NEUTRAL CITATION NO. [2003] EWHC 153 (Ch)
IN THE SUPREME COURT OF JUDICATURE
CHANCERY DIVISION
BEFORE MR JUSTICE PATTEN
Thursday, 13th February 2003
Between:
-and-
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John Wardell QC (instructed by DLA) for the claimant.
Timothy Sisley (instructed by Coffin, Mew & Clover) for the defendants.
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1. The two actions before me concern the management and affairs of Metro Selection Limited (“MSL”), a private limited company which was incorporated in June 1993. The Claimant, Mr Gidman, is a director of the company and was until September 2000 its chairman. The issued share capital consists of 95 shares made up of 75 A ordinary shares and 20 B ordinary shares of £1 each. The A and B shares confer on their holders the same rights, save that the holders of the B shares have no right to vote upon any resolution at a general meeting or to have shares offered to them under Article 6 of the Articles of Association, which contain compulsory transfer provisions that I will come to shortly. Mr Gidman holds 25 A shares and 5 B shares. The other shareholders are the remaining Defendants, Mr Ronald James Barron and Mr Gerald Moore. They each hold 25 A shares. The remaining 15 B shares are held by Capital Project Consultancy Limited (“CPC’), a company controlled by Mr Gidman.
2. At the time of MSL’s incorporation in 1993, Mr Gidman’s principal business was CPC. This company had been set up at the beginning of 1992 to run a project management consultancy business, specialising in the supply of consultancy services to the transport and allied construction industry. The evidence is that this is a niche market and CPC had as its clients organisations such as London Underground, London Transport Property and British Rail. Some of these clients had followed Mr Gidman to CPC from his former employment at Woolf Projects Consultancy Limited (“Woolf”) where he worked from 1981 until 1990. Woolf also undertook construction and project management in the building development and construction field.
3. In 1992, while CPC was managing a project for London Underground (“LUL”), Mr Gidman was approached by Mr Paul Bradford, LUL’s Head of Project Management Services and asked whether CPC would continue to provide consultancy services alone or was likely to diversify its business to include staff recruitment. It was this approach which, he says, gave him the idea of establishing another company to run a recruitment agency providing staff for companies and organisations in the transport-related field. In essence the difference between the consultancy and the recruitment agency business is this. A company, such as CPC, which provides project management consultants, has on its books a number of specialists who can be hired out to its clients to provide the project management services they require. The consultants are not employees of CPC, nor do they become employees of its clients. They are independent contractors whose time and expertise is provided to the clients in connection with a particular project at a daily or monthly rate payable by the client to CPC for the duration of the project. The consultants charge CPC a pre-agreed rate for their services and CPC makes its profit from the difference between the rates which it pays to the consultants and the rate at which it charges their services out to its clients. It is, I think, common ground between the witnesses that the essence of a consultancy agreement is the provision of a deliverable comprising the particular project management service which the client requires. Obviously that service can only be provided through the medium of the personnel who are allocated to the project, but it is the delivery of the service rather than the assignment of named staff who can provide that service which is the essence of the contract.
4. For reasons which will become apparent later, much of the controversy in this case centres on the difference between the business of MSL and that subsequently carried on by various companies set up by Mr Moore and Mr Barron, using the Metro name. If that were to depend upon the difference between a consultancy and an agency contract, then one would need to examine what MSL and the other Metro companies in question agreed to provide: a service or the personnel. The difficulty, however, is that the answer will usually be both. But Mr Barron in his evidence was keen to emphasise that a true consultancy contract is more likely to contain as terms:
(i) the delivery of the service for a fixed fee;
(ii) the right on the part of the supplier to substitute staff, and
(iii) supervision of the placements by the supplier rather than by the client.
A recruitment agency, by contrast, is one whose principal business consists of placing staff with its clients on a long or short term basis, who are then subject to the control of the end client in respect of the services they perform. An agency whose business comprises placements of this kind is commonly referred to in the trade as a body shop. It serves to find staff for its clients. It does not contract to deliver a service or project as such. Nor, in its simplest form, does it monitor the performance of the staff it provides. I accept that it is possible to identify in this way contracts which lie at the far ends of the relevant spectrum. In its purest form, a consultancy contract will involve the agency delivering the designated project at an agreed price within an agreed timescale. The risk of non-delivery within these parameters will lie on the agency, which will staff the project from the consultants selected, with a right to substitute where necessary. One can easily contrast this with the simple placement of an individual who will work for a daily rate as part of a team, supervised and directed by the end client. In reality, placements of this kind will differ little from those made by an employment agency. However, between these two ends of the spectrum lie a number of different possibilities. Some agencies, while stopping short of what might properly be called consultancies, do offer their clients an element of supervision or performance management, as it is usually called, which involves someone with the necessary skill and expertise monitoring the work carried out by the placement. At minimum, the agency will often vet the prospective placements in advance and recommend an individual rather than leaving the task of selection to the client. By the same token, I have been shown agreements for the provision of consultancy services which involve the delivery of services via a single named consultant at a daily rate, but where the expertise of that individual is such as to make any meaningful supervision of his role by the end client unnecessary. The truth is that the dividing line between consultancy and agency (if it exists) is not easy to draw or even to identify, and the more realistic view is that the incidents of the contract will vary in every case according to the scale and complexity of the project undertaken and the seniority of the staff supplied. The need to draw such a line may of course be necessary in some contexts. Mr Barron’s view of what did and did not amount to a consultancy was dictated largely by the tax considerations involved. Contracts involving the provision of a team for a fixed price, with an unfettered right of substitution and minimal supervision by the client, are beyond question contracts for services. By contrast, a contract for the provision of an individual consultant at a daily rate with no rights of substitution is more likely to give rise to a claim to tax the consultant’s earnings under Schedule E as a contract of service, particularly in the light of the approach set out in the 1999 Inland Revenue Press Release (IR35), which indicates that for tax purposes the substance rather than the form of the contractual arrangements will be critical. But I am not persuaded that the essentially legal question of whether a contract is one for services or of service provides the touchstone by which to compare the businesses of MSL and the later Metro companies. As I shall explain in due course, the question whether NISI, could provide consultancy services of a particular kind depends quite simply on two things. The first is whether it had or could obtain access to the consultants required to staff the project and (where necessary) to supervise it. The second is whether business of that kind was (for reasons of market perception) best carried out by MSL itself or through the medium of a separate company which could establish a reputation in that field and was therefore more likely to succeed in attracting that work than if it was tendered for by a division of MSL itself. These are essentially commercial and operational considerations. They are not more technical than that.
5. What, however, is not in dispute is that, once additional services are offered beyond mere placement, then higher fees can be charged. It is common ground that a recruitment agency will operate on margins of between 2% and 10% of the fees paid to the staff placed. For a consultant, the mark-up can be as high as 100%, and the evidence is that CPC aimed at this level of profit and often achieved it. A placement with performance management added on can command fees of between 25% and 40%, and perhaps higher.
6. Mr Gidman had met Mr Moore when he worked at Woolf, where Mr Moore was the construction director. He joined Mr Gidman at CPC in 1992 and became a director and a 5% shareholder of that company in 1993. Mr Barron was introduced to Mr Gidman by Mr Moore. He had been the human resources director for Trans Manche Link, the consortium responsible for constructing the Channel Tunnel. Mr Gidman says that Mr Barron had good contacts in the construction and railway industries and was seen as a valuable addition to the recruitment agency which Mr Gidman was preparing to set up.
7. On 20th December 1992 a meeting took place between Mr Gidman, Mr Moore and Mr Barron at the RAC Country Club in Epsom, to discuss setting up what became MSL. The minutes of that meeting record that the aims of the company were to provide a quality service to clients in relation to the provision of personnel in the construction and railway industry, either on an employment agency fee or consultancy basis. It was also agreed that the company would aim to trade at a positive cash flow and that all decisions would be unanimously agreed and not made on the basis of a majority vote. At the time of the meeting it was envisaged that the directors would be Mr Barron and Mr Moore and a director nominated by Mr Gidman. The shares would be split 33/34/33 between Mr Moore, Mr Barron and Mr Gidman, and each shareholder would have equal rights in relation to the sale of the company, voting rights and the payment of dividends.
8. MSL was incorporated on 7th June 1993. It had an authorised share capital of £100 divided into 100 ordinary shares of £1 each. Of these, 95 ordinary shares were issued and were held as to 25 shares each by Mr Gidman, Mr Moore and Mr Barron, as to 15 shares by CPC, and as to 5 ordinary shares by Ms Meryl Bentham, who subsequently married Mr Gidman. She then transferred these 5 shares to him. On 26th September 1994 the original shareholders entered into what is described as a Minority Protection Agreement. At the same time special resolutions were passed, dividing the authorised share capital of the company into 75 A ordinary shares and 25 B ordinary shares, and adopting new Articles of Association.
9. The Articles of Association of MSL adopted on 26th September 1994 are in the form of Table A, subject to certain amendments. These principally concern the transfer and transmission of shares, and Regulations 23-26 of Table A are replaced by a comprehensive set of articles which I shall mention shortly. Regulation 70 (the power of the directors to manage the business of the company) is preserved, but Regulation 94 (which limits the right of directors to vote on matters in which they have an interest which may conflict with the interests of the company) is excluded. However, Article 9 of the 1994 Articles of Association provides:
No director (including an alternate director) may contract with or participate in the profits of any contract or arrangement with the Company without the written agreement of all the members for the time being. A director shall also be capable of voting in respect of such contract or arrangement, where he has previously disclosed his interest to the Company, or in respect of his appointment to any office or place of profit under the Company and the terms thereof and may be counted in the quorum at any meeting at which any such matter is considered.
It is common ground that these provisions augment but do not limit or replace the well-established duties of the directors to act bona fide in the interests of the company when exercising their powers as directors, to manage and safeguard the company’s property for its own benefit and not to profit from what is a position of trust, except with the consent of the company given at a properly constituted meeting of the shareholders and on the basis of full disclosure. Article 12 governs the conduct of directors’ meetings. A quorum is two directors and decisions can be made by a majority of the directors present. The chairman has no second or casting vote.
10. Article 6 contains an elaborate code governing the transfer of shares. A member who wishes to transfer his shares is required to serve a transfer notice on the company. Article 6.2 then sets out the procedure for ascertaining the sale price of the shares and confers upon the remaining shareholders a right of pre-emption at the sale price. Article 6.2.2 provides that:
The sale price for the Sale Shares (“the Sale Price”) shall be the price specified by the Vendor in the Transfer Notice or (where no price is specified or the specified price is payable in instalments or includes a non-cash element) shall be the cash amount agreed upon by the Vendor and the directors but in the absence of such agreement shall be the price which the auditors of the Company (acting at the request of either the Vendor or the directors as experts and not as administrators) shall certify to be in their opinion the fair cash value of the Sale Shares as at the date of the Transfer Notice as between a willing seller and a willing buyer contracting on arm’s length terms, having regard to the fair value of the business of the Company and its subsidiaries as a going concern but without taking into account (if that be the case) whether the Sale Shares constitute a minority or controlling interest and, in relation to B shares, further assuming that they rank pari passu in all respects with the A shares.
Once the sale price is determined, the directors are required to offer the shares to the other holders of the A shares at the sale price: see Article 6.2.7. These provisions also apply in certain specified circumstances in which the member is deemed to have served a transfer notice with the same consequences. For present purposes the relevant circumstance is that set out in Article 6.8.14, i.e:
A written notice being given by any other party thereto of a material breach by the member concerned (whether or not an original party) of a shareholders agreement originally entered into between Ronald J Barron (1), John L Gidman (2), Gerard Moore (3), Meryl A Bentham (4), CPC Project Consultancy Limited (5) and the Company (6) on the date of adoption of these Articles (“the Shareholders Agreement”) and which, if capable of remedy, is not so remedied within 14 days of the defaulting member first receiving written notice from any other party thereto requiring the breach to be remedied.
If notice of a material breach is given under this provision and the breach (if capable of remedy) is not remedied within the 14 day period, then the transfer notice is deemed to have been served at the expiry of that period and the sale price is then determined by the auditors in accordance with the provisions of Article 6.2.2: see Articles 6.10 and 6.11.2.
11. The Minority Protection Agreement sets out the agreed basis upon which the shareholders (in particular the three holders of A shares) control and run the company. Clause 2 of the Agreement provides that:
2.1 The primary object of the Company shall be to carry on the business of providing recruitment agency services in the project management field
2.2 The Shareholders (other than the Non-Voting Shareholders) shall use all reasonable and proper means in their power so as to ensure that the Business shall be conducted in the best interests of the Company and to maintain, improve and extend the said Business and to further the reputation of the Company so as to generate the maximum achievable maintainable profits available for distribution.
Even if one interprets the reference to providing recruitment agency services as covering an area well short of full-blown consultancy services, it is clear from Clause 2.2 that the shareholders undertook to use their best endeavours to extend the business, and all the witnesses agreed that, from early on, MSL sought to provide recruitment agency services with the add-on of performance management. It was never intended that MSL should always remain a mere body shop. The bulk of its business soon became what Mr Wardell described as agency with knobs on.
12. Clause 5 of the Agreement governs the conduct of the company’s affairs. So far as material it provides that:
5.1 The shareholders shall exercise all voting rights and other powers of control available to them (whether as members of the Company or Directors or otherwise) in relation to the Company so as to procure (in so far as they are lawfully able by the exercise of such rights and powers) that at all times during the term of this Agreement:
5.1.1 the Shareholders (other than CPC) shall each be entitled to examine the separate books and accounts to be kept by the Company and to be supplied with all relevant information, including monthly management accounts comprising a balance sheet and profit and loss account, and such other information (including cash flow forecasts for the next 6 months) as they may reasonably require to keep each of them properly informed about the Business;
5.1.2 the Company shall provide each Shareholder (other than CPC) within 28 days of the end of each monthly period with management accounts and other information requested pursuant to Clause 5.1.1;
5.1.3 the members and officers of the Company shall comply with the provisions of its Memorandum and Articles of Association and the Shareholders shall further take such other reasonable steps to enforce rights of each of the Shareholders thereunder;
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5.1.5 Board meetings shall be convened, at regular intervals not exceeding 3 months by not less than 96 hours’ notice in writing accompanied by an agenda specifying the business to be transacted;
5.1.6 the Board shall determine the general policy of the Company (subject to the express provisions of this Agreement) including the scope of the Directors’ respective activities (such activities being allocated as at the date hereof in accordance with the provisions of Clause 14) and the Board will reserve to itself all matters involving major or unusual decisions including (but subject to obtaining the requisite consent from the Shareholders therefor) all the matters set out in Clause 6.1.
The reference to Clause 14 is a reference to Clause 14.2, which states that:
14.2 Subject to Clause 5.1.6 the Directors shall as at the date hereof (subject to any subsequent resolution of the Board to vary or terminate such responsibilities in accordance with the provisions of Clause 6.1.3) be jointly responsible for marketing and shall have individual responsibility for the following activities:
14.2.1 RJB: business development, sales and the control and updating of information systems;
14.2.2 JLG: planning and strategy;
14.2.3 GM: operations
provided that nothing in this Clause 14.2 shall preclude the Board from requiring any Director to report to the Board from time to time, to exercise a general supervisory role over the activities of any Director and, if it thinks fit, to overrule any decision or act of any Director.
13. As already indicated, the management of the company under its Articles is vested in the board of directors, who may exercise their powers by a majority at a properly convened board meeting. Clause 6 of the Minority Protection Agreement modifies these provisions in the Articles by restricting the power of the directors to deal with certain specified matters without the prior consent of shareholders holding not less than two-thirds of the A ordinary shares then in issue. The matters in question (again so far as relevant to these proceedings) are:
(i) the appointment of any additional directors (Clause 6.1.1);
(ii) the entry into “any agreement or arrangement to remunerate any director” other than by reimbursement of his reasonable out-of-pocket expenses incurred in the proper performance of his duties (Clause 6.1.2);
(iii) the removal of Mr Gidman, Mr Moore or Mr Barron as a director (Clause 6.1.3);
(iv) the variation or termination of the directors’ respective activities specified in Clause 14 (Clause 6.1.4);
(v) the approval for payment of any dividend (Clause 6.1.5);
(vi) borrowing by MSL (except from its bankers in the ordinary course of its business) (Clause 6.1.13);
(vii) the making of any loan or the giving of credit by NISI, (other than normal trade credit) (Clause 6.1.14);
(viii) the acquisition by MSL of shares in any company (Clause 6.1.15);
(ix) the sale, transfer or disposal by MSL of a material part of its undertaking, property and/or assets (Clause 6.1.16); and
(x) entry by MSL into any contract or transaction except in the ordinary and proper course of its business (Clause 6.1.17).
If any of these events occurs with the consent of the necessary two-thirds of the A ordinary shareholders, the dissenting shareholder is entitled to serve a transfer notice in respect of his shares, and the remaining shareholders are required to buy him out in accordance with the price formally contained in Article 6: see Clause 6.2 of the Agreement. There is therefore a way out for each of the three minority shareholders in the event of disagreement with the majority. But in order to require the majority shareholders to sell their shares to him, the minority shareholder must establish that they are in material breach of the terms of the Minority Protection Agreement so as to trigger the provisions of Article 6.8.14. The scheme of the Agreement (as is evident from Clauses 5 and 6) is not to dilute the principle evident from the Articles that the company can be managed and its powers exercised by any two out of the three A ordinary shareholders acting as directors. But the corollary to that is that each of the shareholders must be kept fully informed of all relevant information relating to the management of the company and be given proper notice of board meetings, including the provision of agendas specifying the business to be transacted. A failure by the majority to honour these requirements of openness will not only mean that the expenditure or other acts of the company will be unauthorised but may also lead to the forfeiture of their right to continue to run the company, by entitling the minority shareholder to acquire compulsorily their shares.
14. I need finally to mention two other provisions in the Minority Protection Agreement. Clause 12 of the Agreement provides that:
No shareholder shall at any time hereafter engage in any other trade or business or be associated with any person engaged in any business using or incorporating the words “Metro Selection”, the initials “MS” or words or initials colourably or phonetically similar thereto provided that this undertaking shall not apply to the use by the Company of such names or initials.
Clause 12 is reinforced by Clause 13, which contains detailed provisions prohibiting a shareholder from soliciting clients or former clients of MSL for the purpose of offering them services in competition with those offered by MSL, or from soliciting consultants or employees of MSL. Clause 13.1.5 also prevents a shareholder from being directly or indirectly concerned or interested as a director or otherwise in any business similar to the business of MSL, and from providing technical, commercial or professional advice to any person in respect of such a business.
15. In the first of the two actions before me (HC01CO5183) Mr Gidman seeks a declaration that Mr Barron and Mr Moore have committed material breaches of the Minority Protection Agreement so as to entitle him to acquire their shares in MSL under Article 6.8. The breaches alleged are of Clauses 2.2, 5.1.1, 5.1.2, 5.1.6, 6.1 and 13 of the Agreement. In summary the Claimant’s case is that, from about January 2000, Mr Barron and Mr Moore procured the transfer of new business opportunities to companies controlled by them and their associates to the detriment of MSL. These new companies received substantial capital injections from MSL and were also in receipt of the profits made from contracts between MSL and its clients, using consultants engaged by MSL. In due course many of these consultants were also transferred from MSL’s books to those of the new companies. MSL had either no or no adequate shareholdings in these companies and no contractual arrangements were put in place at the relevant time to provide for the return of the monies invested. The diversion of these assets and opportunities to companies in which MSL had no interest was, it is alleged, carried out without the knowledge or consent of Mr Gidman and was therefore never authorised by a properly convened meeting of the board or the shareholders. With one exception, these companies, which took the benefit of these transfers of assets, are either insolvent or have ceased to trade. Most if not all of the initial investment and subsequently diverted profits has been expended and is irrecoverable. In addition it is said that Mr Barron and Mr Moore have from time to time voted themselves bonuses and other payments without Mr Gidman’s consent. The following transactions are in dispute.
16. It is not in dispute that on 20th January 2000 at a board meeting of MSL Mr Gidman was told of a plan to create two new companies (Metro Systems Management Limited (“MSL”) and Metro Tunnelling Limited (“MTL”) ). Each of these companies was to provide specialised consultancy services and was to be built around a specialist in that field. In the case of MSM, this was to be Mr David Higginson. Mr Higginson was already on the books of MSL as one of its senior managers. MSM was to provide project management for railway communication projects, which Mr Higginson was already involved in providing to Railtrack. In the initial return of allotment of shares completed by Mr Barron 2,000 A ordinary shares in MSM are shown as allotted to each of Mr Moore, Mrs Barron and MSL. Subsequently, in August 2000, Mr and Mrs Higginson were each allotted 999 ordinary shares. In February 2001 the allotment of 2,000 A ordinary shares in favour of MSL was cancelled and Mr Higginson and his wife were subsequently shown as the holders of 1,000 ordinary shares each, in addition to the 4,000 A ordinary shares held by Mr Moore and Mrs Barron.
17. At the meeting on 20th January 2000 Mr Gidman was told that MTL required the services of two very high profile persons with an international reputation who, in order to attract them to the business, would have to be given a “substantial” shareholding in the company. As a consequence MSL would have only a 20% shareholding. Mr Gidman queried the need for this, but accepted it. The two individuals referred to (but not named) were Mr Alan Myers and Mr John Wallis. In fact Mr Myers (who is a specialist in tunnelling with an international reputation and was involved in the management of the Channel Tunnel Project) was never able, due to his other commitments, to join MTL. Mr Wallis did join, but received no shares. Only one share has been issued and this has been allotted to, and registered in the name of, Mr Barron. It is common ground that MSL advanced £50,000 to MSM in June and July 2000, none of which has been repaid. MTL received £145,000 between March and June 2000, of which £75,000 has subsequently been refunded. By June 2001 under inter-company trading arrangements with MSL, MSM had also received some £157,604 by way of transferred profit on contracts between MSL and its end clients. Mr Gidman’s complaint is that the monies received by MSM and MTL were in fact used to set up and support businesses in which Mr Barron and Mr Moore, but not MSL, had an interest, contrary to the basis upon which that investment was presented to, and agreed by, the board.
18. The other companies set up by Mr Barron and Mr Moore were Metro Management and Consultancy Limited (“MMC”), Sagitta Consulting Limited (“Sagitta”), Spot-1 Limited, Rail Awareness (formerly Guardian Support Services Limited) (“Guardian”) and Metro International Group Limited (“MIGL”). MMC was incorporated in January 2001. It was referred to at a board meeting of MSL held on 20th February 2001, at which Mr Gidman was presented with a proposed new group structure for the Metro companies. He was told that MMC was to provide project directors and performance management for a fee through MSL to LUL, Railtrack and CTRL. Mr Moore and Mr Barron hold between them 51 of the 56 issued shares in the company. The remaining 5 shares are held by Mr Peter Harrison. In July 2001 MMC invoiced MSL for the sum of £19,828.13 in respect of property maintenance and general care. Mr Gidman alleges, and Mr Moore in his evidence accepted, that no such services were provided by MMC. The company has now ceased to trade and its business has been transferred to MIGL. Mr Gidman claims that by failing to register MSL as the majority shareholder in MMC and by causing the shares to be allotted to themselves, Mr Barron and Mr Moore have improperly diverted part of MSL’s business to themselves. The claim, however, is limited to the monies paid in satisfaction of the invoice for services which were not rendered by the company, and to the repayment of inter-company loans in the sum of £54,777.
19. In the case of Sagitta and Spot-1, the complaint is not only about the diversion of MSL’s property, but is also one of non-disclosure. At the board meeting held on 20th January 2000 Mr Gidman was told that MSL’s existing office accommodation at Oak House, High Street, Hythe, Kent would be retained when the company moved to new premises at Cheriton Gardens in Folkestone. Oak House was to be let to another company at a rent of £6,000 per annum. In addition to Oak House, MSL also rented premises at 70 High Street, Hythe under a lease expiring in June 2002. Mr Barron had his office at 70 High Street and remained there despite the move by MSL to Cheriton Gardens. It is common ground that between December 1999 and May 2000 MSL paid to Sagitta some £18,000 and supplied at its own expense a computer costing £3982.66. In addition Sagitta was not charged during 2000 for the office space which it occupied at 70 High Street. Sagitta was incorporated in July 1999 to run a market research consultancy business. It was set up by Ms Amanda Johnston and her fiancé, Mr Barry Weller. Ms Johnston had worked for Mr Barron as his personal assistant in 1994. The expenditure by MSL is not referred to in the minutes of any of the board meetings held during this period, nor was it disclosed to Mr Gidman that Mr Barron, Mr Moore and MSL had taken shares in Sagitta. Mr Barron and Mr Moore each held 20% of the issued share capital and MSL 10%. In September 2000 MSL’s shares were transferred to Mr Barron and Mr Moore. This was not disclosed either. Mr Barron and Ms Johnston have given evidence (which I shall refer to later) that the monies transferred to Sagitta constituted payment in advance for translation and other services, such as the answering of Mr Barron’s telephone. This is in dispute. Mr Gidman’s case is that few, if any, such services were rendered and that MSL’s money has been wrongfully diverted, without his knowledge or consent, to assist in the setting up of Sagitta, in which MSL has no interest.
20. Spot-1 was incorporated in August 2000 to carry on the business of a health and safety consultancy. Mr Moore and Mr Barron are directors of Spot-1 and each own 33.3% of its issued shares. The remaining shares are held by Mr Tom McGovern, who at the time of Spot-1’s incorporation was a health and safety consultant working for MSL. MSL has never held any shares in Spot-L In about November 2000 MSL (acting through Mr Moore and Mr Barron) decided to invest some £25,000 in Spot-1. It is accepted that this agreement was never disclosed to Mr Gidman or approved at a board meeting attended by him. Nor was the interest of Mr Moore and Mr Barron in the company disclosed. By February 2001 MSL had paid £25,000 to Spot-1, including £10,000 which came from money advanced to Rail Awareness. There are two agreements in existence under which Spot-1 contracted to provide health and safety audits and inspections in return for a payment of £25,000 per annum. One agreement dated 1st January 2001 is for a period of one year. A similar agreement dated 20th December 2000 covers a period of 5 years from 1st January 2001. The 5-year agreement was first disclosed to Mr Gidman at the board meeting held on 27th November 2001. The second agreement was not disclosed at the time. Both agreements are said to have been signed no earlier than the summer of 2001, when Mr Gidman was seeking information about the management of MSL by Mr Moore and Mr Barron. In addition to this, between January and July 2001, Spot-1 received the entire profit earned on contracts between MSL and its end clients for health and safety services. This is said to amount to a net sum of £49,801 and takes into account the £15,000 paid directly by MSL in February 2001. The invoices rendered to MSL in this period are for the provision by Spot-1 of “performance management support and the mentoring / coaching of MSL’s health, safety and quality consultants”. Mr Gidman’s case is that MSL did not need such services to be provided by Spot-1 and that the invoices are simply a device to justify the transfer of profit on the contracts of MSL’s health and safety consultants from MSL to Spot-1.
21. In the year ended 30th June 2000 MSL advanced some £50,000 to Rail Awareness. Of this £15,000 was subsequently paid on to CPC International PTY South Africa (“CPC(SA)”) and falls to be dealt with separately. An additional sum of £2,000 was paid to Rail Awareness in October 2001. According to its accounts, Rail Awareness did not trade in the period up to August 2000, and Mr Gidman alleges that it provided no services to MSL during that time. The £50,000 was therefore advanced (it is said) as start-up capital, and the board of MSL was not asked to authorise any contract with, or investment in, Rail Awareness at any meeting which Mr Gidman was given notice of and attended. Rail Awareness carries on business as management consultants, and there is a further allegation that turnover has been diverted to the company, using MSL’s goodwill. No shares in Rail Awareness were issued to MSL. Of an authorised share capital of £1,000 only one share has been issued and allotted, which is held by Mr Moore.
22. The other Metro company which features in the claim is MIGL. This was incorporated in December 2000. Mr Barron and Mr Moore between them hold 51 of the 66 issued shares. The remaining shares are held by Mr David Higginson, Mr Peter Harrison and Ms Julie Donoghue, the Company Secretary. The five shareholders are all directors of the company. The two main complaints about MIGL concern the premises at Cheriton Gardens in Folkestone owned by MSL and the course of trading between MSL and MIGL from October 2001. In July 2001 it was agreed that MSL would lease Cheriton Gardens to MIGL at a rent of £18,500 per annum on terms that MSL would be responsible for all repairs and insurance costs. These terms were never put to, or agreed by, Mr Gidman and are said to be uncommercial and not in MSL’s best interests. At a board meeting of MIGL held on 4th October 2001 it was agreed that MMC and MSM would in the future trade as divisions of MIGL; that MIGL would enter into a trading agreement with MSL and, as a result, take on the majority of MSL’s business. On 26th July 2001 MIGL obtained Link-Up accreditation with Railtrack, using MSL’s own turnover figures, and on 1st October 2001 agreements were entered into between MSL and MIGL, under which MIGL took over the commitments of 26 consultants engaged on projects for Railtrack and other clients of MSL, in return for a payment to MSL of 5% of the turnover generated by the use of these consultants. Some 17 consultants engaged through MSL on projects for LUL were to remain on MSL’s books, but MSL was to pay MIGL 12% of the turnover thus generated, as payment for the provision of performance management and coaching services. Under a separate agreement of the same date, a further 2% of MSL’s turnover became payable to MIGL for the use of space and administration services at Cheriton Gardens. Mr Gidman contends that as a result of these agreements, the bulk of MSL’s turnover and business was transferred to MIGL with no corresponding benefit to MSL. In this way Mr Moore and Mr Barron are said to have improperly diverted MSL’s business to themselves.
23. In addition to these complaints about the unauthorised diversion of assets and business to the new companies, Mr Gidman also relies upon what he contends were unauthorised loans and other payments made by MSL at the instigation of Mr Moore and Mr Barron. These are said to constitute breaches of Clauses 5.1.6 and 6.1.14 of the Minority Protection Agreement. The items in question are:
(i) loans totalling £40,000 made to CPC(SA);
(ii) £15,000 paid for the production of a business plan in respect of a company called Metropolitan Offices Limited;
(iii) £4,200 and £3,250 paid by MSL in 1998 and 1999 to a company called Sentinel Project Services Limited;
(iv) bonuses of £35,000 and £25,000 paid to Mr Barron and Mr Moore respectively in the financial year ending June 2000;
(v) £10,000 paid by MSL in October 2000 to Mr Moore’s company, Controlled South Limited;
(vi) £10,000 paid by MSL to Mr Barron in December 2000 to repay a director’s loan; and
(vii) pension contributions of £11,220 each paid to Mr Barron and Mr Moore in the year ending June 2000.
24. On 22nd January 2002 Mr Gidman commenced the second set of proceedings (HC02CO189) which is a derivative action designed to recover for the benefit of MSL the monies and other assets which are alleged to have been improperly dissipated in the dealings which I have already mentioned. He says that this action became necessary once he was able to discover the scale of the transfer of business and assets which had occurred. On 29th January 2002 applications were issued under CPR Part 24 for summary judgment on the claims and for permission to bring the derivative action. On 7th May 2002 Lightman J gave permission under CPR Part 19.9 for the derivative claim and ordered an expedited trial of the action. He also put in place a regime under which Mr Gidman was appointed the Managing Director of NISI, until after judgment in the action and Ms Donoghue and Mr Higginson were appointed joint Managing Directors of the other corporate Defendants, with the exception of Spot-1. Since then the claims against Mr Higginson, Mr Harrison and Ms Donoghue have been compromised and the only effective Defendants have been Mr Moore and Mr Barron. As a result of the order of 7th May 2002 the proceedings are effectively a claim by MSL against Mr Barron and Mr Moore for breach of their fiduciary duties as directors. The effect of that claim, if successful, will be to restore to MSL its business and the value of the assets which are said to have been misappropriated.
25. At the commencement of the trial Mr Sisley, on behalf of Mr Barron and Mr Moore, agreed to transfer to MSL the shares held by them in MIGL. With the addition of the shares held by Mr Higginson, Mr Harrison and Ms Donoghue (which are also to be transferred) MIGL will become a wholly owned subsidiary of MSL, and it is accepted by the Claimant that this will remove the need for MSL to pursue any financial claim against Mr Moore and Mr Barron in respect of the dealings between MSL and MIGL after October 2001. The agreement does not, however, carry with it any admission by either Mr Barron or Mr Moore that they acted in breach of fiduciary duty or in breach of the Minority Protection Agreement, as alleged, in relation to the arrangements in dispute, and it will therefore be necessary for me to go into them in relation to the first claim for the compulsory transfer of their shares. The agreement also extends to the shares held by MSL in the other Metro companies, but in relation to the profits and other monies transferred to these companies, the claim is unaffected by the offer to transfer the shares. This is because the Claimant’s case in respect of these monies is that they were expended prior to October 2001 and are irrecoverable. They are not represented in the share value of the companies concerned, nor were the monies and other assets transferred to MIGL.
26. In order to consider the events in issue, it is unnecessary to distinguish between the two actions. They rest on essentially the same facts. But for ease of exposition I propose to concentrate on the relevant history in the context of the derivative action, and I will then consider whether the evidence discloses a material breach of the Minority Protection Agreement in addition to any breach of duty by Mr Moore and Mr Barron towards MSL. I also need to mention at this stage that the derivative action is based on two possible causes of action: (1) an unlawful conspiracy to injure MSL by diverting away its assets and business, as alleged; and (2) breach of fiduciary duty on the part of Mr Moore and Mr Barron as directors. No Limitation Act problems exist in this case, and Mr Wardell indicated that he was primarily seeking equitable compensation for the alleged breaches of duty and would, on behalf of MSL, opt for that remedy, even if successful in establishing both causes of action. I therefore intend to concentrate on the allegations of breach of duty. The conspiracy (if established) will necessarily constitute a breach of fiduciary duty in itself and really adds nothing. It was, I think, relied upon in the original pleading as a means of obtaining relief against Mr Harrison, Mr Higginson and Ms Donoghue, who were never directors of MSL, but no claim against them is any longer pursued.
27. Although (for the reasons just explained) conspiracy is not the primary claim, Mr Gidman maintains the position that Mr Barron and Mr Moore, from at least June 2000, did act in concert to divert the business of MSL for their own benefit. Mr Wardell emphasised that it is not Mr Gidman’s case that the re-allocation of MSL’s business and assets was a piece of bona fide restructuring with minor acts of non-disclosure and the failure to register MSL’s interests added on. It is his case that from mid-2000 onwards Mr Gidman was effectively excluded from participating in MSL’s business and was lied to at every stage as a necessary part of the enterprise on which Mr Moore and Mr Barron were embarked. This presentation of the facts is in sharp contrast to the submissions of Mr Sisley on behalf of the Defendants, who seeks to distinguish between the decision taken early in 2000 to begin the setting up of other Metro companies in the form of MTL and MSM, and the subsequent failure to allot to MSL the 20% of shares to which it was entitled. That subsequent failure cannot, he submits, convert what was undoubtedly an authorised investment into a breach of duty of the kind alleged, and any breach of duty consisting simply of the non-allotment of shares was put right by the later agreement of the Defendants to transfer their shares to MSL. Similarly his clients’ failure to make disclosure of the shares which they took in the other companies was put right by their subsequent disclosure of these interests in February 2001.
28. It is right that I should make clear at the outset that the attractive logic of Mr Sisley’s arguments is undermined by the view which I have formed of his clients and their conduct in relation to the matters in issue. Although I think that it is difficult to identify a precise point in time at which their interests and those of MSL irreversibly diverged, I have found it impossible to view their conduct of the company’s affairs as simply honest but incompetent. For the reasons which I will explain as I go through the evidence, there is every indication that Mr Moore and Mr Barron put their own interests before those of MSL and deliberately set about to create a network of companies in which they and their associates, but not MSL, had significant interests. These companies were funded not at their own expense, but at that of MSL, on terms which Mr Moore was candid enough, during the course of cross-examination, to admit could not be justified on any proper commercial basis, and would not have been agreed to, even by him, had he been acting solely in the interests of MSL, which it was of course his duty to do. Although the events in question may have been prompted on the part of Mr Moore by the breakdown in relations between him and Mr Gidman which occurred in June 2000, nothing in that could justify, or did justify, the abandonment by the Defendants of their obligations of loyalty to MSL. The fact that Mr Gidman was a shareholder in that company, with guaranteed rights under the Minority Protection Agreement, presented a problem for Mr Moore and Mr Barron, but the honest way out of the relationship was for them to exercise their rights under the Agreement to dispose of their shareholdings. It was not to exclude Mr Gidman from the running of the company and to dilute the value of his shareholding by diverting business opportunities and income to companies in which Mr Gidman and MSL had no interest.
29. My own assessment of Mr Moore is that he is at heart a decent person who can now accept (and did accept) that his conduct fell short of what was required of him as a director of MSL. That makes it all the more regrettable that he has put his name to witness statements which, as I shall indicate, give a wholly false and misleading impression of the true position. It is not, however, possible for me to qualify my criticism of Mr Barron in the same way. I have to say that I found his evidence to be largely an invention designed to justify conduct which on any view was both disloyal and dishonest. He steadfastly refused to concede most of the criticisms put to him, regardless of the implausibility of his attempted explanations. I strongly suspect that he has taken the lead in the strategy which was adopted between 2000 and 2002, and has taken advantage of Mr Moore’s disagreement with Mr Gidman to promote his own interests. There are also a number of instances in which he took it on himself to assist others such as Ms Johnston to profit at the expense of MSL and he seems to have regarded it as within his rights to use the property of that company in this way, regardless of the consequences for it and its other shareholders.
30. The decision to set up and invest in MSM and MTL was taken at the board meeting held on 20th January 2000. By that time the board of MSL had become concerned about finding new areas of work to replace the income which had come from providing personnel to work for LUL on the Jubilee Line extension project. This had been a major source of income for MSL, but was nearing completion by this time. Mr Barron estimated that from 1998 (when it began) the project had accounted for 60% of MSL’s business, and the company’s turnover had risen from £900,000 in 1998 to £4.2m in June 1999. In the year ending 30th June 2000 it was £5.5m. Mr Barron was also keen to emphasise that MSL did not operate a consultancy at this time and that the Jubilee Line business consisted of body shop placements. For present purposes it is unnecessary to resolve that issue. What is not disputed is that MSL had already in 1997 decided to adopt three new trading styles of Metro Selection, Metro Management Services and Metro Project Services. This was done in order to raise the profile of the business by giving it the appearance (even if not then the reality) of being a consultancy. Apart from anything else, this allowed higher fees to be charged.
31. It was put to Mr Gidman that an obvious fetter on the expansion of MSL’s business towards a fully-fledged consultancy was the need to avoid competition with CPC in respect of the same business. But I accept Mr Gidman’s evidence that he was never really concerned about this, because he believed (rightly or wrongly) that there was enough work in the market for both companies, even in related fields. There is certainly no indication in the contemporaneous evidence that the board of MSL ever felt inhibited by this consideration, and the establishment of specialist companies such as MTL and MSM (which the Defendants characterised as part of the restructuring and expansion of MSL’s business) is inconsistent with their being restricted by consideration for the position of CPC. The problem of a potential conflict between MSL and CPC was discussed as early as 1994, but at a board meeting held on 14th June of that year it was decided that any such conflicts could be resolved by agreement between the two companies and that the benefits of having Mr Gidman as Chairman of MSL outweighed any disadvantages. Mr Barron’s assertions about the limited nature of MSL’s ambitions should also be examined in the light of the 4-year business plan prepared by him and Mr Moore, which was presented to the board of MSL at a meeting on 16th April 1997. That refers to the adoption of the new trading styles and to the need for the company to provide differing types of services. An example of this in practice can be seen in a letter from MSL to Jarvis Rail dated 14th September 1998, in which Mr Moore set out the type of services which MSL could provide. This included advice on health and safety issues and the provision of performance management and continuous improvement programmes in respect of personnel. Although (as already indicated) there remains a dispute on the part of Mr Barron as to whether MSL did provide true consultancy services, this is largely a matter of definition. What is clear is that by 1998 MSL held itself out as able to provide a wide range of services extending well beyond anything which could reasonably be described as a mere body shop or recruitment agency. I accept that it had not yet acquired in the market anything approaching an established reputation as a consultancy. This is evident from a customer survey report produced in May 1998. The period was therefore a transitional one for MSL, but there is no doubt about the direction in which the company was intended to head, and Mr Moore (unlike Mr Barron) accepted in cross-examination that MSL’s business did expand from that of a recruitment agency to include an element of performance management, thus enabling it to obtain profit margins in excess of 20%.
32. The 4-year plan is also relevant when considering the areas of responsibility of each of the three directors. One of the points taken by Mr Moore and Mr Barron which is more relevant to the personal action is that Mr Gidman failed to carry out the duties prescribed by Clause 14.2 of the Minority Protection Agreement (i.e. business development) and in effect abdicated responsibility for the running of the company to the Defendants. It is clear from the business development plan that by 1997 (if not before) it was accepted by Mr Moore and Mr Barron that Mr Gidman should have an essentially non-executive function as chairman and be responsible simply for overseeing and promoting the business of the company in what is described as a public relations role. The day-to-day management of the company was concentrated in the hands of Mr Barron and Mr Moore. Consistent with this, Mr Gidman drew no salary from MSL and was paid limited expenses, which amounted in all to about £2,000. His financial interest in the company was as an investor and shareholder, and his sole source of profit was therefore through dividends. By contrast Mr Barron and Mr Moore drew substantial salaries, which in recent times were in excess of £100,000 each. There is nothing which suggests that Mr Gidman did not take his position as chairman seriously or failed to exploit what opportunities presented themselves for expanding the business of MSL. A number of instances were given of his having set up contacts for MSL with potential sources of work. For example Mr Gidman was friendly with the chairman of Jarvis Rail (Mr Paris Moyedi) and approached him to set up a point of contact for Mr Moore to discuss the provision of services as set out in the letter of 14th September 1998. Paradoxically the evidence indicates that it was Mr Barron and Mr Moore, rather than Mr Gidman, who were most concerned about not trespassing in relation to CPC. The note of a business review meeting held on 10th March 1998 records that Mr Gidman offered to undertake a high-profile marketing role, using as contacts the clients of CPC, but that Mr Barron and Mr Moore indicated that no leverage should be used with CPC clients. But however one characterises Mr Gidman’s role, it is obvious that the primary responsibility for managing and developing the business of the company rested with Mr Barron and Mr Moore, who were paid to do just that. Nor did the limited role assumed by Mr Gidman in any way lessen his entitlement to be kept informed and consulted about the course of the business of MSL and the investment of its assets, as stipulated by the Minority Protection Agreement.
33. The first steps towards setting up MTL were taken in about May 1999, when Mr Barron discussed the idea of establishing a specialist tunnelling consultancy company with Mr Alan Myers. As already indicated, Mr Myers is an expert in tunnelling, with a very considerable reputation. In 1999 he was still heavily involved in the Channel Tunnel project and was identified by Mr Barron as the person who could give MTL the reputation and expertise it needed to branch into this very specialised area of work. Neither Mr Barron nor Mr Moore had the contacts or expertise in this area necessary to make MTL a success. Mr Barron in his witness statement described Mr Myers’ involvement as vital.
34. On 28th June 1999 Mr Barron and Mr Moore met Mr Myers to discuss the possibility if his becoming involved in MTL. It was agreed that any such involvement would be on the basis that Mr Myers received shares in the company (described as “sweat equity”), but the note does not indicate what the size of the shareholding was to be. Mr Barron says that Mr Myers wanted more than 50% of the shares, and Mr Myers confirmed in evidence that this was the position. I have no reason to doubt that. I should say at this stage that Mr Myers’ witness statement simply adopts and affirms various identified paragraphs in the first witness statement of Mr Barron. This is not a satisfactory method of providing evidence in chief, and it rapidly became clear that Mr Myers was in fact unable to verify many, if not most, of the facts asserted in the paragraphs referred to. But I attribute this to a reluctance on his part to become involved in the litigation and to a consequent lack of care, rather than to any intention on his part to dissemble. He was an honest witness and I accept his evidence given under cross-examination. What emerges from this is that in June 1999 Mr Myers made it quite clear that he could not commit himself to MTL because he wished to stay with the Channel Tunnel project for at least a year more. The terms upon which Mr Myers might become involved were therefore discussed in that context. It looks as if there were further discussions in November 1999 between Mr Myers and Mr Barron, during which Mr Barron handed over MSL’s current database of tunnellers. Mr Myers thinks that he may also have provided Mr Barron with some information about the availability of various people mentioned in it. His real difficulty was that he was prevented under the terms of his engagement with Halcrow Limited from becoming involved with any other company. He was clearly concerned to honour this obligation. He therefore could not and did not give Mr Barron any sort of undertaking to join the MTL venture, and I accept his evidence that he was never willing to commit himself to joining that company.
35. Against this background one can turn to the MSL board meeting held on 20th January 2000, which was attended by all three directors. The minutes record that Mr Moore stated that MSL intended to make a provision of £250,000 for the set-up and development costs for several new businesses. The proposed investment would be expended over a period of 6 months. Paragraph 6.00 of the minutes sets out in more detail the development opportunities which were identified and discussed. The Hong Kong venture which is referred to was never taken forward, and nothing came of the proposed investment of £100,000 in ETI Limited. Investments were, however, made in MTL and MSM. I should mention at this stage that the monies transferred to those companies were paid under invoices for services rendered, but it is common ground that no such services were in fact rendered and that this was simply the method adopted for making the investment in MTL and MSM. The authority for these investments stems from this meeting. It was the only occasion on which the board of MSL was asked to approve an investment in the two companies, and the terms of that authority were never subsequently reconsidered or revised. Mr Gidman’s evidence (which I accept) is that no mention had been made to him of MTL before this meeting and that Mr Myers was not identified as one of the “key personnel” involved. He says that he was told that other persons of high standing in the field would have shares in the company, but that these would be minority holdings. He was informed that MSL itself could have only a 20% interest, whereas he wanted it to have a 26% interest, in order to be able to call an EGM. However, he accepted that MSL needed to have a specialist tunnelling division and, on the basis of the information presented to him, was prepared to accept the terms proposed. What is, I think, important (as recorded in the minutes) is that the two (unnamed) high-profile specialists needed (it was said) to be given “a substantial shareholding” in order to attract them to the company, and the business of MTL was to be established and trading before June 2000.
36. Mr Barron says nothing in his witness statement which in terms challenges the accuracy of the minutes of that meeting. The same goes for Mr Moore. However, during his cross-examination Mr Barron said that he was sure that he told Mr Gidman at the 20th January meeting that both he and Mr Moore were to take shares in MSM and MTL. Mr Gidman’s recollection is that no such disclosure took place and in this he is supported by Mr Moore, who accepted that Mr Gidman was told nothing about personal shareholdings for him and Mr Barron, and that he would have recorded it in the minutes, had the matter been discussed. I have no hesitation in preferring the evidence of Mr Moore to that of Mr Barron on this point. Even if Mr Barron already had the idea of a personal shareholding for him and Mr Moore, it was certainly not disclosed to Mr Gidman at this time and was not therefore authorised by the board and shareholders of MSL.
37. In summary, then, the approach of the board and that of Mr Gidman as shareholder to the investment in MTL was conditional on the business involving two “very high-profile persons of international reputation” who would be given substantial shareholdings alongside the 20% interest of MSL. Even that authority was obtained on the basis of substantial non-disclosure or misrepresentation by the Defendants. If Mr Barron is right that the possibility of him and Mr Moore taking personal shareholdings originated in late 1999, that should have been disclosed. In any event there should certainly have been disclosure of the fact that Mr Myers was in no position to commit himself to MTL and that no alternative candidate of a similar standing had been identified. When, therefore, between March and June 2000 some £127,127.66 was transferred to MTL, it was, in my judgment, on an entirely false and unauthorised basis.
38. This is confirmed by the subsequent history of the dealings in relation to MTL. Mr Myers repeatedly emphasised in his evidence that he was unwilling to breach his obligations to Halcrow and made this clear to Mr Barron. Notwithstanding this, Mr Barron prepared a document headed “Record of Discussion” dated 26th February 2000, which in terms suggests that Mr Myers continued to be an active participant in discussions about the MTL business. Mr Myers did not approve it and did not sign it. His evidence is that, despite his making it clear to Mr Barron that he could not commit himself to MTL, Mr Barron and Mr Moore told him that they had funds which they wanted to use for the venture and did not want to wait. Mr Myers therefore agreed to find someone to step in and contacted Mr John Wallis.
39. Mr Wallis was about to be made redundant by Taylor Woodrow and indicated to Mr Barron that he would be interested in joining MTL. Mr Barron in his witness statement says that the idea was that Mr Wallis would “hold the baby” until Mr Myers became available. But that presupposes that in early 2000 Mr Myers had at least committed himself to joining MTL at some future time. In fact he had not and never did so. He has remained employed by Halcrow to this day. The truth is that Mr Wallis was not an adequate substitute for Mr Myers and was never seen as such. This is evident from the fact that he was never offered or given any shares in MTL. Although described (doubtless correctly) as an experienced tunnelling engineer manager, he did not have either the experience or reputation of Mr Myers, and it can have been no surprise to Mr Barron when he failed to attract the business for MTL which had been hoped for. His appointment and the use of MSL’s investment in MTL to meet his salary and expenses should have been notified to the board of MSL and approval sought for such expenditure. It never was. I reject the suggestion put forward by Mr Barron in evidence, but not seriously pursued by Mr Sisley in his cross-examination of Mr Gidman, that the latter was aware of Mr Wallis’s involvement from Mr Moore and in some way acquiesced in it. There is no evidence that Mr Gidman was properly consulted about the use of Mr Wallis or given the information necessary to enable him to form any view about Mr Wallis’s suitability. Mr Wallis was never able to generate significant business for MTL and left the company in March 2001. The only real items of business secured for the company through him were some contracts with Liffey-Spraycon for re-lining railway tunnels in Ireland. Later that year MTL ceased to trade.
40. In about March 2001 Mr Myers had told Mr Barron that he had decided not to leave Halcrow and would not therefore be joining MTL even in the future. But this was never formally notified to the board or to Mr Gidman. What does, however, need to be made clear (and I find) is that this decision had nothing to do with Mr Gidman. Mr Myers (on his own evidence) simply decided that he wished to remain with Halcrow. In his witness statement Mr Myers adopts various passages of Mr Barron’s first witness statement, to the effect that Mr Myers was not prepared to have any involvement with MTL if Mr Gidman was to have any interest in that company, whether directly or through MSL. This is relied upon by the Defendants as a justification for withholding from Mr Gidman a copy of the business plan for MTL (despite his frequent requests to see it) and for not allotting to MSL even the 20% of shares promised at the board meeting on 20th January 2000.
41. It is not in dispute that in June 2000 there was a disagreement between Mr Moore and Mr Gidman in relation to CPC, which led to Mr Moore leaving that company. Although the precise rights and wrongs of that dispute do not need to be decided in these proceedings, the incident is important because it led to a breakdown of relations between Mr Moore and Mr Gidman, and was, in my judgment, the catalyst and explanation for the Defendants’ subsequent conduct. Mr Moore had been a director of CPC since October 1993. In 1997 he had sought to resign in order to concentrate on MSL, but had been persuaded by Mr Gidman to stay on. His role at CPC seems to have involved advising and training staff to deal with clients in difficult projects. Mr Moore says that his eventual departure in June 2000 from CPC was brought about by a combination of two main factors: Mr Gidman’s handling of some problems in relation to CPC’s South African subsidiary, CPC International (SA) (“CPC(SA)”), and the disclosure that he had been drawing monies from CPC to pay for the personal expenses of himself and his wife.
42. CPC(SA) went into provisional liquidation in October 2000 and was wound up in August 2001. Amongst its debts was some £405,000 owed to some former directors. In October 1999 CPC gave guarantees in respect of these debts of its subsidiary. Mr Moore says that Mr Peter Maryszczak, the Managing Director of CPC, was prevailed upon by Mr Gidman to sign the guarantees and that there was no proper board approval given. As a result the South African creditors petitioned in England to wind up CPC in March 2000, and funds had to be made available to contest the petition and to make payments to CPC(SA). A schedule for the repayment of the £405,000 was agreed by CPC in the face of the English winding-up proceedings, under which £45,000 was paid to the directors, followed by £15,000 per month. This is still in place.
43. Mr Moore says that his other concern was the payment of Mr Gidman’s personal expenses out of CPC. These are listed on a computer print-out which Mr Moore says he was given by Mr Maryszczak in May 2000. The expenses on the sheet amount to some £47,000 and include items such as holiday costs and golf club membership fees. But the print-out also indicates that the personal items were to be deducted from the dividends in CPC payable to Mr Gidman, and I accept Mr Gidman’s evidence that this practice was followed in respect of the expenses in question. His evidence was not challenged and is supported by that of Eileen Hall, the financial director of CPC. I therefore reject the suggestion (if that is what it is) that Mr Gidman was in some way using CPC to fund his personal expenditure without proper authority or in some surreptitious manner. Mr Moore in his witness statement describes the payments as misappropriation. That is quite clearly wrong. It seems to me that Mr Moore was in reality affected by only two concerns: (i) the possibility that CPC might be pulled down by its liabilities under the guarantees for CPC(SA) and (ii) a sense of resentment at the level of remuneration received by Mr Gidman from CPC. In his witness statement Mr Moore complains that this amounted to more than £350,000 a year, and other witnesses, such as Ms Donoghue, confirm that the scale of Mr Gidman’s remuneration at CPC was a constant source of irritation to both Mr Moore and Mr Barron. I strongly suspect that both Defendants came to believe that they were underpaid by comparison in relation to their services for NISI, and could do better for themselves free from Mr Gidman. Although dressed up in their witness statements in terms of the disapproval of Mr Gidman’s conduct, their real motivation was essentially commercial. They believed (perhaps rightly) that they could do better without Mr Gidman than with him. It may be that they were genuinely annoyed by what they saw as his inadequate contributions to MSL’s business and that they did really believe that he was a freeloader, as Mr Barron described him. For all I know, it may be true that there were occasions when (as alleged) he became intoxicated and caused embarrassment in the presence of clients. But Mr Barron’s description of him as a rogue director is neither accurate nor justified on the evidence I have heard, and such excesses of behaviour as there may have been did not justify what followed. I am not called upon to determine whether Mr Gidman’s behaviour was offensive. What is important is that it was not unlawful. And a breakdown in relations between Mr Gidman and the Defendants, attributable to clashes of personality or style, should have been dealt with (if necessary) by the dissolution of MSL under the terms of the Minority Protection Agreement and the Articles. Instead what Mr Barron and Mr Moore decided to do was to exclude Mr Gidman as far as possible from the business, to provide him with little or no information about the use they were making of MSL’s assets after June 2000, and to run the business of MSL as if it was their own. The derivative action is not of course a claim by Mr Gidman, but his position as a shareholder in MSL with guaranteed rights under the Minority Protection Agreement meant that to exclude him, it was also necessary to exclude MSL, and as I shall explain in more detail as I address the various claims in this action, the strategy adopted in relation to Mr Gidman led inevitably to the Defendants abandoning their duties to act in the best interests of MSL, in favour of the various companies which they set up using MSL’s assets and income, but from which MSL obtained no real benefit at all.
44. This is well illustrated in the case of MTL itself. Mr Moore resigned from CPC on 2nd June 2000. Mr Maryszczak had also resigned on 30th May. Mr Gidman, not surprisingly, was alarmed by these departures, not least because he had to take over the running of CPC until new directors could be found. Mr Moore in his resignation letter referred to Mr Gidman taking monies out of the business and said that he had no desire to work with him. He therefore requested Mr Gidman to resign from the board of MSL, offering to safeguard his and CPC’s shareholding in MSL to the best of his ability. Mr Wardell put it to Mr Moore that this was a front and part of a preconceived plan with Mr Barron to take away MSL’s business. I am not able to be so precise about the exact timing. In my judgment there must have been some discussion and planning about Mr Moore’s departure, and some thought must have been given to the immediate consequences. Whether (as alleged) there was by then a fully formed intention to extract MSL’s business into other companies is unclear, but it probably does not matter. What is, I think, clear from the events which followed is that from June 2000 onwards no arrangement entered into by the Defendants on behalf of MSL was effected for the benefit of that company. As I shall indicate later, I entirely reject the notion that the subsequent arrangements to use MSL’s income from the supply of its consultants to fund companies in which it had no interest was, or was thought to be, in the interests of MSL, and Mr Moore, when pressed, admitted as much. But once embarked on that course, neither he nor Mr Barron felt able to disclose what they had done to Mr Gidman, and there is a history of what can only properly be described as half-truths and deception practised on Mr Gidman and therefore, in a real sense, practised on the company.
45. Mr Myers (according to Mr Barron) was told that Mr Gidman was not to be trusted in business dealings. This was at a time later in 2000 when Mr Gidman, perfectly reasonably, was asking to see a business plan for MTL Mr Barron says that, having been told about Mr Gidman’s lack of integrity, Mr Myers wanted nothing to do with him. If this is true, it is hardly surprising, but as Mr Myers confirmed to me in evidence, he knew nothing about Mr Gidman apart from what Mr Barron and Mr Moore told him. They painted a strongly unfavourable picture of Mr Gidman, and Mr Myers had no real alternative but to accept it. His reluctance, however, to have the business plan shown to anyone was not really due to what he was told about Mr Gidman, but rather to the fact that he did now want his involvement with MTL, such as it was, to become public. Mr Barron and Mr Moore did not explain to him that MSL had by then invested over £100,000 in MTL and was clearly entitled to know what its money was to be used for. I am sure that, had this been properly explained and certain safeguards about confidentiality given, then Mr Myers’ concerns about disclosure would have been overcome. As it was, Mr Barron and Mr Moore used Mr Myers’ concerns, which they had themselves manufactured, as an excuse for keeping the business plan from Mr Gidman.
46. A draft 5-year business plan for MTL had been prepared by Mr Wallis, with some input from Mr Myers, to cover the period from June 2000 onwards. It lists Mr Myers as Managing Director designate (even though he had steadfastly refused to commit himself to the company) and Mr Barron as chairman. There is absolutely nothing in the plan which could justify its non-disclosure to Mr Gidman. At about the same time a board report for MTL was also produced. This would have been a more useful document for Mr Gidman to have seen, because it indicated that Mr Wallis, not Mr Myers, had been engaged, and that the first 6 months of operations had been disappointing. Again, it was not disclosed. At a board meeting of MTL held on 30th January 2001 Mr Myers told Mr Barron and Mr Moore (as I have indicated) of his decision to stay with Halcrow on the Channel Tunnel project. The minutes record that no shares in MTL had yet been allocated, which is inaccurate in that a single share had by then been registered in the name of Mr Barron. Mr Myers is also recorded as indicating that he did not want the business plan to be shown to Mr Gidman, but I have already indicated how this came about.
47. Mr Gidman had requested a copy of the MTL business plan at the board meeting of MSL held on 7th September 2000. He was told that this would require the approval of Mr Myers. The request for the plan had not been discussed with Mr Myers prior to the meeting, and there is every indication that Mr Gidman was being stalled. It was also highly misleading to represent that Mr Myers had a material involvement in MTL when the contrary was the case. On 28th September 2000 Mr Barron wrote to Mr Gidman confirming that Mr Myers considered it to be inappropriate for the business plan to be disclosed. This was followed shortly afterwards on 6th October by a meeting with Mr Turner of Messrs Gambrills, MSL’s solicitors, at which Mr Barron and Mr Moore sought advice about the steps they could take in relation to Mr Gidman. The notes of this meeting seem to me to put beyond any real doubt what the true intentions of the Defendants were at this time. Both Mr Barron and Mr Moore were concerned to know whether they could improve their position in the company both in terms of control and in terms of remuneration. At that time both received salaries of £84,000 per annum, together with bonuses and dividends amounting to a further £45,000 each in a full year. The most revealing part of the attendance note is in relation to the development of the other companies. Mr Turner was told (contrary to Mr Barren’s assertions in the witness box) that MSL, although started as a recruitment agency, now operated as a consultancy. He was asked whether it would be possible for Mr Barron and Mr Moore to start up two new companies whose business would overlap with MSL, but in which neither MSL nor Mr Gidman would have any interest. The companies referred to must be MMC and Spot-L Mr Turner said that he would need to consider the matter, but advised caution. We do not know what further advice (if any) Mr Turner gave on this matter, but it is not suggested (and it is most improbable) that he told the Defendants that they were free to set up companies in competition with MSL. Notwithstanding this, Mr Barron and Mr Moore pressed on regardless.
48. Under cross-examination Mr Moore conceded that he hoped that Mr Gidman would resign from MSL The Defendants had clearly decided by this time to go their own way, but they lacked the means to finance their new companies and therefore resorted to MSL to provide what was needed. From the summer of 2000 onwards there is a marked acceleration in the establishment of other businesses. I shall come to these in more detail later, but to illustrate the point, one need only rehearse the fact that Sagitta, Spot-1, MMC and Rail Awareness were all established and funded in 2000, followed by MIGL in 2001. As part of these arrangements, profits from MSL contracts were transferred to these companies without reference to Mr Gidman. The strategy remained one to bring about Mr Gidman’s resignation as a director of MSL, so as to trigger a buy-out under the provisions of the company’s Articles. This is stated in unequivocal terms in a strategy statement prepared by Mr Moore at the time of a project directors’ seminar in February 2001, which I will come to in more detail later. With Mr Gidman gone, all the remaining assets of MSL were to be transferred into MIGL, which was controlled by Mr Barron and Mr Moore, and in which Mr Gidman had no interest. The takeover would then be complete.
49. Mr Gidman continued to press for disclosure of the MTL business plan. He wrote asking for the business plans of MTL and MSM on 19th December 2000 and followed this up with a further request on 19th January 2001 in the run-up to an MSL board meeting scheduled for 20th February 2001. That letter also requested full details of all the directors’ interests in other Metro companies. In the meantime the board meeting of MTL was held on 30th January, to which I have already referred. On the same day Mr Gidman wrote to Mr Barron in emphatic terms, asking to see the business plans prior to the February board meeting of MSL and making it clear that he wished to see a list of all the companies in which MSL’s directors had either a directorship or shareholding. Both requests were denied. In relation to the request for details of the directorships and shareholdings held by the Defendants, Mr Barron and Mr Moore replied on 9th February 2001, stating that they had nothing to hide, but that Mr Gidman had no right to the information. In the light of the fact that Mr Barron and Mr Moore had by now obtained significant shareholdings in companies such as Spot-1, MSM and MMC, using MSL money, nothing could be further from the truth.
50. By now the pressure was really on Mr Barron and Mr Moore, and on 14th February 2001, prior to the MSL board meeting, they attended a conference with Mr Paul Emmerson of Counsel. The instructions to Counsel (prepared by Mr Turner of Messrs Gambrills) state that Mr Barron and Mr Moore would like to remove Mr Gidman from the board of MSL and to buy out his shareholding. Mr Emmerson was asked to advise how best this could be achieved. The attendance note of the conference indicates that he was told of the Defendants’ dissatisfaction with Mr Gidman’s conduct as a director of MSL and of the allegation I have already mentioned about his drawing excessive, remuneration from CPC. Mr Emmerson was asked about the various companies in competition with NISI, in which Mr Barron and Mr Moore had shares. His advice, not surprisingly, was that in view of their duties as directors of MSL, they could not pursue these interests unless there was full and proper disclosure of the facts to Mr Gidman and his approval was obtained. This was never done.
51. At the board meeting of MSL held on 20th February 2001 Mr Gidman was given a slide presentation on a laptop computer, which was intended to show how Mr Moore and Mr Barron intended to restructure MSL’s business. It needs to be borne in mind that since 1999 Mr Gidman had not been notified of, or asked to attend, any of the regular business review meetings for MSL and was limited to board meetings. He therefore came to this presentation with no forewarning of the intended new structure., Mr Barron in his first witness statement says that this was a full, frank and detailed presentation of the Defendants’ involvement with MSM, MTL, MMC, Rail Awareness and MIGL. Mr Gidman was, he said, told that in order to prevent MSL’s consultants from being poached as a result of the changes in the law introduced by the Conduct of Employment Agencies and Employment Business Regulations 2001 (“the 2001 Regulations”), new contracts would be issued between them and one of the new Metro companies, rather than MSL, with effect from 1st July 2001, and the existing contracts between MSL and its end clients would also be transferred to MSM and MMC. MSL would not provide performance management or any other value-added service, but would receive an agency fee of about 5% if it provided resources to the other Metro companies. In cases where the consultants were still provided directly by MSL to Railtrack, LUL and CTRL (because MSL was an approved supplier with the necessary Link-Up registration), it would get 5% of turnover.
52. The slides used are in evidence. They contained for each of the Metro companies (i.e. MSL, MSM, MTL and MMC) a list of the proposed activities of that company, together with an estimate of its likely income and profit. In the case of MTL, this was given as £200,000 (income) and £20,000 (net profit) for the period June 2001-2002, even though by then Mr Barron and Mr Moore knew that the company had failed to break into the tunnelling market and would have to do without the services of Mr Myers. The projected income of MSM for the same period was £2.2m. The most striking slide and the one which, on the evidence, had most impact on Mr Gidman was one showing the new proposed group structure. This shows MIGL as the holding company with 4 main subsidiaries (MSM, MTL, MMC and MSL). MSL was therefore to be relegated to being a subsidiary of a company (MIGL) of which Mr Gidman was not a director and in respect of which he had no shareholding. Mr Barron and Mr Moore had between them 50% of the shares and control of the company. The MSL slide indicated that it would collect rent from its properties and provide personnel to Railtrack, LUL and CTRL, but only receive 5% of the income and be limited to providing body shop or agency-only placements, with a fee income equal to between 10% - 15% of the charge to the end client. The only possible consolation was provided by the MSL projected turnover figures of £4m, but the net profit was projected to be no more than £163,160.
53. As a result of this presentation Mr Gidman knew that MTL, MSM, MMC and MIGL had been set up with no shares allotted to MSL and were intended to absorb the whole of MSL’s valuable business. Mr Barron’s evidence is that the presentation took over an hour and that Mr Gidman had explained to him the reasons for the new structure and the benefits that would flow to MSL. These were, it is said, the increase in agency placements which would come from the additional work obtained by the new Metro companies. They would look to MSL to provide the body shop placements. Mr Barron said in evidence that the idea of restricting MSL to body shop placements had been made as early as January 2000, but there is no reference to that in the minutes of the January board meeting, and I consider that to be an invention.
54. It is important to bear in mind that under these proposals MSL was to be deliberately downgraded in the type of services it was to provide. Mr Barron sought to justify this by reference, amongst other things, to IR35. But even he was forced to concede that the 2001 Regulations were not an impediment to MSL developing its own consultancy work; indeed the opposite. Moreover his evidence contained in paragraph 110(1) of his first witness statement, that the 2001 Regulations were referred to at the February board meeting, is inconsistent with both the minutes of that meeting and with the recollections of Ms Donoghue and Mr Gidman, whose evidence I prefer. I am not convinced that IR35 or the 2001 Regulations had really anything to do with the Defendants’ thinking. For the reasons already stated, all the evidence indicates that Mr Barron and Mr Moore wished to rid themselves of Mr Gidman and, with him, MSL. The company was only retained because it had the Link-Up registration necessary to do work for LUL and Railtrack. Long term, the intention was that even that work should be taken over directly by MIGL, as I shall indicate later in this Judgment. There is nothing to show that MSL could not have developed the consultancy business itself. Mr Barron said that it was a matter of market perception. Separate specialist companies were needed. But even if this is right (and I am not persuaded that it is), it could still have been done through companies in which MSL had a substantial or controlling interest. Where the Defendants’ position becomes impossible is in seeking to explain why they, rather than MSL, took major shareholdings in the Metro companies, bearing in mind that throughout the period with which this litigation is concerned, those companies were funded by the income earned on contracts between MSL and the end clients, using in virtually all cases MSL’s consultants. I am not the least convinced by any of Mr Barron’s attempts to justify this state of affairs, and it was no surprise to me that Mr Moore displayed obvious discomfort when asked to explain these matters. He accepted that, absent a shareholding in the Metro companies, the use of MSL’s contracts and income could not be justified and should never have been agreed to.
55. The disclosure made at the February meeting was obviously forced on the Defendants by the legal advice which they had received. But even then it was not complete. Most obviously, there was no disclosure about Spot-L Mr Barron says that this was a mistake, but I simply do not believe that. The Defendants gave the minimum disclosure they were forced to do. One can judge this by comparing the slides shown to Mr Gidman with the presentation made by the Defendants at a project directors’ seminar held on 16th February 2001. The slides used on that occasion confirmed in terms that MSL would not remain part of the operational group, and provided information on Spot-1, Sagitta and Hama Limited. None of this was shown to Mr Gidman. He was not told that the Defendants had shares in Sagitta, Spot-1 and Hama, and that some £150,000 in profit had already been transferred to MSM. Nor was he told that monies and business had been transferred to Spot-1 and Rail Awareness. In addition, there was no disclosure of the intention which existed by then to allot shares in MTL to both Mr Moore and Mr Barron in addition to MSL.
56. The other aspect of the presentation to Mr Gidman which was probed in cross-examination was the projected turnover and profit of MSL. The £4m turnover figure shown on the slide contrasts with a figure of £3m contained on a sheet of calculations produced by Mr Moore for his personal use in preparation for the meeting. Mr Moore said that he added £1m on to his initial estimate, but made a mistake in relation to the cost of sales. The slide uses a mark-up of 8%, whereas in the earlier handwritten calculations Mr Moore had used a figure for the cost of sales of 95%: i.e. a 5% mark-up. Mr Barron took refuge in a professed inability to understand figures and declined to answer Mr Wardell’s questions. Mr Moore said that he had made a mistake in the figures, but seemed unable to explain satisfactorily what he had done. I am afraid that I regard the projected turnover figure of £4m as entirely fanciful. There is no evidence to suggest that it was based on any reasoned assessment of the restructuring proposals, and Mr Moore was not able to explain how he arrived at it. It was obviously intended to give some comfort to Mr Gidman, but was in fact valueless.
57. One of the main defences raised to the claim for equitable compensation in the derivative action is that Mr Gidman acquiesced in what he was told at the February board meeting and allowed the proposals to go forward without complaint. I shall come to this in more detail later in this Judgment, but I need to make clear what my findings of fact are in relation to Mr Gidman’s response to what he was told at the February meeting. Mr Gidman accepts that he was shown the slides and told that MSL would be part of a “Metro Group”. It was also said that MSL would benefit from inter-company trading, although it would be restricted to agency placements. He strongly denies that he was told about the 2001 Regulations and I accept this. These were first drawn to his attention by Ms Donoghue, the Company Secretary, in May 2001, and her evidence is that Mr Barron and Mr Moore only found out about them in April of that year. Mr Gidman says that the slide presentation lasted only about 20 minutes. This was confirmed by Ms Donoghue. He described his reaction to what he was shown as one of shock, and said that his main concern was to leave the meeting and obtain legal advice. He also says in his witness statement, and repeated in his oral evidence, that he made it clear that he was unhappy with the proposals and did not consent to them. He rang his solicitors on his way from the meeting and went to see them on 28th February 2001. They then began the investigations which have led to this trial. Although relations between them were difficult after June 2000, I accept Mr Gidman’s evidence that he had no reason in 2000 to suspect that the Defendants were acting other than in the interests of MSL. He was not invited to attend business review meetings, as he had been in earlier years, but he had CPC to run, and I suspect that the tensions between him and Mr Moore did not encourage him to be more pro-active in his supervision of the Defendants. However, he was entitled to assume that all important decisions would be taken at board meetings and that the Defendants would honour the terms of the Minority Protection Agreement by consulting him on the matters specified in Clause 6 of that agreement. In truth, the minutes of the 20th February meeting really speak for themselves. It is clear from them that Mr Gidman did question the failure to allot shares to MSL in MTL and MSM, and was told that this was due to the objections of Mr Myers and Mr Higginson. As already explained, this was not true in respect of Mr Myers. Nor, as I shall come to shortly, was it accurate in respect of Mr Higginson. It was also untrue to say that the shares in MTL were unallocated. Ms Donoghue confirmed that it had already been agreed that the Defendants would have shares. The minutes also record that Mr Gidman stated that he wished to reflect on the information given at the meeting before commenting further. This is only partly correct. Mr Barron took the position that Mr Gidman in effect left the position open, but Mr Moore accepted that they were left in no doubt that Mr Gidman did not consent to the proposals. It was put to Mr Gidman in cross-examination that he deliberately kept quiet and did not object, in order to lull the Defendants into a false sense of security so that they would go ahead and implement the proposals, thereby committing breaches of the Minority Protection Agreement and so enabling Mr Gidman to force them to sell their shares. Mr Gidman denied this, and I accept that evidence. Although primarily relevant to the defence of acquiescence, I am satisfied, as Mr Moore and Ms Donoghue confirmed, that the Defendants were left under no illusions that Mr Gidman was other than deeply unhappy about what had been revealed to him, and was unwilling to accept it.
58. As I shall mention later in this Judgment, the full facts about the new Metro companies, and the Defendants’ involvement in them, were only disclosed to Mr Gidman when he took it upon himself late in 2001 to visit MSL’s offices to inspect the records in person. Mr Barron and Mr Moore were not even prepared to accept and to follow the advice of their own Counsel. This is the clearest possible evidence that the Defendants put their own interests and the protection of their own position above anything else, and I shall come back to this when I consider Mr Sisley’s submission in the personal action that the admitted failures to consult and keep Mr Gidman informed about their use of MSL’s assets can be regarded as a remediable breach of the Minority Protection Agreement.
59. The background to MSM is very similar. At the MSL board meeting held on 20th January 2000 MSM was identified by Mr Moore as a company which MSL would be establishing to deal with the management of railway communications projects. It would be set up in a similar manner to MTL and be built around Mr David Higginson. He was then one of MSL’s lead managers involved in this type of work under contracts with Railtrack. In his first witness statement Mr Barron said that Mr Higginson had the expertise to break into new areas and develop the business. He was also able to bring in his own specialists. MSL, by contrast, lacked people with the appropriate skills.
60. In fact the company had been set up in 1996 by Mr Higginson with the name Oakgate Engineering Limited. It changed its name to MSM on 3rd February 2000, and on 30th March 2000 its authorised share capital was increased to £10,000. On 17th April 2000 6,000 A ordinary shares of £1 each were allotted (as to 2,000 each) to Mrs Barron, Mr Moore and MSL. Mr Barron says that when Mr Higginson was told by Mr Moore and Mr Barron about Mr Gidman’s conduct following Mr Moore’s departure from CPC in June 2000, Mr Higginson indicated that he did not wish to do business with Mr Gidman. Mr Moore and Mr Barron therefore resisted Mr Gidman’s requests for a copy of the MSM business plan, which were made at the same time as the requests for the business plan of MTL. In the light of Mr Higginson’s resistance to any association with Mr Gidman, it was also decided (the Defendants say) that the April 2000 allotment of shares should be cancelled. This is referred to in the minutes of an MSL business review meeting held on 21st December 2000 and attended by Mr Moore, Mr Barron and Mr Higginson, but not Mr Gidman. The minutes record that Mr Higginson was unhappy with Mr Gidman’s involvement in NISI, and wished to withdraw his offer to sell MSM shares to MSL. The shares would be sold to Mr Moore and Mr Barron personally. There was therefore no need to register MSL’s interest in MSM in the year-end accounts to 30th June 2000. That entry is clearly inaccurate, in that the allotment of the shares to Mrs Barron, Mr Moore and MSL had already taken place. It also refers to the MSL shares not being paid up, even though by then MSM had received considerable sums of money, well in excess of £2,000, from MSL.
61. Mr Wardell put to the Defendants that the minute bore no resemblance to reality, and that is my own view of the evidence. Mr Higginson in his own witness statement says that Mr Moore offered and agreed in 1999 that MSL would invest money into MSM to allow it to develop as a specialised business alongside MSL. £50,000 was provided in early 2000 as start-up capital, but after the disclosures made about Mr Gidman he says that he decided to object to the transfer of the 2,000 shares to MSL, which had not been completed, and informed Mr Moore of this on 23rd December 2000. He does not explain in his witness statement why he thought it appropriate to deny MSL the shareholding which it was agreed it should have or why he felt able to continue to receive injections of capital from MSL without offering it any means of securing a return on its investment. He relies on an inter-company trading agreement which he says dealt fairly and equitably with the investment. I shall come to this shortly. He also stated that Mr Moore and Mr Barron had acted fairly and equitably in their dealings with MSL and MSM, but this passage was deleted from the statement when he came to give evidence.
62. When cross-examined, Mr Higginson said that he had not personally known Mr Gidman. In June 2000 he was working with Railtrack under an MSL contract. He was asked to comment on an inter-company trading memorandum dated 31st August 2000 from Mr Moore, which refers to the way in which MSL and MSM currently did business. The memorandum indicates that each month MSL would be invoiced by MSM for the amount due from the end client in respect of all the consultants under contract. This would then be paid to MSM. At the same time MSL would invoice MSM for the amount due from it to the consultants. The effect of these arrangements was to pass from MSL to MSM the profits earned on the relevant contracts. The memorandum lists the consultants concerned, including Mr Higginson. Mr Higginson confirmed that at the time of this memorandum all the consultants were on MSL’s books and were engaged in what he described as agency placements for a daily fee. With very few exceptions this remained the position until 2002. It emerged from his evidence (and I accept) that in time a number of consultants who came to work for MSL were introduced by him, and might not have been involved but for him. Equally, some end clients (e.g. Amec Rail and Comings) were also his introductions. But it is also clear from the evidence both of Mr Higginson and of Ms Donoghue that all the individuals were engaged to these organisations under contracts with MSL. The attraction to the end clients may have been the knowledge that Mr Higginson had an involvement in the supervision of the personnel, but it was with MSL that the contracts were made. It therefore becomes relevant to consider whether the profits from these contracts could justifiably have been transferred to MSM in the way that they were. The answer to that was, I think, given by Mr Higginson himself. He accepted (in answer to Mr Wardell) that the business transferred to, and conducted through, MSM could have been carried out by MSL, had he been offered a suitable package to do so. This might have involved giving him some kind of executive position and possibly a shareholding. He said that he wanted a stake and decent job satisfaction. But I was not given the impression that Mr Higginson refused to contemplate doing business except through a separate company or that he was opposed to the involvement and even the control of the operation by MSL. As for Mr Gidman, he had met him only once and believed him to be a sleeping partner in MSL. He says that he refused consent to the disclosure of the business plan because he feared a conflict of interest on the part of Mr Gidman in relation to CPC. If he had been told that Mr Gidman had to see the plan, he would have sought advice. As it was, his main source of information about Mr Gidman was Mr Moore, who painted an unflattering picture. Notwithstanding this, Mr Higginson does not seem to have been unduly concerned. He said that he paid scant attention to peripheral matters, in which he included the question of Mr Gidman. His main concern was about conflicts of interest in relation to CPC. He accepted that the transfer of MSL’s shares in MSM to him and his wife was due to the antipathy on the part of the Defendants towards Mr Gidman, rather than to any question of non-payment, but in my judgment the pressure for this came from the Defendants rather than from Mr Higginson.
63. Mr Higginson was asked by Mr Sisley about a meeting he had with Mr Gidman at the time of a hearing in this action in February 2002. He said that the meeting lasted about 4 hours; that very little was discussed about the litigation; but that he was able to reach an agreement with Mr Gidman that MSL would continue to deal with MIGL, to which has been transferred the MSM business. As a result of this discussion, the derivative action was eventually discontinued as against Mr Higginson. Although this was not the purpose of Mr Sisley’s questions, the main relevance of this evidence, as I saw it, was to indicate that, had the opportunity been given, Mr Higginson could have established a perfectly reasonable working relationship with Mr Gidman. I accept that there was a lot of pressure on Mr Higginson to reach an agreement in February 2002, but I got no sense of his being unfairly forced into an agreement and believe that, but for the representations made by the Defendants, an arrangement acceptable to both parties could have been reached in 2000.
64. The position of the Defendants in relation to MSM is more difficult. As already indicated, Mr Gidman was not told about their intended shareholdings in MSM at the board meeting on 20th January 2000. In August of that year (as evidenced in the 31st August memorandum) it was decided to transfer the profits from MSL’s contracts in respect of the relevant consultants to MSM on a general basis. Mr Gidman was not informed of, or consulted about, this. There then followed the 7th September board meeting, at which Mr Gidman was told that the consent of Mr Higginson was needed for the disclosure of the business plan. In December 2000 the decision was then made to re-allot MSL’s shares in MSM. Mr Barron says in his first witness statement that this was due to Mr Higginson’s refusal to become involved with Mr Gidman,, as I have indicated. But, for the reasons already explained, this is not an accurate account, and such reluctance as existed on Mr Higginson’s part was entirely due to the Defendants. In my judgment there is little doubt that the removal of MSL’s shares was part of a wider scheme already under way to exclude Mr Gidman, and with him MSL, from the new businesses which the Defendants were seeking to set up. The justification given in Mr Barron’s witness statement is simply a subterfuge.
65. At the 20th February 2001 board meeting of MSL there was no disclosure to Mr Gidman of the fact that profits had already been transferred from MSL to MSM, although it was disclosed that MSL would not now have a shareholding in that company. This was put down to Mr Higginson, and I have already commented on it. There was then an extraordinary board meeting of MSM held on 20th March 2001. Mr Higginson was appointed Managing Director of the company and the shareholders were confirmed to be Mr Higginson, Mr Moore and Mrs Barron with 25% each, leaving a further 25% unallocated. Mr Higginson was to arrange the issue of share certificates. Despite Mr Gidman’s refusal to consent to the new restructuring arrangements at the MSL board meeting on 20th February, the Defendants had clearly decided to press ahead with their proposals. The minutes record that MSL’s Link-Up registration with Railtrack was to be changed to MIGL, and MSL should be listed as an agency only. The target date for achieving this was 22nd June 2001, when the existing registration was due for renewal. A similar discussion took place with regard to changing the supplier registration for LUL. A little earlier, on 2nd March 2001, there had been inaugural board meetings of MIGL and MMC, which had been incorporated on 9th January 2001. At the MIGL board meeting it was agreed that MSL staff would be transferred to MIGL from 1st July 2001. At the MMC board meeting Mr Barron was appointed Managing Director. Mr Moore stated at the meeting that he would like the MSL consultants, under Mr Peter Harrison and Mr Roger Mobbs, to transfer from MSL to MIGL from 1st April 2001, with MSL being paid a 5% agency fee thereafter for each placement.
66. On 5th April 2001 at an MSL business review meeting (not attended by Mr Gidman, who was not invited) there was further confirmation of the intention to limit MSL to trading as a recruitment agency. MIGL would become what was described as the “main strategic company” as from 1st April of that year. MSM, MMC and MSL would be trading companies under MIGL. At the same meeting it was decided that MTL should cease trading, and its consultants be transferred to MMC. By now there was only a very limited amount of ongoing work, largely consisting of the tunnel lining contracts with Liffey-Spraycon I have already mentioned. This meeting was attended by Mr Ian Pascall of Messrs McCabe Ford Williams, the company’s accountants, who is recorded in the minutes as saying that the accounts for MTL to 31st May 2001 needed to show as near as possible a break-even or small profit. Mr Pascall says in his witness statement that he was assured by Mr Moore that legal advice had been given about the propriety of the restructuring operation and he was only concerned to advise the directors of MSL about the tax and accounting consequences. He did not advise on the restructuring as such. His main concern was that any inter-company charges created by the transfer of income and profits from MSL to the other Metro companies could be substantiated for accounting and auditing purposes. He also needed to show MSL assets in the accounts and required to know, for example, whether MSL did in fact have any interest in MTL What, however, he was not concerned to do as an auditor, as he stressed in cross-examination, was to advise the Defendants as to whether they were acting in the best interests of MSL. Nor did he do so. That was not his function.
67. On 5th July 2001 an MIGL business resource meeting was held, at which it was agreed that MIGL would pay MSL 5% for any agency placements, but MSL would then pay back 2% for the provision of office space and administration costs. The 2% figure seems to have been arbitrary, and when one considers that MSL owned the premises it occupied, the decision is all the more surprising and difficult to justify. On 24th July 2001 a meeting of the MIGL board took place, at which the inter-company arrangements between MSL and MIGL were further discussed. As the minutes record, the Defendants agreed that the 5% fee should apply to “all consultants existing at 1st July 2001” for a period of 12 months. The 5% arrangement does not therefore seem to have applied to consultants who were not on MSL’s books as at 1st July. On this basis the value to MSL of even these arrangements would diminish as time went on.
68. On 10th August 2001, having taken advice, Mr Gidman wrote to the Defendants about MSL. He expressed concern about the financial health of the company and asked for an explanation of why fees and expenses had increased and the business was now running at a loss. He notified the Defendants of his intention to attend at MSL’s offices on 23rd August to examine the books and records on which the profit and loss accounts he had been sent were based. He intended to bring Eileen Hall and a representative from Messrs Schaveriens, his accountants, to assist him. He asked for copying facilities to be made available. This letter caused obvious concern to the Defendants. Mr Barron consulted MSL’s accountants about Mr Gidman’s rights to information under the Minority Protection Agreement. On 20th August a letter was written to Mr Gidman from both Defendants agreeing to the inspection, but on the basis that it was carried out by Mr Gidman alone. Access to Eileen Hall and the accountant was refused. The Defendants also proposed holding a board meeting at 3pm on 23rd August to discuss any concerns. Given that Mr Gidman had to carry out his inspection alone earlier on the same day, the Defendants must have known that it was entirely unrealistic to expect him to be able to formulate his concerns in time for a meeting later that day. In a further exchange of correspondence the question of whether Mr Gidman could be accompanied at the inspection was raised but not resolved. In the event, Mr Gidman turned up at MSL’s offices on 23rd August with his accountants and they were refused entry. Mr Gidman was allowed to inspect the books alone and to confer with his accountants outside, but was not allowed to take copies of documents. Notwithstanding this, he was able to discover a significant amount of information about MSL, and on 30th August he wrote to the Defendants with his preliminary observations. The board meeting scheduled for the afternoon of 23rd August did not take place.
69. In his letter (written with professional help) Mr Gidman said this:
4. It was envisaged as far back as 1997 that Metro Selection Limited would diversify into precisely the areas in which the Metro group companies are now operating. Yet, MSL does not have a single share in any of the Metro group companies and does not benefit from their exploitation of its clientele and business opportunities which derive from its goodwill. It is my belief that you have both deliberately diverted to the Metro group companies business opportunities which ought to be exploited by MSL and, by manipulating the shareholding in those companies, have completely excluded MSL from sharing in the benefits of such opportunities.
...
8. In these circumstances, there can be little doubt that your promotion of and involvement in the Metro group companies (as shareholders and directors) clearly breach the following:
8.1 your fiduciary duty as a director of MSL to act in the best interests of the company and to act as trustees of its property; and
8.2 your contractual obligations under the Minority Protection Agreement (a) to improve and extend the business of MSL so as to generate the maximum achievable maintainable profits for distribution and (b) not to be engaged in or be involved with businesses which compete with MSL.
The letter complains in terms about the failure to allot MSL shares in MTL, the cancellation of the allotment of MSM shares and the diversion of business opportunities to the new companies. Mr Gidman called upon the Defendants to account to MSL for the benefits received by them and the Metro companies at the expense of MSL. It is worth observing at this stage that, despite this letter and subsequent correspondence, the Defendants failed to answer Mr Gidman’s queries with any particularity and confined themselves to a mere denial of any wrongdoing.
70. As of 22nd August 2001 no agreements between MSL and the other Metro companies had even been drawn up. There was no legal mechanism in place under which MSL could recover its investment or which dictated how its transferred income should be applied. Nor was there any written agreement even guaranteeing it the 5% return from the use of its own personnel. When Mr Gidman gave notice of his intention to visit MSL’s offices, the Defendants decided that this had to be put right. Ms Donoghue gave evidence that she had started to draft some agreements on about 12th August, but had to stay late on 22nd August in order to finish them. They were signed just before Mr Gidman’s visit on 23rd August. In evidence are three so-called “business development agreements” between MSL and each of MSM, MTL and MMC. They are dated 8th January 2001, 5th February 2001 and 2nd July 2001 respectively. They are in common or similar form and provide for MSL and the company in question to enter into a partnership agreement for the provision of management consultancy services in respect of specified types of work for clients, including Railtrack, LUL and the LUL Infraco companies. MSL was to be paid 5% for the provision of personnel. Other provisions deal with invoicing, termination and the non-disclosure of confidential information. Suffice it to say that no partnership agreements were ever entered into, nor were these business development agreements capable of being performed according to their terms. In the case, for example, of the agreements with MTL and MSM, the 5% arrangement was to run from 1st July 2001 to 30th June 2002, notwithstanding that by July 2001 MTL had ceased to trade and the business of MSM was to be brought under the umbrella of MIGL. The same point goes for MMC. These agreements (consistently with the evidence) exhibit every sign of having been hastily prepared and were little more than window-dressing to give Mr Gidman the impression that the business of MSL was being properly conducted. The most damning aspect of this is the fact that they were all deliberately backdated, yet in his first witness statement Mr Moore asserted that the MSM and MTL agreements had been executed on the dates they bore, in order to protect MSL. Later he was forced to retract this evidence and in cross-examination he admitted that the business development agreements were little more than a sham. There was no prospect of the agreements with MTL and MSM taking effect according to their terms, and even under the terms of the agreements as drawn, MSL was to get no compensation or return in respect of the monies invested prior to July 2001.
71. During his visit to MSL’s offices on 23d August, Mr Gidman handed over a list of questions based on the documents he had seen. This included queries about payments to Spot-1 and MSM. Notwithstanding Mr Gidman’s now active pursuit of these enquiries, the Defendants continued to press ahead with their plans. At a board meeting of MIGL held on 30th August, it was agreed that with effect from 1st July 2001 MIGL would be the trading company and MSM and MMC would cease trading as separate companies and become divisions of MIGL. Mr Moore and Mr Barron would continue each to have 26% of the shares in MIGL and Ms Donoghue 5%. Mr Higginson and Mr Harrison would have 15% and 10% respectively, with options for further shares based on the performance of MSM and MMC as divisions of MIGL. MSL continued to trade as a separate entity in order to preserve its status as an approved supplier with LUL and the Infraco companies, but it is clear from the minutes of an MIGL financial meeting, also held on 30th August, that moves were already being taken to transfer MSL’s Link-Up registration to MIGL. Further confirmation of this was given at what was described as a “Metro financial administration meeting” held on 12th September 2001 and attended by Mr Moore, Ms Donoghue and Mr Pascall. With effect from 1st October 2001 MIGL was to charge MSL 15% of turnover in respect of MSL retained consultants (i.e. those servicing contracts with the Infraco companies) plus 4% for the service and administration charges. In return MSL was to receive from MIGL 5% of turnover in respect of consultants transferred to MIGL. However, by 27th September most of the non-LUL contracts had been switched to MIGL, and the LUL work was in process of being transferred.
72. A striking example of the lengths to which the Defendants were prepared to go in order to obtain the MSL business for their own companies can be found in the evidence about the transfer of the MSL Link-Up registration to MIGL. A Link-Up registration is provided to a supplier under what is known as the Rail Industry Supplier Qualification and Registration Scheme. The registration is necessary in order to bid for work from most of the major contractors in the railway industry who support the scheme. These include Railtrack, Amec, Jarvis Rail and South West Trains. MSL’s Link-Up registration ID number was 8062. On 26th July 2001 MIGL applied to renew the Link-Up registration, which had expired in June. It used the same ID number (8062) and in the application form it was stated that MSL was the previous name of MIGL. The Link-Up registration was therefore renewed under number 8062 for another year in the name of MIGL. This seems to have been a blatant piece of deception. On the basis of this registration, MIGL applied on 22nd August to South West Trains to be considered for project management work. In his letter Mr Harrison on behalf of MIGL says that the company has recently been restructured and that “our trading company for the past 7 years has been Metro Selection. We have therefore attached Metro Selection’s accounts as a basis of our trading”. I should mention, out of fairness to Mr Harrison, that this letter was drafted by his assistant, Mr Wright. But as Mr Harrison accepts, it was clearly misleading.
73. The trading arrangements between MSL and MIGL are set out in 3 agreements dated 1st October 2001. The first is a “Service Level Agreement” under which MSL agreed to pay MIGL 2% of the turnover for its office space and various administrative and secretarial services at Metro House in Cheriton Gardens. The second agreement is described as an “Agreement for Services” under which MSL agreed to pay MIGL 12% of the turnover from the consultants currently working for the Infraco companies and to refer any further consultancy business opportunities to MIGL. In return, MIGL undertook to refer any placement or agency opportunities to MSL for a fee equal to 5% of turnover. Finally there was a trading agreement under which MIGL took over the “commitments” of MMC and MSM to pay MSL 5% of turnover in respect of various named consultants. In a letter to Mr Pascall written on 28th November 2001, Ms Donoghue confirmed that the trading agreement would apply only to the existing MSL consultants as at 30th June 2001 and not to new consultants assigned through MIGL after that date. It was therefore a wasting asset. In accordance with these arrangements MSM and MMC ceased to trade as separate companies on 30th September 2001.
74. In his witness statement Mr Barron contends that the trading arrangements between MSL and MSM were intended to be beneficial to both parties. The work provided to the end clients would be invoiced through MSM as consultancy work, with MSL providing the body shop services and being paid a proper rate for the services it was actually providing. Although it was intended that the MSL staff should actually be transferred to MSM and MMC, this did not take place prior to the business of these companies being absorbed into MIGL. MSL did not, therefore, strictly provide body shop services to MSM or MMC. It continued to provide them direct to the end client. But the agreements produced, Mr Barron said, had the same economic effect. MSL was paid only for body shop placements to MSM. The figure of 5% of turnover was, he said, the Defendants’ best estimate of the ultimate net profit which MSL derived from its business. MSL benefited from this arrangement because it was guaranteed a 5% return, free of overheads, regardless of the level of overheads in fact incurred. There are a number of difficulties about this analysis. In the first place, it needs to be borne in mind that the effect of the service level agreement was to reduce MSL’s income from these arrangements by 2/5ths. Secondly, the agreements made no provision for MSL to benefit from any increase in value from the services being marketed as consultancy services. In the case of MSM the reality was that the performance management was carried out by Mr Higginson. He was already contracted to MSL and, as I have already found, could have been accommodated within MSL if the Defendants had wished to do so. Throughout the period up to 30th September 2001, most of the consultants were also on MSL’s books and, even if introduced by Mr Higginson, they produced an income by being engaged on contracts between MSL (not MSM) and the end clients. In these circumstances it is difficult to see why MSL should not be entitled to most (if not all) of the income from these contracts as a suitable payment for the performance management services carried out by Mr Higginson. However, the arrangements which were effected were clearly designed to extract most of the income and profit from MSL and to invest it in MSM by treating MSL as a recruitment agency and limiting its return accordingly. This was entirely artificial and bore no relation to the commercial and contractual realities. It was simply an attempt to dress up and disguise the diversion of income into the new Metro companies as an arm’s-length transaction, when it was nothing of the sort. The Defendants deliberately downgraded the future role of MSL whilst using its current income and assets to build up the new companies. It was as crude as this.
75. The prospective arrangements with MIGL were also inherently unfair. Mr Wardell presented an analysis of how they might work. If MSL had a turnover of £4m and half of that was transferred to MIGL, it would be entitled to 5% of the £2m turnover transferred (£100,000) plus the rents which were estimated at £18,500 per annum. Against that, it would have to pay to MIGL 12% under the service agreement and 2% for accommodation and services. This would amount to £280,000. It would make a loss of £161,500. Despite Mr Sisley’s best attempts to persuade me otherwise, it is difficult to see how MSL could ever have made a profit from these arrangements, and it is worth noting that in the period up to February 2002, when Mr Gidman took over responsibility for running MSL under Lightman Fs order in these proceedings, the company had made losses each month and had been unable to pay its VAT liabilities. The truth is that MSL had been run into the ground.
76. A board meeting of MSL was arranged for, and held on, 4th September. Mr Gidman did not attend, due (he said) to a mix-up in his diary entries. The Defendants do not accept this and attribute his absence to part of the preconceived plan I have already mentioned, to lure them into a position which Mr Gidman could take advantage of I do not accept this, but even if Mr Gidman had deliberately missed the meeting, it makes no difference. Nothing of any real importance was discussed. By now the arrangements which are complained of had already been put into place. I can therefore move forward in time to the board meeting held on 27th November. By now the breakdown in relations between Mr Gidman and the Defendants was complete, and on 22nd November Mr Gidman’s solicitors had served a notice under Article 6, alleging material and irremediable breaches by the Defendants of the Minority Protection Agreement and requiring them to transfer their shares in MSL. At the meeting Mr Gidman was provided by the Defendants with a number of documents, including MSL’s monthly profit and loss accounts to 31st October, a financial projection for 2001-2002, a declaration of the Defendants’ shareholdings in the Metro companies and in Sagitta and Spot-1, and a chart showing the trading which had taken place between Spot-1, MIGL and MSL. Copies of the trading agreements between MIGL and MSL and between MSL and Spot-1 (which I shall come to later) were also produced. The profit and loss accounts indicated that MSL was already running at a net loss of £43,800 only 4 months into the 2001-2002 financial year, compared with a profit of £116,000 for the same period in the previous year. The minutes of the meeting record that there was some discussion about the claims against the Defendants raised by Mr Gidman in correspondence, and there were repeated denials by Mr Moore and Mr Barron of any impropriety, or that their interests in the other companies, including Spot-1, had been deliberately suppressed. I do not accept that. It seems to me that there is no realistic explanation for the non-disclosure of the shareholdings, and the full picture only emerged under the pressure exerted by Mr Gidman. I think that Mr Moore and Mr Barron were well aware of their obligations under the Minority Protection Agreement and more generally, but chose to put their own interests and ambitions first. Nor to this day has any intelligible justification been put forward as to how (consistently with the Defendants’ fiduciary obligations to MSL and their obligations under the Minority Protection Agreement) they felt able to take shares in companies that were either in direct competition with MSL or at very least were established and financed with its assets and income.
77. During a break in the proceedings on 27th November Mr Gidman was approached by Ms Donoghue and Mrs Arlene Carroll, the Administration Manager of MSL, and told that they were concerned that MSL was in financial difficulties. Subsequently they met Mr Gidman on 12th December and offered to assist him in his investigation into the activities of the Defendants. To this end, they enabled Mr Gidman to gain access to MSL’s premises on 28th December, when the offices were shut for Christmas, and assisted him in copying various documents which are relied on in these proceedings. Mrs Carroll had already resigned from MSL on 27th September, due (she said) to the mismanagement of the company by the Defendants. Ms Donoghue was also about to go. Both were subsequently persuaded by Mr Gidman to stay on under his management and have since been awarded significant pay increases. Ms Donoghue also got a bonus and was released from the litigation. Mr Gidman says that these salary increases were long overdue, and that may be right. But I have no doubt that they were in part intended to reward Ms Donoghue and Mrs Carroll for their loyalty. Based on this, Mr Sisley challenged their impartiality and truthfulness as witnesses. My own assessment is that they were both honest and truthful in the evidence they gave, although inclined, on occasions, to exaggerate. I have borne in mind the possibility that their account of these events may now be coloured by their allegiance to Mr Gidman, and accordingly I have treated their evidence with some caution. In fact most of what they told the Court is documented, and the main allegations which the Defendants face can be substantiated from the contemporaneous written material. Insofar as they have dealt with these issues, the evidence of Ms Donoghue and Mrs Carroll merely confirms what is obvious from the face of the documents.
78. On 5th January 2002 the personal action was commenced, and on 22nd January the claim form in the derivative action was issued.
79. I have already outlined the circumstances in which MMC came to be set up and how its business, as such, was later transferred to MIGL. Mr Moore and Mr Barron held 26 shares in the company and 5 shares were allotted to Mr Peter Harrison. At the inaugural board meeting held on 2nd March 2001 Mr Moore was appointed Chairman of the company and Mr Barron the Managing Director. Mr Harrison first came to know the Defendants in 1995 when he was placed by MSL on a Powertrack project as project manager. Later he was recruited by CPC and worked for that company from 1996 until 2000. He said that he was overlooked for promotion at CPC and went back to MSL. He had kept in touch with Mr Barron, who asked him to act as an operations director to train and supervise MSL consultants engaged with LUL and the Infraco companies.
80. Mr Harrison seems to have received his shares in MMC (as well as 5 shares in MIGL) as a reward for his work in preparing a tender for a contract with the Ministry of Defence. Thereafter he was used to provide the performance management review services I have described. As already indicated, MMC was to be paid for these services by receiving the bulk of the profit earned from the contracts with the end clients. NISI, was to get a fee limited to 5% of turnover. However, Mr Harrison confirmed that the only monies transferred to MMC before it ceased to trade was the sum of £19,828.13 in payment of an invoice dated 31st July 2001 for “property maintenance and general care”. Mr Harrison said (and Mr Moore confirmed) that no such services had ever been provided and that the money was paid to meet the salary costs of Mr Wright, Mr Harrison’s assistant.
81. Mr Harrison was also joined as a Defendant for the derivative action, but no relief is now sought against him. He said that he had been very worried by the litigation and, like Ms Donoghue and Mrs Carroll, he was cross-examined to the effect that he was released from the action in return for agreeing to assist Mr Gidman. Mr Harrison denied this, and I accept that. But in any event he did little more than to confirm what was already established about MMC. It did nothing for MSL through Mr Harrison that could not have been done by him in his capacity as an employee of MSL. His position is therefore almost identical to that of Mr Higginson. The Claimant’s case about the inherent unfairness of the trading arrangements between MMC and MSL is the same as in relation to the arrangements with MTL and MSM. Mr Harrison said that he was told by Mr Moore that he (Mr Moore) resented the fact that Mr Gidman did so little for the dividends he received and that Mr Moore wished to set up companies in which Mr Gidman had no involvement. That evidence is consistent with the evidence of other witnesses and merely reflects what in fact happened. The position in relation to MMC does not differ materially from that of MTL and MSM, save that no advance notice was given to Mr Gidman of the plan to transfer MSL’s income to MMC. Mr Gidman was left to find it out for himself.
82. Spot-1 was incorporated on 7th August 2000. Mr Barron, Mr Moore and Mr Tom McGovern held 2,500 shares each. At the inaugural meeting of the company held on 12th September 2000 it was agreed that the remaining 25% of the authorised share capital should be left unallocated and used to attract key personnel to the company in the future. There is no suggestion that it was ever contemplated that MSL should have shares in Spot-1, and it is accepted that the existence of Spot-1 and the Defendants’ shareholdings in the company were not disclosed to Mr Gidman at the board meeting of MSL held on 20th February 2001. Nor was Mr Gidman consulted about, or informed of, the payment to Spot-1 by MSL of the sum of £25,000, which took place in two tranches of £10,000 and £15,000 in November 2000 and February 2001. The first payment was minuted at an MSL financial meeting held on 30 November 2000, at which both Mr Barron and Mr Moore were present. The £10,000 in question was transferred to Spot-1 by Rail Awareness (then called Guardian Support Services Limited) out of the £50,000 paid to that company by MSL in about June 2000. The second payment of £15,000 was made in February 2001 directly by MSL following an invoice from Spot-1 for the provision of consultancy services in that sum between November 2000 and November 2001. There is no obvious explanation as to why Spot-1 felt able to charge for services for a period in advance.
83. Ms Donoghue’s evidence is that the £25,000 was used to set up Spot-1, and there is no real dispute about this. Mr Barron accepts in his witness statement that it was used to get Spot-1 established and not for services as such. But no such investment was ever notified to Mr Gidman or consented to. Nor, in my judgment, was it justified. Mr Barron says in his first witness statement that the purpose of setting up Spot-1 was to retain for the benefit of MSL the services and expertise of Mr McGovern, who had made it clear that he wished to leave MSL. Mr McGovern wanted, it is said, to set up his own health and safety and environmental consultancy. Mr Barron said that he came to the view that it would assist MSL if Spot-1 supplied these consultancy services to clients such as LUL in conjunction with the body shop placements supplied by MSL. The business of Spot-1 had to be independent, so that the clients could be assured that the health and safety advice was impartial and independent, but the services would be supplied to support the body shop placements.
84. Between 1st January and 30th June 2001 MSL allowed Spot-1 to receive all the profits from its contracts in respect of two consultants, Mr Korsah and Mr Cook. The performance management services of Spot-1 were provided (it is said) through Mr McGovern, who left MSL to join Spot-1 on 12th January of that year. After 30th June 2001 the profits on the contracts were shared equally between MSL and Spot-L Mr Gidman has provided a breakdown of the invoices between MSL and Spot-1 during this period, but I need not at this stage be concerned with the detail of the figures. The substance of the arrangements is not in dispute. Mr Barron accepts that Spot-1 was established with money provided by MSL and continued to receive first the whole and then a share of the profits on MSL’s contracts with the end clients. The arrangements were therefore in all material respects identical to those between MSL and the other Metro companies.
85. The initial “Agreement to Trade” between MSL and Spot- 1, which is dated 1st January 2001 and purports to have been signed by Mr McGovern and Mr Barron on 2nd January, was in fact executed on 22nd August 2001 together with the other Metro agreements. This purports to cover a 6-month period from 1st January and provides for Spot-1 and MSL to work in tandem to secure fees for consultancy commissions from LUL, Railtrack and Rail Link Engineering. The profits were to be shared equally. The agreement did not therefore even accord with the reality, which was that the entire profits up to July 2001 went to Spot-1 There is also a “Service Provider Agreement” dated 1st January 2001 (but not in fact signed until about 20th November 2001) under which MSL agreed to pay Spot-1 £25,000 for health and safety audits at its premises and for advice and guidance on health and safety issues. This agreement was obviously intended to justify the investment of £25,000 and is a sham. It was conceded by the Defendants that the £25,000 was injected to set up Spot-1 and was not paid in return for services.
86. The other agreement with Spot-1 is an “Agreement for Services” dated 1st July 2001, which again was not executed until shortly before the board meeting on 27th November. This provides for the net profits on the consultants’ contracts to be split 50/50. The agreement is for a year, but there is another agreement in similar terms purportedly signed on 20th December 2000 (but, on the evidence, signed in November 2001) which covers a period of 5 years.
87. The principal issue is whether these arrangements can be justified. As to that, Mr Barron asserts in his witness statement that the services provided by Mr McGovern were essential. Mr Moore says that MSL would have had to pay someone else to provide them, if Spot-1 had not made Mr McGovern available. But that does not provide a justification for using MSL money to set up Spot-l. Nor, on analysis, does it justify the subsequent profit split. Mr Moore said in cross-examination that it was his idea to set up Spot-1. The retention of Mr McGovern was not his principal reason and there was no threat at the time from Mr McGovern to leave MSL. Rather it was the Defendants who invited him to assist them in setting up a health and safety company. It was also put to Mr Moore, and accepted by him, that throughout the period in question it was only ever envisaged that the MSL consultants (Messrs Korsah and Cook) would provide a service amounting to agency with knobs on. This is evident from the Spot-1 business plan, which states that the company was likely to produce a reduced consultancy service at a minimum mark-up until it could move towards a full-blown consultancy service. Spot-1 was therefore in direct competition with MSL during 2001. Added to this, the only justification for funding it at all (i.e. the provision of Mr McGovern’s services) is not established on the evidence. There is no reason to suppose that Mr McGovern would not have continued to supply performance management whilst remaining as an MSL consultant. There is also a question as to whether Mr Korsah and Mr Cook in fact required it. Mr Barron says it was essential, but Ms Donoghue and Mr Gidman say that these two consultants were assigned at the time under pure agency contracts (to Bechtel and Infraco JNP) which required no performance management. The contracts in question do seem to have been agency placements and I accept Ms Donoghue’s evidence on this point. It seems to me that the history of Spot-1 is really of a piece with the position in relation to the other Metro companies. It represented yet another transfer of MSL business into a company which it had paid to set up, which it continued to finance (in this case in competition with itself), yet from which it obtained no interest or real return.
88. As mentioned earlier, MSL paid some £18,000 to Sagitta between December 1999 and May 2000, in addition to providing a personal computer purchased at a cost of £3,982.66. Sagitta was incorporated in July 1999 with Ms Johnston and Mr Weller as the only shareholders and directors. The company was formed to take over the market research business carried on by Mr Weller under the name of Sagitta Consultancy. Ms Johnston worked for Mr Barron as his personal assistant on the Channel Tunnel project between 1992 and 1994, when she left to go into market research. In 1999 she joined Mr Weller in forming Sagitta and it was then that she approached Mr Barron to discuss the new business.
89. Mr Barron says that he agreed to help her, and needed some secretarial assistance at 70 High Street. His evidence in his witness statement is that Ms Johnston agreed to supply him with PA and reception services, and to look after his office for 6 months from January to June 2000. He said that she also did some headhunting. Ms Johnston is fluent in a number of European languages and these skills were also said to be of some use to MSL. Mr Moore and Mr Barron each purchased 150 shares in Sagitta for £150 and 100 shares for MSL. Later these MSL shares were transferred to the Defendants when, according to Mr Barron, it was realised that there was no synergy between Sagitta and MSL, and Ms Johnston’s translation skills were no longer required. In his witness statement Mr Barron also says that Sagitta had other advantages. Under the arrangements Ms Johnston occupied space at 70 High Street. Mr Barron said that this was not free accommodation, because until June 2000 Ms Johnston was providing secretarial services for him, for which she was paid, and from July 2000 until 1st April 2001 Sagitta paid half of MSL’s lease costs, including rates. After April 2001, when MSL moved out to Cheriton Gardens, Sagitta paid the whole rent of £3,000 per annum.
90. Ms Johnston accepts in her witness statement that she was never in fact called on to provide translation services, although she did provide administrative assistance and headhunting services. It was agreed that she would provide services up to a maximum cost of £25,000 over a year. In fact only work totalling £18,000 was billed for, but these were, she said, genuine services actually provided over a period of 8 months. The computer was not a gift to Sagitta. It was also, she said, provided in return for legitimate services.
91. Mr Gidman’s case is that the £21,982.66 paid to Sagitta was not in return for genuine services, but was an investment by the Defendants in Sagitta, using NISI, money. The shares allotted to them were not purchased, but obtained in consideration of the investment. To support this, a number of matters are relied upon. At the inaugural board meeting of Sagitta held on 10th February 2000, when the shareholdings I have mentioned were confirmed, Mr Barron is recorded as saying that MSL would levy no charges on Sagitta in respect of 70 High Street until 1st July 2000, after which charges would be calculated pro rata between Sagitta and MSL, based on occupancy. Ms Johnston raised the question of how MSL’s involvement with Sagitta should be presented to clients, to give Sagitta greater financial kudos, and Mr Barron suggested describing NISI, as “a partner company with a 40% interest” in Sagitta. Most significantly, the minutes also record that Sagitta would invoice MSL on a monthly basis “against the sum of £25,000 invested in Sagitta”. There is nothing in this minute, therefore, which is consistent with this being simply an arm’s-length commercial arrangement for the provision of secretarial assistance to Mr Barron.
92. The first invoice was sent to MSL, marked for Mr Barron’s attention, on 21st December 1999 in the sum of £5,000. The invoice refers to “consultancy services”. Ms Johnston said this was a loose term. In any event the invoice was subsequently amended to refer to translation services and administration support in the sums of £2,000 and £3,000 respectively. There is a note on the invoice to Mrs Carroll from Mr Weller, saying that Mr Moore had requested him to re-draft the invoice in this way. Mr Moore in his witness statement refers to his shareholding and that of Mr Barron in Sagitta having been a private matter and nothing to do with MSL. In cross-examination he accepted that this was not correct. MSL had shares in the company and has paid significant sums of money to it. When it was put to him, based on the board minutes I have referred to, that the £25,000 was an investment, he said that MSL expected to get shares in return, but that he personally expected services in return. When asked about the re-drafting of the invoice, he said that he wanted to be more accurate about the services which Sagitta had provided. He was not, however, able, even at the time, to confirm from his personal knowledge that such services had in fact been provided. All his information on this came from Mr Barron. When asked how MSL came to incur secretarial charges of £18,000 over an 8-month period, Mr Moore could not assist. He did, however, accept that Mr Pascall was told at a meeting on 22nd June 2000 that the £25,000 was an investment in Sagitta and could be treated as such. It was also treated as an investment in a schedule of MSL’s shareholdings and investments prepared for an MSL Company Secretary meeting held on 21st December 2000.
93. The inconsistencies with the original account of this matter in their witness statements extend also to the position about rent. Mr Barron’s evidence that Sagitta was never given free accommodation is difficult to square with a memorandum of 20th November 2000 from Mr Barron to Ms Donoghue. This refers to an agreement for Sagitta to pay 50% of the rent and associated expenses with effect from 1st January 2001. This is consistent with the minutes of the Sagitta board meeting held on 17th November 2000, at which it was noted that the company would have overheads in the order of £250-£300 per month from January 2001. The schedule of 21st December 2000 also states that Sagitta had free accommodation and equipment until 31st December.
94. It seems to me clear on the evidence that the monies paid to Sagitta (including the cost of the computer) were an investment and not simply a payment for services rendered. No translation services were required or performed and there is a considerable dispute as to whether Ms Johnston spent any real time headhunting, answering the phone or otherwise assisting Mr Barron. But even if some services of that kind were provided, it is clear from Ms Johnston’s evidence that they were not on a scale which could justify the payment of £18,000, and the money was not, in my judgment, paid in return for any such services. This was simply an investment of MSL money which was never notified to or consented to by Mr Gidman. As with the other companies in which MSL invested at the direction of the Defendants, significant shareholdings were taken by the Defendants and ultimately MSL was divested of even the minority stake which it originally held. As for the rent, I accept Mrs Carroll’s evidence, which is that Sagitta paid nothing towards the rent and outgoings of 70 High Street until January 2001. The value of its free accommodation in 2000 must therefore be added to the other financial benefits which it received.
95. Mr Barron says that Rail Awareness was another of the start-up businesses which the board of MSL resolved to fund at the meeting on 20th January 2000. The business in question was the development of a CD disc containing a training aid for the railway engineering industry. This was to be called the “Rail Awareness Illustrated Library”. Mr Barron accepts that this had nothing to do with MSL’s business. It was based on an idea of Mr Jim Dorward, one of MSL’s consultants. Rail Awareness was incorporated as Guardian Support Services Limited and was originally intended to carry out the business later conducted by Spot-L Mr Barron says that it was then decided to use Guardian Support Services Limited for the purpose of producing the CD and the company changed its name to Rail Awareness. Mr Barron says it was intended to develop the software as a joint product between Mr Dorward and MSM, but it was MSL which funded Rail Awareness to the tune of £50,000. Of this, £10,000 was subsequently transferred to Spot- 1 (see paragraph 82 above) and £15,000 was used to make a loan to CPC(SA) which I will come to shortly. No shares have been issued to MSL and in fact there is only one issued share, which is held by Mr Moore.
96. The inaugural board meeting of Rail Awareness took place on 23rd June 2000. At that time it was still called Guardian Support and was intended to be a health and safety company. On 30th June it issued an invoice to MSL in the sum of £50,000 for “management consultancy and business support services”. None had of course been carried out, but the invoice was paid. It is accepted by the Defendants that the £50,000 was an investment in Rail Awareness, which raises obvious questions about the invoice. Mr Gidman alleges that it was used as a means of disguising the payment from him, but even if this is not correct, it was a wholly inappropriate way of recording that payment. What is, however, clear is that the existence of the payment was kept from Mr Gidman for a considerable period of time. Mr Barron says it was authorised, at least by implication, at the 20th July board meeting, but at that meeting Rail Awareness (or Guardian Support, as it was) was not mentioned in terms as one of the new businesses and no approval was given for any investment in the RAIL software project. I do not therefore accept that the payment of the £50,000 was authorised at that meeting either expressly or by implication. Thereafter no mention was made to Mr Gidman of the proposed payment of £50,000, nor was it disclosed at the MSL board meeting on 7th September 2000. In fact Mr Gidman was misled at that meeting by Mr Moore (as indicated in paragraph 6.03 of the minutes) by being told that the company was still not trading, but might be if the right opportunity arose. Guardian Support was referred to by Mr Moore in the context of the possibility of setting up a health and safety company, when in fact the decision had already been taken to go ahead with Spot-1, which was not of course disclosed.
97. The Defendants disclosed shareholdings and directorships of Guardian Support in the notes to the accounts of MSL for the year ended 30th June 2000, but the note records that £50,000 of services had been acquired from that company. Mr Barron was forced to admit that this was misleading, and it was. Even at the MSL board meeting on 20th February 2001 there was still no disclosure that £50,000 had been invested in Rail Awareness. Therefore the only possible conclusion is that this investment was unauthorised, and no evidence has been presented to me to justify the payment of £50,000 (or any lesser sum) to a company whose business had no obvious connection with that of MSL and in respect of a product the commercial value of which is unproven. Mr Moore’s evidence is that the software is not yet finished, that no sales have therefore taken place, and that the future development of the project now depends on a joint venture between MIGL and Franklin & Andrews, another management consultancy business.
98. In addition to the inter-company trading, various loans were made by MSL. These were not approved at board meetings or by Mr Gidman personally. Ms Donoghue’s evidence was that as of 28th February 2002 the nominal ledger inter-company loan account showed that MSL was owed £5,825 by MSM, £54,776.68 by MMC, £2,000 by Rail Awareness and £277,025.56 by MIGL. These figures are confirmed by the expert accountants, save that the figure for MMC is reduced to £50,575.44. The Claimant also accepts that in the light of the proposed transfer to it of the shares in MIGL, no claim need be made in respect of the loan account with that company. But the other loans represent payments made by MSL on the Defendants’ authority and are no different from the other payments which are the subject of these proceedings. They were advanced to meet the expenses of those companies. They are recoverable for the same reason, subject to any allowable deductions. I shall come to that when I consider the question of quantum later in this Judgment.
99. In August 2000 a total of £40,000 was lent by MSL to CPC(SA) which went into provisional liquidation later that year. The monies were advanced in two tranches: the first payment in the sum of £25,000 was made on 4th August 2000 and was advanced through MTL. MTL was subsequently reimbursed this sum by MSL. The second payment of £15,000 was made by Rail Awareness on about 29th August out of the £50,000 transferred to it by MSL in June 2000 (see paragraph 95 above). No security was provided by CPC(SA), which is now in insolvent liquidation. The instructions to Lloyds Bank to make the transfers were given by Mr Barron in respect of the first payment and by Mr Moore in respect of the second. On 29th August 2000 and 3rd January 2001 the directors of CPC(SA), Mr Woodruff and Mr Cronje, signed letters addressed to Mr Moore, giving certain promises or guarantees that the money would be repaid. It is not suggested that these letters amount to legally enforceable guarantees, but even if they do, there has been no attempt so far to repay the money. Everything indicates that it is irrecoverable.
100. In his first witness statement Mr Moore states that the transfer of the money from MTL and Rail Awareness rather than MSL was a mistake on the part of Mrs Carroll, but does not address the prior question of whether the money should have been lent at all. He says that the £40,000 was advanced in response to an emotional plea by Mr Woodruff, who needed it to pay his staff. He accepts that the loans were of no obvious benefit to MSL. Bearing in mind that Mr Moore had earlier criticised Mr Gidman and CPC for agreeing to provide guarantees to CPC(SA), these loans are strange, to say the least. But it is enough to record that the loan was never put to, or authorised by, a board meeting of MSL, nor was Mr Gidman ever consulted about it. Mr Barron in cross-examination was forced to accept that he and Mr Moore should have asked Mr Gidman before making the loan. Mr Gidman’s evidence, not surprisingly, was that he would not have given consent if asked. In the light of the known difficulties about CPC(SA) I have no difficulty in accepting that evidence.
101. The allegation is that between 29th November 2000 and 30th January 2001 Mr Moore, with the knowledge and assistance of Mr Barron, procured the payment by MSL of £15,000 to finance the production of a business plan for a company called Metropolitan Offices Limited (“MOL”). MOL operated as a business centre from premises in Covent Garden. The £15,000 was paid in three instalments of £5,000 each, under invoices from Controlled South Limited, which is Mr Moore’s company. There was no prior board approval for these payments, nor was Mr Gidman consulted about them.
102. The business plan for MOL was prepared by Hama Limited, a company set up by Mr Maryszczak, the former Managing Director of CPC. The company was incorporated on 21st August 2000. Its directors were Mr Maryszczak and Mr John Orchard, who had also been an employee of CPC. However, at the Metro project directors’ seminar held on 16th February 2001 one of the slides shown indicated that Mr Moore was to be a non-executive director. Hama was to provide project and management consultancy services. A draft business plan for Hama for 2000-2005, which is also in evidence, indicated that shares would be issued to the Defendants. It is also relied upon by Mr Gidman as showing that Hama’s business covered the same area and was at least partly in competition with MSL. This was confirmed to be the case by Mr Moore.
103. The payments to Hama are referred to in the minutes of the MSL Company Secretary Meeting held on 21st December 2000. The schedule attached to these minutes refers to the £15,000 as part of an intended investment of £50,000 and indicates that Mr Moore and Mr Barron would each get a 20% shareholding in the company. There is no indication that MSL would be allotted any shares. Mr Maryszczak said in evidence that the £50,000 investment was offered to him, but that he did not take it up. Mr Moore says in his third witness statement that MSL paid for the MOL business plan because it was hoped that MSL would in time provide staff to MOL, but there is nothing to suggest that it was ever agreed with MOL that MSL should pay for the plan in return for receiving placement work, and the only correspondence on the matter is a letter from Mr Moore to Mr Maryszczak dated 24th October 2000. The terms of that letter strongly suggest that Mr Moore was in fact to have an interest in MOL, and this is confirmed by the MOL business plan, which refers to him becoming directly involved in the company, and by Mr Moore’s own admission that he would have a 15% interest. Either way, there is no indication that MSL’s money was being used for its own benefit. I am satisfied, on the basis of Mr Maryszczak’s evidence, that he received the £15,000 in good faith as payment for the production of the MOL business plan. He said that he was happy to accept the order in October from Mr Moore and did not understand the £15,000 to be the initial part of a larger investment. However, it is clear that Mr Moore and Mr Barron saw it as part of what is described as an investment either in Hama Limited or in MOL. It is not necessary for me to choose between the alternatives. What is clear on the evidence is that the payment was never disclosed to Mr Gidman at the relevant time or formally authorised at a board meeting. Even if MOL was the intended beneficiary, Mr Moore was using MSL’s money to pay for a business plan in return for his obtaining an interest in that company. The possibility of a return for MSL was never guaranteed and has not materialised. Nor do I believe that it was the reason for the payment. This is another example of the Defendants putting their own interests before those of the company.
104. Sentinel Project Services Limited (“Sentinel”) is described in the schedule to the minutes of the MSL Company Secretary Meeting held on 21st December 2000 as Mr Barron’s company for self-employment purposes. Mr Barron’s evidence is that it was set up to provide security vetting for staff employed on the Channel Tunnel project. He said that this had to be done discreetly to avoid action by militant trade unionists, and it was essential that it should not be carried out by persons seen to be connected to MSL, in order to avoid reprisals against that company. I am not convinced that the possibility of action against MSL was anything like as serious as Mr Barron suggested, but that is not strictly relevant to the issue I have to decide. It is a matter of record that Sentinel was established in 1997 and that Mr Moore and Mr Barron each had 300 shares. Mr Barron says that this was approved by Mr Gidman at an MSL board meeting held on 20th March 1997. Mr Gidman denies this and it is inconsistent with the minutes of that meeting, which merely refer to the adoption of new trading styles by MSL. I do not accept Mr Barron’s evidence on this.
105. On 7th October 1998 at an MSL business review meeting Mr Gidman was told that it was hoped to place a security manager and other staff with Kvaerner Construction Limited on the Ashford section of the Channel Tunnel project. No reference was made to Sentinel. On 13th November 1998 MSL invoiced Kvaerner for the placement fees in the sum of £4,200 plus VAT (£4,935) due in respect of Mr Graham Rogers as a security manager. On 31st December MSL was invoiced by Sentinel for that same fee and paid over the money. The following year, on 26th May 1999, MSL invoiced Balfour Beatty in respect of the fees for Mr Kevin Newman, also a security manager, in the sum of £3,250 plus VAT. On 30th June Sentinel invoiced MSL for the same fee and was paid.
106. In his second witness statement Mr Barron says that MSL was intended to profit from Sentinel and that he held some Sentinel shares on trust for MSL. Sentinel was run by Mr Orchard (who was also a director of Hama) from his offices in Sussex. On 1st October 1998 Mr Moore transferred his shares in Sentinel so that Mr Barron and Mr Orchard remained the only shareholders. According to Mr Barron, Mr Rogers was recruited through MSL in order to keep the existence of Sentinel secret. But Sentinel required funding and the fee was therefore transferred from MSL. In the case of Mr Newman, the placement is accepted to have been by MSL, but the money was needed to cover Sentinel’s office costs of £6,968. The two fees were therefore enough to allow Sentinel to break even. Thereafter it ceased to trade and was taken over by Mr Barron as a tax vehicle for charging his salary to MSL.
107. Mr Barron’s claim that all the money paid to Sentinel was spent on office expenses is disputed. My attention was drawn to the fact that at the time the company ceased to trade it had over £7,000 in its bank account, which was split between Mr Barron and Mr Orchard in proportion to their shareholdings. This was confirmed in evidence by Mr Orchard. He said in cross-examination that he regarded his shareholding as his own and that Sentinel made no placements except through MSL. It merely identified candidates for the posts, who were then placed by MSL. In my judgment the investment of monies due to MSL in Sentinel was never approved or authorised by the board of MSL or by Mr Gidman personally. These arrangements, as with the other Metro companies, involved the use of MSL’s income to fund another company in which it had no interest. I do not accept Mr Barron’s evidence that he was holding shares on trust for MSL. There is nothing to support this. The position is, if anything, worse than in the case of the Metro companies, in that there were no contractual arrangements of any kind for the transfer of the monies, nor any disclosure of, or justification for, the Defendants’ taking personal shareholdings in Sentinel. Again the operation was conducted for their benefit.
108. There are four payments to be considered under this heading. The first two are the bonuses of £35,000 and £25,000 paid to Mr Barron and Mr Moore respectively on 30th June 2000. The other two payments are one of £10,000 made to Mr Moore in October 2000 through his company, Controlled South Limited, and a further bonus payment of £10,000 to Mr Barron in December 2000, which was made to enable him to discharge a loan from MSL.
109. The bonuses received on 30th June 2000 came shortly after Mr Moore had left CPC in the circumstances described earlier in this Judgment. The payments relate to the year 1999-2000. They are challenged on the basis that they were not authorised by the board of MSL and that, in the case of Mr Moore, it was inappropriate for him to receive a bonus of that size in relation to a period when he was only working part-time for MSL. The point about lack of authority rests on the fact that at the MSL board meeting held on 20th January 2000 it was decided that bonuses for that year would be determined at the board meeting scheduled for June. No such meeting took place, and at the board meeting held on 7th September 2000 the only decision made related to dividends. By then the bonuses had been paid.
110. In the previous year bonuses and dividends had been decided at the same time. Mr Gidman said that the absence of any discussion on bonuses at the September 2000 meeting led him to believe that no bonuses had been agreed upon. He was not told about the payments made in June. The only document which in terms refers to the £60,000 bonuses is a handwritten note by Mr Barron dated 22nd June 2000, giving instructions for various bonuses, including his own, to be included in the June payroll. Mr Moore gave instructions for the payment of his bonus on 27th June and it was paid on 30th June to his company.
111. These payments were disclosed to Mr Gidman in a letter dated 21st March 2001, which stated that the bonuses were agreed at the 7th September board meeting on the basis of the formula applied in the previous year. But as Mr Gidman pointed out, Mr Moore was not paid a bonus in that year and was only working for MSL part-time. He is adamant that only dividends were discussed and agreed at the September meeting. Ms Donoghue’s evidence is that there was no discussion of performance bonuses at that meeting, but that they were discussed at a business review meeting held on 21st December 2000, which Mr Gidman was not invited to attend.
112. The claim to recover the bonuses of £35,000 and £25,000 was the subject of a late amendment and is not dealt with by Mr Barron in his third witness statement, which does deal with the other bonus payments in dispute. In that statement he does, however, say that MSL did not operate a bonus scheme according to any formula and that the bonuses were awarded at the discretion of himself and Mr Moore. He also says that Mr Moore refused a bonus in the year 1999-2000 because he was only working part-time for MSL. This was confirmed by Mr Moore in his fourth witness statement. However, when cross-examined about the £25,000 payment, he was quite candid. He said that he felt that he had earned it, but accepted that he should have consulted Mr Gidman about it. As it was, he did not do so. There was no disclosure or authorisation of the payment at the 7th September meeting. By contrast, Mr Barron said in cross-examination that the principle of awarding a bonus was agreed with Mr Gidman in about January 2000 and eventually a £60,000 bonus payment was approved. Because of the dispute between Mr Moore and Mr Gidman in June of that year, no board meeting could be held at that time. The dividends were agreed at the September meeting and Mr Barron and Mr Moore had based their bonus payments on that dividend. He accepted that he made the decision to pay the £25,000 to Mr Moore without reference to Mr Gidman. The balance of the £60,000 he allocated to himself because (he said) the principle had already been established.
113. I do not accept any of Mr Barron’s evidence to the effect that these bonuses were agreed to by Mr Gidman or even put to a properly constituted board meeting. This evidence is contrary to the minutes of the meetings and to the evidence of Mr Moore. It is clear that Mr Barron took it on himself (by his own admission) to make the payment to Mr Moore and, in my judgment, he did the same in respect to the payment of £35,000 to himself. The performance bonuses were therefore unauthorised. I shall deal later, when I come to consider the question of remedy, with Mr Sisley’s submission that, apart from the question of actual authority, Mr Gidman had no criticism of the payments, having regard to the performance of MSL. But it may be convenient to record my findings of fact on that issue now. Mr Gidman made it clear that his sole complaint about the bonuses was that they were not properly authorised by the board. But he said in terms that he was not challenging the reasonableness of the amount of the bonuses in respect of the year in which they were awarded. It seems to me, therefore, that if it is relevant to ask whether the bonuses would have been approved by Mr Gidman, had they in fact been tabled at the meeting in September 2000, the answer is that, on the basis of what he then knew, he would most probably have agreed to them.
114. That leaves the two bonus payments of £10,000 each. The first of these was made to Mr Moore’s company, Controlled South, on about 15th October 2000 in settlement of an invoice for additional management and consultancy support for the period from July to October of that year. Mr Barron accepts that he authorised the payment without reference to Mr Gidman. He said that it was to reward Mr Moore for the long hours he had worked since joining MSL full-time. Mr Barron’s case is that it was within the discretion conferred on him by the board to award such bonuses. I do not accept that. There was no express delegation of any such power and Clause 6 of the Minority Protection Agreement expressly requires agreements about the remuneration of directors to be put to all the Class A shareholders. It is also clear that it was always the practice of the company to decide upon bonuses at a board meeting. The other difficulty about the bonus is that it failed to take into account the fact that by October 2000 Mr Moore was not only on a full salary, but had also received in June a bonus for the year 1999-2000. Any performance bonus for the year 2000-2001 should (and normally would) have been determined at the end of that year, based on the performance of the company in that period and the amount of profit available for distribution. I can see no justification for Mr Moore taking an early bonus in October 2000 and I do not believe that Mr Gidman, if asked, would have agreed to it. Mr Moore accepted in cross-examination that his bonus should have been approved at a board meeting, but was not.
115. The payment to Mr Barron falls into a slightly different category. Although the £10,000 was paid to Mr Barron as a performance bonus, it is clear from the minutes of the MSL business review meeting held on 21st December 2000 that the purpose of the payment was to clear part of his Director’s Loan Account, which at 30th June 2000 stood at £30,000. The bonus was paid net of income tax and national insurance, and the total cost to MSL was £18,700. The loan was almost certainly in breach of s330 of the Companies Act 1985, but there was no justification for the award of a special bonus in the middle of a financial year simply to enable Mr Barron to pay the loan off No attempt was made to put the bonus to a board meeting or otherwise to obtain Mr Gidman’s consent, nor do I believe that his consent would, in the circumstances, have been forthcoming.
116. The pension payments in question were made to Mr Moore and Mr Barron in the sum of £11,220 each and recorded in the draft accounts of MSL for the year ended 30th June 2000. Mr Gidman wrote to Mr Barron querying the payments and was told that they were one-off payments to both directors, who had sacrificed their pensions in 1994 in order to set up MSL. Mr Barron and Mr Moore accepted in a letter date 21st March 2001 that the pension payments were not agreed to by the board. The highest that Mr Moore put it in his witness statement was that there had been discussions about MSL making contributions to their pensions in 1994, but it had been agreed that this could not be done due to lack of funds, and the company would contribute as and when it could afford to do so. However, in cross-examination he accepted that there had never been discussion at a board meeting about a pension payment to him, and that any such payment should have been disclosed at a board meeting and authorised.
117. Mr Barron took a different position. He said that it was agreed that he should be paid a pension at a board meeting in April 1997 and this was confirmed in March 1998. In fact it is clear that, although a pension for Mr Barron was approved at the April meeting (as Mr Gidman accepts), it was decided at a business review meeting held on 12th June 1997 not to implement it. There is no evidence that the proposal was subsequently revived and accepted by the board. No justification has been provided for the company making pension contributions to Mr Moore and Mr Barron in 2000, and I do not believe that Mr Gidman would have agreed to one-off payments of this kind, given the level of salary and bonuses which the Defendants were by then receiving.
118. The other aspect of the Defendants’ conduct as directors which features in the pleadings is the disposal of the freehold of MSL’s former premises at Oak House, Hythe. Oak House itself and the adjoining car park were sold for £70,000 and £25,000 respectively and the proceeds used to discharge certain tax liabilities of MSL. The sale prices are not alleged to have been under-values, but these disposals are relied upon in the derivative action as breaches of duty by the Defendants. No separate financial loss is, however, alleged in respect of the disposals, and in these circumstances it is enough for me merely to record that, in common with much else, the disposals do not seem to have been the subject of a proper board resolution. They are of more significance in the personal action, because they are relied upon as breaches of the Minority Protection Agreement. It seems clear that Mr Gidman’s consent was not sought or obtained in relation to the sales.
119. I need say no more about Oak House, but I should mention an issue which has been raised in relation to the lease of MSL’s premises at Cheriton Gardens to MIGL. The lease was granted in 2001 at a rent of £18,500 per annum on terms that MSL would be responsible for all repairs and insurance in respect of the building. These terms are said to have been uncommercial and another aspect of the Defendants’ scheme to benefit MIGL at the expense of MSL. However, no specific relief is now sought in respect of the lease. In the light of the Defendants’ agreement to transfer their shares in MIGL to MSL, the experts agreed that the loss has been made good. The history of the lease is therefore only of evidential value in assessing the overall conduct of the Defendants in relation to MSL.
120. At an MIGL board meeting held on 5th July 2001 it was agreed that the proposed lease to MIGL should be amended so that MSL as landlord and not MIGL as tenant would be responsible at its own expense for internal and external repairs and for insurance. However, the rent of £18,500, which had been calculated by valuers in March on the basis of a full repairing and insuring lease, was to remain. These terms were wholly uncommercial for MSL and Mr Moore accepted as much. Notwithstanding this, the Defendants approved the new terms. On 21st September 2001 Messrs McKeags, a firm of solicitors acting for Lloyds Bank, who as mortgagees had been asked for their consent to the lease, wrote to Messrs Gambrills (MSL’s solicitors) querying the terms of the lease and asking if the repairing and insuring obligations were reflected in the rent. Gambrills replied on 4th October saying that they were taking instructions. On 10th October they wrote to McKeags saying that their client had advised them that the rent had been increased by £1,000 to take account of the changes. This was simply untrue, and the bank’s consent to the lease was obtained on a false basis. The terms of the lease were never approved at an MSL board meeting or put to Mr Gidman. This is therefore yet another example of the almost complete disregard for MSL’s interests which the Defendants have displayed.
121. On my findings of fact the Claimant has established the case of breach of fiduciary duty. For the reasons already stated, I make no findings as to whether there was an unlawful conspiracy, as such, but it is clear that the Defendants acted in concert to cause the business and income of MSL to be transferred the new Metro companies and to Spot-1, and used the company’s assets to fund the establishment of Sagitta and Rail Awareness, in which MSL received no shares and from which it took no discernible benefit. What needs to be emphasised, and is I hope apparent from my judgment on the facts, is that all these steps were taken intentionally as part of a scheme under which Mr Gidman and MSL were deliberately marginalized. I do not accept Mr Sisley’s submission that there was an authorised investment in the Metro companies, followed by a subsequent and unconnected failure to allot the shares. Attempts have been made to justify various aspects of this so-called restructuring by reference, inter alia, to IR35 and to the 2001 Regulations. But as I have found, these are all ex post facto attempts to provide an explanation for what occurred. At the time these arrangements were entered into, the dominant purpose of the Defendants was to establish a string of companies whose businesses would eventually be run apart from MSL. Even if the arrangements made it easier to comply with IR35 and the various statutory regulations mentioned in evidence, that was not the reason why they were implemented, and resort to those matters therefore provides no defence.
122. There is no real dispute between the parties about the duties which the Defendants as directors owed to MSL. Mr Sisley submits (and I accept) that a director must exhibit the skill and judgment to be expected of a reasonably diligent person, with his particular knowledge, skill and expertise. But this case is not about a lack of skill or care on the part of Mr Moore and Mr Barron. They are not charged with negligence but with breach of fiduciary duty. The central issue is not their competence but their integrity. Directors are fiduciary agents for the company and must exercise their powers accordingly. They must act bona fide in the best interests of the company and must not allow any personal interests to conflict with these duties of good faith and loyalty. As Millett LJ observed in Bristol and West Building Society v. Mothew [1998] Ch 1 at page 18:
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. The core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.
...
The nature of the obligation determines the nature of the breach. 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.
Mr Sisley is right to submit that the Court should be cautious about substituting its own judgment for that of the directors. But once it is established, as it is in this case, that the Defendants acted out of self-interest and abandoned their duties of loyalty and good faith to the company, then their decisions cannot stand and the Court must intervene.
123. The distinction between a fiduciary duty and a director’s duty of care is important in terms both of the remedy available and the test of causation to be applied when measuring the financial consequences of the breach. The equitable remedy for breach of fiduciary duty is restitution. The defaulting fiduciary is required to account and to restore to the beneficiary the property which has been displaced. Where restoration in specie is not possible, the Court will award compensation in a sum sufficient to place the beneficiary in as good a position as he would have been, had the breach never occurred. The application of these rules must now be considered in the light of the decision of the House of Lords in Target Holdings Limited v. Redferns [1996] 1 AC 421 which, whilst affirming the basic and traditional approach to compensation referred to above, rejected the imposition of a duty to make restitution without regard to the wider factual and commercial context involved. In that case the Plaintiff had succeeded in obtaining summary judgment against a firm of solicitors who had prematurely released a loan to the borrower in a mortgage transaction. The Court of Appeal held that upon release of the funds without authority the solicitors were in breach of trust and were therefore obliged immediately to restore the fund, regardless of whether the lender would in any event have gone ahead with the transaction. The House of Lords rejected that approach. Compensation had to be assessed not at the date of breach but at the date of judgment, taking into account the full benefit of hindsight and common sense.
124. Whilst the general approach to the assessment of equitable compensation established in Target is not open to doubt, it remains important to identify the circumstances in which it can properly operate. The difficulty for the lender in Target was that it was in effect seeking compensation for the loss of its mortgage advance, which was not, on analysis, caused by the breach of trust consisting of the premature release of the funds. The monies were lost because they were lent to a fraudulent borrower. The release of the funds by the solicitors (premature or not) could not be causative of that loss unless it was itself a material part of the fraudulent scheme. If it was accidental and unrelated, then it could not justify an award of compensation for that loss. But these principles of causation have no application in a more simple case where the beneficiary seeks to recover property which has been removed from him under a transaction with the fiduciary, which is the result of a breach of fiduciary duty or fraud. In cases of that kind the fiduciary is not entitled to enforce the transaction, and it can set it aside as of right. In Swindle v. Harrison [1997] 4 AER 705, Hobhouse LJ expressed the principle in these terms:
Once there has been a breach of a fiduciary duty in relation to a transaction, the fiduciary is not allowed to enforce that transaction. Equity does not allow him to benefit from the improper transaction and can require him to rescind the transaction and make restitution. (Armstrong v Jackson [1917] 2 KB 822) It is no answer for the fiduciary to say that the other party would still have entered into the transaction had he made full disclosure. One can see the same reasoning being adopted in relation to the doctrine of uberrimae fidei (eg s. 17 of the Marine Insurance Act 1906); the transaction is voidable. The principle is not a principle relating to the recovery of damages nor does it give rise to common law rights. It is essentially a principle which precludes the fiduciary from enforcing his common law rights.
It has long been established that it is no answer for the defaulting fiduciary, who has used trust property to his advantage, to say that the beneficiary would have had no interest in taking advantage of the particular commercial opportunity. An example of the application of this principle in relation to directors can be seen in the Judgment of Rimer J in Gensor v. Dolby [2000] 2 BCLC 734 at page 741.
125. An issue raised by the Defendants in this case is whether this principle applies when the transaction under attack was not made with the fiduciary himself but with a third party at the instance of the fiduciary. The obvious example is the case (as here) where a director in breach of fiduciary duty causes the company to enter into a contract for the benefit of an entity in which he has a personal interest. Although a clear breach of duty, it is said that in theory it may be possible to argue that consent would have been forthcoming if asked for and the contract entered into. It seems to me difficult to accept that a trustee or fiduciary who allows his personal interest to override his duty of loyalty and good faith to the beneficiary can be permitted to raise as a defence the possibility that the beneficiary might have consented if asked. I can see no material difference between the case in which a director takes the benefit directly and one in which the profit or commercial opportunity is acquired by another company in which he has shares. The requirement that such a fiduciary should avoid such conflicts and must account for any profits made in the course of that fiduciary relationship has acquired the status of an inflexible rule. In Regal (Hastings) Limited v. Gulliver [1967] 2 AC 134, Viscount Sankey (at page 137) put it in these terms:
In my view, the respondents were in a fiduciary position and their liability to account does not depend upon proof of mala fides. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust.
Similarly, at page 144, Lord Russell of Killowen said this:
The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.
Finally, at page 154, Lord Wright said this:
both in law and equity, it has been held that, if a person in a fiduciary relationship makes a secret profit out of the relationship, the court will not inquire whether the other person is damnified or has lost a profit which otherwise he would have got. The fact is in itself a fundamental breach of the fiduciary relationship.
126. If the fiduciary fails to make full disclosure and to obtain consent in advance, then he must account unless released. I am not persuaded that in cases of this kind it is open to the fiduciary to invite the Court to speculate as to whether the beneficiary might have consented if approached at the relevant time. A defence of that kind is inconsistent with the absolute nature of the rule. In the present case there was no release by the shareholders and none is now possible. The Defendants would have needed to have made full disclosure and to have sought the ratification of their actions by resolution of the shareholders. In so doing they could not have used their majority to affirm arrangements the effect of which was to vest in the Metro and other companies assets which properly belonged to MSL: see Cook v. Deeks [1916] AC 554. Legitimisation of the transaction by this means was not, therefore, open to them. But in fact they have throughout denied any wrongdoing and have contested the action. The order of Lightman J, authorising these proceedings, has now superseded any possibility of action by the shareholders.
127. But even if I am wrong about the availability of a defence of the kind suggested, the corollary of the rule that the directors must act at all times bona fide in the interests of the company requires the Court to presuppose that the contracts with, and transfers to, the Metro and other companies would have been consented to not by a board including Mr Moore and Mr Barron, but by a board of MSL comprising directors who would have considered the proposals independently and having regard to the best interests of the company. Given that the proposed transactions were (on my findings) intended to benefit the other Metro companies and their shareholders to the detriment of MSL, it is inconceivable that they would have been consented to. This is another reason why a defence of this kind is likely in every case to depend upon a factual and legal impossibility.
128. On the findings of fact which I have made, there can be no doubt that the Defendants were in breach of fiduciary duty in causing MSL to enter into the contracts with the Metro companies and Spot-1 and to invest monies in Sagitta and Rail Awareness. Those arrangements were not made in good faith or for the benefit of MSL. On the contrary, they were all part of the scheme which I have described. Subject to the defence of estoppel and acquiescence which I will consider shortly, the Defendants must therefore account for the profits and other monies transferred to the Metro companies, as well as those paid to Spot-1, Sagitta and Rail Awareness. Although in the case of MTL and MSM the initial investment was authorised on terms that MSL would have a shareholding, it is clear that the authority of the board and that of Mr Gidman was obtained on the basis of a substantial misrepresentation and non-disclosure as to the position of Mr Myers and as to the Defendants’ own plans for both MTL and MSM. I therefore draw no distinction between investment in, and contracts with, MTL and MSM and the position in relation to the other companies.
129. That leaves the payments made to CPC(SA), Hama and Sentinel, and the payment of the bonuses and pensions. The payments to Hama and to Sentinel were made in each case to further the interests of Mr Moore and Mr Barron respectively, at the expense of MSL. As indicated earlier in this Judgment, they were not made, even mistakenly, in order to promote the interests of MSL. They must be accounted for. Although made for the benefit of the Defendants individually, it is clear that the other director concerned knowingly assisted in procuring the payments and both Defendants are accordingly liable for them. The same goes for the bonus and pension payments. The Defendants decided to help themselves to these payments regardless of any benefit to MSL. Having regard to the fact that the Defendants were simultaneously engaged on a course of action which was wholly detrimental to MSL, all these payments must be accounted for. Although Mr Gidman was prepared to accept that the performance bonuses in isolation were not disproportionate to the profits, I did not take that evidence to indicate that he would have consented to their payment if he had had full knowledge of all the facts at the relevant time. But the test in any event is whether an honest and reasonable board would have agreed to the payments with full knowledge of the total picture, and the answer to that question is obvious.
130. The only payment which I have felt any real doubt about is the £40,000 lent to CPC(SA). This was not made for the benefit of the Defendants as such, and the precise reasons for the payment are still obscure. The absence of any obvious conflict or personal gain does mean, however, that the payment (unauthorised as it was) falls to be considered on the basis of whether a reasonable board would have agreed to it. In commercial terms it makes little sense, but the same might be said for Mr Gidman’s earlier decision at CPC to provide the guarantees I have referred to. I am not prepared, on the evidence before me, to say that the payment was so extraordinary as to be beyond the scope of what any reasonable board in the circumstances might have done. In relation therefore to this payment, the Defendants will not be asked to account. That does not, however, mean that there has been no breach of the Minority Protection Agreement in relation to it.
131. As an alternative to their denial of the allegations of breach of fiduciary duty, the Defendants have counterclaimed against Mr Gidman for a contribution to any loss which MSL has suffered from their breaches of duty. The basis of the counterclaim is the allegation (pleaded in paragraph 76 of the Amended Defence and Counterclaim) that Mr Gidman was himself in breach of fiduciary duty by:
76.1 not advancing any of his present criticisms until after the diversification and restructuring had been implemented on 1st July 2001, and
76.2 thereby beguiling Mr Moore and Mr Barron into the mistaken belief that he approved and that he had no objections to advance,
76.3 as is to be inferred from the fact that he took advice and yet maintained his silence until after the date of implementation had passed, and after that date first raised these allegations, so acting with the object not of safeguarding the interests of MSL but with the object of taking control of MSL.
I have no difficulty in accepting that a director cannot sit in silence and allow his fellow directors to act in breach of duty, without making reasonable attempts to curtail their activities. But for the otherwise innocent director to become liable for the consequences of the breaches of duty by the other directors, there must be culpable inactivity on his part, and the Court will not require him to do the impossible or to proceed more quickly than he can reasonably do, having regard to the information known to him, the need to obtain legal advice, and the remedies available.
132. In the present case Mr Gidman made it clear (as I have found) at the 20th February 2001 board meeting that he was concerned by, and did not consent to, the restructuring proposals. He sought immediate legal advice and by August wrote setting out his preliminary complaints. The allegations set out in paragraphs 76.1 to 76.3 are not made out on the evidence. Mr Gidman (as Mr Sisley accepts) did make his position clear in February, although he did not then, and was not then in the position to, articulate his concerns in any detail. That was largely, if not wholly, due the fact that until that time most of the Defendants’ activities which are now complained of had not been disclosed to him and, as recorded earlier in this Judgment, the disclosure made at the February meeting was itself extremely partial. Nor do I accept that the Defendants were subsequently under any misapprehension as to Mr Gidman’s position. On the contrary, they were aware that he was taking legal advice, but they decided to press ahead regardless. In so doing they took a calculated risk. The counterclaim, however, does not depend on what the Defendants thought, but rather on whether Mr Gidman could have acted more quickly to stop what they were doing. I am not persuaded that the time taken to progress matters was unreasonable. At the February meeting he made his position clear, but did not then have anything like the full picture. Much of the information necessary to commence the action and to plead out the allegations only came into his possession at the end of 2001. The Defendants made it as difficult for him as possible to ascertain the true position, and disclosed information only when forced to do so. Nor (as I have found) is there any truth in the allegation that this was part of a strategy by Mr Gidman to make the Defendants think that he had no objections to their plans. In any event, the only significant event after July 2001 was the transfer of the arrangements with the Metro companies to MIGL, and it is accepted that this did not give rise in itself to any additional losses. The counterclaim is therefore dismissed.
133. My conclusions on the counterclaim really dispose of these defences. Mr Sisley accepts that, on the evidence, Mr Gidman did not make any positive representations to the effect that he agreed to, or did not object to, what the Defendants had done and were still proposing to do. But it is said that silence can found an estoppel when there is a duty to speak. Mr Gidman’s failure to object is said to have been tantamount to consent. There is a short answer to this. Mr Gidman did not simply remain silent. At the February 20th meeting he made his opposition known and never resiled from that. There was nothing from which the Defendants were entitled to infer, or in my judgment did in fact infer, that he had consented.
134. So far as acquiescence is concerned, I am by no means satisfied that the conditions which require to be satisfied are any different from those in relation to estoppel by silence. In De Bussche v. Alt (1877) 8 Ch D 286 at page 314, Thesiger LJ described the principle in these terms:
If a person having a right, and seeing another person about to commit, or in the course of committing an act infringing upon that right, stands by in such a manner as really to induce the person committing the act, and who might otherwise have abstained from it, to believe that he assents to its being committed, he cannot afterwards be heard to complain of the act.
Those conditions are not satisfied in the present case. Mr Gidman did not stand by. He made it clear at the February meeting that he did not consent, and did nothing subsequently to give the impression that he had changed his mind.
135. I heard the evidence of two experts, Mr Andrew Cottle, called by the Claimant, and Mr Michael Mason for the Defendants. Following a meeting, they were able to agree on a number of matters and to highlight the areas of disagreement. Much of Mr Mason’s evidence was concerned with justifying the conduct of the Defendants and I derived no real assistance from that. It is for the Judge, not the experts, to decide questions of liability, based on the factual evidence before the Court. Where the expert evidence has been useful is in assisting me to quantify the loss resulting from the breaches of duty I have identified. Mr Sisley on behalf of the Defendants conceded in his closing submissions that if I found that the payments to Sagitta and Hama and the bonus and pension payments were made in breach of duty, they must be refunded. I will therefore so order. This will include the gross value of the payment made to Mr Barron to enable him to repay his director’s loan. In the case of Sagitta, there will be Judgment for £24,982, which includes the price of the computer and the loss of rent of £3,000. The payments to Sentinel fall into the same category and £7,450 will be repaid.
136. It is common ground between the experts that under the trading arrangements between MSL and Spot-1 there was a net transfer of profit in favour of Spot-1 of some £49,801 in the period to 30’h June 2001. Thereafter Mr Cottle has been able to identify a further payment to Spot-1 amounting to £9,396. There was therefore a total transfer of profit in the sum of £59,197. The dispute between the experts is as to whether the gross profit on the inter-company trading should rest with Spot-1 or be restored to MSL. Consistently with my decisions that these arrangements should never have been entered into, the right order is that the Defendants should be made to account for these transfers of profit, which must be treated as rescinded ab initio. The Defendants would be entitled to credit for any sums which they could show had been expended by Spot-1 out of those profits to meet costs which would have been incurred by MSL in servicing the same contracts, subject to my being satisfied that no duplication of expense was involved. It is likely that there was some expenditure on such overheads, but the parties have elected to have these issues resolved as part of the trial rather than on a subsequent inquiry, and I have therefore to be satisfied by the Defendants as to the existence and amount of any deductible expenses. As to that, I am not satisfied that one can simply take the recorded overheads of the company as an accurate guide without more. The burden is on the Defendants to justify the expenditure claimed and they have not, in my judgment, discharged that burden. There has been no real attempt to examine the items in question beyond the provision of the accounts. Therefore there will be judgment in respect of Spot-1 in the sum of £59,197.
137. There are two items claimed: the sum of £16,875 paid for the property maintenance services which were not provided, and the sum of £54,777 representing irrecoverable loans. The £16,875 is said to have been used to pay the salary of Mr Wright, who was Mr Harrison’s assistant, and is therefore a deductible expense. I disagree. There is no evidence to show that he would have been employed, had MMC never been set up. The experts are, however, agreed that costs of £1,250 should be credited in respect of an invoice from Henderson-Blake Health and Safety Services. That leaves the question of the loans. As to that, it seems to be agreed that, by reference to the nominal ledger, the sum in question is not £54,777, but £50,575.44. The defence to MSL’s claim to recover this sum is that the liability was passed to MIGL and is currently being repaid to MSL as an inter-company debt. But that does not answer the claim. If monies have been lent to MMC (as they have) without the authority of the board and for no justifiable reason, then the Defendants are accountable for them and are not permitted to require them to be repaid by MIGL from the profits earned on contracts for which MIGL is also accountable to MSL. There will be judgment in respect of MMC in the sum of £66,200.
138. Rail awareness received £50,000 from MSL, of which £15,000 was paid as part of the loan to CPC(SA). This amount should be deducted, and the experts are also agreed that credit should be given for costs incurred by Rail Awareness in respect of Gower Limited in the sum of £6,183. There is no further agreement on legitimate deductions and none has been proved. The other item is the loan from MSL of £2,000. The Defendants contend that it was the intention that MIGL should take over this liability, but there has been no novation of the debt and, for the reasons already stated in respect of MMC, it is objectionable in principle for the profits on the MIGL contracts to be used to repay this sum. The Defendants are therefore accountable for the sum of £30,817.
139. Between March and June 2000 MTL received £145,000 from MSL and repaid £75,000. After adjustments for VAT, the experts are agreed that MSL is out of pocket to the tune of £52,127.66. Between October 2000 and April 2001 a further £52,203.12 was paid. There is also an unpaid loan of £4,287. The experts agree that credit in the sum of £20,498 should be given in respect of the salary payments made through MTL for MSL, but no further credits have been established. No account has been taken in these figures of an additional £25,000 paid to MTL which was then used to fund part of the loan to CPC(SA). There will therefore be judgment in respect of MTL in the sum of £88,120.
140. The experts are agreed that £50,000 was paid into MSM in June and July 2000 and that there is a credit balance on the trading account between the two companies in favour of MSM in the sum of £157,604. As in the case of Spot-1, this represents a transfer of profit for which the Defendants are accountable, and none of the accrued profit was transferred to MIGL in October 2001. The same goes for all the other Metro companies. The experts also agree on deductions of £33,401, but no further deductions are established. After taking into account an unpaid loan of £5,825, Mr Cottle calculates the total sum recoverable as £181,028. I am prepared to give judgment in this sum, subject to it being confirmed that the payment of £25,000 made to MSM on 3 A July 2000 has not been included in the £673,743 figure representing purchases by MSM under the trading arrangements with MSL.
141. The personal action is based on essentially the same factual allegations as in the derivative action, and I can therefore deal with it quite shortly. The breaches of the Minority Protection Agreement relied on can be summarised as follows:
(i) Clause 2.2: failure to ensure that the Business shall be conducted in the best interests of the company;
(ii) Clause 5.1.1 and 5.1.2: the withholding from Mr Gidman of relevant information, including management accounts, reasonably required by him to keep him properly informed about the Business;
(iii) Clause 5.1.6 and 6. 1: the determination by the Defendants rather than by the whole board of MSL of matters reserved to the board, such as the remuneration of directors, the making of loans by MSL, the acquisition by MSL of shares in other companies, the disposal of MSL’s assets, and the entry into contracts otherwise than in the ordinary course of business;
(iv) Clause 13: the Defendants becoming concerned or interested (whether as directors or otherwise) in businesses similar to the business of MSL.
142. It seems to me that there have been breaches of all these provisions. On the basis of my earlier findings, the Defendants have conducted the business of MSL in a way that was intended to benefit not MSL but the other companies they had set up, as well as themselves as shareholders. I should mention at this stage that I do not accept Mr Sisley’s submission that the word “Business” in Clause 2.2 of the Minority Protection Agreement is limited to the business of providing recruitment agency services referred to in Clause 2.1, but includes the business of the company from time to time as extended under the provisions of Clause 2.2. Having regard to the length of this Judgment, it would be unnecessarily repetitive to describe the various breaches in detail. My finding that the business of the company has not been conducted in its best interests applies in relation to its dealings with all the Metro companies, as well as to Spot-1, Sagitta and Rail Awareness. As part of these arrangements, including the transfer of monies and profits on MSL contracts, the Defendants caused MSL to dispose of its assets and to make loans without informing or disclosing these matters to the board. The disposals include those of the property at Oak House and the loans include the loan made to CPC(SA). The various trading agreements with the Metro companies were not contracts entered into in the ordinary course of business, and in the case of Spot-1 and a number of other companies, the business being carried on was actually or prospectively in competition with that of MSL. The award of the bonus and pension payments were also in breach of Clauses 5.1.6 and 6.1.
143. Based upon these breaches, Mr Gidman seeks a declaration that he is entitled to acquire the Defendants’ shares in MSL. For this purpose he relies upon Article 6.8.14, which is set out in paragraph 10 of this Judgment. Mr Gidman served a notice on the Defendants on 22nd November 2001, which incorporates by reference his earlier letter of 30th August of that year. The notice was given on the express basis that the breaches complained of were not capable of remedy, and it did not therefore call upon the Defendants to remedy them. The alleged breaches included the diversion of business opportunities, the failure to supply information and the procuring of the contracts with the Metro companies.
144. In relation to this notice a number of points were taken by Mr Sisley. He submitted that the notice was a nullity, because it did not require the Defendants to remedy the breaches complained of. I do not accept that. On a proper construction of Article 6.8.14 the server of the notice is not required to call upon the other party to remedy an irremediable breach. That makes no sense at all. The notice could have required the Defendants to remedy such breaches as were capable of remedy, but its failure to do so simply means that it will be of no effect if and so far as any of the breaches relied upon were in fact capable of remedy.
145. Another point taken was that Clause 5.1.1 of the Minority Protection Agreement should be construed so as to treat the words “relevant information” as being exhaustively defined by what follows. Again 1 reject that. The word “including” in my judgment means what it says. Relevant information is not limited to trading figures and forecasts.
146. On 24th June 2002 Mr Gidman served a second notice, which refers in terms to the allegations by then pleaded in the draft Re-amended Particulars of Claim in the personal action. The notice was served to meet a point taken by the Defendants that Mr Gidman could not rely upon the first notice in respect of matters not then known to him. Again the notice was served on the basis that the breaches were not remediable. The only additional objection to that notice is the fact that it was not served on the Defendants personally but on their solicitors, who, it was said, had no authority to accept service. To remedy this, a third and identical notice was served on 17th October 2002. However, by this time the Defendants had served their own notice (on 18th September 2002). It is said that the Claimant thereby became obliged to transfer his shares to the Defendants, and the Claimant’s third notice, even if otherwise valid, was therefore of no effect.
147. For reasons which I will come to shortly, none of the alleged breaches set out in the Defendants’ notice is sustainable, and that notice was ineffective. Mr Gidman can therefore rely on the third of his notices, although the allegations of breach contained in all three notices are made out on the basis of this Judgment. The only remaining issue I have to decide is whether these breaches are remediable. Mr Sisley submits that they were all remedied, because the businesses of the other Metro companies and Spot-1 have ceased, and the shares in MIGL are to be transferred to MSL. The Defendants will also (if necessary) give up their shares and directorships in the other companies. Any transfer profit can be restored. I am unable to accept these submissions. The question of whether a breach is remediable falls to be considered not only in relation to the acts complained of, but also in relation to the purposes of the agreement and other arrangements which the transfer mechanism contained in the Articles was intended to enforce. The essence of the Minority Protection Agreement is the trust and co-operation between the three shareholders. Although not a partnership as such, it clearly contemplates that each shareholder should co-operate fully for the benefit of MSL and their common interests. The Defendants have attempted to subvert these arrangements for their own benefit. I am entitled to look at the breaches in the round, but the principal allegation (which is common to all three notices) that the Defendants have acted in their own interests rather than that of MSL is serious enough in itself to amount to an irremediable breach of the agreement. The relationship between the parties has (as all three accept) completely broken down as a result of what has occurred, and the payment of compensation or the transfer of shares is not sufficient to wipe the slate clean. The breaches of the agreement alleged in all three of the notices are fundamental and in my judgment irremediable. It follows that the first notice was effective to operate the transfer provisions in the Articles and determines the valuation date for that purpose.
148. That brings me to the Defendants’ own notice. This relies on some twenty alleged breaches of the Minority Protection Agreement, but six of the allegations were abandoned during the trial. These are paragraphs 2, 4, 12, 13, 16 and 18 of the notice. The position in relation to the remaining paragraphs is as follows:
(i) Paragraph 1: loans to CPC: these were repaid, but in any event the Defendants accepted and approved the payments. Mr Moore withdrew the allegations contained in sub-paragraphs 75.1 and 75.2 of his first witness statement. He accepted that he had authorised the payments of £20,000 and £11,000 and that the other payments had been made under arrangements approved by Mr Barron;
(ii) Paragraph 3: the £2,000 expenses payment to Mr Gidman: Mr Moore accepts that this was ratified in 1998 and is no longer in issue;
(iii) Paragraph 5: Mr Gidman’s failure to take responsibility for marketing, planning or strategy: I have dealt with this earlier in my Judgment. Mr Gidman did take steps to market the company and to obtain business for it;
(iv) Paragraphs 6-8: Mr Gidman’s failure to support the proposals put forward at the 20th February 2001 board meeting: in the light of my Judgment about the nature of these proposals, this allegation of breach is patently absurd;
(v) Paragraphs 9-11 & 17: all these are based on the litigation being a breach of the Minority Protection Agreement. Again there is nothing in any of this;
(vi) Paragraphs 14 & 15: the 13th February 2002 meeting: there is no evidence to suggest that Mr Gidman acted in breach of any duty to MSL. He called a joint meeting of the staff of MSL and CPC to see what help could be given to MSL in the circumstances. There is nothing to show that any business was transferred to CPC;
(vii) Paragraphs 19 & 20: Mr Stenhouse: he was brought in to assist the running of MSL. His appointment was approved by the Defendants at the MSL board meeting held on 16th July 2002. There is nothing in these allegations.
149. It follows that the Defendants’ notice is of no effect and the counterclaim in the personal action will be dismissed. Mr Gidman is entitled to the declaration that he seeks. I should mention for completeness that a defence of estoppel and acquiescence is also raised in this action, but it fails for the reasons given in relation to the derivative action.
150. For these reasons there will be judgment for the Claimant in both actions. The counterclaims will be dismissed. I will hear further argument in due course as to the form of order, and in particular in relation to the question whether Mr Gidman should receive an indemnity in respect of his costs in the derivative action.