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Cite as: [2011] CSOH 147, [2011] ScotCS CSOH_147

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OUTER HOUSE, COURT OF SESSION

[2011] CSOH 147

CA162/08

OPINION OF LORD GLENNIE

in the cause

JOHN DRYBURGH

Pursuer;

against

SCOTTS MEDIA TAX LIMITED (in liquidation) and TIMOTHY BRAMSTON, as the liquidator thereof

Defender:

________________

Pursuer: Simpson; Paull & Williamsons

Defenders: Lake, Q.C., Lindsay; HBJ Gateley Wareing

7 September 2011

Introduction

The pursuer

[1] The pursuer is a chartered accountant. He qualified in 1984. He specialised in taxation. In 1991 he became a partner in Rutherford Manson Dowds ("RWD"), with responsibility for private client taxation. When RWD amalgamated with Deloitte Touche ("Deloittes") in 1999, he became the partner in charge of their private client division in Scotland. He left Deloittes in 2000 to establish what he referred to as "the Scotts business".

The relevant companies

[2] So far as concerns this action, the relevant companies within that business are (or were) Scotts Media Tax Limited ("SMT", or sometimes in the documents "SMTL"), Scotts Private Client Services Limited ("SPCS" or "SPCSL") and Scotts Investment Company Limited ("SIC" or "SICL"). It may be helpful to say something about each of them at this stage.

SMT

[3] SMT was incorporated on 7 December 1999 and started to trade in April 2000. Initially only 2 subscriber shares were issued, but in August 2000 a further 98 ordinary shares were allocated, 70 of which were held by the Trustees of the Dryburgh Trust, a family trust set up by the pursuer for the benefit of himself, his wife and his daughter as beneficiaries, and the remainder by Alison Young ("AY"). At the material times, the pursuer and AY were the only directors of SMT, the pursuer having been appointed a director on 1 June 2000 and AY on 2 March 2000. There was another director, Alan Ross McNiven, between 7 December 1999 and 2 March 2000, but he played no part in the events with which this action is concerned. AY resigned on 26 June 2002 leaving the pursuer as the sole director.

[4] The business of SMT consisted in bringing together private individuals to form private film partnerships under the sale and leaseback initiative then promoted by the government by means of a favourable tax regime under and in terms of s.48 of the Finance (No.2) Act 1997; and to provide services to such partnerships under agreed letters of engagement. It is unnecessary for present purposes to set out in detail the tax treatment of such partnerships. That was explained by the pursuer in his witness statement and was not a matter of controversy in this action. In terms of the letters of engagement with each partnership, SMT agreed to provide the partnership with all necessary administrative, accounting, audit and tax compliance services over a period of 15 years, that being the period required under the Inland Revenue Statement of Practice governing such businesses. The pursuer emphasised, both in his witness statement and in his oral evidence, that the greater part of the work required to be carried out for the film partnerships under the letters of engagement was in the first year. This point is of some importance and I return to it later.

[5] The pursuer explained that the business of SMT grew rapidly during 2000 and early 2001. Initially the business traded from two premises, the pursuer himself being based in Aberdeen and AY in Edinburgh. Later it also traded from London. By September 2001, it had 10 employees. By this time, because of the number of new partnerships being established and the fact that much of the work for each partnership was done soon after it was set up, SMT found itself "employee heavy".

[6] On 17 September 2001, the directors of SMT, with a view to implementing the Scheme referred to in the next paragraph, resolved to establish, through an unapproved trust known as Scotts Media Tax FURBS No.1 (hereafter "FURBS"), a pension scheme for the benefit of the pursuer. "FURBS" stands for "Funded Unapproved Retirement Benefit Scheme".

[7] On 27 September 2001, pursuant to resolutions passed at a board meeting of that day, SMT (a) implemented a scheme ("the Scheme") which involved the grant of a share option to the trustees of FURBS and had the result of benefitting the pursuer, or rather the pension scheme, to the extent of some £654,345 and (b) paid AY a bonus of £102,304. The Scheme and the bonus payment are together referred to hereafter as "the September transactions".

[8] On 26 November 2001, pursuant to a further resolution passed at a board meeting of that day, SMT declared a dividend of £100,000, which resulted in a payment to AY of £30,000 (the Trustees of the Dryburgh Trust having waived their entitlement to their share). This is referred to hereafter as "the November dividend".

[9] SMT ceased trading towards the end of 2001, when its business was de facto transferred to SPCS. The timing and circumstances of the transfer are dealt with more fully below.

[10] SMT was placed in voluntary liquidation on 23 September 2005.

SPCS

[11] SPCS was incorporated on 27 January 2000. The directors were the pursuer and Hazel Gray, who held 70 and 30 shares respectively out of the 100 shares allocated. The business of SPCS was to provide private tax advice to individuals and owner managed businesses. In particular it provided advice to individuals who were considering becoming partners in one of the SMT film partnerships.

SIC

[12] SIC (sometimes referred to in the documents as "SICL") was incorporated on 25 September 2001 as part of the scheme which is that the heart of the present dispute. I shall deal with this too in more detail below. As at 27 September 2001 its directors were the pursuer and AY. It was dissolved with effect from 17 February 2006.

SMT's liquidation

[13] Upon SMT being put into voluntary liquidation on 23 September 2005, Mr James Dickson was appointed liquidator. The pursuer signed a Declaration of Solvency. Sometime later, as a result of an assessment having been raised by HMRC, Mr Dickson formed the view that SMT was unable to pay its debts in full and convened a meeting of creditors. At that meeting, which took place on 2 March 2007, the liquidation was converted into a creditors' liquidation and the second defender, Mr Timothy Bramston (hereafter "the liquidator") was appointed liquidator in place of Mr Dickson.

[14] The statement of affairs prepared by liquidator for the purpose of a meeting of creditors of SMT on 2 March 2007 showed that SMT had no assets and liabilities of £1,354,582. Those liabilities consisted of a claim by HMRC for £304,482, a claim by Indigo Media Partnership ("Indigo") for £1,000,000 and a claim from RLH Crawford ("Crawford") for £50,000. The claims by Indigo and Crawford were provisional claims notified in respect of potential losses allegedly arising from advice given by SMT in the course of its business. They have not yet been finalised and therefore have neither been accepted nor rejected by the liquidator. I heard no evidence as to the strength or weakness of such claims. The claim by HMRC relates to a closure notice and amendment of SMT's tax return issued in February and April 2006, relating to the period 1 October 2000 to 30 September 2001. It arose out of the Scheme implemented by the directors of SMT in September 2001. HMRC's assessment of the tax due from SMT is no longer subject to appeal, and the pursuer accepts that their claim for £304,482 is to be treated as valid.

The liquidator's case

[15] This action relates to both the September transactions and the November dividend. The defenders are SMT and the liquidator. The claim against the pursuer, though in the name of the company, is driven by the liquidator. The liquidator avers that September transactions, taken together, resulted in SMT being denuded of a total of £756,649 for no or at least no substantial correlative benefit to SMT. As a result of those payments, he contends, SMT was left with no material assets and insufficient means to perform the contractual obligations which it had undertaken to the film partnerships or to satisfy its liabilities either to its employees, or by way of its rental commitments, or to its creditors. As a result, he seeks payment of these sums. He avers that, as directors of SMT, the pursuer and AY owed SMT at all times fiduciary duties (i) to act in good faith and bona fide in its interest; (ii) to act for a proper purpose; and (iii) not to allow their personal interests to conflict with those of SMT. In addition he avers that, as directors of SMT, they owed it common law duties to exercise reasonable skill, care and diligence in the conduct of its business. Further, he contends that the September transactions amounted to a fraud on the creditors of the company. Separately, he complains also about the payment of the November dividend of £30,000 to AY, alleging that the company had insufficient distributable reserves to justify payment of such a bonus and there was no material before the board entitling the directors to believe that it was proper to declare a dividend.

Procedure

[16] By a procedural quirk, although the action is brought to resolve issues raised by the liquidator, the liquidator and SMT are in fact defenders in an action brought by John Dryburgh as pursuer. That is because prior to the commencement of proceedings, the pursuer called upon the liquidator to acknowledge that he was under no liability resulting from these transactions. Upon the liquidator's failure to do so, Mr Dryburgh commenced proceedings against SMT and the liquidator, seeking declarator that the transactions did not confer on the defenders a claim against him for breach of fiduciary duty, or for damages for negligence, or for an accounting, or for an indemnity; and further seeking declarator that any such claim as the defenders might have had had prescribed. The liquidator and SMT have counterclaimed for payment of the sums referred to above, and Mr Dryburgh, as pursuer and defender to the counterclaim, has amplified his position in his Answers thereto. It was agreed that the defenders should lead at proof; and the action thereafter proceeded on the more natural basis that it was for the liquidator (suing in his own name and in the name of SMT) to prove his claim against Mr Dryburgh.

Evidence
[17] The liquidator gave evidence and also adduced evidence from Linnet van Tinteren of HMRC and expert evidence from Mr Rob Caven, of the accountancy firm Grant Thornton UK LLP. There was no attack on the credibility or reliability of Mr Caven or Ms van Tinteren. Although there was some criticism, not entirely without justification, of the liquidator himself for tending to give his evidence in somewhat emotive and prejudicial terms, I did not consider that this undermined his general credibility and reliability once allowance was made for this, since most of his evidence was based on the documents before the court.

[18] The pursuer gave evidence personally. He also adduced evidence from Mr Graham McLelland, of FourM Chartered Accountants ("4M"), from Fiona Martin, a Director of Business Services in the Edinburgh office of the accountancy firm of RSM Tenon ("Tenon"), and from Mr Gordon Christie, a chartered accountant with Christie Griffith Corporate Limited who gave evidence as an expert witness. There was no challenge to the credibility or reliability of Mr Christie or Ms Martin. Both Mr McLelland and the pursuer were the subject of adverse comment. It is convenient to deal with this in the context of discussing the matters to which their evidence relates.

[19] I propose first to consider the issues relating to the September transactions before moving on to deal with those relating to the November dividend. I shall then consider the two discrete issues raised by the pursuer, namely (i) prescription and (ii) relief under s.1157 of the Companies Act 2006.

The September transactions

[20] On 27 September 2001, at a meeting of the Board of Directors of SMT attended by the pursuer and AY, following a review of SMT's financial position, it was resolved that (a) a cash bonus of £102,304 should be paid to AY "in recognition of her excellent service during the period" and (b) the Scheme would be implemented to benefit the pursuer "in recognition of his excellent service during the period".

[21] The bonus of £102,304 was paid to AY on 27 September 2001.

[22] So far as concerns the details of the Scheme, the Minutes of the board meeting of SMT on 27 September 2001 records that a resolution was passed to the following effect:

(A) SMT would

(1) set up a new company ("SIC"), the directors of which would be the pursuer and AY, and

(2) subscribe £655,000 for 100 shares of £0.01 in SIC (at a premium of £654,999);

(B) Thereafter

(1) As directors of SIC, the pursuer and AY would procure that SIC issue FURBS with an unapproved option to subscribe for 100,000 £0.01 shares in SIC (at par, i.e. for £100);

and, at the same time

(2) SMT would sell its shares in SIC to the pursuer for £655 (that being the value of those shares following the grant of the option and the consequent dilution of their value).

SIC had already been incorporated on 25 September 2001. As foreshadowed in the resolution passed at the SMT board meeting, a minute of a board meeting of SIC, also on 27 September 2001, attended by the pursuer and AY, records the agreement of the directors of SIC that

"as a means of rewarding [the pursuer] and as part of a larger transaction [SIC] will issue an unapproved option for 100,000 £0.01p shares in SICL to the Scotts Media FURBS No.1"

all on terms, as is minuted as having been stipulated at the SMT board meeting, prohibiting dividends, bonuses or any other means of reducing the value of SIC for a period of 3 years.

[23] The Scheme was duly carried into effect on that same day, 27 September 2001, by the following transactions:

(i) SMT subscribed £655,000 for 100 shares of £0.01 each in SIC;

(ii) SIC issued SMT with a share certificate for 100 shares;

(iv) SMT executed a stock transfer form for the 100 shares in SIC in favour of the pursuer;

(v) a board meeting of SIC, attended by the pursuer and AY resolved to grant the option;

(vi) an Option Agreement was entered into between SIC, the pursuer and Barnett Waddingham Capital Trustees Ltd. ("the FURBS Trustees") as trustees on behalf of FURBS.

The net effect was that SMT transferred £654,345 into a pension fund for the benefit of the pursuer. The option was only exercisable within a period of 10 years. It was in fact exercised by letter dated 1 October 2003.

The scope of the dispute

[24] Mr Lake QC, who appeared for the liquidator, submitted that the September transactions were clearly not in the best interests of the company. There was no evidence that, in awarding themselves bonuses (in the case of AY) or a contribution to a pension fund (in the case of the pursuer), they even considered whether the transactions were in the best interests of the company. They had acted in breach of fiduciary duty and in breach of their duties of skill and care. Although in the board minute and related documentation the contribution to the pension scheme was said to be "in recognition of [the pursuer's] excellent service during the period" and "as a means of rewarding [the pursuer]", the Scheme was not a genuine exercise of the power to remunerate but a device to strip assets out of the company for nothing in return. It was open to the court to go behind the labels used by the directors in approving and implementing the September transactions and to evaluate what had been done. The effect of the September transactions, viz. the Scheme and the payment of a bonus to AY, was to denude SMT of cash assets totalling, in all, some £756,649 (£654,345 plus £102,304) for which SMT received no benefit. It was not in the best interests of the company and could not have been thought to be so. At the time of these transactions SMT, if not absolutely insolvent, had minimal assets and significant ongoing liabilities. It was not in a position to make such payments if it wished to continue as a going concern, meeting its obligations under its various contracts with the film partnerships, particularly when it was on the verge of transferring the benefit of its business to SPCS for no consideration, a transfer which would remove its main income stream while giving it nothing in return. In addition, implementation of the Scheme left SMT exposed to a tax liability which it had insufficient assets to meet. Even though the pursuer took tax advice, he took an unjustified risk, for his own benefit, that the transaction would be challenged by the Inland Revenue, now Her Majesty's Revenue and Customs ("HMRC", an abbreviation which I shall use for convenience throughout). Finally, it was relevant to consider the purpose behind the transactions, which appeared to be to denude SMT of assets so as to avoid having to pay its creditors, including HMRC. The pursuer's willingness to transfer assets out of the company to frustrate the claims of creditors did not suggest that his prime motivation was to act bona fide in the best interests of the company.

[25] Mr Simpson, who appeared for the pursuer, challenged each of these points. He argued that the September transactions were a legitimate way of rewarding the directors by way of a discretionary bonus for past services. The company was not insolvent either before or as a result of the payments. It had sufficient assets to continue to meet its obligations. He challenged the liquidator's assessment of the on-going liabilities and how they would be borne. As regards the liability to tax, the pursuer honestly believed on the basis of legal and accountancy advice that there was no corporation tax risk.

[26] In light of these submissions, it is convenient to consider the evidence under reference to the following heads, viz: (a) the company's financial position as at 27 September 2001; (b) the company's financial commitments as at that date; (c) the transfer of the company's business shortly thereafter; (d) the corporation tax position; (e) SMT's draft accounts for year ended 30 September 2001; and (f) the pursuer's justification for the transactions. Before doing so, however, I should summarise the evidence given by the pursuer in relation to the transactions as a whole.

The pursuer's evidence

[27] The pursuer's evidence in relation to the September transactions was as follows. In the tax year 2000/2001 AY and he earned, as employees of SMT, the sums of £87,829.16 and £197,156.27 respectively. In the following tax year, 2001/2002, they earned £342,303 and £93,333 respectively. AY was also paid dividends during both periods. It was their intention from at least April 2001 to pay themselves sums, by way of additional reward for services, from SMT's earnings when the SMT's cash flow permitted and when the partnerships set up in the year to 5 April 2001 had financially closed the transactions they had entered into in that year.

[28] SMT was a business which operated essentially by the provision of personal services. It was not a business with substantial creditors. The identified creditors comprised basic office costs, related travel and accommodation, premises and wages. The business did not maintain management accounts, though that they did maintain Excel spreadsheets, a summary of cash at bank, known creditors and known upcoming obligations. It was a simple business and it was straightforward to ascertain whether there were funds available to make payments to directors in whatever form. The accounts for the year ended 30 September 2001 showed a turnover of £1,643,688. Given this financial situation, the pursuer and AY agreed that money was available to make a bonus payment to the directors/ employees and to pay dividends. The draft accounts confirmed that there were net assets available for such payments.

[29] The pursuer said that he wished to ensure, before embarking on that course, that there was no risk to the SMT. He wanted to make sure that the Scheme was correctly formulated. Accordingly, he sought advice from his accountants (who were subsequently purchased by Tenon to whom I shall refer as such) and from counsel, Mr Andrew Thornhill QC.

[30] Advice from Tenon was sought in August 2001. The pursuer forwarded the proposal to Tenon to ask how they would account for this transaction in SMT's accounts. According to his evidence, he was informed by faxed letter from Tenon dated 7 September 2001

"that Tenon would write off any loss on the SIC shares as directors' remuneration. Their reason for doing so is that the companies' (sic) accounts must reflect the substance of a transaction rather than its form. Their view was that the substance of the transaction was that the cost would be incurred with a view to remunerating a director out of profits of the accounting period and should be reflected as such (as opposed to a capital loss from the disposal of shares). Tenon's advice was also clear and unequivocal. ..."

He went on to say that Tenon subsequently reflected the transaction in the statutory accounts of SMT and in claiming full relief for the amount of the loss in their computation of corporation tax.

[31] On 12 September 2001, the pursuer formulated a memorial for the opinion of counsel (Mr Thornhill QC) seeking advice on this point. He knew Mr Thornhill well. He had had considerable experience of preparing instructions to counsel from his time as a partner in a firm of chartered accountants in the 1990s. It was at this time that he was first introduced to Mr Thornhill. During conferences which he attended, Mr Thornhill would often tell him about alternative solutions to questions about which his opinion had been sought. He would see him at least five times a year on issues relating to complex tax planning. Mr Thornhill always maintained that his job was to keep the taxpayers out of tribunals and out of the courts. In his role with SPCS, whose business was to provide private tax advice to individuals and owner managed businesses, as well as providing advice to individuals who were considering becoming partners in a partnership offered by SMT, the pursuer had frequently sought Mr Thornhill's advice. In the course of discussions concerning another matter, the pursuer became aware of a way of rewarding directors/employees which would defer the tax payable on such payment. The proposed scheme put forward in the memorial to counsel of September 2001 was based on this previous discussion. According to the pursuer, Mr Thornhill's advice to him in relation to the Scheme proposed in September 2001 was "clear and unequivocal and I was given no doubt that he was certain in his view". This advice was given in a telephone consultation on 17 September 2001. The pursuer said that

"Andrew Thornhill confirmed to me that the proposal represented a proper undertaking by the company in respect of which the company would be entitled to obtain a tax deduction for any loss on shares reflected in the company's accounts."

[32] I turn now to consider the effect of this and other evidence under the six heads mentioned in para.[26] above.

The company's financial position as at 27 September 2001

[33] The defender avers that, as a result of the payments made by SMT set out above, SMT was left with no material assets and insufficient means to satisfy its contractual obligations and liabilities. As the liquidator put it in evidence, "the payments were too much and did not leave the company solvent". There is an issue both as to SMT's asset position at the time and as to its ongoing obligations and liabilities.

[34] Putting more flesh on that submission, the liquidator contends that at the time of the September transactions, SMT's audited accounts for the year ended 30 September 2001 showed total net assets of only £1,787. However, SMT had obligations to clients who had made payments in advance for their services. Mr Caven, who gave evidence for the liquidator, said in his Report that the total cost of SMT rendering its contractual services to the partnerships which existed in September 2001 for the remainder of the 15 year contract periods for each partnership would be between £60,000 and £162,000, though in his oral evidence, he corrected the lower figure of £60,000 to £74,400. Further, at the time of the payments to the pursuer and AY, SMT had offices in Edinburgh, Aberdeen and London and employed nine or ten people in addition to the pursuer and AY. As at 27 September 2001, therefore, SMT had continuing liabilities both in respect of their employees (salaries and PAYE) and in respect of rent. Further, no provision was made for any corporation tax liability, since it was assumed (wrongly as it turned out) that HMRC would accept that the loss on the shares under the Scheme was deductible from profits. Taking into account the future service obligations of SMT et separatim its exposure to corporation tax, the effect of the dispositions to the pursuer and AY was to render SMT absolutely insolvent as at 27 September 2001, with net liabilities in the range of £262,354 to £364,354.

[35] SMT's accounts for the year ending 30 September 2001 were audited in July 2002. They were certified by the auditors to give a true and fair view of the company's affairs as at 30 September 2001. The profit and loss account shows a turnover of £1,643,688 (up from £167,560 the previous year) and administrative expenses of £1,467,097 (previously £165,647), leading to an operating profit of £176,591 (previously £1,913). After taking into account interest received, the profit on ordinary activities was £190,768 before tax and £141,359 after tax. After deduction of dividends (£141,585) paid out during that year, and bringing into account the retained profit from the previous year (£1,913), the retained profit carried forward came to £1,687. The improved figures for the year to 30 September 2001 reflect the rapid growth of the business in its second year as described by the pursuer.

[36] The balance sheet as at 30 September 2001 shows fixed assets (computer equipment) of £6,089 and current assets of £240,406, off-set by debts falling due within one year of £244,708, giving rise to a surplus of net assets over current liabilities of £1,787 (matching the retained profit carried forward or £1,687 and the £100 paid up share capital). The balance sheet position as at 30 September 2001 is broadly supported by a Trial Balance as at that date prepared by the liquidator and spoken to by him in evidence.

[37] In the balance sheet, the figure for debts payable by the company within one year includes the sum of £49,409 in respect of corporation tax, calculated at 20% of profit. The assumption underlying this figure is that taxable profit is correctly calculated. HMRC have claimed that more is due by way of corporation tax for this period, and it is accepted that their assessment can no longer be challenged. The issue turns upon the tax treatment of the loss incurred in connection with the Scheme, which I have already mentioned. The loss of £654,345 on the shares in SIC is included within directors' emoluments within the accounts. It may be noted that directors' emoluments during that tax year amounted in total to £1,043,413 (up from £123,998 the previous year) being comprised of the £756,649 paid to them or for their benefit in the September transactions, together with their earnings for the year referred to above. The figure for debts falling due to the company within one year includes the sum of £95,000 due from SIC. As has already been noted, SIC was incorporated as a wholly owned subsidiary of SMT only on 25 September 2001, and SMT's shareholding in it was sold to the FURBS trustees on 27 September. At the same time as the September transactions on 27 September 2001, SMT made a payment of £95,000 to SIC, and this sum features in the balance sheet as a debt due from a related undertaking.

[38] The figures from the audited accounts alone suggest that, even after payment of the £756,649 on 27 September 2001, SMT may still have been solvent, though only just and with little or no working capital. That conclusion is thrown into some doubt, however, by a number of considerations, including the uncertainties surrounding the tax position and the likely recoverability of the £95,000 from SIC. It is to be noted that the statement of affairs drawn up by the liquidator in March 2007 showed no assets but liabilities (or potential liabilities) of £1,354,582.

The company's financial commitments as at 30 September 2001

[39] The company's solvency as at 30 September 2001 is also thrown into doubt by the existing on-going obligations on SMT as at that date, both (a) in respect of its employees and office accommodation and (b) arising from its contractual commitments to the existing film partnerships.

[40] As at the end of September 2001 the company had 10 employees and 3 offices (in Aberdeen, Edinburgh and London). There was no direct evidence of these expenses in terms of wage slips, rent invoices, or vouching of any sort. There were, however, other sources of information.

[41] One source was the company's financial statement for the year ended 30 September 2001. Administrative expenses are noted in the profit and loss account for that year as £1,467,097. Take away directors' emoluments of £1,043,413, which includes the figure of £756,649 (the cost to the company of carrying out the September transactions) and the balance of £423,684 must relate to other expenses of running the business, including staff and office costs. In so far as it is worth breaking this down, the notes to the company's financial statement for that year show staff costs, including directors' remuneration, as £1,189,996. Take away directors' emoluments of £1,043,413, and the balance of £146,583 must relate to the cost of employing the other staff. But the figure of £423,684 would appear to be the relevant figure for the purpose of assessing the expenses incurred by the company during that year (including staff and office costs, PAYE, etc., but excluding payments to the two directors). In his report at para.6.3 Mr Caven used slightly different figures from the financial statement to arrive at a figure for that year for SMT's net expenses (excluding payments to the directors) of £390,448. This calculation was not examined in any detail at the proof, but I am unable to reconcile his headline figure of £1,147,097, which he uses to get to the £390,448 for net expenses, with the figures in the financial statement. This is of little importance, however, since the difference between my figure and his is relatively small.

[42] Another source of information was that contained in the company's bank statements which were lodged in process and referred to in evidence. Mr Caven summarised the relevant information in the bank statements in this way. They showed that SMT paid salary and PAYE for August 2001 to staff (other than directors) in the sum of £34,000; and that, in the same month, it paid £4,400 in rent for its Edinburgh and London offices. There is no figure for the rent paid for the Aberdeen office. Having looked at the bank statements for that month, it seems to me that the figure of £34,000 probably includes expenses reimbursed to members of staff as well as salaries and PAYE, but that makes no difference to the overall picture. On those figures (totalling £38,400), he estimated that annual ongoing operating costs at that time would have amounted to about £460,800 (£38,400 x 12). The figures might not be exactly the same each month, but the annualised figure would have been of that order.

[43] The figures do not match exactly, but they enable an approximation to be made. Erring on the low side, I am satisfied that the annual staff costs to the company in the year to 30 September 2001, excluding payments to directors and expenses re-imbursed to member of staff, were at least £146,000 (the figure derived from the financial statements) and possibly considerably more. Annual rental costs for the London and Edinburgh offices amounted to a further £50,000 (£4,400 x 12) or more a year. There would be expenses on top of those figures. It is important to note that the staff and office commitments were current at this level (£200,000 or more a year, or £16,500 or more a month) as at the year end, 30 September 2001.

[44] The extent of SMT's subsisting obligations, as at 27 September 2001, arising from its contractual commitments to the existing film partnerships are more difficult to assess. SMT provided tax advice and continuing administration services to the film partnerships which it had helped to establish. The services were provided under 15 year contracts, in terms of which the film partnership paid the full fee at the outset and SMT then provided the services to the partnership over a period of 15 years thereafter. The services included on-going accountancy services, book-keeping, provision of tax advice and liaising with HMRC. The liquidator's case is that, having made the payments totalling £756,649 in carrying out the September transactions, the company was left with minimal assets (if any) with which to provide such services without any significant further income coming in.

[45] To assess the likely cost to the company of providing the services under the existing contracts Mr Caven carried out the following exercise. He identified the film partnerships whose contracts with the company must have come into existence before September 2001. Those made in 2000 ran until 2015, while those made in 2001 ran until 2016. He calculated the cumulative number of years remaining on those contracts as at September 2001. His figure was 150 years. In fact he under-calculated; there was agreement between the experts (reached at the meeting of experts before the proof) that the cumulative number of years was 186. On spreadsheet produced by the pursuer in 2006 (6/12), it appeared that the annual cost of providing the accountancy and administrative services for each film partnership (in 2006) was assessed to be of the order of £400. Multiplying that by the 186 years left under the contracts for all such partnerships gives an estimated cost as at September 2001 of providing the services for the remaining life of all the partnerships then in existence of £74,400 (186 x £400).

[46] Mr Caven referred to a number of matters which, in his view, tended to suggest that this estimate was too low.

[47] First, in his report Mr Caven referred to a document suggesting that a sum of £162,355 was transferred to SPCS at about the time the business was transferred to it. He inferred that this sum might have been transferred to SPCS in order to allow SPCS to service the contracts, and therefore that it might be indicative of the figure which the pursuer thought was necessary for this purpose. To my mind this was pure speculation. It was in any event unclear how this figure fitted in with the fact that the accounts showed SMT to have net assets of only £1,787; and the explanation for this transfer (if it happened) was not altogether satisfactory. I did not understand Mr Caven to place great weight on this point and I do not consider that it would be safe to draw any inference from it.

[48] Second, Mr Caven referred to a document (7/59) which bore to be an analysis of services which SMT had used (and presumably paid for) in the year ended 30 September 2001. This document was not easy to reconcile with the figures in the accounts for that year, but I put that to one side for present purposes. The document bore to show that £20,700 had been paid in that year to Dand Carnegie & Co, accountants, as "fees for accountancy & taxation to media p/ships". Dand Carnegie later became 4M. That figure, which was in respect of work done for all the partnerships in that year, appeared to be consistent with an invoice from Dand Carnegie in November 2000 (7/129) for £1,200 plus VAT (£1,410 inclusive of VAT) as a fee "for preparation of accounts, tax computation and partnership tax return for the year to 5 April 2000" of one of the film partnerships. Applying that across the board to the 13 film partnerships in existence by September 2001 gives a figure close to the £20,700. Those figures tended to suggest that the estimate of £74,400 for the duration of the partnership contracts existing as at 30 September 2001, based on £400 per partnership per year, was on the low side. Quite separately, Mr Caven thought that the figure of £400 per year shown on the spreadsheet at 6/12 seemed low, since an accountant would charge in the region of £100 per hour and some two hours work would be likely to be required even before starting on the tax return.

[49] However, Mr Caven did not himself have any experience of accounting for film partnerships. More direct and detailed evidence was given by the pursuer and by Mr McLelland of 4M.

[50] The pursuer explained that SMT's obligation was to prepare accounts for the partners and for tax return purposes and to file an annual tax return. The accounts were non-statutory, and were more straightforward than statutory accounts. The obligation on SMT was greater in the first year, when all the arrangements concerning finance, partners' shares, fees and other matters needed to be set up. The up-front fee paid by a partnership covered the expense incurred by SMT in setting this up, as well as the more routine expenses of subsequent years. Some partnerships might purchase more films in subsequent years, in which case there would again need to be the detailed work of setting up the arrangements concerning finance and the partners' shares in the new films etc., but the cost of that would be covered by a further fee from the partnership. Otherwise the work was straightforward. The pursuer explained the financial structure of the film partnership business and referred to a typical set of accounts concerning one of the partnerships. I need not go into the detail here. Put simply, under the terms of the lending arrangements, the partnership income would be fixed in advance for the full 15 years. Only small changes in bank interest on current accounts and deposit accounts needed to be taken into account for the purpose of producing accounts and tax returns. The model for the accounts and the tax returns was very simple after the first year (or other year in which a film was purchased). The tax computations were done as an Excel spreadsheet. For all the SMT film partnerships in existence as at the end of September 2001, the expensive work had already been completed by then.

[51] Mr McLelland's evidence was consistent with this. He confirmed the difference between the first year (and any other film purchasing year) and other years. The Dand Carnegie invoice for £20,700 would have been for the first years of each of the partnerships. About 25 hours accountancy work would have been needed per partnership for the first year and subsequent film purchase years. Fewer hours would have been needed in other years. He referred to a spreadsheet (6/12) prepared by the pursuer (probably in 2006), which showed that the annual cost to SMT of providing the accountancy and administrative services for each film partnership was (in 2006) assessed to be of the order of £400. This was prepared on the basis of SMT contracting out the services to 4M. The figure of £400 gave 4M a profit. It did not reflect the cost to 4M, nor would it reflect the likely cost to SMT had it chosen to carry out the work itself. He referred to a schedule (6/58) which had been prepared within 4M from the time record sheets. This schedule showed the time (equivalent to a "senior accountant's" time) spent by 4M in respect of the relevant 13 partnerships in the accountancy period ended April 2009. An average of just over 3 hours had been spent per partnership. Some of the partnerships on that list had had less than an hour spent on their accounts, though more than that in total. Others had had more time spent. It was not possible to predict with accuracy how long would have been required for each partnership, but these figures were indicative of the range. The cost to 4M of a senior accountant in 2009 would have been in the order of £24 per hour. On those figures, the overall cost of providing the service to all of the partnerships in existence as at the end of September 2001 (for the aggregate unexpired duration of all of their 15 year contracts) would not be expected to exceed about £10,000. In cross-examination he accepted that he had not put the information together for the purposes of the schedule and could not speak to it from first-hand knowledge. There appeared to be a conflict between the hours shown in that schedule for work done in respect of Caledonian Film Partnership (2.3 hours in total) and the time shown for that work on an analysis at 7/129. Mr McLelland could not explain this discrepancy.

[52] As I understood his evidence, Mr Caven accepted that the main expense would occur in setting up the systems at the beginning and that thereafter the accountancy exercise (preparing accounts and tax returns) would be relatively straightforward. He did not know how many hours would be involved in preparing accounts and tax returns for the second and subsequent years. It was put to him that preparation of the accounts and tax returns once the system was set up was a simple exercise, requiring just a few new figures to be slotted in each year. Though he questioned whether it would be as simple as suggested, I did not understand him to dissent from the proposition that the Dand Carnegie invoice for £20,700 would not necessarily be indicative of continuing annual costs. As to the schedule (6/58) showing the time spent by 4M in respect of 13 partnerships in the accountancy period ended April 2009, he was surprised at the entries suggesting that some of the partnerships on that list had had less than an hour spent on their accounts. But he was unable to suggest any other figure. He accepted that the cost to 4M of a senior accountant in 2009 would have been in the order of £24 per hour. In re-examination, Mr Caven accepted that it could be possible to provide the services for about £400 per year if the clients passed over the relevant information well packaged, but he was not persuaded that it could go lower than that.

[53] Mr Christie gave expert evidence for the pursuer on this aspect. He analysed the likely cost to SMT of providing the services itself rather than contract out to 4M or others. His starting point was the figure of £400 per partnership per year for "ordinary" years (i.e. not first year and not any film purchasing year) charged by 4M in 2007. If that was 4M's charge out rate, the annual cost to 4M (deducting 70% for profit margin and overheads) would be in the order of £120 per partnership. Making allowance for inflation, he suggested that the equivalent cost to 4M, and therefore SMT, for 2001 would have been about £108 per partnership. Multiplying this by the agreed number of years unexpired on the contracts with the film partnerships in existence in September 2001 (186), he considered that the total future cost to SMT of providing the services for the unexpired part of the contracts was about £20,088 (186 x £108). It was possible that as at the end of September 2001 "year one work" was required for 4 of the partnerships then in existence, in which case a further £8,000 should be added to this figure.

[54] I considered that on this aspect I should prefer the evidence of Mr Christie to Mr McLelland. I accept that Mr McLelland was an honest witness doing his best to assist the court, but he was doing his best on the basis of a summary of time records which he had not himself made and which appeared to conflict with other evidence. Mr Christie proceeded on essentially the same basis as Mr Caven, though he netted the 4M figure of £400 a year down to a figure representing what it would have cost SMT. In my view, that was a perfectly legitimate exercise.

[55] Mr Christie went on to suggest that, on the basis of the draft accounts for the year ended 30 September 2001 (appended to his Report), which would have been available to the directors of SMT, showing turnover of £1,643,688, profit of £746,101 (before taking account of the September transactions, but allowing for corporation tax), and net assets of £606,529 (making the same allowances), a potential cost of £20,000, or even £28,000, spread over the next 14-15 years would quite reasonably have been regarded as immaterial to an assessment of SMT's solvency. That opinion was given expressly on the basis that as at 27 September 2001 SMT was expected to continue to trade on the same basis.

[56] The question of how inflation should be taken into account was a matter of some dispute. It had been agreed at the meeting of experts that if a price was agreed in 2006/7 for the provision of such services, then all other things being equal the equivalent price for earlier years could be estimated by adjusting for inflation. The experts were also agreed that the Retail Price Index (RPI) was a reasonable estimate of inflation. Mr Caven used a figure of 4% for inflation at this time and I did not understand that figure to be seriously in dispute. Mr Christie took inflation into account in working back from the 4M 2006 figure to a figure for 2001 (see para.53 above). This appears to me to be a legitimate exercise. Mr Caven argued that the same should apply for later years. I shall come back to this point later.

[57] The pursuer argued that these commitments, both as regards office and staff costs and as regards the future cost of providing the services to the partnerships, could be met out of future income. On a going concern basis, there would be sufficient income coming in to enable SMT to meet its obligations. It was on that basis that Mr Christie gave his evidence that a potential cost of £28,000 spread over the next 15 years would not be regarded as material to SMT's solvency (see para.55). On the same basis he would, I surmise, have considered that the existing staff and office commitments did not give rise to any problem.

[58] These arguments make it necessary to consider two matters in particular. One arises out of the transfer of SMT's business to SPCS soon after the September transactions were effected. I deal with this later. The other is to identify the revenue stream which the pursuer's argument assumes would continue to be generated had the business continued with SMT. I consider this now.

[59] On the assumption that the business was not transferred from SMT to SPCS, what were the prospects as at the end of September 2001 of SMT acquiring more business and collecting fees up-front from new business which it could use to pay its office and staff costs and service its existing contracts? SMT was incorporated in December 1999. Its business grew in 2000 (when turnover was £167,560); and grew more rapidly in 2001 (when its turnover increased by a factor of 10 to £1,643,688). According to the pursuer, as at 30 September 2001 there were 13 existing contracts between SMT and film partnerships, each lasting for 15 years, beginning either in 2000 or 2001. It is to be inferred from the turnover figures for 2000 and 2001 that the majority of those contracts came into existence in 2001. The 2006 spreadsheet referred to earlier (6/12) listed some 27 15 year partnership contracts between the individual partnerships and SMT (or possibly SPCS) in existence in 2006, with the end date (at the end of the 15^th year) given for each. From this it could be seen which contracts between the partnerships and SMT commenced in which year. (The spreadsheet also listed "Scotts Atlantic Partnerships", but it was not suggested that they were relevant to SMT's position). The spreadsheet showed 2 contracts which began in 2000 (having an end date of April 2015), 9 which began in 2001 (end date April 2016), 13 which began in 2002 (end date April 2017), 1 which began in 2003 (end date April 2018), and 2 which began in 2004 (end date April 2019).

[60] Leaving aside certain questions to which this information gives rise, the spreadsheet does show a pattern of new film partnership business being attracted which could, had the business of SMT not been transferred to SPCS shortly after the September transactions were effected, have brought money into the company to enable it to service its existing obligations (in respect of staff, office costs and existing film partnership contracts) at least in the short term. One thing, however, should be noted, and that is that the contracts all appear to have been made on or immediately after 5 April of each year, at the beginning of the tax year. The pursuer suggested that some were made as early as late 2001, but there is no support for this in the schedule. I proceed on the assumption that the spreadsheet accurately gives the end dates of the contracts. If that is right, very little further money would have been brought into the company before April 2002; and, in particular, very little money would have been available from any new contracts to meet the cost of outgoings during the 6 months from the end of September 2001 through to the end of March 2002.

The transfer of the company's business

[61] A likely source of income is, of course, only relevant to the question of solvency on the basis that the company continues to handle the business from which such income is forthcoming. It is not in dispute in this case that at some time in late 1991 the business of SMT (or at least the benefit of that business) was transferred to SPCS. It appears that there was no written agreement between SMT and SPCS recording the terms of the transfer. However, the transfer was agreed at a board meeting of SMT on 1 December 2001 and separately at a board meeting of SPCS.

[62] In his evidence, the pursuer said this about the transfer of SMT's business to SPCS (see para.17 of his witness statement):

"The trigger was a claim which I have called the Caversham claim. On 5 October 2001, without prior warning, I received a letter from Caversham Consultants based in Berkshire attaching invoices made out to two specific partnerships and alleging that those partnerships for whom SMT acted were due substantial sums to Caversham Asset Management Limited ("Caversham") in respect of a Memorandum of Understanding exchanged between Caversham and SMT at the end of 2000. This effected (sic) SMT since it would have had to credit fees back to the partnerships to enable them to meet any valid claim. However I received advice that the Terms of Business had at no stage been finalised and did not represent contractual commitments and that in any event they required only that SMT used their best endeavours that film partnerships represented by SMT would engage Caversham to source qualifying claims. ... I instructed my lawyers to reject the Caversham claim. I did not consider that the Caversham claim was well founded but Ms Young and I thought it prudent to take steps to protect the business from any attempt by Caversham to pursue the claim he had by then intimated. In particular our concern was that they could pressure SMT into paying the unfounded claim by obtaining a freezing order on the funds of the Company.

Ms Young did not intimate any difficulties with the transfer of the business of SMT into SPCS. Neither Ms Young nor I considered that SMT as a company had a value other than as an income stream. Ms Young was content with the transfer, provided her income stream was protected. Accordingly, at a meeting of the Directors of SMT on 1 December 2001, it was agreed that the business of SMT would be hived into SPCS to trade as a division of SPCS. The appropriate resolutions of SPCS were also obtained. With effect from 1 December 2001, SMT traded as a division of SPCS."

[63] A number of points arise from this. First, the last sentence of the passage quoted suggests that, after the transfer, SMT continued to trade, but as a division of SPCS. That would imply that SMT was taken over by SPCS. However, I do not think that that was what the pursuer was intending to convey. A takeover would not achieve the protection from creditors which, according to the pursuer, the transfer was designed to achieve, since the business and assets would remain with SMT. There was no share transfer. SMT did not thereafter "trade as a division of SPCS". SMT's business (or the benefit of its business, a point to which I return below) was transferred to SPCS, and SPCS thereafter, so it seems, carried on the business formerly carried on by SMT, possibly using for that purpose the trading name "SMT". The idea of SMT having been taken over by SPCS would not be consistent with the minute of the SMT board meeting of 1 December 2001. Under the heading "MOVE OF BUSINESS TO [SPCSL]", it is recorded that "the matter of setting up a branch of [SMT] as part of SPCSL" was discussed. It was agreed that "this was desirable and that all business of the Company would be operated through SPCSL, as a separate identifiable branch, with effect from 1 December 2001". From then on, all fee invoices would be issued on SPCS letterhead and under SPCS' VAT registration, and contracts of employment and service contracts to which SMT was a party "would be treated as if they were contracts of SPCSL t/a SMT". This board minute appears to be consistent with a transfer of the business, or the benefit of the business, rather than with a takeover. The boards of SMT and SPCS would, in any event, have no power by resolution to effect a takeover of the one company by the other. The point, though in one sense only a matter of terminology, is not unimportant. The casual and inaccurate way in which the pursuer described what had been done appeared to me to chime with his relaxed attitude toward corporate personality and governance exemplified by the transfer of SMT's business to SPCS, another company effectively under his control, for nil consideration simply to avoid the potential disruption to the business arising from a claim by a third party.

[64] The transfer of the business involved inter alia setting up a new bank account in the name of SPCS trading as SMT, transferring SMT's employees and related PAYE obligations to SPCS, and arranging for all fee invoices and engagement letters to be issued by SPCS (and fee invoices to be issued with SPCS' VAT registration). The position was to be reviewed in March 2002.

[65] Second, it should be noted that, apart from the transfer of staff contracts referred to in the board minute (which would require the agreement of the members of staff), SCPS did not take over responsibility for the existing liabilities of SMT, e.g. the liabilities of SMT under the 15 year contracts with the then existing partnerships, and the liabilities under the rents of office premises. Whilst it is probably safe to assume (though I heard no evidence of this) that the leases in the name of SMT could be brought to an end relatively quickly, transfer of past and future liabilities under the contracts with the film partnerships would require in each case a novation of the contract from SMT to SPCS with the agreement of the particular film partnership. There is no evidence that any consideration was given to this. Accordingly, the "transfer" could only take effect as a transfer of the benefit of SMT's business, leaving SMT with its existing current and long-term obligations but without the income stream from new business which it needed to meet those obligations.

[66] Third, the fact that neither the pursuer nor AY considered SMT to have any value other than an income stream is also significant. Whether that would justify the transfer of the business for nil consideration is not a live issue in these proceedings - it might be thought that an income stream of the kind described by the pursuer would be an asset of some value, meriting some consideration for the transfer. A document (6/51B) which the pursuer said (in para.17.2 of his witness statement) was drawn up by him to explain why there was no need for SPCS to pay SMT anything for the transfer of the business gave a somewhat different explanation, namely that SPCS would be taking on "significant and potential liabilities", including obligations to SMT staff under existing contracts, a potential claim against SMT in respect of tax advice which it had given to one or more of the film partnerships, and the obligation to administer film partnerships for the full 15 years, providing accounting, tax and audit services at cost to SMT. But this note proceeded on the basis that SPCS would be "acquiring SMT", as opposed to simply acquiring its business. Even if there had been an acquisition of SMT (i.e. a takeover), existing liabilities would formally remain with SMT, but absent such an acquisition the liabilities and obligations undertaken by SMT under contracts already entered into would remain with SMT. SPCS might, as part of any transfer agreement, undertake to indemnify SMT against such liabilities, but there appears to have been no written agreement and there was no evidence that any consideration was given to this. Given, therefore, that this was not an acquisition of SMT, that justification for the absence of consideration does not appear to me to carry any weight. But even if that were the correct explanation it would suggest that the business was at best thought likely to break even. I consider that the pursuer's explanation that he considered SMT to have no value other than its income stream to be the more probable of the two.

[67] There was an attempt on the part of the pursuer to lead evidence about receipts coming into SMT between the end of September 2001 and the beginning of December. Objection was taken on the basis that there was no record for this, an objection which I upheld. Evidence was also led about the information which might have been available to the pursuer as at the end of September 2001 as to SMT's asset position based on draft accounts, to which I shall refer briefly below, but the pursuer's own evidence that he thought that there were no assets apart from the income stream appears to me to render such evidence largely irrelevant.

[68] The fourth and final point relates to timing: when was the business (or the benefit of the business) transferred to SPCS? In the passage from his witness statement to which I have referred in para.[62] above, the pursuer stated that the transfer took effect from 1 December 2001. This was a position to which he adhered in his oral evidence. That is consistent with the board minute to which I have also referred. However, on a number of occasions previously the pursuer claimed that the transfer occurred in October 2001.

[69] Thus, at a meeting with the liquidator on 10 January 2008 (of which there is a note at 7/73), the pursuer told the liquidator that:

"All trading was transferred for the benefit of [SPCS] on 1 October, following which any residual assets and liabilities were transferred on 30 November"

In cross-examination, the pursuer said that he had meant that the benefit of the trading profit was transferred on 1 October 2001. Referring to a profit and loss statement which bore to have been drawn up for SMT for the year ended April 2002, he told the liquidator:

"This is media tax business - from 1 October 2001, the profit and loss account shown relates to the media tax division of SPCS".

At the same meeting, he confirmed the liquidator's statement that

"on 1 October 2001, the business had been transferred to the media division of SPCS ..."

explaining that after December 2003 the sale/leaseback business was transferred to Scott's Atlantic Media Tax LLP ("SMAL"), another company in the group. Statements to a similar effect were also made to others. At 7/120 there is a contemporaneous note of a telephone discussion on 8 October 2003 between the pursuer and Mr Newton of Tenon, the telephone call coming from the pursuer in connection with letter which he had received from HMRC. The note was prepared by Mr Newton. He records the following in the second paragraph:

"JD [the pursuer] pointed out that we should be indicating to the Revenue that the company [SMT] ceased to trade in October 2001 and the company has no assets."

In cross-examination the pursuer said that, if he had said that to Mr Newton, that was an error on his part. On 10 October 2003, in a further conversation with someone else at Tenon (MRG), the pursuer is noted (at 7/119) as reiterating his comments of two days earlier. He was anxious to stress to HMRC that there "was nothing left in the company". It is also recorded that, after the call, MRG realised that there might be merit in preparing accounts for 2002, which would include 2 months of trading, "as JD was sure a loss would be shown, and this could be carried back to 2001 ...".

[71] I was referred to a number of invoices relating to the business bearing to be dated in or after October 2001. There were five such invoices from SMT to certain of the film partnerships claiming fees in respect of completion of certain films. Three of those invoices are dated 1 October 2001 and two are dated 31 October 2001. There is no indication of when the work was done, so the invoices themselves say nothing of any relevance to the question of when the business was transferred - indeed, without there being in existence some assignation of the right to be paid, the invoices would have to be in the name of SMT even after the business was transferred. In addition, however, reference was made to an invoice from SPCS to SMT dates 20 December 2001 charging a "fee for services" in the sum of £79,696.45 plus VAT. That invoice is numbered "smt001", which suggests that it was the first invoice issued by SPCS to SMT. There is no specification of the services or when they were provided. The pursuer said that the description on the invoice ("fee for services") was incorrect. At one point he suggested that it was an invoice for services rendered by SMT to SCPS, rather than the other way round. At another point he said that, despite bearing to be an invoice for services rendered by SPCS, the invoice was a means of bringing SMT's profits into SPCS. He appeared to be anxious to avoid the inference that SMT's business was transferred to SPCS at the beginning of October 2001. On this narrow issue, however, his caution appears to have been unnecessary. I am not persuaded that the invoice should not be taken at face value. If the fee was charged as a "fee for services", there is every reason to believe that the services being charged were related to the carrying on by SPCS of the business previously undertaken by SMT. Standing the date of the invoice, such services could have been provided by SPCS before December 2001, in which case the invoice would support the idea that the business was transferred at the earlier date. But they could as easily have been provided after 1 December 2001, in which case the invoice would be consistent with the case presently advanced by the pursuer that the business was transferred with effect from that date.

[72] I did not find the pursuer's evidence in relation to these various aspects of the transfer of SMT's business to SPCS to be at all satisfactory. I have not as yet given my views as to the pursuer's credibility and reliability. I am not prepared to characterise the pursuer as an untruthful witness so as to lead me to reject his evidence out of hand. But I do consider that he was too ready to dismiss as a mistake, or as hearsay, or as a misunderstanding, or as inaccurate, statements which he had made earlier, when it appeared to him in giving his evidence that those earlier statements did not help the case he was now advancing. His evidence given in court was not consistent in many respects with what he had told his accountants at Tenon and with what he had told the liquidator. His attempted explanation of the SPCS invoice of 20 December 2001 was contrary to the plain terms of the document. And the motive which he put forward in his evidence for the business transfer from SMT to SPCS (to avoid any freezing order against SMT at the suit of Caversham), although consistent with the stance he took in relation to HMRC (instructing Tenon to emphasise that SMT had no assets), does not inspire confidence that he would always be willing to give a truthful account of relevant events when it might operate against what he perceived to be his interests. Taking all these matters into account, I formed the view that I could not rely on the pursuer's evidence alone where it conflicted with the evidence of others or the inferences to be taken from documents.

[73] On the specific question of the transfer of SMT's business, ultimately it matters little whether whatever transfer there was occurred, or was believed to have occurred, at the beginning of October 2001 or only later, at the beginning of December. There was no written agreement setting out the details of the transfer; and the fact that it is recorded as having been authorised by the board of SMT only on 1 December 2001 is by no means conclusive. If, as the pursuer contended, the reason for the transfer was the fear that assets of SMT, if they remained with SMT, would be caught by a freezing order obtained from the English court in an action at the suit of Caversham, and Caversham's claim was intimated without prior notice on 5 October 2001, it would make little sense to delay the transfer until 1 December 2001 - it is, I think, within judicial knowledge that attempts to prevent a defender to an action from dissipating his assets (in Scotland, by interim diligence or, in England, by a freezing order) are likely to be made as soon as an action is commenced, and, conversely, that steps to remove assets from the potential effects of such orders are likely to be ineffective unless carried out promptly upon receipt of information that a claim may be made. Equally, intimation of a claim on 5 October 2001 would come a few days too late to explain a transfer on 1 October 2001, unless of course the transfer was made on or soon after 5 October and designed to have retrospective effect. In the absence of any written agreement it is not possible to take this further. Nor, indeed, in the absence of any relevant documentation, can the court be certain of the accuracy of the date of 5 October 2001 for the first intimation of the Caversham claim. If it is necessary to reach a conclusion on this point, my conclusion on the evidence would be as follows: that there was intimation in early October 2001 of a potential claim by Caversham; that a decision was made at that time to transfer to SPCS the benefit of SMT's business, i.e. its income from existing and future contracts, probably with effect from 1 October 2001, with a view to giving some protection from a freezing order at the instance of Caversham (albeit that the steps taken at that time were probably ineffective to achieve this); and that the "formalisation" of the transfer (at least in the form of resolutions by the boards of SMT and SPCS) followed on from that on 1 December 2001, albeit that, both in terms of the minute of the board meeting of SMT and in any event as a matter of law, even then there was no transfer of liabilities (whether to Caversham, HMRC or other creditors) away from SMT.

[74] Perhaps of greater importance is to consider what this part of the saga reveals as to the attitude of the pursuer, and AY, his co-director, to the continuance of SMT as a successful trading entity. At one point in his evidence in chief the pursuer said that, as at 27 September 2001, the date of the September transactions,

"I was confident that the business of SMT would continue for a number of years. There was no reason to stop. We were successful. ... We had achieved a good level of profitability. Future years would be better ..."

His willingness to transfer that business from SMT to another company within the group simply to avoid the risks of assets being tied up at the suit of a claimant (Caversham) who was thought to have a bad claim only a matter of days after 27 September 2001 suggests that the pursuer, while confident of the success of the business model, was not particularly concerned with which company carried on the business or as to the continued profitable existence of SMT.

The corporation tax position

[75] I have already referred to the fact that the pursuer sought advice on the tax implications of the Scheme for SMT both from Tenon and from Mr Andrew Thornhill QC, a leading tax barrister in London. I should set out that advice in more detail.

[76] Advice from Tenon was sought in August 2001. The pursuer forwarded the proposal to Tenon to ask how they would account for this transaction in SMT's accounts. A copy of the document sent to Tenon outlining the proposed Scheme was not produced, but it is fair to assume that it took a similar form to that set out on the first page of the Instructions to Counsel referred to below. An undated file note prepared by Alan Newton of Tenon records a telephone discussion which he had with the pursuer on 20 August 2001. The relevant part of that reads as follows:

"... we are to comment on a fax that [the pursuer] sent us. They are going to take opinion from Counsel on a tax move they wish to carry out. It involves the setting up of a subsidiary with options being involved.

The question they wish us to answer at this time and are willing to pay for it is as follows - if we feel the write down in cost of the investment is a cost of employment there is a good chance that a tax deduction will be given however if it is shown as a loss of investment it will probably be difficult for a Case 1 deduction to be given.

There is a timing issue here as the whole manoeuvre needs to take place in the same year as the bonus is paid and this is why the year end is to be changed."

I interject to explain that there had been mention of the change of year end earlier in the note. The note continues:

"They were going to pay us for our opinion on treating the cost as a cost of employment in the accounts. [The pursuer's] view is that it is very similar to the NIC avoidance bonuses that were paid in the past by way of gold bars etc. There is a degree of urgency on this as they wish to take Counsel opinion before going through the manoeuvre and therefore we must go back as soon as possible on this."

The pursuer said that he had not seen this note until just before the proof.

[77] On 7 September 2001, following on from this, Mr Newton faxed the pursuer on 7 in the following terms:

"John

SCOTTS MEDIA TAX LIMITED

Apologies for not getting back to you sooner on your proposed executive reward planning exercise, however I now have some comments for your consideration.

At this stage I believe that the reduction in the employerco's investment, due to the issue of share options as described in your letter, would be treated as a cost of employment. However, due to its nature, the write down of the investment would probably be material and an exceptional item requiring disclosure on the face of the Profit and Loss Account all by way of notes to the accounts. This, presumably, would give you some problems and I would welcome your comments on this.

Also, can you let me know if it is the intention of the employerco [to] sell its shares in the rewardco before the period end as this would remove the need for an investment note to be included in the accounts.

Finally, UITF 25 re. National Insurance Contributions one share option gains seems to suggest that National Insurance Contributions require to be accrued on the gains made by employees on share options exercised. I would be grateful if you could advise how you propose to get around this."

There is a note on the copy of the fax lodged in process, written by the pursuer after discussions with Mr Newton, to the effect that (1) there was no problem with disclosure (see the question raised at the end of the second paragraph of the fax) and (2) that the issue about National Insurance Contributions would be raised with Counsel. The pursuer faxed Mr Newton in response soon afterwards (the exact date is unclear). Amongst the points he made was this, clearly referring to the question of disclosure raised in the second paragraph of Mr Newton's fax:

"So long as the loss on investment is a P&L deduction it would not cause any problem. Clearly it would be preferred if this was in a note."

There was no evidence of any note being given by Mr Newton to the pursuer stating categorically that the loss on the investment in SIC would be "a P&L deduction".

[78] The instructions to Mr Thornhill took the form of a two-page document from SPCS entitled "Executive Reward Planning". The first page set out the proposal in the following terms:

"As a mechanism to reward key executives (whom have no prior contractual right to receive a bonus or other payment), a close company ("employerco") is contemplating the following -

1. Employerco [SMT] wishes to reward its key executives [the pursuer] by granting options in a UK company ("rewardco") [SIC]

2. Employerco [SMT] establishes rewardco [SIC] as its subsidiary by subscribing for shares of a nominal amount at a large premium e.g. by subscription of £100,000 for 100 shares of 1 pence each

3. Rewardco [SIC] grants an option to acquire shares to the Trustees of a Funded Unapproved Retirement Benefit Scheme ("FURBS"), which employerco [SMT] has previously established for the benefit of an executive [the pursuer]. The number of shares over which this option is granted would substantially exceed the final issued share capital e.g. 9,900 shares of 1 pence each. The option would only be exercisable within a 10 year period.

4. In consequence of granting this option the value of employerco's [SMT's] investment has significantly reduced e.g. from £100,000 (being 100/100 x £100,000) to £1,000 (being 100/10,000 x £100,000)

5. Employerco [SMT] sells its shares in rewardco [SIC], prior to its accounting period end, to the executive [the pursuer] for their current market value e.g. £1,000 resulting in a £99,000 loss on investment.

6. The executive [the pursuer] then owns the entire issued share capital of rewardco [SIC]."

It is clear, and it was confirmed in evidence, that "employerco" is SMT, "rewardco" is SIC and the executive is the pursuer. In setting out the terms of the first page of the Instructions to Counsel I have inserted these references in italics in square brackets.

[79] On the second page of the memorial, Counsel was asked to confirm the following matters:

"A. At stage 2, there are no tax consequences on the subscription by employerco [SMT] for shares in rewardco [SIC] in the manner described

B. At stage 3, and as a result of the option only being capable of being exercised within 10 years, the provisions of section 135(2) ICTA 1988 apply to ensure no tax or NI charge arises on the grant of this option

C. At stage 5, that the loss on disposal of investment in rewardco [SIC] would arise as a result of providing a benefit to an employee [the pursuer] as remuneration and thus be deductible for corporation tax purposes as an item of revenue expenditure (employment costs). We enclose a written opinion from Tenon Scotland on the appropriate accounting treatment of this item.

D. At stage 6, because the shares are not being acquired at an undervalue no tax charge arises.

E. That there are no anti-avoidance or other provisions which could result in taxation on employerco [SMT] or rewardco [SIC]."

Mr Thornhill was also asked also to comment on any other relevant matters for either employerco [SMT], rewardco [SIC], the executive [the pursuer] or the Trustees of the FURBS.

[80] As already mentioned, Mr Thornhill gave his advice in a telephone conference on 17 September 2001. The pursuer prepared a note of that advice which he submitted to Mr Thornhill for approval. Mr Thornhill made certain amendments to that note and signed it, as amended, on 27 September 2001 (the day the Scheme was approved and implemented), to indicate his approval. That note, as approved, reads as follows:

"A. At stage 2, there are no tax consequences on the subscription by employerco [SMT] for shares in rewardco [SIC] in the manner described

Counsel confirmed there were no tax consequences

Counsel confirmed that those provisions would apply, but later suggested some refinements to ensure the transaction could not be re-categorised as a transfer of shares at an undervalued. (See D below)

C. At stage 5, that the loss on disposal of investment in rewardco [SIC] would arise as a result of providing a benefit to an employee [the pursuer] as remuneration and thus be deductible for corporation tax purposes as an item of revenue expenditure (employment costs). We enclose a written opinion from Tenon Scotland on the appropriate accounting treatment of this item.

Counsel confirmed that corporation tax relief would be forthcoming. Counsel did however consider Section 94 IHTA 1984 could be in point.

He considered that Section 10 IHTA 1984 gave protection against an assessment under that section but suggested that to put matters beyond doubt the shares should be sold at the same time as the option was granted so that the deduction coincided with the grant of the option. Counsel is happy that the market value of the shares sold would still be reduced since any sale to third party would be on terms that the third party would not be able to prevent the option being granted.

D. At stage 6, because the shares are not being acquired at an undervalue no tax charge arises.

Counsel strongly recommended that a clause is inserted only option agreement obliging Rewardco to retain sums in the company of no less than those in place at the time the option is granted. This ensures that the option will retain a value since Rewardco will expose itself to financial loss were it not to honour its obligations. As a result of the value of the shares will be negligible at the time of sale to the executive.

Counsel also considered that section 135(2) ICTA 1988 did not apply if the trustees failed to exercise their option. Arguably there was a s.596A benefit, but they better view was that there was no benefit under the FURB. At this point it should be kept under review.

Counsel suggested that to put the matter beyond doubt the option holder should be given protection from the directors/shareholders of Rewardco withdrawing profits or otherwise reducing the value of the shares for 3 years.

He recommended that there should be included within the terms of the option. It could also be included in Rewardco's articles but this was not necessary.

At the end of three years, there would be a choice of (1) exercising the option, (2) paying dividends on shares and(3) carrying out some other as yet unforeseen action.

E. That there are no anti-avoidance or other provisions which could result in taxation on employerco [SMT] or rewardco [SIC].

Counsel considered that so long as his suggestions were followed that there were no anti-avoidance or other provisions which could result in taxation on Employerco/ Rewardco or indeed the executive."

[81] Mr Lake did not suggest that advice had not been sought and given. But he pointed out that the pursuer had not asked for general advice, such as "is there a risk" or "should the company do it". Counsel was not informed of the company's financial position at the time and was not asked to advise with that in mind. This criticism is, to my mind, entirely fair. Further, it seems to me that the pursuer's account (summarised at paras.[30] and [31] above) of the advice he received put something of a gloss on that advice. He described Tenon's advice that the loss would be regarded as a revenue loss and therefore deductible from profit as "clear and unequivocal". To my mind that is not borne out by the fax and telephone exchanges shown by the documents, in which Tenon were asked to confirm that there was "a good chance", and gave a preliminary view ("At this stage"), but did not respond to the pursuer's request for a note confirming that the loss on the investment would be treated as "a P&L deduction". Nor is it correct, in my view, to describe the advice given by Mr Thornhill QC as advice that the proposed Scheme "represented a proper undertaking by the company". Mr Thornhill was asked for tax advice. I did not hear evidence from Mr Thornhill, but I suspect that without being told the full circumstances of the company's financial position and its future prospects, Mr Thornhill would not have ventured any opinion about whether the Scheme, being in the nature of a payment exclusively for the benefit of a director, represented "a proper undertaking by the company". Nor, from the material which I have seen, did he do so. He was asked for tax advice and that is what he gave.

[82] HMRC did not accept that the loss of £654,345 made by SMT in dealing with the shares in SIC was deductible from SMT's trading profits. They regarded this loss as capital in nature and therefore deductible only against chargeable gains. I need not go through the correspondence about this. HMRC commenced an enquiry in September 2003 into SMT's tax liabilities for the period 1 October 2000 to 30 September 2001. Ultimately, in April 2006 HMRC amended SMT's tax return to reflect the conclusions it had notified in its closure notice earlier in the year. The effect of that was to assess corporation tax on SMT in the amount of £253,450.50. This amendment to the tax return was not appealed by SMT because it had insufficient funds to pay the amount of tax claimed in any event. The pursuer was given extended opportunities to seek to appeal out of time, but did not take them. It is accepted by the pursuer that all avenues of appeal are now closed.

[83] The position taken by HMRC was that the transaction did not result in a revenue loss capable of being deducted from profits for the purpose of assessing corporation tax. The relevant case officer at the time the decision was reached was Mrs L van Tinteren. In her letter of 17 February 2006 she said this:

"I am now closing the enquiries into the company's return for the above Return period [i.e. the return period ended 30 September 2001]. My conclusions regarding the company's liability for the period are given below.

I have noted and considered Mr Dryburgh's comments about the deduction of £654,345 in respect of the subscription by Scotts Media Tax Limited ("SMTL") shares in Scotts Investment Company Ltd ("SIC"). However, since SMTL does not trade in shares, the share subscription is the purchase of a capital asset, for which no deduction is allowable on revenue account. Subsequent events, such as the granting of a share option by SIC to the FURBS, or the sale of the SIC shares by the company to Mr Dryburgh, do not change the capital nature of the asset purchased by the company and therefore cannot give rise to a revenue loss.

I therefore conclude that the CT profits for the return period ended 30 September 2001 are as follows:

Profits chargeable per Return £190,490.00

Add back cost of share subscription £654,345.00

CT profit £844,835.00

CT chargeable £253,450.50"

Mr Simpson did not seek to re-open the question of whether the sum of £654,345.00 was truly deductible. I must proceed on the basis that it was not deductible, though I accept that the pursuer took tax advice on the question and, on the basis of that advice, believed that it was.

Draft accounts for year ended 30 September 2001

[84] Evidence was given of the draft accounts for the year ended 30 September 2001. These were first available to the pursuer in June 2002. The draft accounts were said to be relevant to a consideration of SMT's asset position which the pursuer would have had in mind at the time of formulating and giving effect to the September transactions. I do not think that they are relevant to this question, for two main reasons: first, because, on his own evidence, the pursuer thought, at the time of the transfer of SMT's business to SPCS (which I have held to have been at the beginning of October 2001), that SMT had no assets apart from its income stream; and, second, because he never saw these draft accounts (or anything similar) at that time.

[85] More importantly, the draft accounts are said to be relevant to the question of whether the pursuer could honestly or reasonably have believed, at the time of declaration of the November dividend, that the company had sufficient distributable reserves to justify that payment. This was a matter of detailed discussion in the evidence of Fiona Martin. The figures were analysed in the defenders' evidence and in the outline submissions put in on behalf of the defenders (at p.6). Those draft accounts show that before the adjustments necessarily made to finalise the accounts, the draft accounts would have shown a net asset position of about £59,000 (according to Ms Martin) or (about £49,000 (according to the defenders). The difference relates to a reduction of the tax charge consequent on the treatment of related party transactions and bonus payments. I prefer the position put forward by the defenders on this narrow issue, but ultimately the difference between the two positions is of no great materiality.

The pursuer's justification for the transactions

[86] The pursuer's case is straightforward. The September transactions taken together were a means of rewarding him and AY for their services to the company. The company had been successful, and the bonuses were a reward for that success. There was no reason to think that SMT was insolvent. I shall consider this further in the context of discussing the various bases of legal liability asserted by the defenders.

Was the pursuer in breach of fiduciary duties owed to SMT?

[87] Mr Lake QC, who appeared for the liquidator, sought to simplify matters by emphasising that this was not a case where the actions of the directors were alleged to be ultra vires. Nor was it a case of a return of capital to shareholders. Nor was there here any suggestion that the directors' acts had been ratified by shareholders (the FURBS Trustees were shareholders, and there was no suggestion or evidence that they had ratified those acts). The complaint here was that the directors acted in breach of fiduciary duty by disposing of the assets of the company when that disposal was not done for the benefit of the company or to promote its prosperity.

[88] It was not in dispute that the directors owed a fiduciary duty to the company. The parties differed as to its scope. Under reference to Re Smith & Fawcett Limited [1942] Ch 304, Regentcrest plc (in liquidation) v Cohen [2001] 2 BCLC 80 and Extrasure Travel Insurance Ltd. v Scattergood [2003] 1 BCLC 598, Mr Simpson, who appeared for the pursuer, submitted that the essence of that duty was honesty and loyalty. The relevant question was whether the director honestly believed that the transaction was in the best interests of the company. That was a subjective question. The correct approach could be taken from the judgment of Jonathan Parker J in Regentcrest at paras.120-122:

"120. The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmers Company Law para.8.508). The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director's state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company's interest; but that does not detract from the subjective nature of the test.

121. As Lord Greene put it in Re Smith & Fawcett Limited [1942] Ch 304, 306:

'The principles to be applied in cases where the articles of a company confer a discretion on directors ... are, for present purposes, free from doubt. They must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company, and not for any collateral purpose.' (Emphasis supplied.)

"The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty.'"

Jonathan Parker J added this at para.123:

"123. The position is different where a power conferred on a director is used for a collateral purpose. In such circumstances it matters not whether the director honestly believed that in exercising the power as he did he was acting in the interests of the company; the power having been exercised for an improper purpose, its exercise will be liable to be set aside (see, e.g., Hogg v. Cramphorn Ltd [1967] Ch 254). ..."

This last aspect of the duty was amplified by the Deputy Judge (Jonathan Crow) in Extrasure Travel at paras.92-93:

"92. The law relating to proper purposes is clear, and was not in issue. It is unnecessary for a claimant to prove that a director was dishonest, or that he knew he was pursuing a collateral purpose. In that sense the test is an objective one. It was suggested by the parties that the court must apply a three-part test, but it may be more convenient to add a fourth stage. The court must:

92.1 identify the power whose exercise is in question;

92.2 identify the proper purpose for which that power was delegated to the directors;

92.3 identify the substantial purpose for which the power was in fact exercised;

92.4 decide whether that purpose was proper."

That last stage, as he pointed out under reference to Re a Company, ex parte Glossop [1988] 1 WLR 1068, involved a question of fact, turning as it did on the actual motives of the directors at the time.

[89] Mr Lake referred me to the remarks of Eve J in In Re Lee Behrens & Co. [1932] 2 Ch 46, and to other cases in which those remarks have been considered, including Ridge Securities v IRC [1964] 1 WLR 479, In re W&M Roith Limited [1967] 1 WLR 432, Thompson v J Barke & Co (Caterers) Ltd. 1975 SLT 67, at 70-71, Re Halt Garage (1964) Ltd. [1982] 3 All ER 1016, and Barclays Bank plc v British & Commonwealth Holdings plc [1995] BCC 19.

[90] In In Re Lee Behrens & Co., the articles of a private company authorised the directors to provide for the welfare of employees and their widows and children. Pursuant thereto, the directors granted a pension to the widow of a former managing director. Three years later the company went into voluntary liquidation. The widow lodged a proof in the winding up for the capitalised value of the annuity. The liquidator rejected it. It was held that the grant of the pension was not a transaction for the benefit of the company or reasonably incidental to its business. Further, it did not come within the terms of the company's articles, since the managing director was not an employee and the acts of the directors were not confirmed by the shareholders in general meeting. The grant of the pension was therefore void and ultra vires the company. At p.51, Eve J said this:

"It is not contended ... that an arrangement of this nature for rewarding long and faithful service on the part of persons employed by the company is not within the power of an ordinary trading company such as this company was, and indeed in the company's memorandum of association is contained (clause 3) an express power ... [to make such provision].

But whether they be made under an express or implied power, all such grants involve an expenditure of the company's money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company's business, and the validity of such grants is to be tested, as is shown in all the authorities, by the answers to three pertinent questions: (i) Is the transaction reasonably incidental to the carrying on of the company's business? (ii) Is it a bona fide transaction? and (iii) Is it done for the benefit and to promote the prosperity of the company?"

There was no allegation in that case that the directors had acted in breach of fiduciary duty, nor was there any discussion of the scope of the duty owed by directors to the company. The headnote suggests that the court's reasoning was to the effect that the grant of the pension was ultra vires and hence void, but as Pennycuick J pointed out in Charterbridge Corporation Ltd v Lloyd's Bank [1970] Ch 62, at 70, the liquidator had rejected the proof also on the ground that the award of the pension had not been authorised by the company in general meeting. In his judgment, Eve J did not appear to have kept these issues separate and distinct. As Pennycuick J put it:

"It seems to me, on the best consideration I can give to this passage, that the judge must have been directing his mind to both the issues raised by the liquidator, without differentiating them. In truth (i), the first of the three pertinent questions which he raises is probably appropriate to the scope of the implied powers of a company where there is no express power. Question (ii) is appropriate in part, again to the scope of implied powers, and in part, and perhaps principally, to the duty of directors. Question (iii) is, I think, quite inappropriate to the scope of express powers, and notwithstanding the words "whether they be made under an express or implied power" at the beginning of the paragraph, I doubt very much whether the judge really intended to apply this last question to express powers. None of the cases cited by him, at p.52, would support such an application. If he did so intend, his statement is obiter, and with great diffidence I do not feel bound to follow it. Finally, I would observe that the whole passage beginning on the middle of p.53 proceeds on the footing that the transaction might have been ratified, which would not be possible if it had been ultra vires the company."

[91] Eve J's threefold test has been considered in a number of other cases, in particular in Re Halt Garage by Oliver J who considered that the passage referred to suggested

"a certain confusion between the requirements for a valid exercise of the fiduciary powers of directors (which have nothing to do with the capacity of the company but everything to do with the propriety of acts done within their capacity), the extent to which powers can be implied or limits be placed, as a matter of construction, on express powers, and the matters which the court will take into consideration at the suit of a minority shareholder in determining the extent to which his interests can be overridden by a majority vote".

Those three things were logically distinct. Having referred to certain cases in which the application of the Lee Behrens & Co. to gratuitous dispositions by the directors of the assets of a company had been confirmed, at least so far as concerned dispositions under implied powers, but having confessed to some difficulty in reconciling the cases, he said this (at p.1034h-j):

"I must therefore attempt, although I do so with some unease, some analysis of what I conceive to be the principles which underlie the cases. Part of the difficulty, I think, arises from the fact that Eve J in Lee Behrens & Co. combined together, in the context of an inquiry as to the effective exercise of directors' powers, two different concepts which have since been regarded as a single composite test of the corporate entity's capacity. In fact, however, as it seems to me at any rate, only one of the three tests postulated in Lee Behrens & Co. is truly applicable to that question. The court will clearly not imply a power, even if potentially beneficial to the company, if it is not reasonably incidental to the company's business ... and express powers are to be construed as if they were subject to that limitation .... But the test of bona fides and benefit to the company seems to me to be appropriate, and really only appropriate, to the question of the propriety of an exercise of power rather than the capacity to exercise it."

That passage seems to me to confirm that the Lee Behrens & Co. test, or at least the second and third limbs of it, is applicable to the question of the propriety of an exercise by the directors of their powers. That approach was confirmed, albeit obiter, by Lord Dunpark in Thompson v Barke at p.70-71, who said that the tests proposed by Eve J might well be relevant "(b) to acts of directors without the approval of shareholders".

[92] Thus understood, I do not consider that the line of authority laid before me by Mr Lake detracts from or qualifies in some other way the definition of fiduciary duty established in the cases referred to by Mr Simpson. Where the power conferred on the director has been exercised for a proper purpose, the question is whether the director honestly believed that his act or omission was in the interests of the company. If so, it does not matter that, viewed objectively, it can be shown not to have been. On the other hand, where a power conferred on a director is used for a collateral purpose, it does not matter whether the director honestly believed that in exercising the power as he did he was acting in the interests of the company - if the power has been exercised for an improper purpose, its exercise will be set aside.

[93] The duty placed on directors not to allow their own interests to conflict with those of the company was also relied on by the liquidator in his pleadings. This is but a facet of the fiduciary duty owed by directors. The scope of the duty was considered in detail by the Inner House in Commonwealth Oil & Gas Co Ltd v Baxter 2010 SC 156. However, it played little part in the discussion before me and I do not think it necessary to say more about it.

[94] The defender's primary case is beguilingly simple. The pursuer was under an obligation to act bona fide in the interests of SMT. The September transactions were clearly not in the best interests of SMT. They took away from the company sums totalling £756,649. Even if the results of such payments had not brought the company to a position of insolvency, or near insolvency, such payments made the company worse off by that amount and required to be justified. There was no proper justification here. No benefit accrued to the company in return for such payments. The company was under no obligation to make the payments, or any payments of that kind. The payments to the pursuer and to AY were said in the minute of the board meeting of 27 September 2007, which authorised them, to be in recognition of [his/her] excellent service during the period". The pursuer and AY had both been remunerated for those services. There was no justification for any further payment to them as directors? The pursuer could not have believed that the transactions were in the best interests of the company. In fact he never gave any consideration to whether the transactions were in the best interests of the company.

[95] I have come to the view that this argument is correct. In para.16.1.1 of his witness statement the pursuer described the payment to him, or to the FURBS for his benefit, as a reward for past services, he having been instrumental in building up the company, carrying out most of the administrative duties and bringing in the profit. It may well be the case that he brought that success to the company through his skill and hard work. But there are ways in which such skill and labour may legitimately be rewarded, for example by an increased salary, with or without a bonus scheme, or by payment of a dividend to shareholders. But what in fact happened did not fall into any of these categories. It was argued for the pursuer that the payments should be regarded as, or as akin to, payments of a bonus dependent on results. Had a bonus scheme been built into the directors' remuneration arrangements, payment of a bonus might not have been objectionable in principle. There are countless examples of bonus schemes where bonuses are paid after the services have been provided by the employee. But in such cases the bonus scheme, discretionary or otherwise, is designed to provide an incentive to directors and/or employees and thereby to be of benefit to the company. And there might be cases where bonuses are paid (without any bonus scheme) as a reward for past services, in the anticipation that the prospect of further such payments will encourage loyalty, enhance the image of the company, assist future recruitment and thereby be of benefit to the company. But that is quite different from the present case. Both the pursuer (through the Dryburgh trust) and AY were directors and owners of all the shares in the company. They were paid their salaries. They stood to gain as shareholders from the success of the company. No after the event bonus paid to them could possibly be said to be for the benefit of the company. A director is given a wide discretion. If he genuinely believes the payments to have been in the best interests of the company, he will not be in breach of fiduciary duty, however unreasonable that belief. But I am not persuaded that the pursuer believed that the September transactions would be in the best interests of the company or that he ever gave any consideration to this question. Indeed I am persuaded that he had no such belief and gave no consideration to it. The payments to AY and the FURBS trustees were for the benefit of AY and the pursuer, and only for their benefit. They were, as Mr Lake submitted, simply a means of stripping out of the assets of the company to pay the directors for nothing in return.

[96] Thus far I have considered the matter without reference to the financial position of the company. The effect of the September transactions was to leave the company without any appreciable assets which it needed to carry on its business. The audited accounts for the year ended 30 September 2001 showed net assets of only £1,787. That calculation proceeded on the basis, subsequently shown to be incorrect, that a deduction against profits could be made for the loss of £654,345 on the shares in SIC. It therefore ignores the additional tax liability to HMRC. Mr Simpson made the point that corporation tax would not be paid until some time later, by which time the company could have acquired further assets. I accept that, though the point might have more force it the company had continued to carry on the business after September. However, even if the net asset position of the company is correctly assessed at £1,787, the September transactions left the company without the means to pay rent and salaries in the immediate future and without the means to provide the services it was obliged to provide to the film partnerships under the 15 year contracts then in existence. Although the draft accounts, not seen by the pursuer at the time but indicative of the state of affairs of which he should have then been aware, show net assets of between £48,000 and £60,000 (after payment of the £756,649), that figure is still insufficient to cover the on-going liabilities (rent, salaries and the commitment to the provision of services under the existing contracts). It is difficult to see how, on any view, payments to the directors totalling £756,649 could be thought to be in the best interests of the company. Again, for the avoidance of doubt, I am satisfied that the pursuer did not believe that those payments were in the best interests of the company.

[97] The discussion in the previous paragraphs proceeds on the assumption that the directors intended the company to continue in business for the foreseeable future. Yet within a week or two they had transferred SMT's business - or, at the least, they had transferred the benefit of existing contracts and all future business - to SPCS, depriving SMT of the income stream required to meet its obligations. The pursuer maintained that SMT's obligations in this respect would be met by SPCS. That may be so, though there was no agreement in place under which this was to happen and it is to be noted that SPCS has not offered to meet SMT's liability to HMRC. But that is beside the point. When looking to see whether a payment authorised by the directors might be in the best interests of the company, it is relevant to look to the company's future intentions and prospects. Unless there is a fixed intention on the part of the directors that the company will continue to carry on the business, how can any assessment be made as to whether a payment this way or that is in its best interests? I am not satisfied on the evidence that the directors had that fixed intention. Their actions in transferring the business of the company to SPCS at about the beginning of October 2001 shows, to my mind, a lack of any such fixed intention. On that basis, I can see no possible benefit to the company in it making the various payments (totalling £756,649) involved in the September transactions. Nor can I accept that the directors could honestly have believed that there was any benefit to the company in making such payments.

[98] In the circumstances, I consider that the defenders have made good their case that the pursuer was in breach of fiduciary duty in the manner alleged.

[99] In those circumstances, it is not strictly necessary for me to consider the other grounds on which it is alleged that the pursuer is liable in respect of the September transactions. I shall therefore set out my views on these other grounds briefly.

Was the pursuer in breach of a duty of skill and care owed to SMT?

[100] There was no dispute that the directors owed the company duties of skill and care. In Re D'Jan of London Ltd. [1993] BCC 646, at 648B-F, Hoffman LJ (sitting as an additional judge of the Chancery Division) held that the scope of the duty of care owed by a director was accurately stated in s.214(4) of the Insolvency Act 1986. Their conduct was to be judged by that of

"... a reasonably diligent person having both -

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and

(b) the general knowledge, skill and experience that that director has."

That combines an objective test (by reference to the general knowledge, skill and experience to be expected of a director in that position) with a subjective test (which takes into account any additional knowledge, skill and experience that he may have). In the present case, as Mr Lake pointed out, the pursuer had particular knowledge, skill and experience in tax matters and in dealing with HMRC.

[101] Mr Lake submitted that in their management of the affairs of the company and, in particular, in causing the company to enter into the September transactions, the directors, including the pursuer, acted in breach of their duties of skill and care to the company. Mr Simpson's response was that breach of duty of care, as opposed to breach of fiduciary duty, was only pled against the pursuer in respect of the November dividend (a matter with which I shall deal separately). In those circumstances it was not open to the court to find the pursuer liable for the September transactions under this head.

[102] I am loathe at the end of a proof to decide the matter on a pleading point, but it appears to me that Mr Simpson is correct in his analysis of the defenders' counterclaim. That said, it seems to me inevitable, on the facts of this case, that a finding of liability for breach of fiduciary duty in respect of the September transactions will lead to a finding of breach of the duty of care. Had this head of liability been critical to the outcome of this case, I would have been minded to put the case out By Order to see whether the defenders wished to move an amendment to deal with this objection. It is unlikely that any additional evidence would have been relevant that was not relevant to the case based on breach of fiduciary duty. But the need to take that course does not arise. Suffice it to say that, for these reasons, I do not find the pursuer liable in respect of the September transactions under this head.

Did the September transactions amount to fraud on the creditors at common law?

[103] The liquidator also challenges the September transactions on the basis that they amounted to a fraud on the creditors at common law and that the pursuer has retained the proceeds of that fraud. This challenge only relates to the Scheme benefitting the FURBS, and ultimately the pursuer, and not to the separate payment of the bonus of £102,304 to AY.

[104] The law relating to this head of claim is set out conveniently in McBryde, Bankruptcy (2^nd Ed.) at paras.12-23-12-48. I was referred in particular to the tests set out at para.12-29. They are as follows:

(1) there must be prejudice to creditors;

(2) at the time of the transaction, the debtor must be insolvent or about to become insolvent;

(3) it is not necessary that the transferee should be aware of the debtor's insolvency, although that may be a method of proving fraud;

(4) if the transferee colludes with the insolvent, that is one element in the fraud;

(5) the debtor must be conscious of his insolvency;

(6) the debtor's actions must be voluntary;

(7) the debtor can carry on ordinary acts of administration of affairs until he has decided to take steps to hand over the administration of affairs for the benefit of creditors; and

(8) in general the transaction challenged must be fraudulent.

[105] There can be little doubt that there has been prejudice to creditors of SMT. HMRC's claim remains unpaid. Mr Simpson candidly and realistically accepted that, for this purpose, the pursuer should be regarded as the transferee, even though in fact the transferees were the trustees of the FURBS. Accordingly, it is the pursuer's knowledge and the pursuer's actions which are relevant to the enquiry. It is clear also that the transaction was voluntary, in that there was no prior obligation on it to enter into the Scheme. Further, entering into the Scheme was not an ordinary act of administration of the company's affairs. In those circumstances the dispute centred around three questions: (a) was the company insolvent or about to become insolvent; (b) was the company, through the pursuer, conscious of its insolvency; and (c) was the transaction "fraudulent", in the sense of it being designed to prefer one creditor over another.

[106] Dealing first with the question of solvency, I have already given an account of the company's financial position. Ultimately the question comes to this: is the question of solvency to be answered by reference to the company's ability to pay its debts as they fall due? or is it to be assessed on a "balance sheet approach", by a straight comparison of assets and liabilities. Mr Christie argued for the former, Mr Caven for the latter. I do not consider that there is one general rule to be applied in all circumstances. Where there are reasonable prospects that the company will continue to trade, and there is a settled intention that it should do so if possible, then there is much to be said for looking at its ability to pay its debts as they fall due, since on this basis it may be expected that further income will come into the company. But where there is no such reasonable prospect, or no such settled intent, then, to my mind, that approach is flawed. In circumstances where there is no reasonable prospect of further income coming in, the better approach is to compare the company's assets and liabilities, both present and future. That was the approach adopted by Mr Caven. On the basis of that approach, it is clear that the company was insolvent at the time of entering into the Scheme on 27 September 2001.

[107] The knowledge of the pursuer must be attributed to the company. He knew, on the findings I have made, that there was no firm intent that the company should continue trading. He was prepared to transfer its business to another company in which he had an interest at the drop of a hat when SMT was faced with a claim which might disrupt its business. On that basis he must have been aware at the time of entering into the Scheme on 27 September 2001 that SMT could not rely on future income to pay its debts as they fell due; and that on the balance sheet approach SMT was insolvent.

[108] The requirement that the transaction be fraudulent is more difficult. It seems to me in the circumstances of the present case to involve the question whether the company knew of the existence of other potential creditors and intended to benefit the transferee (the pursuer, or the FURBS) at their expense. The Cavendish claim appears to have fallen away. The claims of creditors other than HMRC have not been accepted as yet. The claim by HMRC appears to be the only relevant claim, and HMRC the only relevant creditor. But the pursuer took tax advice, and I am persuaded that he was entitled, on the basis of that advice, to believe that the loss on the SIC share transaction was deductible against income for corporation tax purposes. On that basis I do not consider that I can find that the transaction was fraudulent, however much it must have been known not to be in the best interests of the company.

[109] This head of claim fails.

The November dividend

[110] At a board meeting of SMT on 26 November 2001, it was resolved that SMT pay a dividend in the total amount of £100,000. The Dryburgh Trust waived its entitlement to payment of its share (its intention so to do having been made known at the meeting), so that, in the event, only £30,000 out of the dividend resolved upon was paid.

[111] That dividend of £30,000 was paid to AY.

[112] The first issue which arises under this head can be stated simply. Did SMT have sufficient distributable reserves or profit to declare a dividend of £100,000 in November 2001 and make a payment of a dividend to AY in the sum of £30,000?

[113] The answer to that question is equally simple. As at 30 September 2001 the company had net assets of only £1,787. It had insufficient distributable reserves. Thereafter its business was transferred to SPCS. It had no further income.

[114] The next issue is this. Were the directors in breach of their common law duty of care in authorising payment of a dividend? This turns first upon what the directors knew or ought to have known about the state of the company's affairs when they authorised payment of the dividend in November 2001.

[115] At that time there were no annual accounts, draft accounts or management accounts available to the directors. Mr Lake submitted that there was no evidence that they had before them any material indicating that they had made any proper assessment of distributable profits. The ex post facto rationalisation carried out by Mr Christie in his expert evidence suggested what the directors might have thought to be the position, but there was no evidence that that was what they in fact thought at the time. I accept this submission. The question of whether the directors were in breach of a duty of care must be answered by reference to the materials which were available to them and to which they applied their minds, not by reference to what they might have thought rightly or wrongly had they considered the whole of the available material.

[116] In any event, Mr Christie's analysis proceeded essentially on the argument that SMT had continued to invoice clients in October 2001 in an amount of over £240,000, and that payment of a dividend of £30,000 represented only a small percentage of sale (12.5%) over that period, a sufficiently small percentage to suggest that it could be paid out of distributable profits. That analysis breaks down for two main reasons. First, because whatever the invoice position (and the invoices in October were indeed in the name of SMT) the fact is, as I have found earlier, that the benefit of the business was transferred to SPCS at the beginning of October 2001. SMT were not going to receive and keep the invoiced amounts. Secondly, it is wrong to consider the matter in terms of a dividend of £30,000. The dividend which was authorised was £100,000. That is distributable amongst all shareholders. That is the amount which must be backed by distributable profit. The fact, if it be the case (as Mr Simpson submitted), that the directors proceeded to authorise the payment only on the footing that they knew that the Dryburgh Trust would waive its dividend, tends to confirm that the directors were aware that the distributable profits were insufficient to justify declaration of the dividend.

[117] I am satisfied that the defenders have made good their claim under this head.

Interim conclusion

[118] Subject to the arguments on prescription and the claim for relief under s.1157 of the Companies Act 2006, I have found that the defenders' counterclaim succeeds (i) for breach of fiduciary duty in respect of the September transactions and (ii) for breach of the common law duty of care in respect of the November dividend. These findings would, in principle, lead to an interlocutor sustaining the defenders' second and third pleas in law in the counterclaim and granting decree in terms of the first and third conclusions therein.

[119] I turn now to consider the arguments on prescription and the claim for relief under s.1157 of the Companies Act 2006.

Has the defenders' claim prescribed?

[120] The defenders' counterclaim asserts claims resulting from acts of the pursuer in September and November 2001. The counterclaim was intimated on 23 December 2008 and the interlocutor giving leave to bring the counterclaim in the action is dated 14 January 2009. Whichever is the relevant date for the purpose of interrupting prescription, the claim was made significantly more than the 5 years laid down in s.6(1) of the Prescription and Limitation (Scotland) Act 1973. There were abortive proceedings in England before the counterclaim was introduced into this action, but they were not commenced until September 2007 and need not be considered for present purposes. On this basis the pursuer contends that the defenders' counterclaim has prescribed. He seeks decree of absolvitor. The defenders seek to resist that conclusion in two ways: first, they say that their right of action in respect of the pursuer's breach of fiduciary duties is imprescriptible in terms of Schedule 3 to the 1973 Act; and, second, they contend, in terms of s.6(4) of the Act, that for so long as the pursuer was responsible as a director for the conduct of the affairs of the company (i.e. before a liquidator was appointed in September 2005) the company was induced to refrain from making a claim against him, so that time should only start to count from that time. The defenders at one point advanced an additional contention, to the effect that the commencement of the five year prescriptive period was delayed in terms of s.11(3) of the 1973 Act, but Mr Lake made it clear that he did not insist on this line of argument.

Imprescriptibility

[121] I deal first with the contention that the defenders' claim for breach of fiduciary duties is imprescriptible. Schedule 3 to the Act provides as follows:

"SCHEDULE 3 RIGHTS AND OBLIGATIONS WHICH ARE IMPRESCRIPTIBLE FOR THE PURPOSES OF SECTIONS 7 AND 8 AND SCHEDULE 1

The following are imprescriptible rights and obligations for the purposes of sections 7(2) and 8(2) of, and paragraph 2(h) of Schedule 1 to, this Act, namely-

...

(e) any obligation of a trustee -

(i) to produce accounts of the trustee's intromissions with any property of the trust;

(ii) to make reparation or restitution in respect of any fraudulent breach of trust to which the trustee was a party or was privy;

(iii) to make furthcoming to any person entitled thereto any trust property, or the proceeds of any such property, in the possession of the trustee, or to make good the value of any such property previously received by the trustee and appropriated to his own use;

..."

"Trustee" is defined in s.15 of the Act as including:

"any person holding property in a fiduciary capacity for another and, without prejudice to that generality, includes a trustee within the meaning of the Trusts (Scotland) Act 1921; and 'trust' shall be construed accordingly".

Schedule 1, which is there referred to in Schedule 3, defines the obligations to which the 5 year prescriptive period in s.6 of the Act applies. Paragraph 2 of Schedule 1 provides inter alia that s.6 does not apply to any obligation specified in Schedule 3 to this Act as an imprescriptible obligation.

[122] It was accepted by Mr Simpson, for the pursuer, that a company director fell within the definition of trustee for the purpose of paragraph (e) of Schedule 3 in respect of fiduciary duties owed to the company: c.f. Ross v Davy 1996 SCLR 369 at 374D, and see also Commonwealth Oil & Gas Co Ltd v Baxter at para.[2]. But it is not every obligation of a trustee which is imprescriptible. For example, it is not suggested that the claim based on allegations of breach of the common law duty of care is imprescriptible. It is only obligations of the type described in sub-paragraphs (i) - (iii) of paragraph (e). Clearly sub-paragraph (i) is not relevant here. Nor, to my mind, is sub-paragraph (iii). Mr Lake argued that the defenders were seeking the return of the proceeds of the breach of fiduciary duty which were appropriated by the pursuer to his own use, within the meaning of that sub-paragraph. That argument would clearly not apply to the claim to hold him liable for the payment of the bonus of £102,304 to AY. Neither would it apply on the facts of this case to the share dealings involved in the Scheme. That transaction involved the following steps: (a) SMT subscribing £655,000 for 100 shares in SIT; (b) SIT granting an option to the FURBS Trustees for 100,000 £0.01p shares in SIC at par; and (c) SMT selling its shares in SIT to the FURBS Trustees for a price of £655. Even proceeding on the basis that the FURBS Trustees can be equated with the pursuer, it is impossible to bring these transactions within the terms of paragraph (e)(iii). That paragraph requires the identification of trust property which has at some stage passed into the possession of the pursuer. The subscription by SMT for the 100 shares in SMT does not involve any such process. Nor does SIT's grant of the option to the pursuer. The third step, the sale by SMT of its shares in SIT to the pursuer, does involve the pursuer coming into possession of property (the shares) which had belonged to the company (trust property), but it is not in dispute that the sale of those shares to the pursuer was at their then market value. SIT has now been dissolved. There is therefore no question of the pursuer being required to make furthcoming to SMT of the shares in SIT which were sold to him. Nor is this a claim for the value of the shares received by the pursuer or appropriated to his use. The value of those shares was only £655. In truth this is a claim by SMT for the loss which it suffered on the share transaction as a whole. As such, it is not a claim falling within the terms of paragraph (e)(iii).

[123] That leaves only paragraph (e)(ii) which refers to any obligation of a trustee "to make reparation ... in respect of any fraudulent breach of trust to which [he] was a party or was privy". What is meant by "fraudulent breach of trust"? The only Scottish authority brought to my attention on this question was Ross v Davy, to which I have already referred. At p.388B-E Lord Penrose emphasised that "dishonesty" was "in general fundamental to the Scottish notion of fraudulent conduct"; and that, although he was at pains to emphasise that the scope of sub-paragraph (ii) was not limited to a case of common law fraud, nonetheless "as a lowest common denominator" the term "fraudulent" as there used necessarily involved "dishonest conduct or conduct from which dishonesty could be inferred". Mr Lake submitted that, taken at its broadest, this covered all aspects of a director's breach of his fiduciary duty. (His alternative argument was that it at least covered the allegations relating to fraud on the creditors, but since I have held that that claim fails I need not consider that argument further.) Mr Lake's argument appears to me to involve the proposition that since the fiduciary duty on a director is to act bona fide in what he perceives to be the best interests of the company, a failure in that regard is necessarily fraudulent. I do not accept that. In the present case, for example, I have found in effect that the pursuer did not stop to consider what was in the best interests of the company when resolving, with his co-director, to enter into the September transactions. It seems to me that such a finding, whilst sufficient to make him liable for breach of fiduciary duty where in the event what he did was not in the best interests of the company, falls far short of a finding of dishonesty such as would be required to bring the case within paragraph (e)(ii).

[124] I therefore reject the argument that the defender's claims are imprescriptible. I should emphasise, however, that the imprescriptibility argument could not in any event apply to the claim for breach of duty of care, and therefore could not apply to the claim in respect of the November dividend.

Was the company was induced to refrain from making a claim?

[125] The defenders contend that the company was induced to refrain from making a claim for so long as the pursuer was a director. They rely on the terms of s.6(4) of the 1973 Act, which is in the following terms:

"(4) In the computation of a prescriptive period in relation to any obligation for the purposes of this section -

(a) any period during which by reason of -

(i) fraud on the part of the debtor or any person acting on his behalf, or

(ii) error induced by words or conduct of the debtor or any person acting on his behalf,

the creditor was induced to refrain from making a relevant claim in relation to the obligation, and

(b) any period during which the original creditor (while he is the creditor) was under legal disability,

shall not be reckoned as, or as part of, the prescriptive period"

The argument is that as a result of the pursuer's position as director (until the appointment of a liquidator in September 2005), the company did not take any steps to investigate the dispositions made in September and November 2001 and therefore refrained from vindicating their rights (making a relevant claim) in respect of them. Until a liquidator was appointed, the company was in error as to its rights and that error was induced by words or conduct of the pursuer, he being the one who had the relevant knowledge. The counterclaim was raised well within five years from the time a liquidator was appointed, so there is no need to investigate the precise sequence of events after that step was taken. I was referred to the decision of the House of Lords in BP Exploration Operating Co. Ltd. v Chevron Transport (Scotland) 2002 SC (HL) 19 at paras.[26]-[33], [65]-[68] and [99] for the correct approach to the application of that sub-section, and in particular as to the meanin of the words "induced to refrain".

[126] The difficulty with this argument seems to me not so much whether the company was "induced to refrain" from making a relevant claim, but rather to the question of whether it was so induced (if it was so induced) by error induced by words or conduct of the pursuer (I do not think that any question of fraud arises on this part of the case, but in any case the same question would arise). The problem is this. The pursuer was a director of the company. His knowledge is the knowledge of the company. There are, of course, occasions where the knowledge of a director will not be imputed to the company, for example where the company is the victim of the director's fraud. I do not need to explore such issues in any detail, because it is clear that the company also had knowledge of what was going on through AY, who was also a director until May or June 2002. AY has not been convened as a party. There may be good reasons for this, and I am prepared for the purposes of this argument to assume that there were, though they were not brought to my attention. It is not alleged that she was fraudulent in her actings. No allegation of breach of fiduciary duty is made against her. It was not suggested that she was a dupe, required to sign off on transactions without knowing what was going on. No case has been put forward to suggest that her knowledge should not be attributed to the company. In those circumstances, it cannot be shown that the company was in error induced by words or conduct of the pursuer, nor that any fraud on the part of the pursuer induced it to refrain from making a relevant claim.

Conclusion on prescription

[127] For these reasons, I am satisfied that the defenders' claims against the pursuer have prescribed. I shall give effect to this decision by sustaining the pursuer's fourth plea in law in his answers to the counterclaim and absolve him from the conclusions of the counterclaim.

Should the pursuer be granted relief under s.1157 of the Companies Act 2006?

[128] In light of my conclusion on the question of prescription, this issue does not strictly arise for decision. But I should deal with it briefly in case the matter goes further.

[129] Section 1157 of the Companies Act 2006 gives the court power in certain cases to grant relief where a director has been found to be negligent, in default, in breach of duty or in breach of trust. It provides, so far as is material, as follows:

"(1) If in proceedings for negligence, default, breach of duty or breach of trust against -

(a) an officer of a company, or

(b) a person employed by a company as auditor (whether he is or is not an officer of the company),

it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit. ..."

That section is in materially identical terms to s.727 of the Companies Act 1985 which it replaced.

[130] The pursuer submits that, even if he is liable, he acted honestly and reasonably. He asks the court to excuse him from liability. I am prepared to accept that the pursuer acted honestly. The fact that he did not apply his mind to the question of whether his actions were in the best interests of the company does not involve a finding of dishonesty (and see above in the context of the discussion about prescription). But, for the reasons already set out sufficiently in connection with the claims made against him, I cannot accept that he acted reasonably. In those circumstances there is no power to relieve him from his liability. I therefore reject this submission.

Disposal

[131] Although I would have found the pursuer to be in breach of fiduciary duty as regards the September transactions, and in breach of a duty of care in respect of the November dividend, I have found that those claims have prescribed. In those circumstances I shall, as indicated in para.[127] above, sustain the pursuer's fourth plea in law in his answers to the counterclaim and absolve him from the conclusions of the counterclaim.

[132] In the summons, the pursuer concludes for declarator that the facts averred by him or as the court may find proved do not confer on the defenders inter alia a claim for damages for breach of fiduciary duty or for negligence et separatim that any such claim has prescribed (the other parts of the declaratory relief claimed are not longer relevant). Standing my decision that but for the operation of prescription I would have found the pursuer liable, I am not prepared to grant declarator in such blanket terms. Nor, in circumstances where the pursuer is adequately protected by my making the order outlined in the previous paragraph, do I think it is appropriate to grant declarator that any liability to the defenders has prescribed. In these circumstances, since decree of absolvitor would not be appropriate, I shall simply dismiss the principal action.