FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Carloway Lord Kingarth	[2012] CSIH 41 CA166/08 OPINION OF THE COURT delivered by LORD CARLOWAY in the reclaiming motion in causa GILLESPIE INVESTMENTS LTD., Pursuers and Respondents; against THOMAS GRAHAM GILLESPIE Defender and Reclaimer: _______

Act: Ferguson, Q.C., Simpson; Semple Fraser LLP (Pursuers and Respondents)

Alt: Moynihan, Q.C., McIlvride; Anderson Fyfe LLP (Defender and Reclaimer)

27 April 2012

1 Facts

[1] The pursuers seek reparation from the defender as a result of his breach of the fiduciary duty he owed to them as a director. In 2002 the defender, who is known as Graham, and his three brothers, namely Alan, Steven and Gary, set up the pursuers as an investment vehicle holding heritable title to the retail and office premises at Ingram House in central Glasgow. Each brother held twenty five of the one hundred pounds issued share capital. The purchase was funded partly by a loan of £250,000 from the Bank of Scotland. The defender also lent £250,000 to pay for certain aspects of the purchase and gave the Bank a personal guarantee in respect of the pursuers' future indebtedness. In 2004 the pursuers sold part of the premises to a third party. The remaining part had a substantial rental income and was valued in 2006 at £4M.

[2] In or about November 2005 there was a proposal that Steven should purchase the premises. At that time, the four brothers and the defender's son Scott were the directors of the pursuers. Scott was the managing director and he worked closely with Gary and a young partly qualified accountant, namely Stephen Bird. There were other businesses run from the premises, including G Street Properties Ltd and Monarch Park Homes Ltd, both of which, along with the pursuers, had overdrafts with the Bank. The Lord Ordinary records (Opinion of 13 August 2010, para [14]) that the defender and Scott, over whom the defender had a substantial influence, tended to view all the businesses as a single family enterprise, although not all of the brothers, notably Steven, had an interest in them. Funds, whether earned or borrowed, were used to pay debts without regard to separate corporate and individual identities. Scott was the sole signatory on the pursuers' bank account. Mr Bird attempted to rationalise any payments made by the pursuers in the company accounts after the event.

[3] Prior to a meeting on 13 December 2005 between Steven, Scott, Mr Bird and the pursuers' accountants, Mr Bird produced a "Share Transfer Proposal" which envisaged a sale of the shares, rather than the premises, in order to obtain Capital Gains Tax relief. The Proposal involved a price for the shares of £4M from which certain payments would be deducted. These included: a bonus to Scott of £100,000; £250,000 in respect of the loan from the defender; and £2.5M in order to clear the pursuers' overdraft with the Bank. There was an estimated Corporation Tax liability of £407,000 also to be deducted, but there was income too from a "Directors Loan" and property investments made by Scott and the brothers, other than Steven, with the pursuers' money, in "Saltoun Street" and "Kirkton Park". The plan was not only to divide the resultant net figure of £1,329,031 between the four brothers (22% each - £292,387) but also to make payments to Scott (10%) and a third party (2%), both of whom were somehow thought to have shares. The cash entitlements of Scott and the brothers, other than Steven, were reduced by figures representing their interests in Saltoun Street and Kirkton Park. A later version of the Proposal put in a more precise figure for the bank overdraft (£2,889,333), omitted references to the bonus and the tax provision and slightly varied the figures for the "Directors Loan" and the property investments. It brought out a total for distribution of £1,446,968, producing £318,274 (about 22%) for Steven and lesser net figures for the others.

[4] At some point it was determined that the shares would be purchased by Eastercroft House Ltd., a company controlled by Steven. In due course a formal document, entitled the Share Purchase Agreement, was drawn up by law agents DLA, acting for Eastercroft, and Maclay Murray and Spens, representing all four brothers. It was executed by the brothers ("vendors") and Eastercroft ("purchaser") on 12 May 2006. As will be seen, this document contains an agreement which is different from the Share Transfer Proposals, even if the twin essentials of the price being £4M and the need to pay off the overdraft remain apparent from the figures adopted. One of the few documents available to explain the change in form was an e-mail dated 10 May 2006 to Mr Bird from an agent at Maclays stating:

"Funds flow: I understand from DLA that the consideration will be a headline figure of £4m from which the bank debt of approximately £2.9m will be remitted to Bank of Scotland. I understand that Kirkton Park, Saltoun Street and the loan to [the defender] are now out of the equation (emphasis added). We need to discuss how the remaining £1.9m (sic) is to be divided. Please confirm".

[5] The Agreement acknowledged that the only shareholders were the four brothers. Clause 3.1 specified the price for the shares at precisely £1,051,362.80, payable in cash in four equal sums of £262,840.70 by the purchaser to each vendor. Clause 4.2 stated that the purchaser "shall not be obliged to complete the purchase... unless the Vendors comply fully with their obligations under part 5 of the Schedule".

[6] Part 5 is in the following, amongst other, terms:

"Completion

1. Each of the Vendors shall repay or procure the repayment of all sums owed by him... to the [pursuers].

2. The Vendors shall deliver or procure to be delivered to the Purchaser:

...

2.13 written confirmation... that neither any of the Vendors... are indebted to the [pursuers] (or vice versa)...

4. The Purchaser shall, subject to compliance by the Vendors with the obligations set out in paragraphs 1 to 3...

4.1 pay by telegraphic transfer the sum of £1,051,362.80... to the bank account of the Vendors' Solicitors...

4.2 on behalf of the [pursuers] pay by telegraphic transfer the sum of £2,948,637.20, being an amount sufficient to discharge in full the liability of the [pursuers] in respect of the Bank Debt, to the bank account... The Purchaser and the Vendors shall procure that instructions are given to the Vendors' Solicitors to pay such funds to the Bank immediately following Completion and discharge in full the liability of the [pursuers] in respect of the Bank Debt".

"Bank Debt" had earlier been defined as the amount owed by the pursuers to the Bank "at the Completion Date, being £2,948,637.20". The Completion date was the date of the Agreement.

[7] What happened thereafter was rather different from what appeared to have been intended by the contractual terms. It is easily noticed that the money which was to be paid to the four brothers (£1,051,362.80) combined with that destined for the Bank (£2,948,637.20) totalled £4M, being essentially the price to be paid for the acquisition of the premises by Eastercroft, free from any secured debt. The whole amount was paid into the pursuers' account with the Bank. The pursuers' overdraft stood at only £2,700,943.15. It was promptly paid off. However, the Bank then diverted £988,698.38 to meet the indebtedness of G Street Properties and a further £302,000 to meet that of Monarch Park Homes. Thus the Bank absorbed the whole £4M and Steven, who had no interest in these two companies, initially received nothing. A voluble protest on his part resulted in a payment of £300,000 from the defender through Scott; a sum which was promptly lent back to Scott to assist him in the purchase of a house. This sum was rather more than the figure due to Steven in terms of the Agreement, on the assumption that the figure for the overdraft was correct, which it was not. Had the correct figure for the overdraft been included and the other sums adjusted, Steven would have been due about £325,000. The Commercial Judge considered (para [41]) that the payment of the £300,000 was an attempt by Scott to redress the imbalance which he had perceived to exist in relation to the amount owing to his uncle Steven.

[8] In due course, Steven, who was by then in control of the pursuers through Eastercroft, made inquiries into the financial dealings of the pursuers before the sale of the shares. The Commercial Judge was satisfied (para [38]) that, although a director, he had not been consulted on the application of the pursuers' funds and borrowings for the benefit of the business ventures in which he had no interest. It was not disputed that the extent of the pursuers' indebtedness, as illustrated by the level of the overdraft, at the time of the Agreement had been caused not only by legitimate expenditure but also partly as a result of payments made to fund these other ventures and to meet private expenditure by the family (partly through the medium of another company, namely Strathbell Ltd.). It is also not now disputed that, over a period prior to the sale, the defender had effectively appropriated from the pursuers, in breach of his fiduciary duty, a net total of £508,162.42 in the form of payments to G Street, himself and other family, friends and associates.

2 The Commercial Judge's Analysis

[9] At the conclusion of the proof, the defender made a number of submissions relative to the appropriated sums. These included, first, a contention, under reference to, amongst other cases, In re Duomatic [1969] 2 Ch 365, that the pursuers had waived their right to seek repayment of these sums. Secondly, under reference to Menzies: Trustees (2^nd ed) pp 684-686 and Mackenzie Stuart: Trusts pp 371-375, it was argued that the pursuers had suffered no loss because the shareholders and directors had repaid the sums misappropriated when they had paid off the overdraft at the time of the sale. In relation to waiver, this was rejected by the Commercial Judge on the basis that paragraph 1 of Part 5 of the Schedule to the Share Purchase Agreement did not support such a plea. The Commercial Judge did not consider that Steven had known about the relevant misappropriations. He concluded therefore that Steven could not have waived the pursuers' right to recover these sums. He considered (para [55]) that the central issue for resolution was whether the pursuers had suffered any loss, given that the overdraft had been repaid in implementation of the Agreement.

[10] The Commercial Judge reasoned as follows (para [55]):

"The repayment of [the pursuers'] borrowings removed that company's liability to the Bank which included the liability resulting from the irregular transactions (emphasis added) which were the subject of this action... Thus after that repayment [the pursuers] had a value which reflected principally the value of Ingram House and had no liabilities resulting from the irregular transactions".

In so holding, the Commercial Judge stated (para 57) that the Agreement reflected a decision amongst the brothers that the bank overdraft would be repaid "out of the sale proceeds and that the residue of those proceeds would be distributed among them". He continued:

"... the shareholders arranged that when [the pursuers were] transferred to Eastercroft, [they] had a value which reflected the agreed purchase price of £4 million and as a consequence had not been devalued by the irregular transactions. In effect the shareholders, by agreeing to have its indebtedness paid off and in the knowledge of certain irregular transactions, indemnified [the pursuers] against the loss which [they] had incurred as a result of the irregular transactions and which comprised a considerable proportion of that indebtedness".

[11] The Commercial Judge became concerned about the effect of the parties' competing positions. The pursuers had argued that, but for the misappropriations, the pursuers would have retained more of the £4M and that they had therefore suffered loss to that extent. The defenders had argued that because the shareholders had paid off the overdraft, there had been no diminution in the value of the pursuers and thus no loss remained. This meant, according to the Commercial Judge, that if the pursuers were correct, they would receive a "windfall" through the payment of sums to which none of their shareholders envisaged they would be entitled. If the defender were correct, he would retain part of the benefit which he had gained from his breach of fiduciary duty. The Commercial Judge invited further submissions on this issue. At this stage, the pursuers, who must have been concerned about the precariousness of their position on record, moved to the court to receive a Minute of Amendment which sought to add a plea-in-law designed to advance an alternative position; that being for an accounting of the profit made by the defender in consequence of his misappropriations. This was intended to circumvent the perceived problem that the pursuers' loss had been removed by the clearing of the overdraft.

[12] Having considered further submissions, the Commercial Judge expressed further concerns (Opinion of 22 June 2012 para [5]) about the losses suffered by an innocent shareholder disappearing into a "legal black hole". Although not prompted by either party's submissions, the Commercial Judge held that this result, which he categorised as unjust, could be resolved by holding (para [19]) that the repayment of the overdraft by such a shareholder amounted to an indemnity by him of the pursuers in respect of their claim against the defender. That shareholder would thereby become entitled to be subrogated, by virtue of the indemnity, to the pursuers' claims against the defender to the extent of the indemnity contribution. Thus, he continued (para [21]):

"while the claim against the directors in breach of their fiduciary duty remains vested in [the pursuers], the payment of the overdraft by the shareholders does not mean that [the pursuers have] no loss for which [they] can claim damages, if the repayment of the overdraft or part of it was made under a contract of indemnity".

[13] Following this line of reasoning, the Commercial Judge concluded (para [25]) that:

"[The shareholders'] decision to repay [the pursuers'] overdraft inevitably involved [the pursuers] accepting that [their] overdraft would be repaid in this manner and giving a mandate to its shareholders to do so. It was the equivalent of a formal resolution of the company to this effect. ... [That] amounted to a collateral agreement between [the pursuers and their] shareholders which took effect at the time the Share Purchase Agreement was signed. The shareholders were therefore liable to each other and to [the pursuers] to pay off the overdraft and the company could have sued any one or more of them under that collateral agreement. In this circumstance one would not need a formal contract between all of the shareholders and the company in order for the principle of subrogation to arise".

The Commercial Judge likened Steven's contribution towards the repayment of the overdraft as the equivalent of an insurance company paying an insured to indemnify him against loss caused by a third party. The payment did not extinguish the right of action against the third party and thus, it was reasoned, Steven was entitled to pursue, in name of the pursuers, his subrogated claim against the delinquent director, namely the defender, to recover that contribution. The Commercial Judge therefore refused to receive the Minute of Amendment and granted decree for one quarter of the misappropriated funds; more precisely £127,040.60.

3 Submissions

(a) DEFENDER

[14] The defender submitted that the Commercial Judge's decision was based upon an erroneous legal construct whereby the action was assumed to be truly one being pursued by Steven for losses which would otherwise fall into a "black hole". Steven's right was grounded upon the existence of a collateral agreement of indemnity with the pursuers which afforded him a limited right of subrogation to recover the sums which he had paid towards the defender's unauthorised expenditure in breach of his fiduciary duty. All of this arose, on the Commercial Judge's analysis, because the Share Purchase Agreement had not been implemented in accordance with its terms.

[15] The Agreement provided, in terms of paragraph 1 of Part 5 of the Schedule, that each vendor was to repay to the pursuers all sums owed by him. There were to be certificates in this regard, although none were ever created. In terms of paragraph 4.2, Eastercroft were not obliged to proceed unless repayment had been made. The e-mail from Maclays had made it clear to Steven that payments stipulated in the Proposals, including the Saltoun Street and Kirkton Park figures, were now "out of the equation". What had been meant was that, in terms of paragraph 1, any sums due by the sellers to the pursuers, such as misappropriated funds including the loan for Kirkton Park, were to be repaid in advance of the completion of the Agreement. There was accordingly no legal black hole for these sums, as they could have been recovered under this paragraph.

[16] The Commercial Judge's construct was entirely unnecessary. The true issue ought not to have been concerned with the rights of the pursuers, whose funds had been restored, but with the rights of the brothers amongst themselves. Had the Agreement been operated, it would have accommodated the adjustment necessitated by the misappropriations because the monies would have been put back into the pursuers by the defender. When the brothers paid off the overdraft, they were repaying not only the misappropriated sums, but also legitimate sums paid by the pursuers and unknown sums. Where there was a mixed payment of this type, the brothers were co-obligants indemnifying the pursuers for a variety of causes. Payment by one or more brother would discharge the debt or obligation leaving issues of relief or contribution between the brothers to be resolved in due course. The correct analysis was that the primary obligation had been discharged. Issues, such as those stemming from the principles of unjustified enrichment between the co-obligants inter se remained (see Mitchell: Claims in Unjustified Enrichment to Recover Money Paid Pursuant to a Common Liability [2001] 5 Edin LR 186). The defender had contributed one quarter to the legitimate debts and towards the misappropriations.

[17] An equitable result could have been achieved by one of two routes: (a) the direct route of implementation of the Agreement; and (b) the more oblique course of Steven taking action against the defender based on unjustified enrichment. The latter presupposed that the liability to the pursuers had been discharged. If it had, the unjustified enrichment stemmed from Steven entering into a transaction resulting in his receipt of a sum undervaluing his shares.

[18] Contrary to the view of the Commercial Judge, it was unusual for the real raiser in a subrogated claim to restrict his conclusion to the amount which he had paid. He would normally sue for the whole loss. In any event, there was nothing in the pleadings to indicate that what was being pursued in this action was in the nature of a subrogated claim. The cause sought the whole amount of the misappropriations. The existence of a subrogated claim only arose with the issue of the Commercial Judge's first Opinion. In order for such a claim to exist, the Commercial Judge had acknowledged that he had to find that there had been a collateral agreement. Yet the existence of such an agreement was not supported by either party. If, as the Commercial Judge had held, the right of subrogation survived to the extent that Steven had suffered loss, that ought to have been apparent from the record.

[19] If a right of indemnity was created, the question was not just to whom it related but what its actual terms were. If it was contained in a collateral agreement, it had to be ancillary to something. If it were ancillary to the Agreement, the implementation of paragraph 1 of Part 5 had to be assumed. The Commercial Judge's construct was based on In Re Duomatic [1969] 2 Ch 365 but: it was not said that the brothers had had any discussions about a right of indemnity; there was no record for such a right; and no one had been asked about its existence during the course of the proof.

[20] It was agreed that the right of subrogation had to be derived from a contract of indemnity (Esso Petroleum Co v Hall Russell & Co 1988 SLT 874, Lord Jauncey at 882). It was therefore central to the Commercial Judge's reasoning that he was able to identify such a contract (In Re Duomatic (supra), Buckley J at 373). Subrogation could be available in addition to a right of relief among co-obligants, but it failed in the absence of a contact of indemnity, which could not exist without a collateral agreement. The right of Steven to sue in the name of the pursuers was the same whether the claim had been discharged or not (Caledonian North Sea v London Bridge Engineering 2000 SLT 1123, LP (Rodger) at 1132, 1142).

[21] The e-mail was critical and the Commercial Judge ought to have concluded that the onus had been on Steven to supply a good reason for the matter falling into a black hole as distinct from being caused by his failing to implement paragraph 1 of Part 5. There was no reason for the Commercial Judge to create an alternative route for Steven, akin to the terms the Proposals. He had failed to ask how it had come about that the adjustments in the Proposals had not been replicated in the Agreement. The answer to that was, first, the family's general disregard of legal documents and, secondly, the discussion that the adjustments were to be "left out of the equation". The Commercial Judge had re-introduced them into the equation.

[22] In relation to the contention that there was a direct route whereby it could be held that the pursuers' losses had not been discharged by the shareholders' payment, there were two approaches. First, it could be said that, akin to a trust fund, the estate had been restored (Menzies; Mackenzie-Stuart (supra)), although the cross appeal had introduced a claim for an accounting for profit (Hobday v Kirkpatrick's Trustees 1985 SLT 197). Secondly, the payment might be regarded as res inter alios acta. The issue was whether the money had been lost or whether it had been restored by virtue of the payment. The end result was that this was truly a dispute between the brothers and the nephew. Despite the Commercial Judge's reasoning, this was not an action by Steven for a quarter of the money misappropriated, although it ought to have been. [23] The cross reclaiming motion (infra) based on the Minute of Amendment was resisted on the basis that it came too late. But, in any event, whether the remedy were analysed in terms of damages or an accounting for profit, the cause remained the same, viz. breach of fiduciary duty to which only the pursuers had title to sue. Steven did not have such a title other than by way of subrogation. In either event, the answer remained that the losses had been restored. There was no cross reclaiming motion which, as the pursuers suggested (infra), would have allowed the re-introduction of a claim for the recovery of the full amount of the losses. Were such a course to be contemplated, there were areas of the legal debate before the Commercial Judge, based on the principles in Parry v Cleaver 1970 AC 1 and concerning quantum of loss relative to the treatment of the payments by the brothers, which had not been dealt with in his Opinion

(b) PURSUERS

[24] The pursuers contended that the Commercial Judge had concluded that the pursuers' loss had been made good by the payment to the Bank. That explained why he had taken the indirect route which he did. He recognised that the misappropriations of the money had occurred at the expense of Steven, who had been unaware of them, and that it was the wrongdoer who ought to pay for his wrongdoing. There were three routes through the maze: direct, indirect and the one urged by the defender. The result of each was important, since legal policy suggested that the defender's answer was a flawed one. It was crucial not to lose sight of the fact that the defender had misappropriated significant sums. The consequences of the defender's argument would be that Steven would bear the same responsibility for the losses as the defender. The Commercial Judge had found an elegant solution of how to do justice, consistent with legal policy.

[25] In relation to the direct route, the action was framed as a suit for the whole of the loss to the pursuers as a result of the misappropriations. The action had been one seeking "repayment" of the sums (article 4 of condescendence) albeit that the plea-in-law had been framed as one for "reparation". The intention of the shareholders had undoubtedly been to repay the overdraft but not to repay the misappropriated funds. Without intention, the repayment of the overdraft could not discharge the claim relative to the latter. At the heart of the problem was knowledge and intention. If Steven had not known of the misappropriations, he could not be taken as contributing to the losses, which remained and were recoverable by the pursuers from the delinquent director. The repayment of the overdraft was neither here nor there. It was just coincidence that the misappropriations had occurred on the same bank account. The measure of loss was the full amount misappropriated in the absence of proof that, in paying off the overdraft, any party had intended to repay the misappropriated funds. The overdraft had to be paid off to achieve a sale of the shares. The direct route ought to have resulted in decree for the full £508,162.42, although it was accepted that there was no cross appeal for that amount.

[26] If the direct route was not the correct one, the indirect route selected by the Commercial Judge, whereby Steven had acquired a subrogated right to claim one quarter of the losses because of a collateral indemnity, was the right one. It was conceded that the Commercial Judge had predicated his analysis on the existence of a contract (Caledonian North Sea v London Bridge Engineering (supra), LP (Rodger) at 1133-34) and it was not maintained that equitable subrogation was part of Scots law (Joint Liquidators of Simclar (Ayrshire) v Simclar Group 2011 SLT 1131, Lord Hodge at para [31]). The question was whether a collateral agreement existed. This was not something which required pleadings or evidence. The fact that the shareholders had paid the money to the Bank on behalf of the pursuers was sufficient to give rise to a collateral agreement. It did not matter that the brothers did not know what they were doing. It was a reasonable interpretation of what had occurred. The agreement could be inferred from the equivalent, in terms of In re Duomatic (supra), of a resolution of the pursuers that the shareholders would pay off the overdraft. If the shareholders had not paid off the overdraft, the pursuers could have sought implement of the agreement. This was not because of a ius quaesitium tertio but because of a collateral agreement. That agreement could be said to be one of indemnity, which gave rise to a right of subrogation (Caledonian North Sea v London Bridge Engineering (supra) LP (Rodger) at 1138-39, quoting Lord Cairns LC in Simpson & Co v Thomson (1877) 5 R (HL) 40 at 42). If there were no contract of indemnity, however, there could be no subrogation.

[27] The position of the defender produced an unjust result ("black hole") at the expense of the innocent party. The use of paragraph 1 in Part 5 of the Schedule to the Agreement in the manner suggested by the defender presupposed knowledge of the misappropriations. Fiduciary duties were owed to the pursuers but the Commercial Judge had held that their breach had resulted in no loss. The brothers could not sue one another in terms of the Agreement since the obligation was on Eastercroft and not on the brothers. The black hole had not occurred because of any lack of attention to the terms of the Agreement but because of the Commercial Judge's finding that no loss had existed.

[28] The cross reclaiming motion was only relevant if the defender succeeded. In that event, the court could allow the amendment to introduce a claim for profits as an alternative. The defender would not be prejudiced by the lateness of the amendment. The evidence at proof would still have been the same. If the amendment were allowed, the matter could be remitted to the Commercial Judge for an assessment of the profits made on the figures already available.

3 Decision

[29] The issue is a straightforward one. It is not disputed that, prior to the sale of the shares by the brothers to Eastercroft, the defender had misappropriated funds of the pursuers in breach of his fiduciary duties as a director. The pursuers, at least at the time of the Agreement, had a valid claim against the defender for reparation in respect of the loss of these funds. That claim was not dependent upon the identity of their shareholders. The sale of the entire shareholding by the brothers to Eastercroft could not, per se, have had any effect on the subsistence of the pursuers' claim. There is no suggestion that the claim itself was discharged in terms of the Agreement. The reasoning of the Commercial Judge is, however, that, because the funds were misappropriated from the pursuers' bank overdraft account, or at least had a material effect on the level of that overdraft at the time of the Agreement, the repayment of the whole overdraft by, in effect, the brothers had the consequence that the losses were restored. This is a non sequitur, at least in the absence of any finding that it had been agreed by the parties to the Agreement that the repayment was to achieve that object.

[30] The correct analysis of what occurred is simply that the brothers had agreed with Eastercroft that they would sell their shares to that company on the basis that the pursuers' overdraft would be repaid. That is, in essence, all that was agreed in terms of paragraph 4.2 of Part 5 of the Schedule to the Agreement so far as the pursuers' obligations were concerned. The liability of the pursuers to the Bank was paid off but nothing beyond that, and certainly no other person's liability to the pursuers, was thereby extinguished. The Commercial Judge's reasoning that the pursuers' liability to the Bank in terms of the overdraft "included the liability from the irregular transactions" cannot be sustained. The two liabilities were entirely distinct. It so happened that the misappropriations caused an increase in the level of the overdraft, but that fact did not produce a situation whereby payments into that particular account extinguished the losses as soon as the account ceased to be in debit. Such extinction could only occur if there were proof of an agreement between the pursuers, who had suffered the loss, and the brothers, as effective payers to the Bank, that this was to be the effect of their payment on the pursuers' behalf. Payment of funds into a person's Bank account does not, without more, extinguish earlier losses caused to that person and which may, coincidentally, have been reflected in the level of funds remaining in that account.

[31] All that was agreed was that, before, or at least at the same time as, the shares transfer, the pursuers' overdraft was to be paid off. That, of itself, is an entirely normal business transaction but it cannot carry with it an agreement, whether implied or collateral, that the brothers, as shareholders, were thereby resolving on behalf of the pursuers that any earlier losses caused as a result of the actions of a delinquent director (or indeed any other losses prompted by the actions of any third party which had contributed to the pursuers' indebtedness) were to be written off. On this basis, the pursuers are entitled to pursue the claim against the defender for the whole amount of the misappropriations by him. The agreement by the shareholders to repay the pursuers' overdraft is res inter alios acta so far as the relationship between the pursuers and the defender as a director is concerned. The Agreement had no effect on the existence of losses suffered as a result of the earlier misappropriations.

[32] The Agreement has to be interpreted according to its terms, albeit seen in the context of the factual matrix surrounding it. The terms of the earlier Proposals may be interesting and illustrative of what was in the parties' minds at the time when the Proposals were being developed. However, the Agreement was in a different form. It did not involve the parties agreeing to deduct any payments, other than the overdraft, from the headline figure of £4M before distribution to the brothers. It is therefore difficult to take anything substantial from the terms of the Proposals in interpreting the Agreement. Similar considerations apply in relation to the e-mail. It may be possible for a lawyer to imbue the content of its terms with some form of meaning, even in the absence of evidence of that meaning from its author, but the court does not consider that it can place any significance on its terms when interpreting the terms of the Agreement, which in any event was not completed until two days later.

[33] In looking at the issue of whether there had been an agreement that the losses created by the misappropriated funds were to be written off in consequence of the repayment of the overdraft, the significant feature is not strictly what the knowledge and intention of the brothers, and in particular Steven, might have been. It is whether, as a matter of fact, they had agreed that this should happen. That requires proof of contractual terms, whether oral or otherwise, to that effect. It is, in this connection, not without significance that, in relation to the entering into contracts by the pursuers, the identity of the pursuers' directors was not entirely coincident with that of its shareholders. In this respect, the principle derived from In Re Duomatic (supra), is of limited value. The stark position is that neither the pursuers nor their directors nor their shareholders entered into any agreement involving terms relating to the writing off of losses caused by misappropriated funds.

[34] The indirect route, selected by the Commercial Judge, is, as the defender submitted, an erroneous legal construct based upon a collateral agreement to indemnify which simply did not exist. It is not without importance to observe that this action is one for reparation by the pursuers in respect of losses suffered as a result of the misappropriations. It is not a claim by a subrogated party based upon the existence of an indemnity contained in an agreement collateral to the Share Purchase Agreement. Were such a claim to be advanced, it would have to have been foreshadowed in the averments upon record. The court cannot grant a decree in favour of a party based upon the existence of a collateral agreement between parties in an action in which the pleadings make no reference at all to such an agreement.

[35] It is accepted that, for the Commercial Judge's analysis to take effect, there requires to have been a collateral agreement. The Commercial Judge has categorised the relevant agreement as one which indemnified the pursuers against losses which they had incurred as a result of the misappropriations. The problem with this analysis is that there is no evidence that the shareholders, or one or other of them, had even thought about such an agreement, far less that they had entered into it. It would have involved the brothers, as shareholders, agreeing (presumably as co-obligants) to write off any losses which the pursuers had sustained and which had resulted in the creation of the overdraft. There is no hint of this in the Agreement actually entered into or, indeed, quantum valeat, in the pre-contract negotiations as described in the Proposals.

[36] If, as the Commercial Judge has held, Steven did not know about the misappropriations in the first place, it is difficult to see how he can be taken to have entered into a "collateral agreement" to indemnify the pursuers in respect of these misappropriations. It is not enough to assert that parties entered into a collateral agreement to indemnify the pursuers without identifying just what the terms of the indemnification were. In relation to the Agreement, the brothers had agreed with Eastercroft to pay off the overdraft. If there were any element of indemnity involved, it would have had to have been one whereby each brother, as a co-obligant, had somehow agreed to indemnify the pursuers in respect of the whole of their liability towards the Bank in return for which they had the right of subrogation to claims in some way related to the extant indebtedness. Had this been mentioned at the time of the Agreement (and there is no suggestion that it was), it may have come as a surprise to all parties and their law agents. In short, the court does not consider that the existence of any contract of indemnity can be demonstrated, far less that rights of partial subrogation might have arisen under it.

[37] The defender's argument that this is truly a dispute between the brothers brought about by a failure to implement paragraph 1 of part 5 of the Schedule to the Agreement is rejected. This clause is primarily designed to ensure that the shareholders repay any loans made to them by the pursuers, for whatever reason. No doubt it would cover the obvious situation of a loan by a company to a director. It is not designed to procure the advanced payment of damages for events brought about by a shareholder or director of which the other directors and shareholders, or at least some of them, are unaware. It does not create a carte blanche in so far as the prior delinquent actings of a director are concerned. If it is contended that the intention of the Agreement was to write off losses created by such actings, the answer to that must be that it could readily have so stated. It does not do so and such a write off can neither be implied from the terms of the Agreement or by the creation of a collateral bargain of which no party was aware.

[38] There are two further matters to be considered. The first is the pursuers' en passant submission that they should now obtain decree for the full amount of the losses generated by the defender's misappropriation. Such a submission might have been made if there had been a cross reclaiming motion giving proper notice that this was the pursuers' position. In the absence of such a motion, the court does not consider that it is reasonable to allow this submission to be made at this late stage. Had this been the pursuers' stated position, it might have given the defender cause to reflect on the strength of his own case and to seek to develop arguments, equitable or otherwise, tending to restrict his liability arising out of the payment he did in fact make towards elimination of the pursuers' overdraft and hence altered the course of the reclaiming motion itself. Secondly, in relation to the actual cross reclaiming motion and the Minute of Amendment, these are now essentially academic standing the decision of the court. Had it been necessary to resolve the matter, the court would have held that the Minute had come too late as an attempt to introduce an entirely different basis for a claim against the defender. An accounting for profits is not the same as an action for reparation and quite separate calculations are involved.

[39] Accordingly, the court will refuse the reclaiming motion, refuse the cross reclaiming motion and adhere to the interlocutor of the Commercial Judge dated 22 June 2011.