England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre Bull Street, Birmingham B4 6DS
		25/04/2017

HHJ David Cooke:

Introduction and factual background

1. In this claim the Autocal Holdings Ltd (which I will refer to as "the claimant" or "Holdings") seeks:

i) Repayment of a loan of £131,000 made by it to the defendant Mr Jeffery in 2009 to fund the purchase of shares in itself. The claimant's case is that the loan is repayable on demand, which has been made and not complied with. Mr Jeffery's position is that the loan was only repayable on the occurrence of a "trigger event" which has not occurred.

ii) Repayment of sums totalling £14,156 debited to Mr Jeffery's director's loan account and also said to be payable on demand. Mr Jeffery contends these sums were paid in advance of declaration of dividends and expressly or impliedly on terms that they would not be repayable save out of dividends subsequently declared.

iii) Repayment of sums totalling £37,500.80 drawn by Mr Jeffery from its bank account for his own purposes and in breach of duty to the company.

2. Mr Jeffery accepts that he is liable to repay the last amount, and at the opening of the trial Mr Leader abandoned any defence of set off against it. Mr Jeffery denies liability for the first two amounts, but if liable contends he is entitled to a credit against those claims for the value of his shares in a separate company, Autocal Topco Ltd ("Topco") which he had pledged by way of security for a guarantee by him of sums owed by the claimant to another connected company, Modena International Ltd ("Modena"). Modena enforced this security and procured the transfer of the Topco shares to yet another company, Autocal Management Ltd ("Management") at a stated price of £1.
3. Mr Jeffery says that the true value of those shares was much more than £1 and exceeds any amount payable by him. The claimant denies any entitlement to a credit in respect of the Topco shares, but says that in any event they were valueless at the date of transfer.
4. The main witness for the claimant is Mr Antony Bird. He was a director of the claimant between 2009 and 2011 and though he no longer holds that position is a principal actor behind the claimant and the various connected companies. He is an accountant and businessman and was a personal friend of Mr Jeffery for some years before the events relevant to this claim began in 2009.
5. At that time, Mr Jeffery was an equal shareholder in a trading company, Autocal Ltd ("Autocal") with a Mr Anthony Dimavicius. Autocal's business was in the manufacture and supply to garages of emissions testing equipment, used for the compulsory annual testing of vehicles. It had important revenue streams arising from the servicing and maintenance of the equipment, and from its periodic recalibration and updating to meet standards issued from time to time by the Department for Transport, which historically had been varied or updated annually.
6. In early 2009 Mr Jeffery approached Mr Bird seeking assistance to buy out Mr Dimiavicius. He had agreed in principle to pay £450,000 for Mr Dimavicius' 50% interest, and attempted to raise the necessary funds from a bank. Mr Jeffery's position is that he had a firm offer from a bank of funds that left him needing to raise only a further £60,000 and that he originally wanted only to borrow that amount from Mr Bird, but Mr Bird insisted on taking over the whole funding. Nothing in the end turns on this, but I consider Mr Bird's account, which is that Mr Jeffery had not been able to obtain bank funding, more likely to be true. I note that in correspondence at the time his accountant Mr Harrison referring to Mr Bird's proposal said "I think Neil is aware that he is being held to ransom but that his hands are tied… I do not agree with it but appreciate that this is his only avenue of finance remaining" (7/W/3).
7. The structure eventually agreed, as proposed by Mr Bird in an email of 8 April 2009 (Bundle 7/Tab W/p1) was as follows:

i) Modena, a Guernsey company controlled by Mr Bird and his wife, would subscribe for 234,000 £1 shares in Holdings for cash at par, so paying £234,000.

ii) Modena would also lend Holdings £131,000 ("the Modena Loan").

iii) Holdings would lend the £131,000 to Mr Jeffery, who would use it together with £85,000 of his own funds to subscribe for a total of 216,000 shares in Holdings at par.

iv) Holdings would thus have £450,000 of cash (£234,000 + £131,000 + £85,000) which it would use to buy Mr Dimavicius's shares in Autocal.

v) Mr Jeffery would simultaneously exchange his 50% holding in Autocal for a further 450,000 shares in Holdings.

8. The result would be that Holdings had £900,000 of issued share capital, held as to 234,000 (26%) by Modena and 666,000 (74%) by Mr Jeffery. Mr Jeffery owed £131,000 to Holdings, which in turn owed an equal amount to Modena. Autocal became a wholly owned subsidiary of Holdings.
9. These arrangements were set out in documents prepared by Howes Percival, solicitors acting for Modena, negotiated with solicitors acting for Mr Jeffery and completed on 15 April 2009 at a completion meeting at which, Mr Jeffery told me, some 120 documents were signed. The Modena loan was set out in a written loan agreement (2/H/1) that provided for repayment by Holdings in six-monthly instalments over a four year period such that repayment in full was due no later than 30 April 2013.
10. The Modena loan was secured by:

i) A personal guarantee and indemnity by Mr Jeffery, supported by a charge over all his 666,000 shares in Holdings (2/H/18). This guarantee and the charge over the shares in Holdings were however released on 11 November 2009 (2/H/66).

ii) A guarantee by Autocal (2/H/27) supported by a legal charge over its factory premises at Enderby (2/H/35).

11. There was no written agreement setting out the terms of the loan of £131,000 by Holdings to Mr Jeffery, which has led to the dispute now before me. The only documents executed that day referring to the loan were:

i) Minutes of a directors meeting held between Mr Bird and Mr Jeffery as directors of Holdings (3/I/3) which approved the various documents to be entered into, including those setting out the terms of the Modena loan and security for it. At para 7.2 the minutes state "It was noted that £131,000 was being loaned to Neil Barry Jeffery by the company for the purpose of subscribing for 131,000 ordinary shares in the company." There is no other reference to the terms of the loan. The minutes go on to approve the sending of a written resolution to members by which they would approve and authorise the loan to Mr Jeffery.

ii) A written resolution of the shareholders of Holdings, circulated and signed at the meeting and providing "That the proposed loan in the sum of £131,000 to be made by the company to Neil Barry Jeffery to enable him to subscribe for shares in the company is hereby approved" (3/I/1).

12. By 2011 trading was not going particularly well and Mr Bird and Mr Jeffery agreed the terms of a restructuring, which was put into place on 10 June 2011. The terms of that restructuring included the following:

i) A new company, Topco, was introduced. Mr Jeffery transferred his 666,000 shares in Holdings to Topco and received in return the same number of shares in Topco. The agreement for this (2/H/88) is labelled on its cover "Share Exchange Agreement" but its operative provisions are expressed as a sale; Mr Jeffery is defined as "the Seller" and Topco as "the Buyer" and clauses 1 to 3 provide for a sale with full title guarantee and a purchase for a consideration by way of issue of fully paid shares in Topco.

ii) Topco borrowed £234,000 from Modena ("the Modena Topco loan") and used that amount to buy Modena's shares in Holdings for cash. The terms of this loan were set out in a written agreement (2/H/107) and included:

a) repayment in two instalments; £84,000 on 30 September 2011 and £150,000 on 10 June 2014,

b) guarantees of Topco's obligations by Holdings and Autocal,

c) security given by Autocal by way of second charge over some additional premises that it had acquired since 2009 at Melton Mowbray

iii) The loan of £131,000 made by Modena to Holdings remained in place, but the original loan agreement was replaced by a new one providing for repayment by monthly instalments over 3 years (2/H/69). Mr Jeffery's guarantee was reinstated, now supported by a charge over his shares in Topco (2/H/124). As before, he provided a blank stock transfer form which Modena was authorised to complete in order to transfer the shares if the charge was enforced. The new loan agreement provided that any default by Topco in relation to the Modena Topco loan would also amount to a default as between Modena and Holdings, with the consequence that Mr Jeffery's liability under his guarantee of Holdings' obligations could be triggered (see cl 14.3.19 at p 82).

iv) Mr Bird ceased to be a director of Holdings. Mr Clive Maudsley, who gave evidence, was appointed in his place and thereafter represented Mr Bird's interests.

13. This restructuring did not affect the existence or terms of the loan of £131,000 from Holdings to Mr Jeffery.
14. Topco failed to make the first payment to Modena in September 2011. Modena served a default notice and instructed accountants, PKF, to prepare a report in relation to the Autocal group. In March 2012, Modena enforced its guarantee against Mr Jeffery and the security over his shares in Topco by completing the share transfer form and registering a transfer of the shares from Mr Jeffery to another new company, Management, for a stated price of £1. Mr Bird tells me that he does not control that company.
15. Trading did not improve, and there were discussions about insolvency from September 2012. Eventually, administrators were appointed to Autocal Ltd (but not to Holdings or any of the other companies in the structure) on 30 October 2012. The administrators sold Autocal's business and assets in a prepack to Automotive Test Equipment Ltd ("ATE") a new company controlled by Mr Jeffery.
16. In 2014 Modena was wound up following Mr Bird's move from Guernsey to the United States. Modena's rights under the Modena Topco loan were assigned to a new company incorporated in the United States which is controlled by Mr Bird.
17. On 11 November 2014, Holdings made demand on Mr Jeffery for repayment of the loan of £131,000 and the sum of £14,156 referred to above. Neither amount has been paid.

Terms of the £131,000 loan from Holdings to Mr Jeffery

18. As noted above, there is no written agreement setting out the terms of this loan. It is a matter for the court to find from the evidence what if any terms were expressly agreed and, to the extent there was no express agreement, whether any terms may be taken to have been agreed by inference or implication from such discussions as there were and the surrounding circumstances. It is common ground that as a matter of law if no terms whatever for repayment were agreed or can be inferred or implied, the loan would be immediately repayable without demand. However, even if no terms can be found providing for repayment on a specific date or dates, the court will fairly readily infer that a loan is repayable on demand being made, rather than becoming due immediately after it was advanced.
19. The evidence of discussion or consideration of the terms of this loan prior to its being advanced is very limited. Mr Jeffery relies heavily on what Mr Bird said in his email of 8 April 2009 setting out the proposed structure of the deal. That email included the following:

"My accountants too busy covering their arses. Can you clear it as described with your guys please, I do not know when PKF will come back to me. My lawyers say financial assistance [by a company for purchase of its own shares] no longer an issue in law, only limit is size of loan to a director which they are checking.

Subject to that the deal is:

TB [ie Mr Bird] lends 131k to Holdings subject to 2^nd charge on property payment schedule per model but to be agreed as to principal repayment timing. I understand this is delayed due to Barclays so something in the interim will have to do. Lawyers sorting this…

NJ [ie Mr Jeffery] borrows 131k from Holdings, this is interest free and no repayment until trigger event like sale of NJ/TB shares. TB needs tag along rights if NJ sells . Likewise NJ would want drag along rights …

This is per the model I sent you.

If we can agree this then we can get cracking! By now the funds should be in Leicester."

20. The reference to a "model" suggests there must have been some earlier document setting out the basis of the proposed structure, but it is not in the documents before me and I have no evidence of its contents. "Tag along" and "drag along" rights refer to terms commonly inserted into an agreement for a minority investment by which, firstly, the minority investor has the right if the majority holder wishes to sell his shares to require that he must procure that the purchaser will also buy the minority shareholding on the same terms, and secondly that on such a sale the majority holder may require the minority investor to sell at the same time and on the same terms.
21. It is common ground between Mr Bird and Mr Jeffery that Mr Jeffery did not send any response to this email and the two men did not prior to completion have any further discussion between themselves about the terms of the loan. Instead, each instructed his advisers to set about preparing for completion. Mr Jeffery sent a copy of Mr Bird's email to his tax adviser Mr Richardson, who in turn sent it to Mr Harrison advising that application should be made for a revised tax clearance for the transaction. An application had already been made, describing a proposed transaction financed by a bank. Mr Richardson's advice was that the structure proposed by Mr Bird was a material change and a revised application was necessary.
22. Mr Harrison did make a revised application for clearance the same day based on the terms Mr Bird's email. In it Mr Harrison included the following:

"… an unconnected outside investor Modena International Limited will subscribe for 26% of the company [ie Holdings] … together with a loan on normal commercial terms to the company of £131,000 [which] will be lent to Mr Jeffery by the company and he will use the loan proceeds to subscribe for 131,000 ordinary £1 shares in the company at par. This loan will be interest-free and non-repayable until a future sale of the shares. "

This letter was not sent to or seen by Mr Bird or his advisers (except possibly at the completion meeting, as to which see below) nor were its terms agreed to or approved by any of them. Thus the change of language from "trigger event like sale of NJ/TB shares" to "sale of the shares" (which drops any reference to events "like" a sale and seems to refer only to Mr Jeffery's shares) originated from Mr Harrison and was not, expressly at least, put to or adopted by Mr Bird.

23. Mr Jeffery gave evidence that this clearance letter was among the documents on the table at the completion meeting, from which I was asked to infer that the approval of the directors and/or shareholders to the loan at that meeting must have been taken to be on the terms set out in it. This would involve a finding that Mr Bird had agreed to abandon the idea that there might be trigger events other than a sale. It was not however referred to in the only documents that refer to the loan, being the resolutions of the directors and members referred to above. Mr Jeffery produced at the trial a copy of a further minute of resolutions of the directors of Holdings, which dealt with approval of the share exchange agreement by which Holdings would acquire Mr Jeffery's share in Autocal in exchange for 450,000 shares in itself. That minute includes the following:

"7 There was (sic) produced at the meeting the following draft documents ...

(a) The Share for Share Exchange Agreement between [Mr Jeffery] and the Company…

(b) Copies of two letters to the Inland Revenue from Messrs Mark J Rees in respect of capital gains and income tax clearances together with reply dated 26 March 2009 from the Inland Revenue …

8.4 It was noted that the Inland Revenue had given clearance under s138 of the Taxation of Chargeable Gains Act 1992 and clearance under s701 of the Income Tax Act 2007 in advance of the proposed transaction."

24. Mr Jeffery's evidence was that the clearance letter dated 9 April 2009 was one of the two letters to the Inland Revenue referred to. In fact, it is far from obvious that this is the case. It is common ground that by the date of the meeting there had been three letters written to the Inland Revenue seeking clearance, not two. The first two were dated 3 and 24 March 2009. The reply referred to dated 26 March 2009 was a reply in effect to both of these two letters, since the second made amendments to the structure that had been put forward in the first. The most obvious interpretation therefore would be that these were the "two letters" referred to.
25. It would not seem particularly sensible for the minutes to note that consent had been given to the transaction if one of the clearance request letters referred to was dated after the date of that approval, it set out a material change in the terms of the transaction requiring an amended application and (as is accepted to be the case) there had been no reply from the Revenue to it at the date of the completion meeting. A possible explanation may be either that the draft minute was prepared in ignorance of the 9 April clearance letter, or that it was done before that letter was submitted and not amended thereafter to take account of it.
26. In any event, even if Mr Jeffery is right and the 9 April letter was on the table this minute refers to it only for the purpose of noting that clearance has been sought in respect of the share for share exchange. It makes no reference whatever to the loan to Mr Jeffery, let alone the terms of that loan.
27. Mr Jeffery's own evidence was that at least 120 documents were signed and he could not be expected to remember what they all were let alone the contents of them. There is no evidence that anybody actually read or referred to this clearance letter during the meeting, and even if one were to make the perhaps generous assumption that when the directors approved the minutes of the various meetings prepared for them they went through and considered each of the items set out in those minutes, they do not refer to the clearance letter in the context of the loan to Mr Jeffery and so cannot create any implication that the loan, the making of which was merely noted, was agreed to be made on the terms of that letter. The same applies to the written resolutions of the shareholders.
28. Although there must have been considerable discussion before the completion between the solicitors acting for Mr Bird and Mr Jeffery respectively, it appears that none of it addressed the terms of this loan. I am told that the files of both firms have been disclosed, but there are no documents passing between them referring to any terms of the loan. Mr Bird's solicitor sent him an email on the morning of completion advising him of a considerable number of respects in which the documentation did not contain all the terms and protections that would ordinarily be expected in an arm's length commercial purchase and investment. She said:

"In advance of completion, I have briefly set out the key areas where you do not have protection in this transaction. We have discussed all of these previously but if you need any further detail, do call me.

1. Tony Dimivicius has not given any warranties…

2. We have not carried out any legal due diligence on either [Holdings] or [Autocal]…

3. Other than very basic representations in the Loan Agreement … you have no warranty protection in relation to your investment…

4. Neil is neither providing warranties to [Holdings] in connection with the sale of his shares in [Autocal] to [Holdings] nor to you in connection with your investment…

5. Neil is not entering into a service agreement …

6. The loan being made to Neil by [Holdings] is not currently being documented. It would be advisable that the terms of this are agreed between you and documented so as to ensure certainty.

7. No new articles of association or a shareholders agreement are being adopted/entered into at completion. As such you are not receiving any of the following protections

a. rights of pre-emption on a transfer of shares – Neil is free to transfer his shares to whosoever he may wish without offering them to you first;

b. no "tag" or "drag" provisions …

c. There is no entrenchment of your position as a director …

d. You have no minority protection …

8. …"

29. This email would not of course have been seen by Mr Jeffery at the time, but it does confirm that there can have been no discussion between solicitors about the terms of the loan and that, so far as Mr Bird's solicitors were aware, no terms had been agreed between the clients. Otherwise, in either case, the email would not have advised him that terms ought to be agreed, but that the terms which had been agreed should be documented.
30. After the completion, the parties rely on evidence of consideration as to how the loan should be described in the accounts. Holdings and Autocal produced unaudited accounts which were prepared by Mr Harrison. The first set, for the period ended 30 September 2009, were evidently sent by him to Mr Bird and Mr Jeffery by early November 2009. Somewhat ironically in view of the positions now adopted, it was Mr Bird who queried whether the loan should be shown as a long-term liability (which would be consistent with it not being repayable on demand) and Mr Harrison, who gave evidence on behalf of Mr Jeffery, who expressed the view that it should be shown as a current liability (implying it was due on demand). This arose as follows:

i) In an email to Mr Harrison 9 November 2009 (5/P/49, copied to Mr Jeffery) Mr Bird commented on the draft accounts he had received and said "There should be a long-term liabilities line in Autocal Holdings for the loan from Modena instead of including it all as current. Do you think there should be a long-term asset for the loan to Neil[?]". Mr Harrison responded (also copied to Mr Jeffery) "Whether the asset should be shown as a current or long-term asset is debatable I agree – personally I would show as current so forms part of the current ratio which many credit rating agencies will use – if you/Neil prefer long-term then I can adjust."

ii) There is no evidence of any further consideration or discussion of the point, but the accounts as adopted (4/K/1) show the debt payable by Mr Jeffery as a current asset being a debt "falling due within one year" (see note 6). This would be consistent with repayment being due on demand not with repayment being contingent on a trigger event that was not expected to occur within a year. These accounts are stated to have been approved by the board and are signed both by Mr Jeffery and Mr Bird as the two directors at the time.

iii) This treatment was maintained the following year, both in the accounts prepared for the company's own use and in the abbreviated accounts filed at Companies House. Both of these sets of accounts (4/K/22 and 32) included an additional note, which had not been in the September 2009 accounts, stating that "The loan is repayable on demand and is interest-free."

iv) The same treatment, and the same note, were adopted in both sets of accounts for the period ended 30 September 2011, which was after the reconstruction in which Topco was inserted as the holding company. Mr Jeffery was the sole director at the time these accounts were approved, and signed them (or at least the accounts filed at Companies House) on behalf of Holdings.

31. Mr Leader on behalf of Mr Jeffery submits that Mr Bird's email of 8 April 2009 setting out the proposed structure was an offer made by Modena, which should be taken as acting as agent for Holdings, of a loan on terms that it was not to be repayable until a trigger event "like sale of shares" occurred. Since there had been no discussion or agreement of any other trigger events "like" a sale of shares, the only operative trigger event was a sale of shares. This offer had been accepted by Mr Jeffery instructing Mr Harrison to make the tax clearance application and instructing his own solicitors to proceed with the transaction. He points out that although the debt was shown as a current asset in the 2009 accounts, the note stating that it was repayable on demand was not inserted until the following year. He suggests that the correspondence between Mr Bird and Mr Harrison gives rise to the possibility that the asset was wrongly stated as current in the accounts, when in truth it was not, in order to present a more favourable picture to credit rating agencies. Mr Harrison gave evidence that his firm had reviewed the format of accounts it prepared and determined that it was necessary to state whether a related party loan was or was not repayable on demand, and that the wording of the subsequent note represented "standard wording which does not appear to be correct". Mr Leader submitted that this was an act by Mr Harrison and did not show any acknowledgement by Mr Jeffery of the original terms of the loan, or any variation of those original terms.
32. Mr Mohyuddin's submission was that the contractual analogy of offer and acceptance as at 8 April 2009 was inappropriate. Mr Bird was not at that point a director of Holdings and neither he nor his company Modena had any authority to make any offer on Holdings' behalf. The email of that date was, he said, inadmissible evidence of pre-contract negotiations, referring to Chartbrook Ltd v Persimmon Homes Limited [2009] UKHL 38. If it was admissible, it was no more than a proposal setting out terms for discussion, some of which had been subsequently discussed, agreed and documented, but others of which, including the terms of the loan to Mr Jeffery, had not. Insofar as it shows Mr Bird's thoughts at that point in time, it shows that he was considering that there might be a number of possible trigger events, but there had been no subsequent discussion as to what these might be. Insofar as the loan had been approved by directors and/or shareholders at the completion meeting, that approval could not be taken as being on the terms of either the 8 April email or the clearance letter, because neither of them was referred to. The directors could not be taken to be adopting terms put forward by Mr Bird since he had no authority on behalf of Holdings to do so at the relevant time. The upshot was that no terms for repayment been agreed. He did not resist the implication of a term that repayment would only be due upon demand, which would be consistent with the broader commercial nature of the arrangements under discussion.
33. On these issues, I am broadly in agreement with Mr Mohyuddin's submissions. I do not however agree that the email of 8 April 2009 is inadmissible; the exclusionary principle set out by Lord Hoffman in Chartbrook is a rule relevant to the construction of documents. It is to the effect that although in performing the construction exercise the court may have regard not only to the words contained in such a document but also the factual matrix surrounding its execution, it is not permissible to have evidence of the subjective intentions of the parties in reaching the agreement set out in the document under construction. That rule is accordingly not relevant to cases where there is no written document to construe, where the question before the court is whether the parties reached any agreement is all, and if so on what terms. Any evidence of what discussions they had is potentially relevant to those issues.
34. It is not in my view appropriate to look at the email of 8 April 2009 in terms of contractual offer and acceptance, since no contract was intended to be formed at that stage. Although at the time the email was sent Mr Bird had no standing to make any proposals on behalf of Holdings, I would have no difficulty in principle with the analysis that if a clear agreement had been reached between Mr Bird and Mr Jeffery, the subsequent approval by them once they were both appointed and acting as directors of Holdings might be taken to be adopting the terms they had previously agreed, even if one or both of them lacked formal standing on behalf of the company at the time of their discussions. The relevant question is whether any such agreement was reached and, if so, expressly or impliedly adopted on behalf of Holdings.
35. The email was however no more than a broad outline of terms of the deal which would be subject to discussion and agreement in the following days, with a view to preparation and agreement of documentation on the basis of which the transaction would be completed. It is plain from reading it that a number of matters were not fully set out and would require further discussion if they were to form part of the eventual arrangement. The timing of repayment of the loan from Modena to Holdings was one such term; evidently that must have been discussed and agreed because a schedule of repayments was incorporated in the written loan agreement that resulted. Others were not discussed further, and in particular there was no subsequent discussion of repayment terms of the loan to Mr Jeffery, of whether repayment would be conditional on a trigger event, or if it was, what the trigger events would be. Nor was there any discussion of tag along or drag along rights.
36. It would not be right to regard these matters as being impliedly agreed on or immediately after 8 April by proceeding with arrangements for the transaction without any further discussion, such that the words of the email be taken to be incorporated into the overall terms of the transaction when it was subsequently put into effect. Plainly, that cannot be the case in respect of tag along and drag along rights, because there would need to be fairly detailed elaboration of what these terms were to mean if any enforceable right was to be created. Nor can it be right to infer that the two men agreed that repayment would only be due on a "trigger event like sale of shares" when they failed to discuss what other events would be regarded as "like" a sale of shares.
37. The court cannot itself determine what these other events might be. No doubt it is possible to imagine other events that a commercially aware lender might regard as making repayment desirable. These might be events "like" a sale of shares, in the sense that they were transactions similar to a sale of shares (for instance, a gift or declaration of trust of the shares in favour of some third party) or in the sense that they had the effect of destroying the business relationship the parties were putting in place (an instance might be the insolvency of Autocal or of Mr Jeffery). But to conclude that the phrase "like a sale of shares" should be taken to include some or any such possible alternatives would go far beyond any legitimate process of construction and amount to the court making the bargain on behalf of the parties.
38. Mr Leader's submission was that since no other events were discussed, the word "like" should simply be ignored, with the result that the only agreed trigger event would be a sale of shares. But while that would no doubt suit Mr Jeffery as the borrower, it would not at all be a fair inference that Mr Bird on behalf of the lender intended to abandon the possibility of recovering the loan in any other circumstances.
39. The correct inference therefore, in my judgment, is not that the two men are to be taken to have agreed that the loan would only be repayable in the event of a sale, but that in the period running up to the completion meeting they did not address their minds to, and so did not agree, in what circumstances it would be repayable. As a result, when the making of the loan came to be approved by the directors of Holdings at the completion meeting (as it must have been, notwithstanding it was only "noted" in the minutes) there was no pre-existing agreement in principle which the directors can be taken to have adopted. There was no actual discussion at the completion meeting, nor any written record of terms which the directors approved. Such references as there were, even if I had been able to find that Mr Harrison's clearance letter of 9 April had been on the table, are not sufficient for me to find that the directors agreed to adopt its terms as the terms of the loan. It follows that no terms of the loan as to repayment were actually agreed between Holdings and Mr Jeffery. No term as to repayment can be inferred beyond that which, Mr Mohyuddin accepts, follows fairly routinely from making of a loan in circumstances in which an intention for immediate repayment is unlikely, ie that repayment is due upon demand.
40. It is no objection that on the face of it this leaves Mr Jeffery vulnerable to the possibility that a demand might be made at any time, even though the parties expected their business relationship to continue for some time. Many aspects of the transaction as they eventually put it into place left important commercial considerations undocumented and such that the participants were exposed to the risk of actions they did not expect. In this respect, the parties no doubt relied upon the trust and personal relationship between Mr Bird and Mr Jeffery. Mr Bird's solicitors advised him of the extent of the risks he was running, for instance by receiving no warranties or minority protection rights, but he was prepared to complete nonetheless. The fact that Mr Jeffery also ran some risks is no reason for the court to strain to find that the terms of the transaction excluded those risks.
41. Further, any risk to Mr Jeffery of an unexpected demand would not seem to have been particularly high. His creditor was Holdings, of which he was the controlling shareholder and one of only two directors, so that he was in a position to block any demand as long as that remained the case. There is no reason, therefore, for the court to find it so unlikely that he could have agreed to this risk that some other term must be implied.
42. This finding is consistent with the way that the debt was subsequently represented in the accounts of Holdings. That treatment was recommended by Mr Harrison and not objected to by either Mr Bird or Mr Jeffery, from which the most likely interpretation is that they all thought it represented the correct legal position, whether or not they expected a demand to be made in the imminent future. There is no proper basis, it seems to me, for the contrary interpretation which would imply that Mr Harrison recommended, and the two directors agreed, a false presentation to mislead people looking at the accounts. Nor do I accept that when the note specifically referring to the loan as being repayable on demand was inserted Mr Harrison did so as a result of inadvertence when he did not consider it represented the true position. Mr Jeffery's failure to raise any objection supports the view that he too considered this to represent the correct legal position.
43. I find therefore that the loan to Mr Jeffery was repayable on demand, and since it is not in dispute that demand has been made and not complied with, the claimant is entitled to judgment for the principal amount of the loan, with interest from the date of demand. I will hear further submissions if the parties cannot agree as to interest.
44. In case the matter goes further, I should say that if I had reached the opposite conclusion and found that the loan was not repayable until there had been a sale of shares, I would have accepted Mr Mohyuddin's further submission and held that there was a sale at the time of the Topco reconstruction. As referred to above, Mr Jeffery sold his shares in Holdings for a consideration consisting of shares in Topco. Modena sold its shares (these being the shares referred to as "TB" shares in the 8 April email) to Topco for cash.
45. Mr Leader argued that what the parties had in mind was only a sale for value to a third party and not a reconstruction of the sort that was agreed in 2011, but it seems to me that this argument is seeking to have his cake and eat it. There is nothing in the email of 8 April 2009 to indicate what is meant by a sale, or whether some transactions that legally amount to a sale should not be regarded as such for the purposes of the loan. Nor was there any material, before or after that email, that might show that Mr Bird intended a particular, special or limited meaning. The argument that he must have intended, and Mr Jeffery must have understood him to have intended, only a sale to a third party requires the court to seek to speculate or make inferences from its own views as to what terms it would have been commercially appropriate for the parties to have had in mind in the circumstances of the transaction, but had failed in fact to discuss. It is no more legitimate for the court to indulge in this process to reach a conclusion as to what was meant by "sale" that it was in order to seek to identify what amounted to an event "like" a sale.

The claim for £14,156

46. I can deal with this shortly. Mr Jeffery does not dispute that these amounts were properly debited to his director's loan account. Nor does he dispute the evidence from Mr Maudsley that they consist of spending of a personal nature from the company's account identified by him over a period of time. Mr Maudsley said that Mr Jeffery was in the habit of using the company's money as if it were his own and he therefore had to review the outgoings, identify those that were proper business expenses and charge those that were not to Mr Jeffery's director's loan account.
47. Mr Jeffery's argument however is that the company had a policy of paying out funds to the shareholders in anticipation of dividends, on the basis that they would be shown initially as debts due to the company on loan account but in due course a dividend would be declared and the amount of it credited to the loan account, so eliminating the debt. Mr Bird, he said, had known of and either agreed or acquiesced in his making these payments with a view to them being treated in this way.
48. I accept that Mr Bird must have known, either from his own dealings with matters or from what Mr Maudsley told him, that Mr Jeffery was in the habit of paying for personal spending out of the company. Further, it may well have been the case that in the past no actual repayment had been sought and the loan accounts had been settled on declaration of a dividend. There is no evidence however to corroborate the suggestion that he or Mr Maudsley agreed that any such amounts would not be repayable unless and until a dividend was paid, either specifically in the case of the amounts going to make up this balance or as a matter of general policy, and accordingly I find that no such term was agreed between Mr Jeffery and the company.
49. Furthermore, even if any such term had been agreed, it would in my judgment be unenforceable as against the company. Payment of the company's money to a shareholder on terms that it is not to be repaid except out of a dividend to be declared subsequently would amount to an immediate distribution of the company's assets to that shareholder. If no lawful dividend is in the event declared (and in the present circumstances of Holdings it is accepted that there are now no longer any reserves out of which such a dividend could be declared) Mr Jeffery's position would mean that he cannot be required to repay the money to the company at all. It would not therefore in any real sense at any time represent a debt due by him to the company, or an asset of the company available to meet its liabilities.
50. Such a distribution would be a breach of duty by the director or directors concerned in agreeing it, either because it was not made by dividend approved and declared in accordance with the company's constitution or because it would mean that the company would have given away the right to recover its funds whether or not a distribution could in future be lawfully paid out of profits in accordance with the Companies Act 2006. Mr Jeffery as the recipient of such a distribution would be guilty of that breach himself, and so be aware that he had received a payment with knowledge of the breach. He would thus be prevented from enforcing, as against the company, the term so as to deny repayment.
51. In the absence of agreement of any specific date or terms for repayment it again follows that the sums due on loan account were due for payment at the latest on demand, and accordingly that Holdings is likewise entitled to judgment for repayment of that amount, with interest from the date of demand.

The payments of £37,500.80

52. These amounts were drawn from Holdings' bank account at a time when Mr Jeffery was no longer a director but still had access to its online banking system. He never had any credible reason for thinking he was entitled to do so and has now abandoned any attempt either to justify the withdrawals or to set up any defence against liability for breach of fiduciary duty, including abandoning a defence by way of set-off in respect of the value of his shares in Topco, which I refer to below. Holdings is therefore entitled to judgment for repayment of that amount, with interest.

Claim for the value of Mr Jeffery's shares in Topco

53. Mr Jeffery claims that he is entitled to a counterclaim and (in relation to the claims for the loan and the £14,156) set off in respect of the value of his shares in Topco as at the date when they were transferred to Management by way of enforcement of his guarantee, as referred to above. His pleaded case is that his entitlement arises "as a matter of proper accounting practice", which has caused confusion in that he has been requested to identify the accounting practice concerned, and has struggled to do so. A considerable amount of time and effort seems to have been spent on this, and on whether his case required him to demonstrate such an accounting practice by expert accounting evidence.
54. In my view, the position is much more straightforward. Where a guarantor is obliged to discharge the obligations of a principal debtor he has an equitable right of counter-indemnity against the principal to recover what he has paid. In the present case, the guarantor has not paid in cash, but instead has had property that he had charged by way of security for his own obligations taken by the beneficiary of the guarantee. The same principles apply; as between the guarantor and the beneficiary the value of the security realised will reduce pro tanto the liability of the guarantor and as between the guarantor and the principal debtor will be taken as discharging the debtor's obligations, giving rise to a right of recovery exercisable by the guarantor against the principal debtor.
55. Cases do arise in which there is an issue as to whether the right of recovery can be enforced where the guarantor has made only a partial payment, such that the principal debtor's obligations have not been discharged in full. In such cases, there is a possibility of competing claims against the principal debtor; on the one hand the creditor is entitled to recover the balance that has not been paid and on the other the guarantor has a claim to recover in respect of what he has paid. It is common to provide in guarantee documentation that the guarantor must not exercise his rights of recovery unless and until the creditor has been paid in full. But there is no such provision in the guarantee given by Mr Jeffery to Modena.
56. In the present case, the charged property was not realised by way of sale but by way of a transfer at a stated price of £1 to a purchaser introduced for the purpose by Modena and in circumstances which suggest a connection between them. I proceed on the basis therefore that if it can be shown that the true value of the shares was more than £1 Mr Jeffery would be entitled to a declaration that he had discharged Holdings' liability to the extent of the true value. It would follow that he would have a claim for counter indemnity against Holdings for that value, which he could enforce by counterclaim in these proceedings. His entitlement arises as a matter of law from the facts pleaded, so it is no objection that his pleaded case relies on an "accounting practice" that he has not identified.
57. It is necessary therefore to consider what the true value of Mr Jeffery's shares in Topco was as at the date the security was enforced. On that issue I have conflicting evidence from experts instructed by the respective parties.
58. Ms Longworth for the claimant adopted a conventional approach, starting with the valuation of the trading entity, Autocal Ltd. She considered two bases of valuation:

i) A multiple of 4 times assessed future maintainable earnings of £92,303 pa (£372,812) less net debt of £365,950, giving an equity value of £6,862, or

ii) Net assets at the last balance sheet date (30 September 2011) adjusted for subsequent losses and to write off the value of capitalised research and development that she considered a purchaser would not pay for, resulting in a figure of £102,524

and adopted the higher figure.

59. Autocal Ltd was wholly owned by Holdings, which had additional net assets of its own amounting to £672, giving a net asset based value for Holdings' shares of £103,196. Holdings in turn was wholly owned by Topco, but Topco had a liability of £234,000 owed to Modena (and no other assets) so that the asset based valuation of Topco's shares was negative (minus £130,804). The value of Mr Jeffery's shares in Topco was therefore assessed at nil.
60. Mr Bowes for the defendant identified what he regarded as income streams within Autocal Ltd which he considered showed that Autocal Ltd was likely to own valuable intangible assets not reflected in its balance sheet, which a purchaser was likely to be prepared to pay for. The income streams arose from the need to recalibrate machines regularly as updated requirements were issued by the DoT and recurring income from maintaining and repairing equipment already supplied. He estimated the net income from these activities for the next ten years, and then discounted that figure back to arrive at a net present value for shares in Autocal Ltd of £1,165,188 and a value for shares in Topco, allowing for that company's liability to Modena, of £931,189.
61. This approach was premised on the ability of Autocal Ltd to sell to a third party the rights necessary to realise these income streams, Mr Bowes stating his assumption that such rights, in the nature of intellectual property that he had not specifically identified, must exist and be capable of being sold.
62. Mr Bowes' entire methodology was, in my judgment, so hopelessly flawed that I could place no reliance on the opinion it led to. Among the problems with it were:

i) Mr Bowes had not identified what intellectual property or other rights Autocal Ltd owned that could be sold so as to give a purchaser the clear and exclusive right to earn the income streams he set out to value. In fact, Autocal was not the only entity carrying out calibration of the machines it made; a substantial part of that work had always been done by a separate partnership of which Mr Jeffery was a member, according to him by undocumented agreement made with Mr Dimivicius when they established the limited company. Any purchaser from Autocal (other than Mr Jeffery himself) would be likely to find itself in competition with Mr Jeffery or in dispute with Mr Jeffery as to the extent of the rights acquired. It would be unlikely to pay for the right to that income without a discount to reflect the risks resulting. Mr Jeffery points to an expression of interest made to him subsequently by Tecalemit as supporting Mr Bowes' opinion, but crucially that was on the basis of acquiring the combined business of Autocal and the partnership, which had by then been transferred to his new company ATE. Its weight in terms of valuation is further doubtful because that transaction in the event did not proceed, for reasons that are not in evidence.

ii) The revenue estimated from this income stream was based on a wholly untested and unverified apportionment of Autocal's sales income allocating 50% of revenue to after-sales work and 50% to new equipment sales. There were other equally unverified assumptions, a key one being that in future the DoT would issue recalibration requirements every two years. This could not have been safely assumed at the time; the previous practice of annual variations had been halted, apparently in response to complaints about the cost to industry of frequent changes, and no decision announced about when the next one would be made or the frequency after that.

iii) The costs associated with that income, which were assumed to be borne by the purchaser from Autocal, were based on a wholly arbitrary division between Autocal's operations of manufacturing machines (70%) and servicing/ calibrating machines after sale (30%).

iv) If the assumptions about revenue and costs of the after-sales work were accurate, it necessarily implied that the manufacturing side of the business was running at a large loss. Mr Bowes' assumptions about future revenue depended on manufacturing and sales of new machines continuing at similar levels indefinitely (see his list of assumptions at 1/D/66) and yet he could not explain how this would happen if Autocal were to sell its after sales business. In that event, if it attempted to continue manufacturing itself, it would be immediately plunged into large losses and likely to have to cease trading. Mr Bowes suggested in cross examination that a purchaser already in the industry would buy Autocal Ltd as a whole and merge the manufacturing with its own so saving cost and not incurring these losses, but he had no identifiable basis for assuming that this would be possible or, even if it was, why a such a purchaser would pay the seller for all the identified revenue benefits of the after sales business without any allowance for its own contribution by way of cost reduction for the essential manufacturing.

v) If Autocal had sold its after-sales operation and then closed down its manufacturing business, it would no doubt have incurred costs in doing so, yet Mr Bowes seemed to assume that a purchaser would buy the shares in Autocal for the same price as Autocal could sell the after sales business, as if that price could be paid straight out to the shareholder free of tax and ignoring the steps and costs required to deal with the rest of the business.

vi) No reasons were given why a purchaser would be likely to pay for an income stream on the basis of the present value of ten years' revenue, rather than a more conventional multiple of future maintainable earnings.

63. Mr Bowes attempted to dismiss these and similar issues by suggesting that he was only giving an opinion on a hypothetical sale not a real one. Of course, a valuation opinion assumes a sale where there is none in fact, but it must still be based on considering what would happen if there were a real sale, negotiated between real parties. Mr Bowes' approach of identifying hypothetical value in a hypothetical income stream but ignoring what would happen, on the hypothesis of realising that value, to the rest of the business and the costs of maintaining (or closing) it, did not do so.
64. I note that the opportunity to separate and realise the after sales income stream for a substantial sum was not pursued in the pre-pack sale of Autocal's assets to Mr Jeffery, which was at a price of £65,000. This would not of course necessarily mean that Mr Jeffery was unaware of it, but on the assumption the administrators were acting properly it must mean that they did not identify it as a viable possibility that could produce a better outcome for creditors.
65. For these reasons I prefer Ms Longworth's evidence and find that the value of Mr Jeffery's shares in Topco at the transfer date was nil. It follows that the counterclaim must be dismissed.