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Cite as: [2004] ScotCS 275

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Sykes v. Grant & Anor [2004] ScotCS 275 (24 December 2004)

OUTER HOUSE, COURT OF SESSION

A518/04

OPINION OF LORD BRACADALE

in the cause

ROBERT SYKES

Pursuer;

against

ALLAN GRANT AND ADVICEFIRM LIMITED

Defenders:

________________

Pursuer: Sandison; Morton Fraser

Defender: G Walker; Murray Beith & Murray WS

24 December 2004

[1] This case came before me on a motion by the first and second defenders for partial recall of an interim interdict granted on 3 August 2004.

[2] The second defenders are a company registered under the Companies Acts. The first defender is a director and shareholder of the second defenders. The pursuer has raised an action seeking an order for the transfer to him by the first defender of 500 ordinary shares in the second defenders. The pursuer avers that in the summer of 2003 he and the first defender had agreed to form a company for the purpose of obtaining a franchise to market and operate a de-fogging machine for industrial ventilation systems devised and owned by Incapsulation Technologies LLC ("Incapsulation"), a United States company. The pursuer avers that to that end Sherwood Technologies Limited ("Sherwood") was incorporated. Both the pursuer and the first defender were shareholders in the company. The first defender was a director of the company. The pursuer avers that the first defender concluded a franchise agreement with Incapsulation but in the name of the second defenders rather than Sherwood. The pursuer avers that he was surprised and dismayed by the revelation of this act by the first defender, which the pursuer claims was a breach of the fiduciary duty owed by the first defender to Sherwood. He goes on to aver that in these circumstances it was agreed between them that the first defender would transfer to the pursuer half the shares in the second defenders so that each of them would continue to have an equal interest in the corporate vehicle which held the benefit of the franchise.

[3] On 3 August 2004 the Temporary Lord Ordinary granted an interim interdict in the following terms:

"(1) against the first named defender, directly or indirectly, alone or jointly with any other person or persons (a) from disposing of, burdening or dealing in any way with the shares held by him in the second named defenders and (b) from procuring or taking part or assisting in the allotment or grant of options for, or conversion of securities into, shares in the second named defenders; and (2) against the second named defenders, directly or indirectly, alone or jointly with any other person or persons, from (a) issuing, allotting, granting options over, converting securities into, or otherwise dealing in any way with shares in themselves; (b) disposing of, burdening on dealing in any way with the franchise agreement between themselves and Incapsulation Technologies LLC relating to de-fogging technology or the fruits thereof."

[4] In the course of discussion the motion was modified to recall of parts 1(b) and 2(a) and variation of part 2(b). The parties were agreed that Part 2(b) should be varied in order to make it clear that its purpose was to prevent the second defenders from disposing of the franchise. It was agreed that in the last line between the words "technology" and "or" there should be inserted the following: "in any way which materially and adversely affects the value of that agreement". Part 2(a) prevents the second defenders from issuing shares and part 1(b) prevents the first defender from assisting the second defenders from doing so. The second defenders have undertaken to keep an account of their profits in order to protect the ability of the pursuer to bring an action for damages. Part 1(a) was not included in the motion for recall and would in any event remain in force.

[5] Very crudely, de-fogging involves the introduction of an atomised de-contaminant into a contaminated area. Agents attach themselves to the contaminants which drop down. According to the defenders the process is very efficient. The second defenders have an exclusive franchise to operate the process outside the United States. The second defenders wish to begin trials with British Nuclear Fuel Ltd (BNFL) in the hope that they will secure a lucrative contract. It is intended that the trials should begin at the end of January 2005. Preparatory work requires to be carried out in the course of January. The defenders assert that unless the trials can be carried out Incapsulation will terminate the contract and the second defenders will be unable to continue in business.

[6] The discussion before me focused on the question as to where the balance of convenience lay. Mr Walker invited me to take into account five factors which, he submitted, should tilt the balance of convenience in favour of the defenders and lead to the recall sought. The first on these was that if those parts of the interim interdict which prevented a share issue were not recalled, the second defenders would be unable to claim a grant of £200,000 in Regional Selective Assistance ("RSA") from the Scottish Executive. One of the conditions attached to the offer of grant was that the second defenders had additional ordinary share capital of £60,000. I was referred to the offer dated 2 July 2004 and to a letter dated 16 December 2004 from Scott Moncreiff, Chartered Accountants, which confirmed the position.

[7] The second factor was that failure to recall the interim interdict would lead to the liquidation of the second defenders within a short period. Since the interim interdict was granted the second defenders have been treading water. For the time being the seven employees of the second defenders had been found employment in other companies. However, that situation could not be sustained for long. The letter from Scott Moncreiff confirmed that given the bank balance, the overdraft facility and the current monthly spend the company had sufficient resources to continue for approximately two months. It should be noted that the figures upon which this conclusion was based did include staff costs.

[8] The third, fourth and fifth factors flowed from the second. If the second defenders were liquidated the seven employees would lose their jobs. In addition, the Company Secretary, Tina Wright, who would be personally liable for £40,000 of the debts of the second defender and her shareholding would become worthless. Further, some twenty-four jobs, which were expected to be created in the Borders area, would be lost.

[9] On behalf of the pursuer Mr Sandison submitted that the strength of the pursuer's prima facie case was a factor of which I should take account in assessing the balance of convenience. In support of that proposition Mr Sandison referred to in the Minutes of a meeting of the Board of Sherwood on 1 October 2003, apparently signed by the first defender, in which it was recorded that the first defender had agreed that shares in the second defenders would be held equally between himself and the pursuer. Some further support for this was drawn from the Minutes of a meeting on 4 November 2003. On the other hand, Mr Walker produced a copy of the franchise agreement between Incapsulation (in this document the name is spelt "Encapsulation" but nothing turns on that) and the second defenders signed in August 2003 at the time when Sherwood had not been incorporated. This, it was suggested, undermined the pursuer's case on breach of fiduciary duty. It is clear that there is in this case considerable factual conflict and the averments are characterised by allegation and counter allegation. I do not consider that the strength of the pursuer's prima facie case is a matter which I should take into account in determining where the balance of convenience lies.

[10] Mr Sandison submitted that where there was an agreement to transfer shares the appropriate remedy would be specific implement. The concern of the pursuer was that an issue of share capital would have the effect of reducing the percentage of the shares in the second defenders held by the first defender. The consequence would be that specific implement would become impossible. Furthermore, a remedy in damages might the difficult to prove and of little practical value.

[11] Mr Sandison submitted that there was a lack of independent support for the assertions made by the defenders about the urgency of the second defenders' dealings with BNFL. The pursuer did not wish to prevent the second defenders from continuing to operate but wished time to discuss adequate protection for his interest. Mr Sandison questioned whether the RSA grant was essential to the operation of the Company. In addition, there was reference to "acceptable alternative sources of finance" in the paragraph in the offer which required the additional share capital. The defenders had not indicated whether any steps had been taken to explore alternative sources of finance.

[12] Mr Sandison was critical of the basis of which the accountants had concluded that the second defenders would be unable to continue to operate beyond two months. As to the question of the redundancy of the employees and the position of the Company Secretary, Mr Sandison pointed out that the defenders had taken no steps to deal with a situation since August 2004 and were now presenting the court with an ultimatum. The question of the possibility of twenty-four potential jobs was so speculative that it should not be taken into consideration.

[13] I am satisfied that unless the second defenders are able to move forward towards developing contracts the prospects of survival are poor. I accept that the obtaining of the RSA grant is a significant step and that for practical purposes the issue of additional share capital is a requirement. I also accept that if the second defenders go into liquidation it is inevitable that the seven employees who are currently being accommodated on a temporary basis will lose their jobs. In addition, if the second defenders go into liquidation, the pursuer, even if he establishes his case, will have a worthless claim. Against that background I am persuaded that the balance of convenience favours the defenders. I should add that I did not take into account the fourth and fifth factors urged on me by Mr Walker. It seems to me that Tina Wright is a person who has taken a commercial risk and that the prospects of the additional jobs are too remote and rather speculative.

[14] Accordingly, I shall grant the defenders' motion to the extent of recalling parts 1(b) and 2(a) of the interim interdict and I shall allow the variation of part 2(b) by inserting in the last line between the words "technology" and "or" the following: "in any way which materially and adversely affects the value of that agreement". I shall reserve meantime the question of expenses.