INTELLECTUAL PROPERTY ENTERPRISE COURT
Fetter Lane, London, EC4A 1NL
B e f o r e :
| (1) ELSWORTH ETHANOL COMPANY LIMITED
(2) NEIL BOOKLESS
|- and -
|(1) BRIAN SELBY HARTLEY
(2) NAMDAR BAGHAEI-YAZDI
(3) MUHAMMAD JAVED
(4) BIOCONVERSION TECHNOLOGIES LIMITED
(5) ENSUS LIMITED
Mr Michael Hicks (instructed by Redd Solicitors LLP) for the Fifth Defendant
Hearing dates: 18th and 19th December 2013
Crown Copyright ©
His Honour Judge Hacon :
The background facts
Meeting of 5 March 2006
"Elsworth Ethanol given sole rights to the Ethanol technology exploitation. Shares could be allocated in Elsworth on the basis of investment funds or for work undertaken."
I will return to what was meant by 'Elsworth Ethanol'. According to Mr Bookless both Dr Yazdi and Dr Javed, the two directors of BCTL, were unhappy with this idea because they viewed BCTL as a vehicle for their own research.
Continued work on the projects
Draft patent applications
Meeting of 24 March 2006 at Reddie & Grose
Negotiations with Low Carbon Initiative
Investment in the 2002 Company by Professor Hartley
Change of company names
Letters of 1 June 2006
Challenge to ownership
The change of company names
"30. In In re Richborough Furniture Ltd  1 BCLC 507 the question was raised whether one of the three respondents, who was not a director of the company de jure, was nevertheless a director of the company de facto and as such liable under section 6 of the Company Directors Disqualification Act 1986 to be disqualified. Asking himself what is a de facto director, Timothy Lloyd QC (sitting as a deputy High Court judge) said, at p 524:
"It seems to me that for someone to be made liable to disqualification under section 6 as a de facto director, the court would have to have clear evidence that he had been either the sole person directing the affairs of the company (or acting with others all equally lacking in a valid appointment, as in Morris v Kanssen  AC 459) or, if there were others who were true directors, that he was acting on an equal footing with the others in directing the affairs of the company. It also seems to me that, if it is unclear whether the acts of the person in question are referable to an assumed directorship, or to some other capacity such as shareholder or, as here, consultant, the person in question must be entitled to the benefit of the doubt."
He held that the individual in question, who was a business consultant providing computer and other management services to the company, was not a de facto director despite having undertaken negotiations with creditors and performed some of the functions of a finance director.
31. In Secretary of State for Trade and Industry v Tjolle  1 BCLC 333 Jacob J was referred to what was said in In re Hydrodam (Corby) Ltd  2 BCLC 180, including a passage at p 182 where Millett J pointed to the purpose of any test as being to impose liability for wrongful trading on those persons who were in a position to prevent damage to creditors by taking steps to protect their interests, and to In re Richborough Furniture Ltd  1 BCLC 507. He said  1 BCLC 333, 343–344:
"For myself I think it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks 'was this individual part of the corporate governing structure', answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law."
In that case the individual in question was given the courtesy title of deputy managing director but did not form part of the real corporate governance of the company. There was no function that she performed that could only be properly discharged by a director.
32. In In re Kaytech International plc  2 BCLC 351, 423–424 Robert Walker LJ said that he saw much force in what Jacob J said in the Tjolle case when he declined to formulate a single test. Referring to the passage which I have just quoted, he added this observation:
"I do not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director."
Here again the word "assumed" is used. But, as Lewison J said in In re Mea Corpn Ltd  1 BCLC 618, para 83, in considering whether a person "assumes to act as a director" what is important is not what he calls himself but what he did: see also Secretary of State for Trade and Industry v Hollier  Bus LR 352, para 66."
"91. Once the concept of de facto director was divorced from the unlawful holding of office, there were two consequences. The first consequence was that the distinction between de facto directors and shadow directors was eroded. … The second consequence is that the courts were confronted with the very difficult problem of identifying what functions were in essence the sole responsibility of a director or board of directors. A number of tests have been suggested of which the following are the most relevant. First, whether the person was the sole person directing the affairs of the company (or acting with others equally lacking in a valid appointment), or if there were others who were true directors, whether he was acting on an equal footing with the others in directing its affairs: In re Richborough Furniture Ltd  1 BCLC 507. Second, whether there was a holding out by the company of the individual as a director, and whether the individual used the title: Secretary of State for Trade and Industry v Tjolle  1 BCLC 333. Third, taking all the circumstances into account, whether the individual was part of "the corporate governing structure": see Secretary of State for Trade and Industry v Tjolle , at pp 343–344, approved in In re Kaytech International plc  2 BCLC 351, 423, where Robert Walker LJ also approved the way in which Jacob J in the Tjolle case had declined to formulate a single test. He also said, at p 424 that the concepts of shadow director and de facto director had in common "that an individual who was not a de jure director is alleged to have exercised real influence (otherwise than as a professional adviser) in the corporate governance of a company". See also especially In re Mea Corpn Ltd  1 BCLC 618 (Lewison J); Ultraframe (UK) Ltd v Fielding (No 2)  FSR 293 (Lewison J); Secretary of State for Trade and Industry v Hollier  Bus LR 352 (Etherton J). In fact it is just as difficult to define "corporate governance" as it is to identify those activities which are essentially the sole responsibility of a director or board of directors, although perhaps the most quoted definition is that of the Cadbury Report: "Corporate governance is the system by which companies are directed and controlled" (Report of the Committee on the Financial Aspects of Corporate Governance, 1992, para 2.5)."
(1) There is no single test by which a de facto director may be defined. The court must take into account all relevant factors.
(2) The following, although not constituting an exhaustive list, are of particular significance:
(i) Where the individual (the putative de facto director) was acting with one or more others who were true directors, whether he was acting on an equal footing with those others in directing its affairs.
(ii) Whether there was a holding out by the company of the individual as a director and whether he used the title.
(iii) Taking all the circumstances into account whether the individual was part of the corporate governing structure, that is to say the system by which the company is directed and controlled.
(3) Factor (i) is especially important. For someone to be held to be a de facto director alongside one or more de jure directors there must be clear evidence that he was acting on an equal footing with the other(s) in directing the affairs of the company.
(4) If it is unclear whether the acts of a person are referable to an assumed directorship, or to some other capacity such as a consultant, that person must be entitled to the benefit of the doubt, i.e. there will be no inference of a de facto directorship.
"I have already formed 'EECO Ltd' and 'Environmental Ethanol Company Ltd.' EECO has gained EIS status, and for simplicity I have been using this name to promote the business – as unsure how it would develop. I wish to keep EECO Ltd, and the logo, as my own separate Co. I have agreed that the company LCI and Family and friends will invest in is Environmental Ethanol Co. My Accountant has suggested simplest way forward is to 'swap' company names, due EIS clearance. Can this be achieved with name change to Elsworth from 'Environmental Ethanol?"
Evidence relied on by the claimants to infer de facto directorships of the 2002 Company
"It was previously agreed that all should consider Elsworth to have been formed 12 months ago, all agreed to 5th April 2005, for tax purposes".
This is consistent with 'Elsworth' being the 2005 Company.
Dr Yazdi signed the minutes as 'Chairman of the Board'
Discussing the patent applications and IP strategy
Assisting in proposed dealings with other parties to exploit the bio-ethanol project
Represented to the public as directors
"Both Dr. Yazdi and I are Directors of Elsworth Ethanol Company Ltd., joining Prof. Brian S. Hartley FRS, and Neil Bookless, the Managing Director."
Even assuming that Professor Humber took this to mean that Drs Yazdi and Javed, and Professor Hartley, were directors of the company, Dr Javed went on to say more in the letter about the company he was talking about:
"Elsworth was formed just over one year ago, to commercialise Prof. Hartley's novel idea…for the bioconversion of sugars…into Bio-ethanol, for use as a bio-fuel."
Investment in the 2002 Company by Professor Hartley on behalf of his son
Payment by the 2002 Company for the GB 890
"We were not aware of being officially appointed as EECo Directors, and fully understand why you wish to sack us if that was the case."
I do not consider that this response indicates that they had any understanding of the concept of de facto directors or that the three had even heard of such a thing. However it does suggest that they, like Mr Bookless, believed that Mr Bookless controlled the 2002 Company and could hire and fire at will. (There is also a reference in the letter to treating expenses as director's loans, but that is not the same as saying that Professor Hartley or Drs Yazdi or Javed were, in fact, directors).
Breach of fiduciary duty
What happened on 24th March 2006?
"…I note that the 3rd point in your email states that: "Elsworth paid for the filing, Brian Hartley only making the suggestion of BCTL as you walked out the room to file". Simply by way of clarification, I point out that this does not fit with my record of our meeting of 24th March 2006. At the meeting I raised the question of the name in which the applications should be filed. This arose because the original draft specifications I had been given specified that the Applicant was to be EECO, but subsequent revised drafts specified BCTL. This was discussed in the meeting, and I was then instructed by you to file the applications in BCTL's name."
"13. The two patents were assigned to BCTL and filed with Reddie and Grose by myself and Neil Bookless on 24th March 2006.
[Mr Bookless] was present and did not object to this assignation"
The period from 24th March to 31st May 2006
Breach of contract