England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		1 March 2012

Mr Hirst QC:

1. On 25 February 2009, the Claimant ("ParOS") and the Defendant ("Worldlink") entered into Heads of Terms (the "HoT") in respect of the possible reverse take-over of Worldlink by ParOS ("the transaction"). The HoT were expressed to be legally binding in part and not binding in other parts. Eventually the negotiations to complete the transaction foundered. ParOS now seeks to recover its costs and expenses, and additionally damages for non-payment of the costs and expenses, for breach of an exclusivity clause, and for negligent misstatement.

Background

2. In 2009, ParOS was a public limited company listed on the Alternative Investment Market ("AIM") of the London Stock Exchange. Its directors were (and remain) Patrick McHugh, executive chairman, and Joseph King, a non-executive director. It had sold its only business in March 2008 for a nominal sum and was treated by Rule 15 of the AIM Rules as an investing company. Rule 15 requires that within 12 months of becoming an investing company, the company must enter into a reverse takeover under Rule 14. If it fails to do so, its shares will be suspended and after six months' suspension, the listing is cancelled. The deadline for a reverse takeover of ParOS was 28 March 2009.
3. ParOS was therefore a shell company. It had liabilities to a number of creditors, including Mr McHugh and Mr King. In the jargon of the City, it was a "busted shell". The company still had an attraction to potential buyers, because the buyer could achieve a listing on AIM relatively cheaply and easily via a reverse takeover but its liabilities were a downside for a buyer. By January 2009, ParOS' situation had become serious. A number of possible deals had fallen through and the deadlines were starting to loom up.
4. Worldlink was also a public limited company, but unlisted. Its directors were Neil Riches, managing director, and Crispin Burdett, a non-executive director. Its finance director (not a board director) was Ian Coburn. Mr Riches is a trader by background. The company's principal asset was a subsidiary which owned a series of patents relating to the transfer and updating of data over mobile telecommunication systems. The patents had a significant potential value if it could be established that they had been infringed by manufacturers of mobile telephones/handsets. However, that value had not been exploited and in early 2009, Worldlink had very limited liquid assets and was effectively being supported by Mr Riches. The directors were looking to obtain a listing on AIM in order to gain access to working capital. Worldlink was introduced to Mr McHugh on 19 January 2009 by Alex Borelli of IAF Securities Ltd.

The Heads of Terms

5. On 25 February 2009, ParOS and Worldlink entered into the HoT which were in the form of a letter agreement. The relevant terms were as follows:

Subject to Contract

We write to confirm the terms which have been agreed between us in principle, subject to contract, formal announcement and Takeover Panel considerations (if any) for the proposed acquisition ("the Acquisition") by [ParOS] of the entire issued share capital of [Worldlink] (together the "Parties"). Except as specifically set out in paragraph 4 below, this letter is not intended to be legally binding on either Party.

1. Major Terms

1.1 Worldlink will re-register as soon as possible as a private limited company.

1.2 ParOS will acquire the entire issued and to be issued share capital of Worldlink ("the Acquisition"). The consideration for Worldlink will be satisfied by the issue and allotment of ordinary shares ("the Consideration Shares") in ParOS.

1.3 The number of Consideration Shares shall be such as to give the shareholders of Worldlink 99% of the fully diluted share capital of ParOS after the Acquisition.

1.4 Sufficient cash before costs and expenses to satisfy the working capital adequacy stipulations of Schedule 2 Paragraph (c) of the AIM Rules will be available in Worldlink following completion of the Acquisition.

1.6 The board of directors of Worldlink applicable on Admission will be:

1.6.1 Patrick McHugh (non-executive chairman)

1.6.2 Neil Riches (managing director)

1.6.3 Ian Coburn (finance director)

1.6.4 Joseph King (non executive director)

1.6.5 Crispin Burdett (nonexecutive director)

1.9 The offer to acquire Worldlink is subject to satisfactory due diligence and the following conditions [....]

1.9.6 Worldlink not having undertaken any action after the date of this Agreement which might have a material adverse effect on the terms of the offer made by ParOS .... except in the ordinary course of business or as agreed with ParOS (such consent not to be unreasonably withheld or delayed;

1.10 Subject to satisfactory due diligence (being financial and legal) and those other conditions set out in this letter, an offer document will be issued to shareholders as soon as reasonably practicable. ....

...

We believe the terms outlined above cover the major points but they are not intended to be exhaustive. We also understand and acknowledge that Worldlink will require its own due diligence to be performed on ParOS ... and any recommendation by the directors of Worldlink will depend upon the satisfactory outcome of such due diligence.

2 Exclusivity

2.1 In consideration of ParOS proceeding with due diligence in relation to Worldlink and with negotiation and preparation of an admission document and related documents, Worldlink agrees that during the period of 90 days from the date it countersigns this letter [which was 25 February 2009] (the "Exclusivity Period") it shall not, except where approval has been given in accordance with paragraph 1.9.6 above, enter into any discussions with any third party or continue any such discussions which may already be in course, with respect to the possible acquisition of Worldlink or any material part of its assets or business or any material interest in its shares, whether directly or indirectly.

3 Mutual Confidentiality and Information

3.6 During the Exclusivity Period, Worldlink and ParOS will each allow the other and its agents access to such information as is reasonably necessary to evaluate the Acquisition and to assist the other as far as is possible. Subject always to paragraph 3.7 below, the Disclosing Party will in good faith use reasonable endeavours to ensure that the information provided to the Receiving Party for the purpose of evaluating the Acquisition is accurate and not misleading.

3.7 Worldlink and ParOS each acknowledge that no representation or warranties have been or will be given by the disclosing Party and that the Disclosing Party shall have no liability as a result of reliance on any information supplied to the receiving Party in connection with the Acquisition, except as expressly set out in any final written acquisition agreement entered into between them. For the avoidance of doubt, this provision shall not be interpreted to restrict fraud.

4 Legal Effect

4.1 Paragraph 1 (Major Terms) of this letter is not intended to be legally binding and this letter does not constitute an offer to acquire the entire issued share capital of Worldlink on the terms set out in this letter or at all. The terms set out in paragraph 1 are only an expression of the current intention of the parties and are subject to contract and a formal announcement being made in due course.

4.2 All other paragraphs of this letter are legally binding with effect from the dater that this letter in countersigned by Worldlink, in particular, the provisions of paragraphs 3, 4 and 5.

4.3 Either ParOS or Worldlink may at any time end discussions and negotiations, without having to give any reasons for doing so or thereby incurring any liability for the payment of damages subject to any rights ParOS may have for breach of paragraph 2 above and either party may have for breach of paragraph 5 below.

4.4 ParOS and Worldlink enter this Agreement in good faith having made reasonable efforts to disclose all relevant matters to each other.

5 Costs

5.1 Subject to any rights either party may have for breach of paragraphs 2 or 3 above and paragraph 5.2 below, Worldlink shall bear all ParOS' costs and its advisers' agreed fees and costs on a schedule to be agreed between the Parties. For the period between signing this Agreement and the re-registering of Worldlink as a Private company, if discussions and negotiations end due to Worldlink refusing for any reason to proceed with the Acquisition, a Break Fee shall be payable to ParOS of £12,500 for each week elapsed since signing this Agreement with a cap of £150,000. After Worldlink is re-registered as a Private company Worldlink will pay ParOS's agreed fees and costs incurred in connection with the Acquisition monthly.

5.2 If discussions and negotiations end due to ParOS not acting in good faith and withdrawing without cause ("cause" being a material matter discovered during due diligence, such that, in the sole opinion of the Nomad, Worldlink is not considered appropriate for admission to AIM, including due to working capital requirements), then each Party shall bear its own losses.

6 General

6.1 This letter and the negotiations between Worldlink and ParOS concerning the Acquisition shall be governed by and construed in accordance with the law of England and each party agrees to submit to the non-exclusive jurisdiction of the courts of England as regards any claim or matter arising under or in connection with this letter.

6.2 The parties will take all reasonable actions to effect the transactions described in these Heads of Agreement. This obligation is not intended to be legally binding, but merely an expression of the parties' intentions.

6. Clause 5.1 was devised in order to avoid the prohibition in section 151 of the Companies Act 1985 on the giving of financial assistance by a company to a person who is acquiring or proposing to acquire shares in that company. As at 25 February 2009, this prohibition only applied to public companies. The theory underlying clause 5.1 was that the break fee would not infringe the prohibition, and that once Worldlink was re-registered as a private company, it could then lawfully give financial assistance to ParOS in connection with the purchase of its shares. It is in issue whether clause 5.1 successfully avoided the prohibition in section 151, and that is something I have to decide.
7. It is common ground that on about 4 March 2009, the parties orally agreed that the share acquisition route envisaged by clause 1.2 of the HoT would be replaced by the acquisition of Worldlink's assets by ParOS in consideration for the issue of shares in ParOS. The end result would be the same, but the means of achieving it would be different. The reason for the change was that Worldlink received advice from SSD, its financial advisers, that the market would not look favourably on Worldlink re-registering as a private company and then (in effect) re-emerging shortly thereafter as a public company following the reverse takeover. Section 151 does not prohibit the giving of financial assistance by a public company in connection with the purchase of its assets, as opposed to its shares. It is not suggested that the parties agreed any other variation of the HoT.
8. Worldlink never re-registered as a private company. Negotiations continued, on and off, until October 2009, when they finally broke down and Worldlink refused to proceed further. In December 2009, Worldlink listed on the Frankfurt Stock Exchange.

The proceedings

9. These proceedings were issued by ParOS on 21 December 2010. Essentially the claims and issues are as follows:

(1) ParOS claims £719,806.99 fees and costs under clause 5.1. In response, Worldlink contends:

(i) Upon the true construction of clause 5.1, Worldlink's liability is capped at £150,000, Worldlink never having re-registered as a private company. Alternatively, ParOS is estopped from contending to the contrary.

(ii) Clause 5.1 – or at least the second sentence – constitutes unlawful financial assistance and is void and/or unenforceable.

(iii) Alternatively it can invoke clause 5.2 because ParOS terminated the negotiations not acting in good faith.

(iv) Alternatively, if Worldlink is liable to pay uncapped fees and costs, its liability is confined to fees and costs (a) incurred in connection with the Acquisition and (b) agreed in advance of being incurred.

In the alternative, ParOS claims the £150,000 break fee.

(2) ParOS additionally claims damages for non-payment of the sums due under (1). The damages claimed relate to the costs of setting up and operating a Creditors Voluntary Arrangement ("CVA").

(3) ParOS alleges that Worldlink breached the exclusivity clause 2.1 and that, as a result, it lost a real chance that the reverse take-over would have been completed as envisaged by the HoT (as varied). Worldlink now admits one breach but denies any further breach. It contends that any breach was of a trivial nature and that no loss has been sustained by ParOS. There was no real chance that the Transaction would have proceeded but for the breach.

(4) ParOS contends that Worldlink owed a tortious duty to ParOS to use reasonable care to ensure that the information it gave ParOS was accurate, that it breached that duty by misleading ParOS as to the availability of funds to support the Transaction and that ParOS has suffered loss because, in reliance on the representations, ParOS entered into a Letter of Engagement with John East Partners, financial advisers. Worldlink denies that it owed any duty of care to ParOS, that it breached that duty, that ParOS actually relied on anything that it did represent and that (if ParOS did) acted unreasonably.

Evidence

10. In the course of the trial, ParOS called Mr McHugh and Mr King. Worldlink called Mr Riches, Mr Burdett, Mr Coburn and Mr Borelli. I am satisfied that all the witnesses were honest but they were not all reliable.
11. Mr McHugh kept copious handwritten notes of meetings and conversations. They were generally accurate and I found his evidence to be broadly reliable, but there were occasions when I considered that he was drawing conclusions from what was said (or not said) which were unjustified. Building on what was recorded in his contemporary notes, he was also prone to exaggerating what had been said, and inclined to consider that matters had been agreed simply because Mr Riches or Mr Coburn did not positively express disagreement.
12. I found Mr King to be a reliable witness, but his direct knowledge was limited.
13. Mr Riches was an unreliable witness. On several occasions in cross-examination, it was demonstrated that events, which he claimed to remember clearly, had simply not occurred (at least at the critical time he claimed to remember). Mr Burdett and Mr Coburn were more reliable, but Mr Burdett had little direct knowledge of events. Mr Borelli only had a very peripheral involvement. As he readily accepted, his recollection was (unsurprisingly) weak.
14. It follows that I have paid close attention to the contemporary documents, especially those exchanged between the parties.

The main facts

15. The following findings represent my assessment of the evidence.
16. The first meeting between Mr McHugh and Mr King of ParOS and Mr Riches and Mr Coburn of Worldlink took place on 22 January 2009. The introduction had been effected by Mr Borelli who worked for IAF Securities Limited. Mr Borelli had indicated in general terms that Worldlink had access to funding. Mr McHugh's note of the meeting on 22 January recorded "£2 million stated; £1-2 million aiming; £1.5 million need". Mr McHugh's evidence was that Mr Riches stated "We have got £2 million", but I do not accept Mr Riches went that far: that is not what the note records. I am satisfied that a £2 million figure was mentioned and that Mr Riches indicated that that was the sort of money that he thought he could raise.
17. Worldlink was interested in the possibility of a reverse takeover with ParOS, but it was still looking at other possibilities. On 23 January the parties agreed to continue their discussions. Mr Riches had a long business relationship with Mr Wilson Rondini, Managing Partner of Falcon Capital LLP ("Falcon"), which was associated with Falcon International Consulting Limited of Tortola, British Virgin Islands ("Falcon BVI"). Falcon did not itself have significant capital available for investment, but it had access to a number of wealthy US investors who were prepared to follow Mr Rondini's recommendations. Falcon had supported a number of Mr Riches' previous ventures (via its investors) and indeed ultimately supported the Frankfurt listing. On 28 January 2009, Falcon entered into a letter agreement with Worldlink whereby Falcon was engaged to provide services "with respect to introducing you to potential investors, and raising capital for you on a best efforts basis". Clause 7 of the agreement indicated that the offering would run from 2-28 February 2009 and indicated that a figure of £1 million (at a valuation of £20 million post money) was in consideration, which could be "expanded".
18. There was a further meeting between Mr McHugh and Mr Riches on 29 January 2009 during which there were discussions about future business plans. Mr McHugh records Mr Riches as having said "Falcon Capital £1m cash by end of Feb". His evidence was that Mr Riches said that Falcon would invest £1 million by the end of February. Mr Riches could not remember. In the light of what had just been agreed with Falcon, I think Mr Riches probably did use words to this effect.
19. Mr McHugh and Mr Riches spoke on 10 February 2009. Mr McHugh's note records "They have got a £20 million valuation from Falcon. Signed". Mr McHugh's evidence was that Mr Riches told him that Falcon had signed an agreement to invest. Mr Riches could not remember. I think Mr Riches probably did say this. I do not accept that Mr Riches said that Worldlink had a £20 million valuation from Falcon. I think that what Mr Riches probably did say was that the assumption underlying Falcon's involvement was that the vehicle would have a value of £20 million after the investment: i.e. this would be a likely requirement of the investors.
20. Mr McHugh gave evidence that in the course of a meeting on 13 February, Mr Riches indicated to Mr McHugh that Falcon was securing the £1 million and that he was speaking to ARC, another investor. There is nothing in Mr McHugh's notes about this but I accept that Mr Riches probably did say something to this general effect. On 19 February there was a conference call. Mr McHugh states that Mr Riches said that Worldlink had secured sufficient funds to support the transaction and the working capital requirements of the merged group. Again there is no reference in Mr McHugh's note, but I accept that Mr Riches probably did say something to this effect.
21. As from mid-February, the parties started to exchange drafts of the HoT. The drafts are irrelevant to the construction of the HoT, but Mr Riches' evidence was that he was insistent throughout the negotiations that there should be a cap on Worldlink's exposure to ParOS's fees and costs of £150,000. He gave evidence that before the HoT were executed he received an explicit assurance from Mr McHugh that clause 5.1 operated to limit Worldlink's exposure to £150,000. In fact, there is clear contemporary written evidence that he resisted the inclusion of the £150,000 break fee right up to the eve of execution of the HoT. Mr Riches is clearly mistaken. The assurance that was given took place much later and well after the HoT had been executed, when Mr Riches had started to see the potential value to Worldlink of the cap. This is a good example of the unreliability of Mr Riches' evidence.
22. During the period leading up to the execution of the HoT, the parties also exchanged financial plans in the form of a memorandum prepared by Mr McHugh which went through a number of revisions. Amongst the issues it dealt with were the outstanding directors' fees owed by ParOS to Mr McHugh's and Mr King's service companies. They were put at £195,000, but Mr McHugh proposed that they be reduced to £42,500. These fees and other historic liabilities (which had no connection with the transaction) proved to be a source of difficulty and tension between ParOS and Worldlink. In the final revision of the memo dated 20 February 2009, management costs, office costs and directors fees between signing the HoT and admission on to AIM were put as follows:

"a. Patrick McHugh will bill through Trinity normal monthly Board Fees of £6,000 a month plus the time spent concluding the deal estimated to be £6,000 a month.

b. Joseph King will bill through Regis normal monthly Board Fees of £4,000 a month plus the time spent concluding the deal estimated to be £4,000 a month.

c. Office costs and expenses will be paid by Worldlink. We agreed that £20,000 would be invoiced on signing the Heads. These costs will be approved by Worldlink before payment is made."

23. In a spreadsheet entitled "ParOS costs for Worldlink's Account", Mr Coburn collected together estimated costs between February and May 2009 of Creditors (outstanding directors' fees of £42,500), deal costs (£194,999) and "Running Costs (to be agreed)" of £74,751 (being ongoing directors' fees and £20,001 (sic) office expenses. Mr Coburn sent the spreadsheet to Mr McHugh early on 25 February, explaining that he was trying to capture all the deal costs and associated ParOS costs which would form the basis of the short term cash budget. He added that he realised that some of the items had yet to be agreed.
24. The HoT was agreed and executed later on 25 February 2009, but (as recorded above) the agreement was varied on about 4 March 2009, so that it became a sale of assets rather than shares. By 14 March, Mr Coburn was becoming concerned that the change of direction (as he termed it) gave rise to a number of significant challenges, including stamp duty of £100,000 and other tax implications. He floated whether it would not be preferable for Worldlink to go for a direct listing on AIM. He recorded that Falcon had indicated confidence that, providing the proposition was well researched and presented, it could raise sufficient funds to meet all working capital needs of Worldlink. He recorded this in a paper sent to Mr Riches. The Worldlink team lost enthusiasm for the proposed ParOS deal.
25. Worldlink consulted Strand Partners, HB Corporate and Old Park Lane Capital ("OPLC") as potential advisers and fundraisers in connection with a possible straight listing. On 17 March there was a meeting between Strand during which Strand offered to act as nominated advisers (or "Nomad") to promote a straight listing on AIM. OPLC was introduced as broker and Mr Riches offered the right to subscribe for a 0.5% interest in the share capital on admission to AIM.
26. In the meantime progress on the proposed reverse takeover by ParOS largely stalled. Mr McHugh was told on 20 March that Worldlink was losing interest in the reverse take-over deal with ParOS and was investigating other possibilities. This was confirmed on 27 March. However, discussions continued between ParOS and Worldlink. Mr McHugh gave evidence that on 23 March Mr Riches said to him that Falcon wished to support the transaction and put in £2 million. Given the situation at the time, I am doubtful that more than anything very general was said.
27. However, by about 4 April 2009, interest in the direct listing on AIM had waned. Mr Riches was critical of the time and costs wasted. Work recommenced on the ParOS deal. A plan was produced which envisaged the completion of the deal and the admission of Worldlink to AIM by early July 2009.
28. On 20 April 2009, there was a telephone conversation between Mr McHugh and Mr Riches. There was a long discussion. Mr Riches had had a difficult journey back from Montreal. Mr McHugh's note reads "Got £2m raised need to get in". He explained in evidence that he appreciated that the money was not committed but he believed there was sufficient money to take the transaction forward and he wanted the documentation prepared that would let investors put the money in. Mr Riches did not seriously dispute that a conversation along these lines had taken place. Mr McHugh gave evidence that "what Mr Riches described was not a general placing of funds. What he described was very specific investors who were going to put very specific amounts of money in". There is evidence in Mr McHugh's notes made on 22 April that Mr Riches spoke of OPLC producing £500,000, Falcon PLC £1.5 m (?) [sic] and ARC £500,000. These were all financial institutions to whom Mr Riches was speaking, and I accept that at or around 20 April, Mr Riches did state that investors were indicating a willingness to produce that level of funding.
29. However, it must be emphasised, in relation to these various occasions (including 20 April) when Mr Riches indicated that funding had been obtained, that as an experienced City man, Mr McHugh fully appreciated that there was no legal commitment and that the investors' ultimate decision would depend on the transaction as finally presented. That was dependent on ParOS and Worldlink reaching full and final agreement as to the structure of the transaction. At most therefore what Mr Riches was indicating was an indication on the part of investors of their willingness to invest in principle.
30. By late April Mr Coburn had produced a draft balance sheet of the combined ParOS/Worldlink entity. An accompanying list of expenses included current ParOS directors' fees, consultancy costs and operating costs. It was copied to Mr McHugh with a request for a speedy response. In an e-mail dated 26 April 2009, Mr Coburn stated that the "Deal Costs" put forward by Mr McHugh were fine – these included Hammonds' legal fees. Mr Coburn concluded: "I am trying to tie down the numbers and just need this in order to get a pre-review final numbers together (sic)".
31. On 6 May 2009, ParOS entered into a letter of engagement (dated 28 April 2009) with John East Partners ("JEP"), stockbrokers, to act as Nomad in connection with the acquisition of Worldlink. The fees payable were:

"£110,000, which will be payable as to £20,000 on 18 May 2009 and £5,000 payable on the same day every week thereafter, with the remaining balance payable on Admission becoming effective. If the initial fee of £20,000 is not paid on or before 18 May 2009, the corporate finance fee for acting as nominated adviser and financial adviser with respect to the transaction will be £120,000, the remaining balance of which will be payable on admission becoming effective."

32. Worldlink received clearance from HMRC for an assets based deal with ParOS in early May. According to Mr Riches, Mr Rondini had "agreed to put £1 million Worldlink's way at the end of January", but had become perturbed by the delays. Mr Rondini was now fully aware of why Worldlink had acted as they did, and had offered to introduce Mr Riches to a partner in the UK.
33. However, Mr Riches was still considering other alternative opportunities through HB Corporate. On 19 May 2009, he made a presentation to Hurlingham Plc ("Hurlingham"). Mr Riches contended that Hurlingham was a potential investor but this was clearly incorrect. Hurlingham was another shell company with an AIM listing and the purpose of the presentation was to consider a possible reverse takeover of the kind proposed with ParOS. However, nothing came of it and Hurlingham entered into a reverse takeover with another company.
34. The 90 day exclusivity period expired on 21 May 2009. By 27 May, Mr McHugh was becoming concerned at the delays and ParOS' financial position was becoming very difficult. On 27 May 2009, he e-mailed Mr Riches indicating that £96,823 was needed that week (which included £41,658 due to Mr McHugh and £22,280 to Mr King) and £150,000 was really needed to avoid extra costs. These costs – and in particular the scale of funds required by Mr McHugh and Mr King personally – caused Mr Riches considerable concern. Mr McHugh sought to dampen those concerns in an e-mail dated 1 June 2009. However, on 8 June 2009, Mr McHugh delivered to Mr Riches an invoice on behalf of ParOS requesting payment of £172,109.44 (inc. VAT). This included some £50,000 of fees due to Mr McHugh (plus £4,201.50 expenses) and £18,000 to Mr King. Mr McHugh's evidence was that the invoice was sent on a "hypothetical basis" and was not a demand for payment.
35. However, on 16 June 2009, he e-mailed Mr Riches stating that he had become increasingly concerned by the delays and difficulties experienced by Worldlink in raising working capital. He asserted that ParOS had been negligently misled about the funding that had been arranged. The e-mail stated:

"As you are aware, under the AIM Rules, ParOS must publish its accounts by 30 June 2009. We have discussed the matter in detail with our nomad and have been advised that unless you can confirm by 4 pm on 26 June 2009 that you have raised the necessary working capital for the deal to proceed, it will request that ParOS withdraw from the acquisition for cause (cause being defined in the Heads of Terms as a "material matter discovered during due diligence, such that in the opinion of the Nomad, Worldlink is not considered appropriate for admission to AIM, including due to working capital requirements").

...

We have received legal advice that unless we believe that Worldlink is in a financial position to reimburse us for [professional and other] costs, as it is legally obliged to do under clause 5.1 of the Heads of Terms, we will be at risk of trading wrongfully. In this respect we presented you with an invoice for £149,660.38 excluding VAT on 8 June for costs incurred to 1 June. A further sum of £50,339.62 excluding VAT is our estimate of costs that will be incurred by 26 June 2009. As the acquisition proceeds further costs will also become payable as we have set out in the schedules we have provided to you. Please confirm you will be able to make payments in the total amounts falling due? Failing your confirmation we will pass the matter to our solicitors to commence legal proceedings against you to recover the debt, including use of a winding up petition".

36. This provoked a strong response from Mr Riches on 18 June asserting that there was no contractual obligation to raise working capital by 30 June and disputing that the costs demanded were payable. Worldlink gave notice that it was withdrawing for cause "which is an act of bad faith", and it held ParOS liable for the full amount of Worldlink's costs.
37. On 22 June 2009, Mr McHugh and Mr Riches met. They agreed to take their e-mails "off the table" and to resume discussions. In evidence, Mr Riches asserted that this was conditional and subject to a new workable agreement being made to replace the HoT. I reject that evidence: the agreement was to take the e-mails "off the table" without qualification.
38. However the relationship remained tense. On 17 July Mr Riches took strong exception to invoices rendered by ParOS and made it clear that, if there was to be payment, it would be in the form of the issue of shares in the merged entity. Following a meeting held on 21 July to discuss ParOS' fees and costs, Mr Riches sought a yes or no answer to the question whether, if Worldlink walked away from the transaction, its total exposure was £150,000. Mr McHugh answered "Yes, if Worldlink has not re-registered as a Private company and the deal was completed by 20^th May".
39. The transaction remained alive, but only weakly. Nothing much occurred in August when the key individuals were away on holiday. In September relations deteriorated further and on 7 October 2009 Worldlink finally withdrew and refused to proceed further with the transaction.
40. ParOS entered in a CVA on 2 December 2009 with a view to commencing these proceedings against Worldlink.

THE ISSUES AND CONCLUSIONS

41. I can now consider the issues in the case and the arguments advanced by counsel, and express my conclusions.

Construction of the HoT

42. To recapitulate, clause 5.1 of the HoT provides:

Subject to any rights either party may have for breach of paragraphs 2 or 3 above and paragraph 5.2 below, Worldlink shall bear all ParOS' costs and its advisers' agreed fees and costs on a schedule to be agreed between the Parties. For the period between signing this Agreement and the re-registering of Worldlink as a Private company, if discussions and negotiations end due to Worldlink refusing for any reason to proceed with the Acquisition, a Break Fee shall be payable to ParOS of £12,500 for each week elapsed since signing this Agreement with a cap of £150,000. After Worldlink is re-registered as a Private company Worldlink will pay ParOS's agreed fees and costs incurred in connection with the Acquisition monthly.

There are three key issues of construction of clause 5.1:

(1) Whether, after the HoT were varied so as to provide that the Acquisition would consist of an asset sale rather than the issue of share capital, the second sentence still applied – i.e. that until Worldlink was re-registered as a private company, a break fee capped at £150,000 only was payable if Worldlink refused to proceed, or whether Worldlink was to be treated as being under an uncapped liability to pay ParOS' expenses.

(2) If the break fee was payable, whether ParOS was entitled to be paid the fee as of right, or whether it depended on proof of recoverable expenses incurred.

(3) If the capped break fee was no longer applicable, what costs and expenses Worldlink was liable for.

(1) Break fee

43. Counsel were agreed that, as the HoT originally provided:

(1) unless and until Worldlink re-registered as a private company, its sole obligation, in the event that it decided to withdraw from the transaction, was to pay a break fee of £12,500 per week capped at £150,000; but

(2) Worldlink was under no contractual obligation to re-register, because clause 1.1 of the HoT was expressly agreed not to be legally binding – see clause 4.1. Clause 1.1 was only an agreement in principle.

44. However, Mr Tom Richards, counsel for ParOS, submitted that the core agreement between the parties was, as expressed in the first sentence, that Worldlink agreed to pay all ParOS' costs and its advisers' agreed fees and costs. The second and third sentences were subsidiary to the first and were intended to avoid the prohibition on financial assistance in section 151 of the Companies Act 1985. Both sentences proceed on the assumption that the transaction would follow the share acquisition route, and accordingly it would be necessary for Worldlink to re-register if it was to pay ParOS' costs. The parties did not intend the second and third sentences to be applicable in the event that the share acquisition route was not followed. The parties' intention was to preserve flexibility: they made no binding commitment to the share acquisition route and preserved the possibility of restructuring the transaction. Accordingly, if the share acquisition route was abandoned, then the position is simply that in the first sentence. The second and third sentences are engaged only if the share acquisition route is followed. It was unreal to suppose that the figure of £150,000 was intended to be a general cap on Worldlink's liability to pay costs. In answer to my question: by what process of construction the second and third sentences fall away, Mr Richards responded that: "they fall away for this reason, that the clear intention of the parties is to provide for a situation in which – and this is in sentences 2 and 3 – the intention of the parties was to provide for the situation in which Worldlink plc has to re-register as a private company."
45. In response Mr Alex Barden, counsel for the Defendant, submitted that there was no reason why the change from a share acquisition based reverse takeover should "magically" delete the second and third sentences of clause 5.1. The cap in the second sentence remained entirely workable and was not deleted from the HoT. Further the cap had a real commercial effect and value to Worldlink. It was never varied.
46. In construing clause 5.1, I accept that it is relevant that it was structured with the intention of avoiding the prohibition financial assistance in section 151 of the 1985 Act. As originally agreed, the first sentence was introductory to the second and third sentences. Unless and until Worldlink re-registered as a private company (as to which it had no legal obligation), Worldlink's liability was limited to a break fee of £12,500 per week, capped at £150,000. The parties clearly considered that this arrangement was permissible under section 151, but that a general undertaking to pay ParOS's costs would be caught.
47. The HoT was varied about a week after it had been agreed, but the evidence is clear (and not in issue) that the only variation agreed was that share acquisition route envisaged by clause 1.2 of the HoT (a non-binding section of the HoT) would be replaced by the acquisition of Worldlink's assets by ParOS in consideration for the issue of shares in ParOS. The parties might well have also agreed to vary clause 5.1 on the basis that the original rationale for break fee and cap of £150,000 no longer continued, but they did not. So the second and third sentences remained in clause 5.1 of the HoT.
48. In those circumstances I do not see how the Court can simply ignore the second and third sentences and treat them as superseded as a result of the variation to clause 1.2. Mr Richards' argument that the second and third sentences should be treated as having fallen away cannot be right. The third sentence is highly relevant to the construction of the obligation in the first sentence. I have considered a slightly less ambitious possibility: that the second sentence should be treated as having fallen away as a result of the variation in clause 1.2, but I can see no basis for reaching such a conclusion. The wording is quite clear. It contains no qualification. It plainly had commercial value to Worldlink in capping its liability at £150,000, should it decide to withdraw, unless it chose to re-register as a private company. The parties might reasonably have agreed to remove the second sentence – they might also have agreed to increase the cap – but they did not, and in my judgment the Court cannot impose that result by a process of construction.
49. Worldlink never did re-register as a private company. It follows that its liability, if it decided not to proceed with the acquisition, was confined to paying a break fee to ParOS of £12,500 for each week elapsed since 25 February 2009, with a cap of £150,000.

(2) Break fee as of right

50. Mr Barden did not really develop his contention that the break fee was only payable to the extent of the costs incurred and properly recoverable under the HoT. I think he was right not to do so. In my judgment the second sentence of clause 5.1 is clear. ParOS is entitled to the break fee as of right. The parties' intention was to try and distance the break fee from any agreement to give a financial assistance. No doubt the figure of £12,500 was based on an estimate by the parties of the likely costs to be incurred by ParOS in connection with the acquisition over a 12 week period, but in my judgment there is no requirement on ParOS to prove what costs were actually incurred.

(3) What fees and costs are recoverable

51. The parties were at issue as to the extent of Worldlink's liability to pay ParOS' costs assuming that the break fee/cap did not apply. This issue is academic in the light of my construction of clause 5.1, but I should set out my conclusions.
52. Mr Richards argued that the obligation in clause 5.1 was unlimited, and included all costs incurred by ParOS, prospective and historic and whether or not connected with the transaction. He submitted that this was the clear purport of the first sentence and that it was unqualified by the third. Such a construction made good commercial sense because ParOS had no other means of funding itself and in order to complete the transaction it needed to be able to defray these costs. Worldlink's protection lay in the fact that the costs and fees had to be agreed before it became liable to pay them Even if the obligation was to be interpreted as confined to fees and costs incurred in connection with the acquisition, this was not confined to deal costs, but extended to all costs which must be defrayed to allow ParOS to continue to operate and work towards completion.
53. In response, Mr Barden submitted that ParOS's arguments did not accord with the natural meaning of the words and made no commercial sense. The context of clause 5.1 is a proposed take-over transaction. The heading "costs" and the words "agreed fees and costs" plainly refer to the costs of the acquisition. The position was rendered absolutely clear by the third sentence where the obligation to pay costs is explicitly qualified by the words "in connection with the Acquisition". Clause 5.1 is not making provision for costs incurred before the HoT were concluded or for ordinary running costs unconnected with the Acquisition.
54. I approach the construction of clause 5.1 on the basis that there was an obvious tension between the parties' interests. It was in ParOS' interests to maximise the recovery of costs and it was in Worldlink's to minimise them. Both were impecunious and dependent on their shareholders to provide funding.
55. Had the first sentence of clause 5.1 stood alone, I would still have considered that Worldlink's obligation was to pay ParOS's fees and costs incurred in connection with the transaction and that there was no unqualified obligation to pay fees and costs. Of course, if Mr Richards' argument was correct, the need for Worldlink's agreement would have provided some protection, but given (as both parties agreed) Worldlink would be obliged to act reasonably in refusing to agree particular costs, it would still be essential to define the nature of the costs for which Worldlink was accepting an obligation. It would require clear words (in my judgment) for the obligation to be construed as extending beyond the fees and costs incurred in connection with the acquisition.
56. However the first sentence of clause 5.1 does not stand alone and it is a basic proposition that a contract must be construed as a whole – a fortiori a clause must be construed as a whole. In my judgment the third sentence of clause 5.1 confirms that the fees and costs payable are "in connection with the Acquisition". They do not include historic accrued costs, such as director's fees, solicitors' or nomad's fees, or future ordinary corporate running costs, as opposed to the costs incurred in connection with the Acquisition. So I would have held (if relevant) that fees incurred to Mr McHugh and Mr King for their time actually spent on the Acquisition were in principle recoverable under clause 5.1, but not their ordinary director's fees.

Estoppel

57. Worldlink's estoppel case does not arise because I have upheld its case on the construction of clause 5.1 of the HoT. However, I should indicate that, had I decided that on the true construction of clause 5.1, the break fee/cap no longer applied once the HoT was varied, I would have found against the estoppel case. I have rejected Mr Riches' evidence that he was insistent throughout the negotiations for the HoT that there should be a cap on Worldlink's exposure to ParOS's costs and expenses of £150,000 and that, before the HoT was executed, he received an explicit assurance from Mr McHugh that clause 5.1 operated to limit Worldlink's exposure to £150,000. I accept that an assurance was given but only very late on in the chronology, and then in somewhat guarded terms^[1], but I do not see how this could ground an estoppel by convention or representation, given that neither party acted on it.

Clause 5.2

58. Worldlink contends that, even if it is liable to pay the £150,000 break fee, it can invoke clause 5.2 to justify non-payment on the basis that the negotiations and discussions ended due to ParOS not acting in good faith. Worldlink rely on Mr McHugh's e-mail of 16 June 2009^[2]. I can deal with this aspect of the case shortly. In my judgment, Worldlink's argument does not even get off the ground, for at least three reasons:

(1) The e-mail does not amount to a withdrawal by ParOS from the discussions and negotiations. It is at most a threat to do so if ParOS' demands are not met.

(2) The e-mail was not sent in bad faith.

(3) In any event it was taken "off the table" unconditionally by agreement.

It follows that Worldlink cannot invoke clause 5.2 as a defence to payment of the break fee.

Section 151

59. I now turn to Worldlink's more formidable defence to the claim for the break fee.
60. In February/March 2009 the relevant provision in the Companies Acts prohibiting financial assistance was s.151 of the Companies Act 1985. By force of s.1295 and Schedule 16 of the Companies Act 2006, and Article 5(2) of the Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order together with paragraph 51 of Schedule 4 to the same Order, s.151 had by 25 February 2009 been repealed, so far as it applied to the giving of financial assistance by a private company for the purposes of the acquisition of shares in itself or another private company. Section 151 continued however to apply to the giving of financial assistance by a public company.
61. Section 151 provided as follows:

151.— Financial assistance generally prohibited.

(1) Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.

(2) Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.

(3) If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both.

Financial assistance was defined as follows:

152.— Definitions for this Chapter.

In this Chapter—

(a) "financial assistance" means—

(i) financial assistance given by way of gift,

(ii) financial assistance given by way of guarantee, security or indemnity, other than an indemnity in respect of the indemnifier's own neglect or default, or by way of release or waiver,

(iii) financial assistance given by way of a loan or any other agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party to the agreement remains unfulfilled, or by way of the novation of, or the assignment of rights arising under, a loan or such other agreement, or

(iv) any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets.

62. The essential issues between the parties were:

(1) Whether clause 5.1 constituted financial assistance contrary to s.151 in whole, or at least insofar as it provided for payment of a break fee;

What the consequences were if clause 5.1 infringed s.151 in whole or in part, especially as from 4 March 2009 when the nature of the acquisition changed.

(1) Breach of s.151?

63. Mr Barden submitted that the general mischief to which the provisions are addressed is described in Chaston v. SWP Group plc [2002] EWCA Civ 1999; [2003] BCC 140 at §31:

"… that the resources of the target company and its subsidiaries should not be used directly or indirectly to assist the purchaser financially to make the acquisition. This may prejudice the interests of the creditors of the target or its group, and the interests of any shareholders who do not accept the offer to acquire their shares or to whom the offer is not made."

64. As to the definition of financial assistance, the starting point is the commercial substance of the transaction – Chaston at §32:

"It is clear from the authorities that what matters is the commercial substance of the transaction: 'The words "financial assistance" have no technical meaning and their frame of reference is the language of ordinary commerce' (see per Hoffmann J in Charterhouse v. Tempest Diesels (1985) 1 BCC 99,544, approved by the Court of Appeal in Barclays Bank plc v. British & Commonwealth Holdings plc [1995] BCC 1059 at p.1071."

In other words, one must ask whether the agreement "smooths the path to the acquisition of the shares" (Chaston at para 38)

65. Terms such as "guarantee" and "indemnity" bear their usual legal meaning when used in the context of s.151 – see Aldous LJ in Barclays Bank plc v British & Commonwealth Holdings plc [[1995] BCC 1059 at p.1071]:

"The words 'financial assistance' are not words which have any recognised legal significance whereas the word 'indemnity' does. It is used in the section as one of a number of words having a recognised legal meaning."

66. The legislation prohibits not only the giving of financial assistance in connection with a consummated transaction, but also agreeing to give financial assistance in relation to a proposed transaction: Arden LJ in Chaston (at para 42):

"Mr Cunningham made a further submission that there was a distinction to be drawn between financial assistance given in advance of a transaction and financial assistance given in the course of a transaction. As to the former, this was not prohibited. On this, he relied on the four cases referred to above. In my judgment, this distinction is not justified by s.151. It prohibits financial assistance given 'directly or indirectly' and those words are sufficiently wide to cover 'pre-transactional' financial assistance. Moreover s.151(1) provides that a transaction can offend the section even though a person is only 'proposing' to acquire shares. In my judgment, the distinction which Mr Cunningham seeks to draw is not borne out by the authorities which he cites in support."

67. Where a transaction or proposed transaction is financially assisted by the entering into of a future obligation to pay money (for example giving an indemnity or, potentially, paying a break fee) the assistance is considered to be given on the date when the commitment is entered into, rather than the date on which the money is paid: Parlett v. Guppys (Bridport) Ltd [1996] BCC 299. This is because the net assets of the company making the commitment are impaired at the date it is given.
68. The aspects of Clause 5.1 dealing with costs and expenses are an indemnity in respect of those liabilities. That part of Clause 5.1 which is expressed to be a "break fee" is also financial assistance. On a proper construction, as explained below, it is also an indemnity in that it is payable only in respect of fees and costs actually incurred.
69. Even if that construction is incorrect and the £150,000 (or lesser sum based on the weekly "burn rate") is a flat fee (as I have held it is), the break fee is "other financial assistance" and has a material effect on the net assets of Worldlink. It is financial assistance because it is a proposed financial payment which "smooths the path" towards the acquisition of the shares. It is not clear whether a break fee is always financial assistance. It has been argued, based on dicta in Barclays Bank plc v. British & Commonwealth Holdings plc [1995] BCC 1059 that in some circumstances a break fee could be characterised as an "inducement" rather than "assistance". However, in Chaston, Arden LJ indicated (at §44) that she did not consider Barclays to decide that an inducement was not financial assistance. Mr Barden also cited Roberts, Financial Assistance at 7.33ff, Eaborn, Takeovers: Law and Practice (1^st ed 2005) 10.159 to 10.169.
70. There is no authority on the meaning of "material" in s.152(a)(iv) but Buckley on the Companies Acts (§968) suggests that an asset reduction in excess of one per cent would be regarded as material. See also Roberts, Financial Assistance p101-102). Where, as here, the company has negative net assets, the reduction is plainly material.
71. In response Mr Richards did not seek to controvert the legal submissions made by Mr Barden. He confined himself to a short submission that the break fee would only have become payable had the Share Acquisition Route been followed, but the transaction had then been abandoned altogether prior to re-registration. In that event, there would have been no question of the break fee constituting financial assistance for the purposes of an acquisition.
72. In my judgment, as at 25 February 2009, the break fee in the second sentence of clause 5.1 did amount to the giving of unlawful financial assistance contrary to s.151. It is clear that s.151 applies to cases where a person is proposing to acquire shares in the company, just as much as where he is actually acquiring them. Here ParOS was proposing to buy the issued shares in Worldlink. It would clearly have constituted unlawful financial assistance for Worldlink to agree to pay ParOS's fees and costs incurred in connection with the acquisition whilst Worldlink was a public company. The break fee was only payable in the event that the acquisition fell through, but it is striking that the obligation to pay the fee appears in a clause headed "Costs" and providing for Worldlink to bear all ParOS' and its advisers' agreed fees and costs. The £12,500 per week was clearly based on a broad estimate of the costs likely to be incurred by ParOS in connection with the acquisition. I think that it was plainly intended to ensure that, if Worldlink withdrew from the negotiations before it was re-registered as a private company, ParOS was certain to recover a minimum contribution towards its expenses. As such the fee was "smoothing the path to the acquisition of the shares" because it enabled ParOS to incur up to £150,000 of expenditure in progressing the proposed acquisition secure (or virtually so^[3]) that it would be reimbursed to that extent if the transaction failed. The break fee was not a mere inducement to enter into the transaction (if relevant). I consider that it amounted to "other financial assistance" and that it materially reduced the net assets of Worldlink, given that they were negative at the time.
73. On the other hand, the undertaking to pay ParOS' fees and costs after it re-registered as a private company does not in my judgment infringe s.151. The commitment was subject to a condition precedent that Worldlink re-registered. Unless and until it did so, there was no obligation to pay ParOS' fees and expenses. If ParOS did re-register, the financial assistance would not be caught by s.151 because it does not apply to private companies. I think it is taking s.151 too far to hold that because the conditional promise was given at a time when Worldlink was still a public company, it is unlawful. There is support for this conclusion at the highest level: see Brady v. Brady [1989] AC 755 where the House of Lords granted an order for specific performance of an agreement to give financial assistance where there was a means by which the appellants could perform the contract lawfully by using the "whitewashing procedure". The parties were to be presumed to intend that the contract was to be performed in the lawful rather than the unlawful manner: per Lord Oliver of Aylmerton at p. 783D. Here the position is a fortiori. The obligation to pay ParOS' fees and costs only arose if the company re-registered as a private company, when it would become lawful.

Effect of illegality

74. Mr Richards argued that as at 25 February 2009, clause 5.1 was not unenforceable at law. He cited Toulson LJ's judgment in Anglo Petroleum Ltd v. TFB (Mortgages) Ltd [2007] BCC 407:

There are different ways in which a statute may give rise to an argument that a contract was illegal in its formation and therefore unenforceable. They are (1) that its formation was prohibited by statute, (2) that it was a contract to do an act prohibited by statute or (3) that was it was entered into for the purpose of doing an act prohibited by statute.

On this he based an argument that because the HoT did not require the parties to proceed by the share acquisition route and it remained open to them to proceed by some other route, clause 5.1 was not rendered void and/or unenforceable as a result of illegality.

75. I disagree. As at 25 February 2009, the only transaction envisaged by the parties was the acquisition of the shares of Worldlink. There was no legal obligation to complete the acquisition, but the HoT envisaged no other transaction. In my judgment, the second sentence of clause 5.1 providing for payment of a break fee was a contract to do something (viz. the giving of financial assistance) prohibited by statute. It may also have been a contract prohibited by statute. Either way, it was invalid and unenforceable. Counsel were agreed that clause 5.1 could potentially be severed, and it may well be that the remaining lawful part of clause 5.1 (which only came into effect when Worldlink re-registered as a private company) was unaffected.
76. A week later, however, the parties revised the HoT and agreed that the acquisition was of Worldlink's assets, and not shares. Clause 5.1 no longer infringed s.151. Is the break fee now enforceable?
77. Mr Barden argued that an agreement to provide unlawful financial assistance was not merely unenforceable but void in the true sense of that word. It was also ultra vires: Precision Dippings Ltd v. Precision Dippings Marketing Ltd [1986] 1 Ch 447, 455. Clause 5.1 (or at least the second sentence) was not just inapplicable for a week. It was just not there. When the HoT were varied a week later there was nothing done subsequently which could be said to rekindle the clause or to bring it back into life.
78. Mr Richards submitted that obligation to pay the break fee was merely unenforceable until the HoT was varied. Once it was varied, it ceased to be unlawful and any bar to the enforceability of the obligation was removed.
79. Both counsel cited authorities. Some state that illegality renders the contract void. Others that it is unenforceable. And yet others that it is void and unenforceable. There was a notable disagreement in Mackender v. Feldia AG [1967] 2 QB 590, where Lord Denning MR considered that illegality would only render the contract unenforceable (p. 599A), whereas Diplock LJ considered that unenforceability and voidness were not the same concept. A contract wholly unenforceable was void: it was not a contract at all (p. 661C-G). Other cases have treated unlawful contracts as unenforceable. In his book on Illegal Transactions (at pp. 29-31), Dr Nelson Enonchong argues that the better view is that an illegal agreement is in general unenforceable, not void. He cites Cleaver v. Mutual Reserve Fund Life Association [1892] 1 QB 147, 152, Bennett v. Bennett [1952] 1 KB 260, 262 and Aratra Potato v. Taylor Joynson Garrett [1995] 4 All ER 695,709e.
80. It seems to me that the correct analysis is that illegality renders a contract unenforceable rather than void, if by void is meant that the agreement was never made. It is clear that property can pass under an illegal contract, and in some circumstances a Court will enforce a contract which involves an element of illegality. If the contract was truly void, in the sense that it is to be treated as never having existed, it is difficult to see how that could occur. The distinction between void and unenforceable is in any event narrow. The Shorter Oxford Dictionary defines "void" as "having no legal force, not binding in law; (legally) invalid, ineffective Freq. in null and void". The essence of a contractual obligation is that it is enforceable. If it is not, then it is ineffective as a contract.
81. In any event, whether the obligation to pay a break fee is to be regarded as at 25 February 2009 as void or unenforceable, or both, should to make no real difference. On 4 March 2009, the parties varied the HoT in a significant way. Their objective intention was clearly that clause 5.1 should apply in full to the arrangement as varied. The break clause ceased to be unlawful under s.151. It is to be treated as either reinstated or rendered enforceable. There is no longer any reason why the Court needs, as a matter of public policy, to decline to enforce the break fee obligation. After all the parties would have been entirely free to tear up the HoT and to conclude a new contract. It is irrational to say that they could not achieve the same result by varying the HoT.

Conclusion on ParOS' claim under clause 5.1

82. For these reasons, I conclude that ParOS is entitled to recover £150,000 but no more.
83. If I had decided that ParOS was entitled to recover its agreed fees and costs incurred in connection with the Acquisition, I would have had to decide what fees were recoverable. I heard a good deal of evidence as to what was or was not agreed. The evidence was somewhat inconclusive partly because the parties did not clearly distinguish in their negotiations as to what Worldlink might agree to pay under clause 5.1 and what liabilities of ParOS would be taken on to the combined balance sheet on completion of the transaction – Mr Coburn was concerned with both exercises.
84. It is common ground that Worldlink approved the letter of engagement with JEP. As I construe the letter, ParOS having elected not to pay the first £20,000 up front, JEP was entitled to be paid £5,000 per week starting on 25 May 2009 and the balance of the total fee of £120,000 on Admission. This included Nomad fees with respect to the transaction. By early October when Worldlink withdrew, some £105,000 would have been earned by JEP, and Worldlink would have been liable to pay this.
85. I would also have held that Worldlink, through Mr Riches and Mr Coburn, agreed to pay Hammonds' (ParOS's solicitors) fees incurred in connection with the transaction and Mr McHugh's and Mr King's consultancy fees for work reasonably done in connection with the transaction (as opposed to normal board fees). I consider that Worldlink agreed following the memorandum of 20 February 2009 to pay the consultancy fees and reasonable office costs and expenses of up to £20,000. In the case of Mr McHugh these were up to £6,000 per month and for Mr King up to £4,000 per month. I think it is reasonably clear that the deal costs, which included JEP's and Hammonds' fees were agreed in principle on 26 April 2009. There was an issue as to whether Mr Coburn had authority to agree these deal costs but I think he clearly did have that limited authority.
86. In some respects, the exact sum due to ParOS needed clarification, and I would have held a short enquiry to fix the exact sum due. However, in view of my main findings, this does not arise.

Damages for Non-Payment

87. ParOS claims damages for non-payment of the invoices due under clause 5.1. It asserts that it was entirely forseeable that, if the invoices were unpaid, it would be rendered insolvent and compelled to enter into a CVA, in order to avoid an insolvent liquidation and to enable it to pursue the claim against Worldlink. A CVA would inevitably involve costs being incurred, and directors' fees. ParOS was entitled to recover this loss, which was put at £43,624 for establishing the CVA and £12,245.87 per month (inclusive of administrators' fees of £2,500 and directors' fees of £7,250 per month). Mr Richards submitted that these costs were recoverable as damages following the decision of the House of Lords in Sempra Metals Ltd v. IRC [2007] UKHL 34; [2008] 1 AC 561 that damages can be awarded for late payment of a debt on normal principles. That claim was maintained even if the Court held that ParOS was only entitled to recover £150,000 because payment of that sum would have allowed ParOS to keep its creditors at bay, "to keep the wolf from the door", and avoid the costs of a CVA.
88. This is a novel claim. Counsel were not able to point to a case where a claim for true damages, rather than interest had succeeded for late payment of a debt. In Sempra Lord Nicholls said :

[93] In the Pintada case the House made clear that, contrary to the general understanding of the effect of the London, Chatham and Dover Railway case, claims for damages for interest losses suffered as a result of the late payment of money are not taboo. That is plainly right. Those who default on a contractual obligation to pay money are not possessed of some special immunity in respect of losses caused thereby. To be recoverable the losses suffered by a claimant must satisfy the usual remoteness tests. The losses must have been reasonably foreseeable at the time of the contract as liable to result from the breach. But, subject to satisfying the usual damages criteria, in principle these losses are recoverable as damages for breach of contract. This is so even if the losses consist of a liability to pay borrowing costs incurred as a result of the late payment, as happened in Wadsworth v Lydall [1981] 1 WLR 598. And this is so irrespective of whether the borrowing costs comprise simple interest or compound interest.

[94] To this end, if your Lordships agree, the House should now hold that, in principle, it is always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt. These losses will be recoverable, subject to the principles governing all claims for damages for breach of contract, such as remoteness, failure to mitigate and so forth.

[95] In the nature of things the proof required to establish a claimed interest loss will depend upon the nature of the loss and the circumstances of the case. The loss may be the cost of borrowing money. That cost may include an element of compound interest. Or the loss may be loss of an opportunity to invest the promised money. Here again, where the circumstances require, the investment loss may need to include a compound element if it is to be a fair measure of what the plaintiff lost by the late payment. Or the loss flowing from the late payment may take some other form. Whatever form the loss takes the court will, here as elsewhere, draw from the proved or admitted facts such inferences as are appropriate. That is a matter for the trial judge. There are no special rules for the proof of facts in this area of the law.

[96] But an unparticularised and unproved claim simply for 'damages' will not suffice. General damages are not recoverable. The common law does not assume that delay in payment of a debt will of itself cause damage. Loss must be proved. To that extent the decision in the London, Chatham and Dover Railway case remains extant. The decision in that case survives but is confined narrowly to claims of a similar nature to the simple claim for interest advanced in that case. Thus, that decision is to be understood as applying only to claims at common law for unparticularised and unproven interest losses as damages for breach of a contract to pay a debt and, which today comes to the same, claims for payment of a debt with interest. In the absence of agreement the restrictive exception to the general common law rules prevails in those cases.

The majority of the House of Lords agreed. Mr Barden observed that this part of the decision is obiter. He is probably right, but he did not submit that I should not follow these dicta.

89. Here, in my judgment, the claim fails on ordinary principles, and I think it would be better for the Courts to consider how to apply this element of Sempra in a case where a claim arises more naturally. The claim fails for at least the following reasons:

(1) As Mr Richards accepted, it is necessary for ParOS to plead and prove special damage within the second limb of Hadley v. Baxendale (1854) 9 Exch 341, i.e. that there was actual knowledge of special circumstances outside the ordinary course of things of such a kind that breach in those special circumstances would be liable to cause loss type or kind of loss – see the Victoria Laundry case [1949] 2 KB 528, 539-540 and the Heron II [1969] 1 AC 350, 384-5. In this case, the parties knew at the time the contract was made that ParOS was in a parlous financial state, but it by no means followed that it was a natural or probable result that the failure to pay £150,000 would constitute the tipping point into an insolvency process, and certainly not that the directors would decide to go down the much more costly process (as compared with a winding-up) of using a CVA. I consider that it was not forseeable and that this loss is too remote. I would add that I see considerable force in Mr Barden's submission that this kind of insolvency expenditure was not the kind of expenditure that it was reasonable to assume that Worldlink was taking responsibility for in the event of breach: cf. Transfield Shipping Inc. v. Mercator Shipping Inc. ("The Achilleas") [2008] UKHL 48; [2009] 1 AC 61 at §23, but I do not need to decide it.

(2) The decision to enter into a CVA was justified to the creditors on the basis that ParOS had a claim against Worldlink for £591,000 and a £150,000 break fee. The creditors were misled. They were also not told about the director's fees that Mr McHugh and Mr King proposed to charge the company. None of this does Mr McHugh credit. Had the creditors appreciated that the likely return was only £150,000, and the true level of the costs which would be incurred, I think it improbable that the creditors would have considered it worthwhile to enter into an expensive CVA, rather than go through an ordinary liquidation procedure. The company would have remained seriously insolvent even if the break fee had been paid. The failure to pay £150,000 cannot be said have caused the establishment of a CVA and the considerable associated costs.

So the claim for damages for late payment fails on grounds of remoteness and causation.

Breach of the exclusivity clause

90. By clause 2.1 of the HoT, Worldlink undertook that during the period of 90 days from the date it countersigned the HoT [i.e. 25 February 2009] it would not enter into any discussions with any third party or continue any such discussions which were already in course, with respect to the possible acquisition of Worldlink or any material part of its assets or business or any material interest in its shares, whether directly or indirectly.
91. Mr Richards accepted that this clause would not prevent Worldlink from taking professional advice from solicitors and financial advisers, including advice as to whether some other option should be considered or was preferable – e.g. a direct listing – but he submitted that clause 2.1 was drafted in broad terms and was not restricted to discussions with third parties about a reverse take-over, and extended to cover discussions as to any possible acquisition of any material interest in the Defendant's shares. So Worldlink was prevented during the exclusivity period from discussions with:

(1) brokers or alternative shell companies with a view to proceeding with a reverse take-over; or

(2) brokers or fundraisers with a view to pursuing a direct listing, which would necessarily involve the offer for sale of Worldlink's shares on AIM; or

(3) brokers or fundraisers with a view to fundraising for any transaction other than the proposed reverse take-over of ParOS, whether by way of pre-IPO fundraising before a straight listing or the raising of finance prior to the acquisition of Worldlink by some other shell than ParOS.

92. Mr Barden submitted that it would be absurd to treat clause 2.1 as prohibiting Worldlink from obtaining advice from professional advisers, especially given that Worldlink had an absolute right to walk away from the transaction. A flotation on AIM is not an "acquisition of Worldlink or any material part of its assets or business or any material interest in its shares". It is simply an admission of shares on a market on which existing shareholders can trade shares. At most it is a prelude to an acquisition on the market of a material interest in Worldlink's shares.
93. In my judgment, clause 2.1 did not prevent Worldlink from seeking professional advice about whether the proposed ParOS transaction was advisable, or whether the were better alternatives such as a deal with another shall or a straight listing. Professional advisers (acting as such) are not "third parties" within the contemplation of clause 2.1. If the discussions were with a true third party, then the question is whether the discussions were with respect to the possible acquisition of Worldlink, or any material part of its assets or business, or any material interest in its shares, whether directly or indirectly. The reality of any discussion with a fundraiser about an AIM listing is that the parties will be discussing the issue of a significant number of shares in the company to third parties so as to raise working capital.
94. Worldlink was in obvious breach of clause 2.1 in holding discussions with Hurlingham in mid-May 2009, as Mr Barden was constrained to admit in the light of Mr Coburn's evidence which directly contradicted Mr Riches'. I also consider that the discussions held with Strand and Old Park Lane Capital plc ("OPLC") on 17 March 2009 probably went beyond merely taking professional advice and strayed into discussion about the acquisition of shares by Strand and OPLC or their clients of shares in Worldlink on a straight listing. I find that there was also a breach at this stage.
95. ParOS' pleaded case is that but for the delay caused by Worldlink's breach of the exclusivity provision, ParOS would have enjoyed a real chance of successfully completing the transaction and of profiting thereby. Mr Richards contended that, as a result of Worldlink's breaches of clause 2.1, ParOS lost a real or substantial chance (as opposed to a speculative one) to conclude a reverse take-over with Worldlink. He cited Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, 1614D-E, per Stuart-Smith LJ. The immediate effect of Worldlink's temporary abandonment of the transaction and its decision to explore alternatives with Strand, HBC and others was to delay the progress of the transaction, at least for the period through March until 7 April 2009, when Worldlink announced that it had decided to return to the ParOS reverse take-over. Even after that period, Worldlink was "hedging its bets" and was not committing itself to the transaction with ParOS. The distraction of Worldlink caused a serious delay to progress, and had two immediate consequences:

(1) Mr Rondini of Falcon, became (in Mr Riches' own words) 'perturbed at how long it ha[d] taken', and by May 2009 his support was no longer available. Worldlink lost its slot and in effect had to start fundraising from a blank sheet, causing yet further delay.

(2) The costs of the transaction for the Defendant increased, because the accrued deal costs and operating costs of ParOS increased with every passing month.

If, by contrast, Worldlink had not breached the exclusivity clause, but had devoted its attention to the transaction, there would have been a real chance that the parties would have followed the timetable to completion which was initially envisaged, and would have completed the transaction as early as April or May 2009. Completion would not have been guaranteed, but a sensible assessment of the extent of that chance is in the region of 80%. A relatively high figure was justified, in particular, by the strength of Falcon's support for the transaction

96. In response, Mr Barden submitted that the delay following the "down tools" decision on 20 March was about 2 weeks before discussions resumed. During that time Worldlink was still investigating the tax issues inherent in the assets acquisition route with Baker Tilly (its accountants) and with its solicitors. It was wholly unrealistic to consider that the transaction would have gone ahead at this stage. The original proposed timetable was based on the share acquisition route and no longer applied once the transaction changed to the asset acquisition route. There was no "slot" lost with Falcon, because there never was a commitment. Falcon remained interested when discussions resumed. The transaction did not ultimately fail till much later.
97. Mr Barden also submitted that ParOS' case was fundamentally flawed as a matter of law. Any damages must be calculated on the basis of the minimum performance by Worldlink (see McGregor on Damages, 8-093) – that is to say, damages cannot be calculated on the basis of Worldlink doing anything which it was not contractually obliged to do. Worldlink had an unfettered right to withdraw from the Transaction on any footing under Clause 4.3., with a liability to pay only any sum due under Clause 5.1 (which is being separately enforced by means of the same claim). ParOS cannot be entitled to additional damages for Worldlink's withdrawal.
98. I reject the proposition that, as a result of delays caused by the two breaches of clause 2.1, ParOS lost any real or substantial chance of concluding a reverse take-over with Worldlink. Although Worldlink's conduct in March/April amounted to a breach of the exclusivity clause, the underlying reason was a genuine concern in as to whether a reverse take-over based on an asset acquisition was really in Worldlink's best interests. Worldlink was under no obligation to do a deal with ParOS and as long as these doubts continued, Worldlink was going to prevaricate. The discussion in May with Hurlingham took place right at the end of the exclusivity period and it wholly unrealistic to think that, had those discussions not taken place, a deal might have gone ahead with ParOS.
99. I am sure that in the end any deal would have foundered with ParOS for the reasons it ultimately did: a lack of chemistry between Mr Riches and Mr McHugh, who are very different characters and types of businessman, and disagreement about the level of debt (particularly, but not only, historic directors' fees and other costs) which Mr McHugh wanted to recover either under clause 5.1 or on merger of the balance sheets. There was a clear conflict of interest between Mr McHugh and Mr King on the one hand, who wanted to have substantial outstanding directors' fees included in the merged balance sheet (if not paid earlier), and Mr Riches, Worldlink and potential investors on the other hand, who would want any capital raised to go towards developing Worldlink's business for the future, rather than paying off ParOS's historic debts.
100. It follows that ParOS has failed to prove its pleaded loss. I shall award nominal damages of £4, being £2 for each proven breach.

Duty of care: availability of funding

101. ParOS contends that it entered into the letter of engagement with JEP in reliance on assurances from Worldlink that it had adequate funding to pay JEP's fees and that Worldlink voluntarily assumed responsibility for taking reasonable care to check that the assurances were correct. It contends that the assurances were entirely incorrect and Worldlink did not have sufficient funding. ParOS claims damages on the basis that, if it does not recover JEP's fees from Worldlink pursuant to the HoT, it will have suffered loss and damage in that amount.
102. Citing Hedley Byrne v. Heller [1964] AC 465, 486 per Lord Reid, Mr Richards submitted that a common law duty on a party to take reasonable care to ensure that information provided to another party is accurate arises where:

"the party seeking the information… was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him"

The touchstone is an assumption of responsibility by the representor, a test which is to be objectively applied (Henderson v. Merrett [1995] 2 AC 145, 181B). Key factors in determining whether there has been an assumption of responsibility include:

(1) the purpose of the Defendant's representation;

(2) the knowledge on the Defendant's part of Claimant's use of and reliance upon its representation; and

(3) the reasonableness of the Claimant's reliance.

103. Although Hedley Byrne duties arise less frequently between counterparties in a commercial context than in the context of professional relationships, this is due to the fact that, as between commercial counterparties, a representor is in general less likely to know that the claimant is relying upon its representation, and it is less likely to be reasonable for the claimant to rely upon the defendant. There is, however, no reason in principle or in the authorities why a duty of care should not be held to arise between commercial counterparties where the objective test of an assumption of responsibility is satisfied. The Hedley Byrne principle is broad in scope, and the reference in that case to a representor applying his "skill" is to be understood in a broad sense: 'the principle may apply in a case in which the defendant has access to information and fails to exercise due care (and skill, to the extent that this is relevant) in drawing on that source of information for the purposes of communicating it to another': Spring v. Guardian Assurance [1995] 2 AC 296, 318H per Lord Goff.
104. Mr Riches made a series of representations to Mr McHugh as to funding (as summarised in my chronological findings). The critical factor for the Court in determining whether Worldlink assumed a responsibility for the accuracy of its representations was whether it was reasonable for the Claimant to rely upon those representations.
105. ParOS' reliance was reasonable. First, Worldlink's representation that funding was currently "available" or committed, notwithstanding the fact that no final arrangements for the transaction had been completed, were perfectly plausible. Secondly, ParOS took steps, as far as it could, to check the accuracy of the assurances it had been given. As Mr McHugh stated under cross-examination:

"We checked those documents that we could, and we took understandably assurances where documents were not available from Wordlink's principal parties. When they told us things, we tried to check as much as we could, but that was all we were able to do."

106. In response Mr Barden submitted that this was an arm's length commercial transaction. Worldlink was not acting as ParOS' adviser. The parties were negotiating. He cited Lord Oliver's speech in Caparo v. Dickman [1990] 2 AC 605:

What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice ('the adviser') and the recipient who acts in reliance upon it ('the advisee') may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment. That is not, of course, to suggest that these conditions are either conclusive or exclusive, but merely that the actual decision in the case does not warrant any broader propositions.

107. The use of the words "adviser" and "advisee" is significant. The Hedley Byrne principle is not limited to cases involving professional advisers, but that is the situation in which the principle is most commonly deployed. The large majority of Hedley Byrne cases arise in the context of professional advice, not between counterparties in a commercial context. As Lord Morris put it in Hedley Byrne (at 502) the case is one where the giver of the information must "undertake to apply his skill for the benefit of the claimant".
108. The one, exceptional, case where a duty of care was found as between commercial negotiating parties was Esso Petroleum v. Mardon [1976] QB 801, where the facts of that case were highly unusual. Esso's representation (as to the throughput of a petrol station) was in relation to a highly technical and commercial assessment which could not realistically have been assessed by an outsider. As Shaw LJ put it (at p.828):

"In this case the plaintiffs had all the expertise, experience and authority of a large and efficient organisation carrying on the business of developing service stations to sell their petroleum products through dealers who were expected to invest a substantial amount of capital in the business and to observe the detailed trading requirements laid down in the tenancy agreements."

So the parties' bargaining positions and expertise were fundamentally unequal. That was not at all the case between ParOS and Worldlink.

109. Mr Barden submitted that in an arms' length commercial transaction:

(1) It was highly unlikely that the Court will conclude that one party is applying its skills for the benefit of another. The counterparty is not acting as an adviser.

(2) The assumption is that each party will take responsibility for evaluating the facts and deciding whether and how to commit itself.

(3) Where there is to be an allocation of responsibility of this nature, the contract should provide for it – either by way of a direct contractual warranty as to certain facts, or through a due diligence process. Here the HoT allocated responsibility in relation to information to be provided and provided quite clear rules as to the extent and accuracy of the information to which ParOS would have access – and any complaint about lack of or inaccuracy of information would arise under those clauses. No such contractual claim was advanced. It would be quite inconsistent with the carefully drafted HoT to infer that Worldlink assumed some wider duty of care.

110. Further, if there was any duty, Mr Barden challenged whether ParOS actually relied on anything said by Mr Riches, or that any reliance was reasonable.
111. In my judgment, the starting point in considering whether Worldlink assumed a duty of care to ParOS lies in the HoT agreed between the parties. By clause 3.4, the parties agreed that:

During the Exclusivity Period, Worldlink and ParOS will each allow the other and its agents access to such information as is reasonably necessary to evaluate the Acquisition and to assist the other as far as is possible. Subject always to paragraph 3.7 below, the Disclosing Party will in good faith use reasonable endeavours to ensure that the information provided to the Receiving Party for the purpose of evaluating the Acquisition is accurate and not misleading.

It is also relevant that, at the time they entered into the HoT, the parties confirmed that they entered into them in good faith having made reasonable efforts to disclose all relevant matters to each other (clause 4.4), and that both parties agreed to undertake due diligence (clauses 1.10 and 2.1), a well understood concept in business, whereby the parties conduct their own investigations to satisfy themselves as to the merits of the transaction.

112. The parties have therefore set down in clause 3.4 a contractual standard for the provision of information: the parties will "in good faith use reasonable endeavours to ensure the information provided ... is accurate and not misleading". I do not read the second sentence of clause 3.4 as confined to the exclusivity period. It is striking that ParOS does not allege any breach of clause 3.4, presumably because it considers that to establish a breach of contract it would need to establish a lack of good faith on the part of Mr Riches, and an allegation of bad faith could not be properly made.
113. The alleged tortious duty of care sets a higher duty than the HoT envisaged. A duty of care can of course arise between contracting parties – Henderson is an example – but it would be unusual to find that a duty of care arose between commercial counterparties negotiating a deal: Mardon is a case where a duty was found to have arisen, but there was a substantial imbalance in the sophistication of the parties and the strength of their negotiating position. I think it would take quite exceptional facts for a Court to conclude that one party assumed a duty of care to the other going further than the contract required – all the more so where (as here) the parties were sophisticated businessmen with their own professional advisers.
114. Are there any exceptional circumstances in this case? In my judgment there are not. The closest and therefore most relevant representation relied upon in connection with the JEP letter of engagement was made on 20 April 2009 in the course of a telephone conversation, during which Mr McHugh noted Mr Riches as having said: "Got £2m raised need to get in". Two days later, he further recorded:

"Old plc £500k,

Falcon plc £1.5 m (?)

ARC £500k"

The question mark, which appears in the original, rather emphasises the lack of precision in what Mr Riches said. Mr McHugh fully appreciated that there was no legal commitment on the part of the investors and that their ultimate decision would depend on the transaction as finally presented. That in turn would be dependent on ParOS and Worldlink reaching full and final agreement as to the structure of the transaction. At most therefore what Mr Riches was indicating was an indication on the part of investors of their willingness to invest in principle. None of the representations made can have led Mr McHugh to believe that Worldlink had actually raised funds (in the sense of legal commitment, let alone receipt).

115. In my judgment, such assurance as Mr Riches gave – and I accept that his words gave some assurance – was informal in character and rather imprecise. Mr McHugh could have pressed for more detail, but did not do so. There was nothing to show that Worldlink was assuming any responsibility going beyond the existing contractual obligation. In Henderson, Lord Goff (at p. 181D-F) observed that "where the undertaking to furnish the relevant service is given on an informal occasion, there may be no assumption of responsibility". That observation applies with added force where there is an existing contractual obligation of a rather different kind. Moreover, the imprecision of the representation makes it difficult to judge whether exactly what was being represented, and whether it was inaccurate.
116. It follows that, in my judgment, Worldlink did not owe any duty of care to ParOS beyond what the HoT provided and its claim for damages for negligent misrepresentation fails. I would add that even if I had held that there was a duty of care, I would have rejected the case that there was a breach: I consider that the level of assurance given on 20 April was fair: Mr Riches did have an indication on the part of investors of their willingness to invest £2 million in principle.

Conclusion

117. ParOS is entitled to recover the £150,000 break fee and £4 in nominal damages. The remainder of its case fails.
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Note 1   See §38 above.    [Back]

Note 2   See §39 above.    [Back]

Note 3   Because of clause 5.2.    [Back]