I find) as being from “Torex Dev”. They said:
“3. We are slightly concerned about this receipt
because it seems that Jat borrowed £440,000 from BBL on behalf of his private
company being Torex (we believe). Our client is unaware as to the shareholding
but knows that neither he nor his parents have shares in the organisation. Is
it true that Jat did borrow this money? If so, could you please provide a copy
of the board minute authorising it.
4. …
5. The concern is clearly one which needs to be
explained with the supporting board minutes. The tax position is unclear. We
understand that Jat is attempting to arrange bank facilities to discharge the
current tax liability, but it seems that he owes or his company owes BBL around
£300,000. If this is the case why does his company [not] simply pay BBL back
so that [the tax liability can be paid without the need for further
facilities]?”
74. Inder’s evidence is that he did not become
aware of the Torex payments until around February 2008. His evidence was that
he did not open or see the bank statements relating to BBL (or to BDL, for that
matter) at the time of the September transfers, and that he was completely
unaware from any other source, whether Jat, his parents, anyone else in his
family, Ms Stratton, the bank, or any other documentary source, that they had
been made. He says that his attention was fully focussed on trying to rescue
the situation with Silvercrest at the time, including making a number of trips
to Africa.
75. In his first witness statement he said that
“in or around February 2008 I became aware that BBL’s bank borrowing under its
bank facility had increased to around £550,000. Initially I assumed that this
was because the facility had been used to pay off a substantial tax bill, which
I knew to be owing at the time. When I discovered that the tax bill had not in
fact been paid I took steps to investigate the finances of BBL and BDL”. In
cross-examination he said that he had seen the bank statement showing borrowing
at around £500,000 in January 2008. It was pointed out to him that the BBL
account was never more than £485,000 overdrawn throughout January or February
2008, and it was suggested to him that he must have seen a bank statement
earlier than January 2008. The BBL bank statements show that the balance rose
– briefly – as high as around £619,000 on 25 September 2007 and then hovered
around the £600,000 mark – broadly keeping within the £600,000 overdraft limit
– until mid November 2007 when it started to reduce steadily so that the
overdrawn balance stood at around £485,000 on January 2008. It is not apparent
that it ever stood at or around £550,000 over that period. However it seems to
me to be plausible on the basis of the movements on the account together with
the evidence referred to below that at some stage in December 2007 Inder did
see a bank statement showing the balance at around £500,000 overdrawn, and did
assume that this was because the tax had been paid, especially in circumstances
where he was distracted by Silvercrest’s affairs.
76. It is known from the documentary evidence that
on 16 November 2007 Baxter Caulfield wrote to Inder giving notice of an
intended board meeting of all 3 Bhullar companies at which a formal division of
the companies would be discussed. Inder wrote asking for an adjournment to
enable him to obtain legal advice. Meetings took place on 27 November and 2
December 2007. Although those meetings were held on a without prejudice basis,
some evidence has been given as to what was said before and after those
meetings, and it has not been alleged that anything was said about Torex or the
Torex payments by anyone at that stage. Nor did Inder make any reference to
these matters in his letter to Baxter Caulfield of 5 December 2007 in which he
objected to its continuing to act. Nor did Baxter Caulfield do so in its further
letter of 6 December 2007, advising of a formal meeting to take place on 14
December 2007, in which it referred amongst other things to the means by which
a formal division could be achieved as well as the significant and overdue tax
liabilities of the Bhullar companies which needed to be addressed. Mr Newman
accepted that he was unaware of Torex at this time, and the tenor of this
letter is wholly inconsistent in my view with all concerned being fully aware
that Jat had already set up his own company which had been advanced substantial
funds by BBL and BDL and which already held its own investment properties.
77. Reference was also made to the tax liabilities
in Simpson Wood’s letter of 11 December 2007. Inder’s letter of the same day
records that he was due to be in Africa the following week to deal with
Silvercrest matters, in the context of asking that the meeting be postponed.
It appears that the meeting proceeded in his absence in relation to certain
matters, one of which was a resolution to discharge the tax liability as soon
as possible, and this decision was notified to Ford & Warren, who were then
involved, the following week. There is no evidence of anything else material
occurring until 28 January 2008, when Ford & Warren wrote to explain that
Inder had still been heavily involved ever since in relation to seeking to
resolve Silvercrest’s affairs, and nothing of significance occurring from then
until the letter of 27 March 2008.
78. Inder’s evidence in cross-examination was that
upon discovering these transactions he had telephoned home and asked Jaswant –
who was then visiting – to ask his parents if they knew anything of these
transactions and was told by her that they did not. He said that he had a
little later spoken to his parents about them, who had asked him not to call
the police, as he had threatened to do because in his view Jat had stolen the
money. Later in cross-examination he said that he had also raised this with
Jat a few days later. I do not accept this evidence. It is not consistent
with what he said in his fourth witness statement at [26] –[31], nor is it
consistent with the delay in raising this until the letter from Ford &
Warren at the end of March 2008 and the more measured way in which it is
expressed in that letter.
79. In short, in my view there is nothing in this
contemporaneous correspondence which is inconsistent with Inder’s account that
he was unaware of Torex or the Torex payments until sometime in early 2008, or
which tends to support Jat’s case that the letter of 27 March 2008 was a
charade.
80. Mr Chaisty described this as a letter written
in moderate terms. I agree, although in the context of a dispute such as this
I would regard that as a compliment rather than as a criticism. Because it is
relevant to the question of acquiescence, which I address later, I should
record that although Mr Chaisty submitted that there was no suggestion in this
letter of any personal responsibility on Jat’s part that is not quite right,
because it did make reference to Jat having borrowed the funds on behalf
of Torex, and to Jat or Torex owing BBL £300,000. Mr Chaisty points out
that it was not until August 2009, when it was revealed in a meeting that there
was a concern that Torex might be unable to repay the monies advanced to it by
BBL and BDL, that Ford & Warren wrote making for the first time a positive
allegation that Jat had breached his fiduciary duties to the companies as
regards the Torex payments. However, since the question of board authorisation
was expressly raised in this March 2008 letter, there is little doubt in my
view that there was at least an implicit suggestion at this stage that Jat
might have procured a substantial loan to himself or to his company without
prior proper authorisation, which in my view carried with it an implicit
suggestion of personal responsibility if not repaid by Torex. It is not
surprising that no claim against Jat personally for breach of fiduciary duty
was made until it became apparent that Torex might not be able to repay the
monies.
81. It is also right to record that Baxter
Caulfield never provided a substantive response to that letter, even after Ford
& Warren had written a chasing letter and a further letter raising what was
perhaps a less focussed question. Jat contends and Mr Chaisty submits that
this letter was simply a device to put forward a negotiating position for Inder
in the context of the argument about the financial division of the family
business. However, as Ms Anderson submits, it seems inconceivable that if
Sohan had informed Inder of the proposed loan to Jat’s new company and that
Inder had agreed and was aware of it, that Baxter Caulfield would not have been
instructed to write a speedy response making that point in firm terms. Indeed,
if the explanation given by Ford & Warren why Inder had only recently
become aware of the advance was itself manifestly untrue and a cynical
contrivance, one might also – and perhaps even more – have expected Sohan and
Jat to take issue with that. Jat’s evidence was that he refused to respond to
this request in relation to BDL because so far as he was concerned Inder was
also refusing to deal with his requests for information in relation to
Silvercrest. That seems to me to be consistent with what was happening; in
short a “tit for tat” approach rather than a deliberate attempt to conceal
matters from Inder.
Breach of fiduciary duty – the law and the respective
arguments
82. It is not in dispute that Jat, as a director
of BBL and BDL, owed fiduciary and other duties to those companies in his
capacity as director. There is no director’s service agreement or
shareholders’ agreement which seeks to modify in any way such duties as are
imposed by law or statute and nor do the articles of association of the companies
seek to do so.
83. Identifying with precision the particular
duties owed in this case is a little more complicated than it might otherwise
have been because: (i) the incorporation of Torex and the first substantial
Torex payments pre-date the coming into force of the first tranche of the
relevant sections of the Companies Act 2006 on 1 October 2007; (ii) the later
Torex payments post-date the coming into force of the second tranche of those
relevant sections on 1 October 2008. However fortunately this is not a case
which turns on any material distinction between the law pre and post 1 October
2007 or pre and post 1 October 2008. In her written opening Ms Anderson
provided an extremely helpful summary of the position as regards the applicable
law and the pleaded cases in that regard, which is not the subject of dispute
and which I gratefully adopt and repeat here in slightly modified form.
84. Jat admits that, as a director of BBL and BDL,
he owed the following duties prior to 1 October 2007 – see the Particulars of
Claim at [10] and the Amended Defence at [8]:
(1) A fiduciary duty to act in good faith in what
he believed to be the best interests of the company;
(2) A fiduciary duty to exercise his powers
lawfully and for proper purposes;
(3) A duty, at common law, to act with reasonable
skill, care and diligence.
84. Jat also admits that, as a director of BBL and
BDL, he owed the following duties prior to 1 October 2008 – see the Particulars
of Claim at [11] and the Amended Defence at [8]:
(1) A duty under s.317 Companies Act 1985 to
declare any interest, direct or indirect, in any contract or proposed contract,
at a meeting of the directors of the company;
(2) A duty in equity not to put himself in a
position where his personal interests conflicted or might conflict with his
duties to the company.
85. Jat also admits that, as a director of BBL and
BDL, he owed the general duties in ss. 171 to 174 Companies Act 2006 after 1
October 2007 – see the Particulars of Claim at [12] and the Amended Defence at
[8]. This included:
(1) Under s. 171(b), a duty to exercise powers
only for the purposes for which they were conferred;
(2) Under s.172, a duty to act in good faith in
the way he considered in good faith most likely to promote the success of the
company.
86. Jat also admits that, as a director of BBL and
BDL, he owed the general duties in ss. 175 to 177 CA 2006 after 1 October 2008
– see the Particulars of Claim at [13] and the Amended Defence at [8]. This
included:
(1) Under s. 175, a duty to avoid conflicts of
interest;
(2) Under s. 177, a duty to declare to the other
directors the nature and extent of any interest in a proposed transaction or
arrangement with the company.
87. So far as concerns the obligations to declare
in BBL, Jat admits – see the Particulars of Claim at [14] and the Amended
Defence at [18] - that pursuant to Regulation 84(1) of Table A 1948 and Article
12 of the Articles of Association he was obliged to declare the nature of his
interest in the manner required by s.199 of the 1948 Act. So far as concerns
the obligations to declare in BDL, Jat admits – see the Particulars of Claim at
[15] and the Amended Defence at [18] - that pursuant to Regulation 85 of Table
A 1985 he was obliged to declare the nature and extent of his interest to the
directors.
88. The main differences between the pre- and
post-Companies Act 2006 position is that:
(1) In the case of the general duties relating to
conflict of interest, the Companies Act 2006 provides for their disapplication in
certain circumstances upon either (a) disclosure of the material facts to the
directors in the context of s.177 or (b) approval by the disinterested
directors in the context of s.175, notwithstanding the pre-Companies Act 2006
rules requiring the consent of members – see s.180(1).
(2) The general duties are subject to (a) any rule
of law enabling the company to authorise the matter in question, and (b) any
provision in the company’s articles of association dealing with conflicts of
interest – s.180(4). This thus preserves the power of the company to ratify
conduct by a director amounting to “negligence, default, breach of duty or
breach of trust”. Post 1 October 2007 ratification is governed by s. 239,
which provides that any such ratification must be made by resolution of members
of the company disregarding the director in question or any member connected
with him (which for these purposes would include Sohan and Rajinder).
(3) Otherwise the UK statutory code does not
permit the duties or liabilities of directors to be diluted or limited by the
articles of association – s.232.
89. In their written opening Mr Chaisty and Mr
Grantham made the following submission:
“5.5. It is recognised that:-
5.5.1. Jat failed formally to declare his interest in
the loans to Torex;
5.5.2. There was no formal resolution of the directors
of BDL/BBL resolution of the member of BBL/BDL authorising such loans.
5.6. However, there was unanimous and informed
consent to each of:-
5.6.1. The Original Loan Agreement;
5.6.2. The incorporation and trading of Torex and
Jat’s involvement and interest therein;
5.6.3. The Varied Loan Agreement;
5.6.4. The making of payments to Torex
by the directors of each of BL, BBL and BDL (that is Jat, Inder and their
parents) and of the members of BL and accordingly the member of BBL/BDL (that
is BL).
5.7. Each of BL, BBL and BDL were at all material
times solvent. It was not therefore necessary to give consideration to the
wishes of any creditors and Inder has not sought to allege the contrary.
5.8. In those circumstances, the principle in Re
Duomatic applies.”
90. In my view the concession in paragraph 5.5 is
a realistic acceptance of the position. Insofar as relevant I would go further
and hold that:
(i) It would be a breach of his fiduciary duties
as a director of BBL and BDL to cause those companies to agree to make and to
make substantial payments to his company, Torex, to enable it to undertake
speculative property developments, without any terms as to repayment, as to
payment of interest, or as to the provision of security, unless he had made
full disclosure of his interest in Torex and the proposed agreements and/or
payments and unless BBL and BDL had given informed consent to the making of
such agreements and such payments in the manner required by the general law, by
the Companies Acts as in force at the relevant times and by the articles of
association of those companies.
(ii) Neither BBL nor BDL followed the requirements
of the general law or the Companies Acts as in force at the relevant times or
the articles of association of those companies as regards the making of such
agreement and such payments. In particular, there was no formal meeting of the
directors of BBL or BDL at which Jat declared his interest in Torex and the
proposed transactions and at which the making of any agreement as regards Torex
or the making of the Torex payments was sanctioned in the requisite manner, nor
any ratification of his conduct in accordance with s. 239 Companies Act 2006.
91. It therefore follows that Jat is obliged to,
and does, rely on what is commonly referred to by lawyers as the Duomatic
principle to legitimise what would otherwise amount to an undoubted breach by
him of his fiduciary duties to BBL and BDL.
92. The principle was explained by Buckley J in in
Re Duomatic [1969] 2 Ch 365, 373 as being that:
“…where it can be shown that all shareholders who have a right to attend
and vote at a general meeting of the company assent to some matter which a
general meeting of the company could carry into effect, that assent is as
binding as a resolution in general meeting would be.”
93. Mr Chaisty and Mr Grantham drew my attention
to certain material aspects of the Duomatic principle in their written opening.
94. They referred me, as did Ms Anderson, to the
decision of the Court of Appeal in Sharma v Sharma [2013] EWCA Civ 1287,
[2014] BCC 73 as confirming a number of significant principles of relevance to
this case. That was an appeal from a decision of Simon J. [2012] EWHC 2529
(Fam), in the context of financial remedy proceedings in the Family Division,
that the director of a dental company was not in breach of her fiduciary or
statutory duty by acquiring certain dental practices for her own benefit,
rather than for the benefit of the company, where the central issue in the
appeal was whether the shareholders with knowledge of the material facts had
acquiesced in the director’s proposed course of conduct. It was held by
Jackson LJ, in a judgment with which McCombe and Floyd LJJ agreed, dismissing
the appeal, that (and I quote from the helpful headnote in the BCC report):
“The relevant principles could be summarised as follows: (i) a company
director was in breach of his fiduciary or statutory duty under s.175 of the
2006 Act if he exploited for his personal gain: (a) opportunities which came to
his attention through his role as director; or (b) any other opportunities
which he could and should exploit for the benefit of the company; (ii) if the
shareholders with full knowledge of the relevant facts consented to the
director exploiting those opportunities for his own personal gain, then that conduct
was not a breach of the fiduciary or statutory duty; (iii) if the shareholders
with full knowledge of the relevant facts acquiesced in the director’s proposed
conduct, then that may constitute consent. However, consent could not be
inferred from silence unless: (a) the shareholders knew that their consent was
required; or (b) the circumstances were such that it would be unconscionable
for the shareholders to remain silent at the time and object after the event;
(iv) for the purposes of (ii) and (iii) full knowledge of the relevant facts
did not entail an understanding of their legal incidents, i.e. the shareholders
needed not appreciate that the proposed action would be characterised as a
breach of fiduciary or statutory duty. (Boardman v Phipps [1967] 2 AC 46 followed; Re Duomatic Ltd [1969] 2 Ch. 365, Re Home Treat Ltd
[1991] B.C.C. 165 and Knight v Frost [1999] B.C.C. 819 applied.)”
95. Mr Chaisty and Mr Grantham also noted that the
principle in Re Duomatic applies to both members and directors,
referring me to the observations of Lewison LJ at [36] in Speechley v Allott
[2014] EWCA Civ 230, where he cited Barron v Potter [1914] 1 Ch 895 and Runciman
v Walter Runciman plc [1992] BCLC 1084. They also noted that provided the
shareholders/directors agree to the course of conduct in question, there is no
need to enquire as to the capacity in which they purport to act, and that the
shareholders/directors need not be present at the same time, so that assent
given on separate occasions will suffice, referring me to the observations of
HHJ Purle QC in Re BW Estates Ltd (No 2) [EWHC] 2156 (Ch) at [40] – [41].
96. Mr Chaisty and Mr Grantham also refer me to s.
239(6)(a) Companies Act 2006, which makes clear that nothing in s. 239 affects
the validity of a decision taken by unanimous consent of the members of the
company.
97. In this case the decisions in question to
agree to and make payments to Torex were of course decisions which were taken
on behalf of the companies BBL and BDL. From March 2007 onwards Sohan,
Rajinder, Inder and Jat were all directors of those companies, as well as
directors of BL. The sole shareholder of BBL and BDL was BL. All four were
the sole shareholders in BL. It follows that the correct analysis is that in
order for the Duomatic principle to apply it must be shown that all four agreed
to or acquiesced in any decision to agree to and make payments to Torex.
98. Ms Anderson emphasised that the Duomatic
principle required: (a) full knowledge of the relevant facts; (b) approval, not
just knowledge; and (c) unanimous approval of all the relevant shareholders. I
agree with that submission. I note that in Re D’Jan of London Ltd
[1993] BCC 646, a claim against a director for negligence in completing and
signing an insurance proposal form, Hoffman LJ (sitting as an additional judge
of the Chancery Division) said in a similar context that it was no defence to
argue that the director and his wife as sole shareholders would probably have
ratified his action if they had known or thought about it before the subsequent
liquidation of the company removed their power to do so.
99. It followed, she submitted and I agree, that
the burden of proof is upon Jat to establish actual assent or acquiescence, so
that it would not be sufficient for Jat to say that even if Rajinder did not
assent or acquiesce nonetheless since she habitually did what Sohan said she
would have agreed if asked. Nor is it sufficient for Jat to say that Inder
knew unless it could also be said that he assented or acquiesced. Nor, for
that matter, would it be sufficient for Jat to say that Inder would have agreed
eventually if that is what Sohan told him he had to do.
Did the other
directors know of and agree to or acquiesce in the Torex payments?
100. I have already made findings to the effect that
there was no agreement by Sohan nor Rajinder, let alone by Inder, in the terms
of the Original Loan Agreement or the Varied Loan Agreement. Thus there is
simply no question of there having been any assent or acquiescence to Jat being
entitled to procure BBL or BDL to make payments to Torex.
101. However I must also consider the position in
relation to the Torex payments.
102. It is sensible to begin with the payments made
in 2007 onwards (excluding the Cumberworth payment and the final £13,000
payment in December 2009, in respect of which different considerations may
apply).
103. The first question is whether or not I am
satisfied on the balance of probabilities that Sohan and Rajinder knew of and
consented to the payments. Inder’s primary case has always been that neither
Sohan nor Rajinder knew of or agreed to these payments, because of his belief
that neither would have agreed without obtaining his agreement as well.
However, in my view this failed to reflect what I am satisfied was the reality
of the relationship as between him and his parents by September 2007, and is
also inconsistent with the evidence he adduced from Satwant, which as I have
said I accept. Accordingly I am satisfied that Sohan did both know of and
consent to Jat using BBL and BDL’s funds to enable Torex to acquire and develop
the Carlton Road property. In short, I am satisfied that by this stage he was
so aggrieved by the scale of Silvercrest’s losses, for which he blamed Inder,
and by Inder’s refusal to agree to a formal division of the family business on
what he regarded as fair terms, that he decided that Inder should no longer be
permitted to frustrate and to delay Jat’s plans to acquire and develop further
property in his own right, in circumstances where he believed that this was the
only sensible way forward and one which was going to happen, either by
negotiation and agreement or if not by exercising the majority voting rights,
before long in any event.
104. As regards Rajinder, Ms Anderson has submitted
that there is insufficient evidence to make such a finding. She submits that
it is inconsistent with the evidence that Sohan would not have involved her in
business decisions, so that the likelihood is that it was something which was
agreed solely as between Sohan and Jat. However, on balance I am satisfied
that Rajinder did both know and consent. In particular I am satisfied that
this was not a purely business decision, but one which had family ramifications
insofar as it did involve treating the two sons differently because of Sohan’s
view as to their behaviour in the wider sense. I am also satisfied that Sohan
would have wanted to ensure that Rajinder knew and approved, because he knew
that she would have to exercise her rights as director of BBL and BDL and as majority
shareholder in BL after his death, in the face of possible opposition from
Inder, to ensure that his decision was respected and adhered to.
105. This is also consistent with Satwant’s
evidence, which is that Rajinder was present at the family lunch in September
2007 where Sohan explained to her what he was going to do. It could be argued
that her silence in such circumstances is insufficient to amount to consent or
acquiescence. It could also be argued, given Rajinder’s evidence as to her
knowledge of her responsibilities as a director, that this could not have
amounted to informed consent. However, in my view it would be unrealistic to
treat this as the first or only occasion on which Sohan and Rajinder would have
discussed this; I am satisfied that it must have been discussed on a number of
occasions. Moreover, even if that was wrong, I am satisfied that in the
fact-specific context of this case, given the inter-connected family and
business relationship and responsibilities, in circumstances where as I have
said Sohan had taken steps to ensure that she was positioned to operate as his
representative after his death, on an objective analysis her silence can only
be taken as amounting to agreement. Finally, whilst I accept that Rajinder
would not have had any knowledge of the legal issues involved and nor,
probably, of her role as shareholder and director of BL or as a director of BBL
and BDL, I am satisfied that she knew of the essential facts in relation to the
proposed payments.
106. I should also resolve the question as to
whether these payments were intended, on an objective analysis, to be
unconditional and permanent transfers, in effect to be gifts – as is Inder’s
primary case - or to be loans, as Jat contends. I am satisfied that there was
never any discussion let alone agreement to the effect that these monies were to
be given outright to Jat. When Jat was asked about this in cross-examination
he said that “if I’d done well it would have been repaid … when I’d made money
I’d pay it back”. I am satisfied that it was agreed or understood at the time that
they were to be regarded as a form of loan as opposed to an outright gift, but
on a non-commercial family basis, so that there was no provision for interest to
be payable and no time for repayment was specified, with the agreement or
understanding being that Jat would repay the loan at a timescale to be agreed
as between himself and Sohan (or Rajinder after his death), the expectation
being that it would be repaid as and when the Carlton House development was
completed and sold, subject to any further agreement to roll over the loan for
use in a further development project.
107. I accept that this is a very loose form of
agreement which does not address what would happen if – as Jat appears to say has
happened - the Carlton House development was loss-making and there was no money
available to repay the loan once the bank and other third party creditors were
paid off. Nonetheless I am satisfied that this does reflect the way in which
matters were agreed at the time as between Sohan and Jat. I also consider that
Sohan and Jat proceeded on the basis that if the development had made a
handsome profit some agreement would have been reached whereby as well as
repaying the loan some part of the profit would have found its way to Jat’s
parents one way or another, possibly by way of payment of what would have been
described as interest, as Jat appeared to suggest in cross-examination. As is
natural in a situation like this, transactions between family members proceed
on the basis that it is assumed the project will be successful and, unlike
commercial lenders, little if any thought is given to what will happen if
things do not go well. Nonetheless, I do not consider that Sohan would ever
have contemplated giving family funds to Jat unconditionally, with no
obligation to repay however successful the project, any more than he would have
considered giving family funds to Inder outright. I do not consider that Jat
would have expected these funds to be provided as an unconditional gift.
108. It is not without relevance in this context
that in the contemporaneous correspondence, for example Ford & Warren’s
letter of March 2008, Inder clearly believed that it was a loan, and indeed he
continued to write referring to them as unauthorised loans – see his memorandum
to Jat of 23 September 2010 and his letter to Simpson Wood of 20 December 2010,
and I reject his oral evidence to the contrary. Of course, as a matter of law
the default position is that if monies are transferred by one to another they
are to be assumed to have been transferred by way of loan unless the evidence
shows that there was a clear agreement or intention to make them over as a
gift.
109. I now turn to the crux of the case, which is whether
or not Inder knew of and agreed or acquiesced in the payments.
110. Perhaps the strongest point made by Mr Chaisty
was that it would not have made sense to seek to conceal matters from Inder, in
circumstances where everyone else in the family knew what was going on, and
where there was no realistic prospect of concealing from Inder the fact that a
substantial payment had been made by BBL to Torex. I am completely satisfied
that they knew that it would have been impossible to conceal the transactions
involving BBL and BDL from Inder for very long and, as I have already found, no
attempt was made by Jat to seek to conceal the bank statements from Inder in
September 2007. I suspect that it was a surprise to them that Inder did not
discover what had happened before he did.
111. However, there is a significant difference in
my view between knowing that Inder would almost certainly discover in due course
what had happened and taking a positive decision to notify him in advance of
the transactions, let alone proceeding on the basis that his consent would have
to be obtained before the transactions could lawfully proceed. I have no doubt
that Sohan and Jat would not have wanted to notify him in advance, strongly
suspecting – as I am satisfied they must have – that he would almost certainly
have objected and might have taken steps to block the payments. Although no
disclosure has been made of Baxter Caulfield’s conveyancing file for the
purchase of Carlton House, so that the gap – if any – between exchange and
completion is not known - there is no reason to consider that the vendors would
have been prepared to wait indefinitely for completion whilst Jat attempted to
obtain Inder’s approval. Under cross-examination Jat initially said that he
told Sohan the same day as the £440,000 was transferred and that he believed
Sohan had told Inder the following day. Later he said that he told Sohan what
he was going to do and Sohan said that he would tell Inder, but he did not know
when this was. I am satisfied that Jat would have wanted Sohan’s agreement
that he could use family company funds for the purchase before he committed to
it, but there is no satisfactory evidence in my judgment that Inder was told in
advance of the transaction, let alone that he was told some time in advance to
enable him to decide whether or not to consent and any necessary formalities to
be completed.
112. I also do not accept that he was told after the
transfers had happened. On the balance of probabilities, I am satisfied that Sohan
and Jat decided that the best course was simply to transfer the funds from BBL
and BDL without seeking or obtaining Inder’s advance approval. I am satisfied
that whilst they expected that Inder would discover what had happened in due
course and would be extremely upset, they believed that he would be in a weak
position to complain, given the losses suffered in relation to Silvercrest, and
given that they believed – as it transpires erroneously – that they could
always use their majority interest (including Rajinder) in the family companies
to legitimise it anyway, so that in the end he would just have to live with it
and accept a partition of the family business.
113. In short, I am satisfied that Sohan did not
tell him within a short time of it being agreed, as Jat, supported by Rajinder
and Jaswant, says. Even if it did in some way come to his attention at the
time, I am also and even more firmly satisfied that he did not agree to it. This
whole version of events is, in my view, completely inconsistent with the
version of events in the contemporaneous and subsequent correspondence (in
particular the pre-action protocol letter of response) or in the witness
statements. I have no doubt that it has been introduced, quite
opportunistically by Jat supported by Rajinder and Jaswant, once it became
apparent to him that it would not be a sufficient defence for him to rely upon
the majority control of the companies by Sohan, Rajinder and himself at the
time of the transactions.
114. In my view, the letter of 27 March 2008 from Ford
& Warren is entirely consistent with Inder having first discovered what had
happened sometime in the previous month. Had he known about it in late September
2007, or prior to the meetings of November and December 2007, I have no doubt
that it would have been raised at that time by him as a matter of complaint –
whether justified on his case or as a cynical tactic on Jat’s case, yet the
documentary evidence shows and everyone including Mr Newman confirms that he
did not.
115. Nor in my view does the evidence show that Inder
must have known before he says he did. In particular:
(i) It is clear that the transfers from BBL and
BDL to Torex were indeed shown on the bank statements. It is also clear, and I
accept, that Ms Stratton wrote on the BBL bank statement recording “transfer to
Torex Developments” the words “Jat’s new company”, and thereafter caused the
Sage accounts for both companies to show in the nominal ledgers the
transactions as transfers to Torex. However, notwithstanding what she said in
her witness statement, in cross-examination she accepted that she could not say
- especially since she was only in the office 2 days a week - that it was Inder,
as opposed to Jat, who would invariably have opened or scrutinised all of the
bank statements as they came in. Nor could she say that it was Inder and not Jat
who must have provided her with the explanation which caused her to write what
she did on the BBL bank statement.
(ii) In my view it is equally possible and on balance
more probable, that by this stage Inder was sufficiently distracted by his concerns
in relation to Silvercrest that he was not in the office at the relevant time
and that Ms Stratton asked and was provided with the explanation by Jat. In a
way that is not surprising, because she knew that BDL was – as she perceived it
– Jat’s company, and would have seen the payments out from BBL and BDL to Torex
at around the same time. Again therefore, she was more likely, if Inder was
not immediately available, to have asked Jat for an explanation.
(iii) It is also worth noting that 2 days after the
£440,000 was transferred out of the BDL account sufficient was paid in to cause
the balance to reduce back to below the £600,000 limit. It follows that it is
entirely plausible that the bank would not have felt it necessary to seek to
contact Inder to enquire why the overdraft limit had been exceeded.
(iv) Although initially I was unimpressed by Inder’s
explanation that once he saw that BBL’s overdrawn balance had increased to
£550,000 he assumed, without checking, that this was because Jat had paid the outstanding
tax liability whilst he was away in Africa on Silvercrest business in fact, on
an analysis of the documentary evidence and the correspondence in relation to
this in the context of the meetings and correspondence in December 2007, this
explanation seems to me to be both plausible and reasonable. It is clear that
by this stage steps were being taken by Sohan and Jat, with the assistance of
Simpson Wood and Baxter Caulfield, effectively to remove his de facto control
of BBL and its financial affairs and reinstate the control of Sohan, supported
by Jat.
116. I accept, however, that there is no evidence to
support any contention that Jat deliberately intercepted the bank statements or
concealed them from Inder or sought to involve Ms Stratton in a strategy to
conceal the transaction from Inder. I am satisfied that she would not have
been party to such conduct, nor was it seriously if at all suggested to her
that she had been. The evidence, including that of Inder, shows clearly that
the bank statements for both companies were there for him to see at the office,
had he wanted to, from September 2007 onwards, and that it was not until later
in November 2007 that BDL’s bank statements were redirected to Jat’s home
address (and even then were still returned to the office for Ms Stratton to
work on until she started to work on BDL’s books at Jat’s house in 2008)
whereas BBL’s statements were always kept there. The evidence also shows that
there would have been no reason why Ms Stratton would not have told him about
these payments had he asked, or have provided him with a Sage printout, had he requested
one.
117. So far as the Cumberworth payment is concerned,
this was transferred to Torex on 22 August 2008, which was only just over 2
weeks before Sohan’s death. When Jat was asked about this in cross-examination
he said that he had told Sohan that the property was being sold and that he was
intending to transfer the proceeds to Torex. He also said that Sohan had told
Inder about this, but he did not suggest that Sohan had told him that Inder was
agreeable to this.
118. Again I am prepared to accept on the balance of
probabilities that Jat would have informed Sohan, who did not object. I am
also prepared to accept that Sohan would have told Rajinder at that time, and
she would not have disagreed. However there is no satisfactory evidence that
Sohan even told Inder, let alone that Inder agreed. The context is of course
important, which is that in my judgment it is virtually inconceivable that
Sohan, who was on any view in a very poor state of health at least physically
at this stage, would have provoked a serious falling out with his eldest son by
informing him that he had agreed to allow Jat to receive £335,000 as the
proceeds of sale of a development property acquired by BDL only 2 years
previously.
119. There was no evidence adduced in relation to
what appears to have been very much an isolated one-off payment of £13,000 from
BDL to Torex in December 2009. By then, of course, only Rajinder and Inder
would have been involved, and I have no doubt whatsoever that even if Rajinder
was informed, which I have to say I doubt, Inder would not have been.
120. What then about acquiescence? Given the
conclusions that I have reached that Inder was never even informed, let alone
asked to agree, to the payments to Torex, there is no basis for finding any
acquiescence as regards his conduct prior to the time he found out, as I have
found, about the payment from BBL in around February 2008.
121. In closing submissions, Mr Chaisty contended
that acquiescence could be found by reference to Inder’s conduct in relation to
the letter from Ford & Warren dated 27 March 2008 and subsequent events.
Whilst I applaud the ingenuity of the argument, in my judgment it has no
merit. I have already referred to the terms of the letter at [73] above and
have already noted at [80] that whilst it was moderately expressed it
nonetheless: (a) asked Jat’s solicitors to explain on what basis this
substantial payment had apparently been made to Jat’s company without
authorisation; (b) cannot be read as Inder electing to look solely to Torex for
repayment of the loan, as opposed to looking to Jat to repay the money on the basis
that it was an unauthorised payment to his company and for which he was
responsible. It is simply not possible in my judgment to read this as
amounting to anything like acquiescence. Moreover, whilst Mr Chaisty also
pointed to the delay until August 2009 in Inder making a positive allegation
against Jat of breach of fiduciary duty, that does not really assist Jat in
circumstances where over that whole period neither Jat nor his solicitors had
ever provided any substantive response to the simple questions posed in the 27
March 2008 letter. By reference to the test as explained in Sharma it
is difficult to see how this exchange of correspondence could possibly be
construed as Inder being asked to give his consent to this unauthorised payment
and, by his silence, being treated as having failed to voice an objection which
in the circumstances he would be expected to voice.
Was Jat in
breach of fiduciary duty?
122. Given the findings I have already made I can
summarise my conclusions relatively shortly. In short, I am satisfied that no
thought was given by Sohan or Jat (or Rajinder for that matter) as to whether
what was done was in the best interests of BBL or BDL. They completely ignored
the cautionary advice given by Simpson Wood in November 2005 as to the
appropriateness of lending substantial funds without express provision for
repayment to a non-family company and without provision for interest, so as to
make it a justifiable commercial proposition, and appear to have given no
thought to the financial risk to BBL or BDL if the property development was not
successful. No thought was given to the possibility of taking security over
Carlton House or other property, nor of taking a guarantee from Jat. It is
apparent that neither Sohan nor Jat thought it sensible to approach Simpson
Wood or Baxter Caulfield for advice or assistance in structuring the
transaction on some proper accounting or legal basis, contrary to the position
adopted previously for example in relation to Silvercrest. I am satisfied that
this was because they simply regarded this as family money, as opposed to
company money, which they believed that Jat was entitled to borrow and to risk
for his own benefit, on the basis that this was justified because of their adverse
view about Inder and the monies lost by Silvercrest, and also because they
believed that Jat would be entitled to use his interest in the assets of the
family business for his own property investments once the business was formally
divided, as they expected would happen before long either by Inder finally
agreeing or, if not, by taking action as majority directors and shareholders to
force through their wishes.
123. In conclusion, I am satisfied that Jat did act
in breach of his fiduciary duty to the companies and that the Duomatic
principle is not engaged so as to excuse it.
Limitation
124. It is common ground that unless the case can be
brought within one or more of the exceptions in ss. 21 or 32 of the Limitation
Act 1980 the vast majority of the claim is statute-barred. That is because the
claim was issued on 22 December 2014, and it is established law that the claim
in this case is subject to a 6 year limitation period. Here, the payments span
the period September 2007 to December 2009, so that all payments made before 22
December 2008 would be statute-barred. Only 4 payments were made by BDL on or
after 22 December 2008, totalling £22,530.
125. Prior to trial it appeared that the claimant
accepted that in order to overcome the limitation defence it would need to
establish either that Jat was party to a fraud or fraudulent breach of trust,
so as to bring the claim within the exception in s. 21(1)(a), or had been
guilty of deliberate concealment, so as to bring the claim within the exception
in s. 32(1)(b). Although the claimant had not pleaded a positive case in
relation to limitation in his Reply to Defence, as Mr Chaisty said it is clear
both from the terms of the Particulars of Claim and from the judgment of Morgan
J. that this was the case being advanced by the claimant.
126. However, in her opening written submissions Ms
Anderson advanced the alternative argument that the claim also fell within the
exceptions in s. 21(1)(b) (claims for the recovery from a trustee of trust
property or the proceeds of property in the trustee’s possession or previously
received by the trustee and converted to his use) and/or s. 32(1)(a) (action
based on fraud by the defendant). Mr Chaisty objected that this was not
pleaded, and needed to be pleaded before this argument could be run and so that
a decision could be taken on behalf of the defendant whether or not to object
to any amendment of the existing statement of case. I agreed and Ms Anderson duly
provided a draft amended Reply, in which reliance on s. 21(1)(b) and s.
32(1)(a) was explicitly pleaded. Having considered the draft pleaded case Mr
Chaisty sensibly and realistically conceded that he could not oppose the
amendment although he reserved his position in relation to costs.
127. Mr Chaisty also considered the case law in
relation to s. 21(1)(b) and, in particular, the recent decision of the Court of
Appeal in Burnden Holdings v Fielding [2016] EWCA Civ 557, in which
David Richards LJ, in a judgment with which Tomlinson LJ and Arden LJ agreed, approved
an earlier decision of Richard Field QC (later Field J) in Re Pantone 485
Ltd [2002] 1 BCLC 266, and held that where a director used company money to
confer a benefit on another company controlled by him that amounts to a
conversion of trust property and hence a claim against the director for
equitable compensation for breach of fiduciary duty in that regard falls within
the scope of s. 21(1)(b) and is not subject to the 6 year limitation period.
Although Mr Chaisty reserved his client’s position to argue the point in the
appropriate court should the matter go further, he accepted that the effect of
this decision is that the claim made here for equitable compensation for breach
of fiduciary duty is not limitation barred.
128. Although, that leaves outstanding the issue as
to whether or not the alternative pleaded claim for an account of profits was
nonetheless statute-barred, in circumstances where in Burnden David
Richards LJ inclined to the view that such a claim was not within s.21(1)(b),
for reasons I give later I am satisfied that it is neither appropriate nor
necessary to award the claimant such relief in this case. However, since the
limitation issue in relation to the other subsections of the Limitation Act
were argued, and may be relevant as to costs, I should address them, if only
briefly.
129. The most hotly contested issue was whether or
not Inder could satisfy me that Jat’s breach of fiduciary duty was dishonest,
so as to allow him to rely on the s. 21(1)(a) gateway.
130. There was no dispute between the parties as to
the applicable law in this regard. The test for dishonesty in this context was
stated by the Court of Appeal in the case of Gwembe Valley Development Co
Ltd v Koshy [2003] EWCA Civ 1048. It is necessary to refer only to the
relevant parts of three paragraphs:
“122. In view of Mr Page’s detailed challenge to the
judge’s finding of dishonesty, it is necessary to set out the relevant parts of
his judgment in some detail. They begin in the earlier part of the judgment
(para 20ff), where the judge made certain “Preliminary Observations”. First, he
directed himself correctly as to the need for strong evidence to establish the
serious allegation of dishonesty, by reference to In re H. and Others
(Minors) [1996] AC 563, 586, per Lord Nicholls of Birkenhead. …”
131. In Armitage v. Nurse [1998] Ch 241 at
251D, 260G Millett LJ held that, in this context, a breach of trust is
fraudulent, if it is dishonest. He accepted counsel’s formulation that
dishonesty -
“… connotes at the minimum an intention on the part of the trustee to pursue
a particular course of action, either knowing that it is contrary to the
interests of the company or being recklessly indifferent whether it is contrary
to their interests or not.”
and added:
“It is the duty of a trustee to manage the trust property and deal with
it in the interests of the beneficiaries. If he acts in a way which he does not
honestly believe is in the interests of the beneficiaries then he is acting
dishonestly.” (p 251D-F)
132. The correctness of this guidance was not in
issue before us. We were also referred to the recent decision of the House of
Lords in Twinsectra v Yardley [2002] AC 164, [2002] UKHL 12. Lord
Hutton, giving the leading speech, emphasised the objective and subjective
aspects of the “combined test”:
“which requires that before there can be a finding of dishonesty it must
be established that the defendant's conduct was dishonest by the ordinary
standards of reasonable and honest people and that he himself realised that by
those standards his conduct was dishonest.” (paras 27, 38)
…”
131. In this case I consider that the arguments are
finely balanced.
132. On the one hand Ms Anderson can and does submit
with some force that: (i) Jat must have known from his involvement in the
previous litigation with his uncle and cousin about the fiduciary obligations
owed by directors; (ii) Jat must have known that for the companies to advance
substantial monies to Torex on the terms agreed was contrary to their
interests, or at least was recklessly indifferent as to that; (iii) Jat must
have known that his own interests did not necessarily coincide with the
interests of the companies, and that the interests of the companies necessarily
involved the wider interests of the Bhullar family business, including
therefore the interests of all four shareholders of BL; (iv) the very fact that
Jat did not seek to obtain Inder’s approval, whether formally or informally,
indicates very strongly that he knew that what he was doing was wrong, as does
the fact that no attempt was made to obtain advice from the accountants or the
solicitors as to the appropriateness of what was being done. She also seeks to
rely upon her case as regards deliberate concealment, although based on my
findings as expressed above it seems to me that this has lost what force it
originally might have seemed to have.
133. On the other hand Mr Chaisty can and does submit
with some force that the case was initially advanced on the basis that the
payments were – as Inder did not shy from contending – thefts from the
companies, concealed from Sohan and Rajinder as well as from Inder, whereas as
I have now found that was not the case, and they were made with Sohan’s and
Rajinder’s knowledge and consent on the basis that it was at least hoped they would
be repaid on the successful conclusion of the development. Not seeking or
obtaining Inder’s assent as well as that of Sohan and Rajinder is as consistent
with an honest belief that it was not necessary, given that the majority of the
family in terms both of directors and shareholding were in favour, as it is
with knowledge that the payments would be illegitimate without Inder’s assent
being obtained. It can also be said that if Jat honestly believed that all
that he was doing was taking money to which he was entitled since Inder had
effectively had family company money given to him for Silvercrest, and which was
going to come to him anyway on a division of the company which he believed was
going to happen sooner or later and which Inder could not properly resist, that
is not dishonest. It can also be said with some force that the case for
inferring dishonesty relying on concealment of the payments cannot now stand
given the conclusions I have already reached on that issue.
134. In my judgment Inder has failed to satisfy,
with strong evidence, the burden of proof upon him to prove dishonesty on Jat’s
part. For essentially the reasons submitted by Mr Chaisty I am satisfied that
the evidence is as, if not more, consistent with an honest albeit misguided
belief that Jat was entitled to do what he did than with actual dishonesty.
Whilst the facts of this case come close to reckless indifference, on balance I
am not satisfied that they cross the line.
135. It follows that Inder does not succeed in
relation either to s. 21(1)(a) or s.31(1)(a). As to the latter, there is the
further difficulty that on the authorities an action is not “based upon the
fraud of the defendant” unless fraud is an essential element of the cause of
action, which is plainly not the position here.
136. Finally, I must consider s. 32(1)(b). It is
acknowledged by Ms Anderson, rightly so, that this argument cannot succeed in
relation to the BBL payment, since Inder was aware of it in February 2008 and
thus the 6 year limitation period running from the date of discovery would have
expired before December 2014 when this claim was issued.
137. Although it was pleaded on Inder’s behalf that
he did not discover the concealment until after he was provided with the BBL
company books and accounts in January 2010, following an order for pre-action
disclosure made in December 2009, in cross-examination he confirmed what he had
said in his fourth witness statement at [31], which was that he had discovered
the removal of funds from BDL in January or February 2009, when Jat had
provided him with access to some of the BDL books. However that would still of
course mean that the claim was not statute-barred if that was when the 6 year
period started to run.
138. In cross-examination, Inder was also asked
whether he was aware in February 2008, at around the time he discovered the BBL
payment, of the possibility that monies had been paid from BDL as well as from
BDL. He said that he was. He said that he had taken it up with his parents
and asked them to deal with it, but had taken no other action. This however is
inconsistent with the fact that in their letter of March 2008 Ford & Warren
had asked for the BDL books to be returned to the office, repeating that
request with the threat of an application to the court in June 2008.
139. It would also appear on the evidence of Ms
Stratton that it would still have been possible for him to have accessed the
BDL bank statements in February 2008, since they were still kept at the
Salendine Nook office. He could also have asked Ms Stratton to provide a Sage
printout of the nominal ledger relating to Torex, and thus ascertained the
details of the Torex payments made by BDL. However by March 2008 and certainly
later I am satisfied that he would have been unable to access the bank
statements which had by then been moved to Jat’s home office.
140. The two key issues therefore are:
(a) Whether or not there has been deliberate
concealment, in circumstances where by s. 32(2) it is provided that “deliberate
commission of a breach of duty in circumstances in which it is unlikely to be
discovered for some time amounts to deliberate concealment of the facts
involved in that breach of duty”;
(b) Whether or not Inder could, with reasonable
diligence, have discovered the concealment earlier.
141. The first difficulty for Inder in my view is
that given my findings as to concealment there is no basis for a finding that
the payments made by BDL to Torex in September 2007 were unlikely to be
discovered for some time. They were not positively disclosed, but equally they
were not concealed, and Jat would as I have found have known that there was no
impediment to Inder seeing the weekly BDL bank statements at any time after the
initial payment was made and discovering what had transpired, in precisely the
same way he did in February 2008 when he did see the relevant BBL bank statements.
It follows, in my judgment, that this first pre-condition is not satisfied at
least as regards the 2007 statements.
142. The second difficulty for Inder in my view is
that as at February 2008 he knew that it was at least possible that payments
had also been made to Torex from the BDL bank account. As he said in his first
witness statement – see [75] above – once he discovered the BBL payment he
began to investigate the finances of both BBL and BDL, and it is clear from his
evidence and I find that this was because he at least suspected that payments
might also have been made by Jat from BDL to Torex. This, I am satisfied, was
one of the reasons why he subsequently began to press Jat and the accountants
and solicitors for production of the BDL books, and why he eventually made a
successful claim for pre-action disclosure against BDL. Whilst I am prepared
to accept that he did not realise in February 2008 that the BDL bank statements
were still in the office, nor did he realise that the Sage accounts on the
desktop in the office would have showed – as I find from Ms Stratton’s evidence
- at least the 2007 payments from BDL to Torex, I accept Mr Chaisty’s
submission that he cannot excuse his failure to take any real steps from
February to December 2008 to search for or obtain this information, especially
since he was still a director of BDL and had retained solicitors. I am
satisfied that with the exercise of reasonable diligence he would have
discovered prior to 22 December 2008 any concealment of the BDL payments made
up to and including the year end 2007.
143. I do accept however that the position is
different in relation to the 2008 and 2009 payments, and specifically the
Cumberworth payment. These were payments made at a time when Inder had no
access to the BDL bank statements or accounts, and amounted in my view to deliberate
commission of breach of duty in circumstances where they were unlikely to be
discovered for some time. Whilst there may be some room for criticism of Inder
in not making an application for pre-action disclosure earlier than he did, it
is difficult in my view to be satisfied that with reasonable diligence he could
have discovered them before early 2009. In the circumstances I would have been
satisfied that these claims were not statute-barred regardless of the s.
21(1)(b) point.
Relief under s.1157 Companies Act
2006
144. This section
provides as follows:
“1157 Power of court
to grant relief in certain cases
(1) If in
proceedings for negligence, default, breach of duty or breach of trust against–
(a) an officer of a
company,
…
it appears to the court hearing the case
that the officer or person is or may be liable but that he acted honestly and
reasonably, and that having regard to all the circumstances of the case
(including those connected with his appointment) he ought fairly to be excused,
the court may relieve him, either wholly or in part, from his liability on such
terms as it thinks fit.”
145. Whilst I have
found that I am not satisfied that Jat acted dishonestly, I am wholly
unpersuaded that he acted reasonably. He cannot rely on the fact that Sohan
and Rajinder agreed or acquiesced in his breaches of fiduciary duty, nor on his
ignorance of the true ambit of his fiduciary obligations. Nor do I consider
that having regard to all of the circumstances of the case he ought fairly to
be excused from his liability to repay the net indebtedness of Torex to BBL and
to BDL. It is irrelevant that Inder may have lost family monies through the
investment in Silvercrest, since this is a claim being pursued for the benefit
of BBL and BDL.
The
appropriate remedy
146. Whilst the claim
for equitable compensation for breach of fiduciary duty is made out and is not
statute-barred, any claim for an account of profits could only proceed as not
statute-barred by reference to the 2008 and 2009 BDL payments.
147. It would appear
to me that the straightforward remedy is for repayment of the outstanding
monies together with payment of interest which, although I have not heard
submissions on the point, would prima facie appear to be appropriate at the
interest rate applicable to the BBL and BDL accounts over the periods in
question.
148. In my view,
there is no reasonable basis for believing that there are any other payments
made by BBL or BDL which were procured by Jat in breach of fiduciary duty,
whether payments to Torex or to Jat or otherwise. I bear in mind that
following disclosure Inder’s then solicitors raised queries in relation to
certain further transfers, and that Jat’s solicitors responded by accepting
that these were also payments made to or for the benefit of Torex, which were
then admitted in Jat’s evidence and in the Amended Defence. Whilst Ms Anderson
says that this raises a reasonable suspicion that these were previously
concealed and there may also be others, when one looks at these items in
context I accept Jat’s explanation in evidence that they were simply errors,
which were corrected when drawn to his attention. In the circumstances, I am
satisfied that there is no reasonable basis for making an order for some
further investigation in that regard and that it is not in the best interests
of BBL or BDL for permission to be given for that to be done.
149. Furthermore,
although Inder made some reference in his evidence to bank charges and costs or
losses arising out of taking out an interest swap product, I am satisfied that
there is no sufficient evidence before me to justify awarding equitable
compensation on that basis, and that there is no sufficient basis for allowing
this derivative claim to continue so as, in effect, to require a further trial
process to ascertain whether there is a loss in that regard and, if so, what
loss.
150. Finally, I am
also not satisfied that a sufficient basis has been made out for awarding an
account of profits. This is not a case where, on the evidence before me, there
is any reason to believe that Torex has made any or any significant profits by
reference to the use of this money which ought to be returned to BBL or BDL,
whether in relation to the 2008 or 2009 payments or otherwise. Again, I do not
think that it is in the interests of BBL or BDL to allow this derivative claim
to take on a further life of its own and extend to such an investigation.
Conclusions
151. That concludes
this substantive judgment. All remaining matters will have to be left over for
further argument at a further hearing unless agreement can be reached.
152. I conclude by
expressing my gratitude to counsel and to the solicitors for their efficient
conduct of this litigation, which has made my task very much easier than
otherwise would have been the case.
