Case No: 2L530557

BAILII Citation Number: [2014] EWHC B19 (Ch)
IN THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
LEEDS DISTRICT REGISTRY

The Courthouse
1 Oxford Row
Leeds
LS1 3BG

24th March 2014
BEFORE:

HIS HONOUR JUDGE SAFFMAN
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BETWEEN:

 	Oxford Fleet Management Limited	Claimant	
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 	Mr Douglas Watson Brown

Karen Tracey Clothier	1st Defendant

2nd  Defendant	

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Mr Lewis on behalf of the Claimant 

Defendants, Litigants-in-person

Judgment date: 24th March 2014

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JUDGMENT
His Honour Judge Saffman:

Introduction

1.	This is a claim by the Liquidator of Oxford Fleet Management Ltd (OFM), against Mr Douglas Watson Brown and Miss Karen Clothier.  Both Defendants, who were married to each other but are now divorced, were directors of OFM from 1st October 1997 until the 19th August 2006 upon which date they both resigned.

2.	They were reappointed as directors on 7th February 2007.  Miss Clothier resigned again on 22nd August 2007.  On 3rd December 2007 OFM was placed into administration at which time the sole director was Mr Brown.  It moved from administration to creditors’ voluntary liquidation on 12th December 2008.  There is a substantial deficiency as regards creditors.  

3.	Mr Brown owned 37 of the 100 issued shares in the company.  At one point at least Miss Clothier owned 36 shares and the balance of 25 shares were owned by the Fyfield Discretionary Trust.  The Trustees of the Trust included Mr Brown and Miss Clothier and also an independent third party Trustee, Miss Julie Pope.  The beneficiaries of the trust were Mr Brown and Miss Clothier and their children and remoter issue.

4.	Between 26th September 2006 and 25th December 2006 various payments were made by the Company to Mr Brown or, if they were not paid to him, they were credited to him to reduce, or perhaps more accurately, to extinguish a directors loan account.  The payments total £732,406.25 and they are identified in a witness statement dated 14th February 2014 by the Liquidator of OFM, Mr John Hedger.  I refer in particular to paragraphs 46 and 49 of his witness statement (pages 90 and 91 of bundle A of the four bundles provided for the trial).  The payments made to or on behalf of Mr Brown are also set out in paragraph 21 of the Particulars of Claim (A12).

5.	Mr Brown does not deny that these payments were made or credited to him but he does not necessarily accept that they were.  He does not know how much he received.  He does not suggest that the Company’s records from where this information has been obtained are wrong, he simply does not have the records to either confirm or deny the information contained in the Company’s records.  It will be noted that all these payments were made during the six month period when Mr Brown was not a de jure director of the OFM, by which I mean that he was not recorded in the Company’s books or at Companies House as a director.

6.	The Claimant seeks the recovery of this money from Mr Brown which was paid to him over and above his annual salary of £200,000 per year.  The Claimant does so on the basis that, while not recorded as an official director, Mr Brown was actually a de facto director of the Company.  I will go into more detail shortly as to what a de facto director actually is.  Suffice it to say at this stage that it encompasses somebody who, whilst not the holder of the official position of director, undertakes functions in relation to a company which could properly be discharged only by a director or where, as is contended in this case, a person who is not a formal de jure director acts on a footing equal to that of the actual de jure director in directing the affairs of the Company. In this case it is contended that in the relevant period Mr Brown acted on an equal footing to Mr Glynn Jones who was the de jure director. 

7.	The point is that if Mr Brown is a de facto director during those times when he was not actually a de jure director then he owes fiduciary duties to the Company in the same way as he would if he were a de jure director.  As set out in paragraph 30 of the Particulars of Claim at page 12 of the bundle those duties include;

a.	 A duty to act in good faith and in the best interests of the Company.  

b.	A duty not to act for a purpose collateral to the purposes conferred by the Company’s Articles.  

c.	A duty to exercise powers only for the purpose to which they are conferred and 

d.	A duty not to act so as to place oneself in a position in which personal interests do or might conflict with the interests of the Company.

It is contended that the payments now reclaimed were paid in breach of those duties.  

8.	On or about 31st October 2007 a further payment was made by OFM to Mr Brown of a £151,833 and a few pence.  At this point he was a de jure director of the Company and so the Claimant seeks to establish that this payment was in breach of Mr Brown’s fiduciary duties as a de jure director without having to go to the trouble of establishing that he had those duties as a de facto director.  

9.	On 20th December 2006 OFM made a payment of £130,000 to St Edwards School in Oxford.  It was apparently to clear some arrears of school fees and also as a lump sum payment in lieu of termly fees going forward in respect of Mr Brown and Miss Clothier’s three children.  The Liquidator seeks repayment of this amount from both Mr Brown and Miss Clothier on the basis that they were both liable to the school to discharge this liability.  It is contended in the first instance that this payment was no more than a loan by OFM to the Defendants for which a demand for repayment was made on 19th October 2012.  It is pointed out by the Claimants that this payment was actually treated as a loan in the Company’s books.  I have been referred to two documents that show how it is treated, one produced by the Company and one produced by Miss Clothier.  
10.	Alternatively, against Mr Brown it is contended that this payment of £130,000 was made when he was a de facto director and that the payment breached his fiduciary obligations, in the same way as the other payments made between September and December 2006 to which I have already referred.  
11.	As regards, Miss Clothier, this money is alternatively claimed on the basis that there was a total failure of consideration by her for its receipt.  In other words it was money belonging to the Company had and received by her or if not by her, then received by the School for her benefit in the sense that it discharged a liability that she had to the School.  It is contended that OFM got nothing out of the transaction and so the money should be repaid.
12.	Finally, in the week commencing the 13th December 2006 OFM made two payments, one very small one of about £15.00 and one much larger one of £374,995 or thereabouts totalling £375,000 in all to Miss Clothier.  The Claimant argues that this too was a loan to Miss Clothier, which it is true was made against the background of discussions about a buyback by the Company of her shareholding in it.  However, the buyback never actually took place and so it is contended that Miss Clothier received this money on the basis that it was simply a loan to her in respect of which a demand for payment has been made. 
13.	Alternatively, if not a loan then, because the Company never received the shares, it is once again alleged there has been a total failure of consideration and on that basis the money should be returned.  In layman’s terms the liquidator argues that, even if there was a contract for OFM to buy back Miss Clothier’s shareholding, in the end OFM did not get what it contracted for and so it is entitled to its money back.  
14.	In addition, it is contended that Miss Clothier must have known that insofar as the payment of £375,000 was authorised by Mr Brown, it was not in the interests of the Company and was a breach of his fiduciary obligations. In other words she knew or ought to have known that the arrangement was tainted and so is obliged to repay the monies received. 
15.	The Claimant’s position that this was a loan is supported to some extent by the way that this £375,000 was treated in the books and records of OFM, at page 252 in bundle B, the £375,000 is described as a loan to Miss Clothier then known as Mrs Brown.  But Miss Clothier has produced another document from the Company described as a “nominal activity ledger” which indicates that it is described as “K Brown transfer agreement”.  She says that supports her contention that it was a payment pursuant to an agreement by her to transfer her shares back to the Company. It is also true to say however, that even the document produced by Miss Clothier is named “The Loan Account Karen Brown” ledger.  
16.	I note for completeness that the Particulars of Claim actually make reference to other payments called the KB Expenses Payments.  I refer to paragraph 62 in respect of which some reimbursement is sought.  It does not appear that this is a matter which has been pursued in these proceedings.  In fact the Particulars of Claim include claims for that plus indeed the sums about which I am concerned but on the basis that such claims arise under the Insolvency Act 1986.  As I understand it these Insolvency Act claims have been stayed pending the outcome of these proceedings.
17.	I am not therefore concerned with any cause of action referred to in the Particulars of Claim which arises under the Insolvency Act.  I am only concerned with claims in the Particulars of Claim which arise out of allegations of breach of fiduciary duty, claims for repayments of loans or alleged loans and or claims for money had and received on the basis that there has been a total failure of consideration.  
18.	In short therefore the liquidator claims £884,239.58 from Mr Brown in respect of payments made to him or on his behalf and £130,000 in respect of the school fees paid and the same £130,000 is claimed by the liquidator from Miss Clothier together with an additional £375,000 paid to her on 20th December 2006.  The total claim therefore for the proceedings is actually £1,389,239.58.  
19.	Mr Brown denies that he was a de facto director of the Company and that he is thus in breach of any fiduciary duties to the Company insofar as any payments were made in the period when he was not formally a director or indeed otherwise.  He disputes in any event the Claimant’s contention that OFM could not afford to make these payments because he disputes the contention by the Liquidator that OFM was in a parlous financial position when these payments were made.  Indeed he says that it is ridiculous to suggest that these payments were made when the Company was staring insolvency in the face.  As a result he says that insofar as he owed fiduciary duties to OFM he has not breached them.
20.	Miss Clothier argues that she was not aware, and there is no evidence to suggest that she was aware, that the £130,000 paid to the school was for her benefit or that she knew the payment breached Mr Brown’s fiduciary duties.  Or indeed for that matter that she knew that the payment had been made at all.  As for the £375,000 as I have briefly touched upon, she alleges that that was a payment by OFM for her shareholding in it.  
21.	Her position is that in late 2006 she and Mr Brown were going through an acrimonious separation and ultimate divorce, and the view was taken that it would be best under those circumstances if she relinquished her interest in the Company. On 1st November 2006 she agreed to sell her shares in the Company for £375,000 and she has produced a letter to that effect which had not been seen before this trial but is referred to in the pleadings.  It is also agreed that the Company would be responsible for Capital Gains arising out of the buyback.  As far as she was concerned that is what happened.  She got her money and she parted with the shares.  She recalls a meeting in April 2007 at which she says she signed a letter or some other document by which the shares were formally transferred.  That was the last date that she had any equity in OFM. 
22.	Insofar as formalities concerning equity buy back required by the Companies Act relevant at the time viz, the Companies Act 1985 (since repealed) have not been complied with then she contends that the principle in Duomatic [1969] 2 Ch 265 apply.  That provides that the informed and unanimous consent of all shareholders in the Company can be the equivalent of a formal shareholders resolution (in this case a shareholders resolution to buy back the shares).  She says that the arrangement has been validated under those circumstances on the principle of Re Duomatic even if the particular requirements of the Companies Acts 1985 have not actually been formally complied with.

Background

23.	OFM had operated as a vehicle fleet management business for a number of years prior to entering into insolvency.  Mr Brown became involved in about 1996 and clearly he built the company up no doubt by lots of hard work.  In 2003 he entered into a contract with Volvo, this was not the first contract with Volvo, indeed contracts with Volvo had been a staple diet of the Company for some considerable time and every now and again they had to be renegotiated.  I have not seen the contract but, as I understand it, it might fairly be described as a contract to undertake the management of Volvo cars.

24.	In 2006 it is right to say that over 80% in fact about 86% of the Company’s business was related to that Volvo contract.  There is indeed a fax from Mr Brown himself at B196 of the bundle which indicates that to be the case.  By the year end April 2005 the Company had a turnover of about £8,500,000, but net assets of only about £234,000.  It was making a gross profit of over £3,000,000, but a net profit of only £236,000 or so, down in fact from the previous year.  Those details are obtained from B318 of the bundles.

25.	Mr Brown acknowledged during the course of his evidence that the Company’s performance deteriorated further in the financial year commencing 1st May 2005.  On the 13th January 2005 Volvo gave 24 months’ notice of its intention to terminate the Volvo contract.  Not because they were dissatisfied with OFM’s performance but because that by this time Volvo had been taken over by Ford.  The Volvo OFM contract was a rolling contract and such contracts were contrary to Ford’s policy and they had to be got rid of as a result. 

26.	In paragraph 5 of his witness statement (A69) Mr Brown deals with this.  He states that he was advised by his contact in Volvo that he could expect a notice of termination but could also expect a new contract which may in fact be more beneficial to OFM because it was likely to include OFM taking over responsibility for Volvo’s technical department.  It was all going to need relocation by OFM to larger premises which apparently Volvo were prepared to pay for.  That was the start of much work by Mr Brown and his team to get things ready so that once the new contracts became operative things could proceed smoothly from new premises.

27.	However by the end of 2005 nothing had progressed, the Volvo management team had changed, their priorities apparently had also changed, and it was beginning to look, at least from the description painted by Mr Brown at paragraph 10 of his witness statement, that OFM were being left high and dry by Volvo.  Eventually the relocation project did actually formally collapse and by March 2006 the whole basis of OFM’s relationship with Volvo had changed.  It appears that Ford had decided to restructure their entire supplier relationship.  A company called Excel Logistics Ltd was to be their first tier supplier and OFM merely a second tier supplier.  

28.	At paragraph 12 of his witness statement Mr Brown admits that he did not like this but there was the possibility of a silver lining in that from being a first tier supplier only to Volvo, OFM would become a second tier supplier to the entire Ford group.  It was also clear however, from Mr Brown’s statement, that it was not clear how things would develop.  He says in his statement, and I quote:

“Neither Hugh Reid, (who was his contact at Volvo) nor his colleagues were able to furnish him with any operational information.”

29.	The plan appeared to be to come to some contractual arrangement with Excel which would provide an income stream for OFM, but by mid December 2006 this contract had not yet been signed.  That is clear from the fax of 14th December written by Mr Brown in which he reminds Mr Jones (who as I have said was the de jure director of the Company) to ensure that when, the operative word being “when”, the contract is signed to make sure it does not unduly restrict OFM operations.

30.	In any event it seems to have been clear that Excel were only proposing to sub-contract some and not all of their work and therefore some restructuring of OFM, including some redundancies, was going to be likely.  I get that from paragraph 19 in Mr Brown’s witness statement.  Nevertheless Mr Brown’s evidence was that he had no doubt that a contract with Excel would be signed and that the Company’s future was assured.  A contract was indeed signed with Excel, I am not quite sure exactly what date, but certainly it seems sometime towards the end of 2006.  I have not seen that contract, it has not been produced to me.

31.	Mr Brown’s evidence was that the contract would have been one that would have secured OFM’s future if only Excel had complied with it.  They did not do so and the fact that they would not do so could not be foreseen in 2006.  The problems about their compliance with the contract only seem to come to light in about mid 2007.  I have been referred to an email where Mr Brown seeks to contact somebody in authority at Excel to complain about various deviations from Excel’s commitment from the contract.

32.	In any event what Mr Brown says is that these deviations or breaches of contract by Excel could not have been foreseen.  Neither indeed could it have been foreseen that Volvo itself, with whom he had had a very good relationship for a very long time, would become hostile to OFM and place obstacles in the way of its survival which is what apparently had happened.  Essentially what Mr Brown says is that therefore even when it became clear that OFM would, if I can use the vernacular, have to get into bed with Excel, he was confident that they would not only survive, but prosper and flourish not least because that was what Excel and indeed Volvo were telling him.

33.	His evidence is that he did not regard the loss of the Volvo contract as terminal.  The notice of termination provided OFM with two years to make the necessary alternative arrangements.  It was not the first time that a Volvo contract had been terminated and the Company had managed in the past nevertheless to go from strength to strength.  He was receiving assurance that alternative arrangements would be made and under the circumstances there was absolutely nothing wrong in being optimistic for the future of the Company. 

34.	In May 2006 however, Mr Brown had consulted a business consultant called Bramley Carrington.  His oral evidence was that he did so for a number of reasons. He develops this at paragraph 19 of his witness statement. In short, there was a recognition by him that even though it was unlikely that no contract would emerge from Excel, if it did not then the Company would require outside expertise including advice relating to potential solvency issues.  Even if an arrangement could be reached with Excel he felt that OFM may benefit from independent expertise in negotiating the most beneficial terms and the shape of the company going forward.  In addition by this time sadly Mr Brown and Miss Clothier’s marriage was on the rocks.  This impacted on the business since they were both directors and shareholders and outside help with all these problems was therefore considered to be expedient.  

35.	I have already mentioned Mr Glynn Jones, he was appointed a director on the advice of Bramley Carrington with a view to radically restructuring the Company and negotiating a contract with Excel that provided a viable future.  I use the phrases used by Mr Brown at paragraph 20 of his witness statement.  The appointment of Mr Jones was to provide a viable future for the business and because a provision had to be made to consider potential solvency issues, it has to be said does not suggest unrestrained confidence in the Company’s future.  

36.	Mr Brown and Miss Clothier resigned as directors on Mr Jones’s arrival or very shortly thereafter.  Mr Brown says he did so because he was convinced that this was a good idea because he may not be disposed to take the radical steps that were required to restructure the Company which was after all his baby.  His evidence was that Miss Clothier would not resign unless he did and it was not helpful to have two directors on the board who entertained animosity towards each other.

37.	 Mr Lewis, counsel for the Claimant relies not just on Mr Brown’s own words in his witness statement but on further evidence to suggest that in the second half of 2006 the Company’s future was in reality precarious. At B 160 is a draft shareholders report which was prepared by Mr Jones.  Mr Brown accepts that it was prepared in good faith albeit that he is not sure that he ever read it, and of course he points out that it was only ever a draft.  In any event it seems clear that at the time he wrote it Mr Jones felt that the failure to tender for work in light of the termination of the Volvo contract could have “serious implications.”

38.	At page 161 of this report, Mr Jones mentions that, when the Volvo contract terminates it will have the effect of removing 86% in financial terms from the current turnover of the business.  He also stated that it is necessary to treat with an amount of caution the prospects of a contract to succeed the terminated Volvo contract and at page 162 he argues that “if” the Company is to survive then certain routes have to be followed.  In fact the reference to the Company’s survival occurs on more than one occasion in the course of that draft shareholders note.  At page 163 he talks of Volvo’s actions placing the Company under enormous and undue pressure.

39.	It has to be said that it does not make happy reading from the Company’s prospective.  Mr Brown dismisses it as naive on the part of Mr Jones and simply wrong.  It was drafted, he says, only a few days after Mr Jones’s arrival and betrays a misunderstanding by Mr Jones of the true position.  For a start it is, he says, far too pessimistic about the prospects of a replacement contract as indeed Mr Brown would say was borne out by subsequent events because a replacement contract with Excel was actually signed, which was what Mr Brown believed all along was going to happen.

40.	I have already referred I think on a couple of occasions to the fax of 14th December sent by Mr Brown to Mr Jones.  First it is fair to say that it approves a payment to Miss Clothier of £375,000 for her shares.  It is a matter that Mr Lewis refers to in the context of whether Mr Brown was a de facto director or not, but in the context of the Company’s future that fact too talks about the loss of 86% of the Company’s business and remarks that it would be normally terminal, and it has resulted in OFM “fighting to survive.”  Mr Brown says only that this was said to reinforce the need to negotiate a good contract with Excel, and that seeing hios remarks as an indication that he had serious concerns about the Company’s survival is simply taking his fax out of context.

41.	One may have thought that Mr Jones as the MD of the Company would see it as a given that he should negotiate as good a contract as he could with Excel.  I mention figuratively in parenthesis as regards this fax that it appears it was sent from a hotel in the Gambia. Nothing very significant in that except that it may account for the cheque to the school for £130,000 dated 20 December 2006 to which I have referred was signed by Mr Jones and somebody else and not by Mr Brown.   It is also right to point out while I am on the subject of signatories, that Mr Brown was still a signatory on the bank mandate even though not a director.  Indeed his mandate was superior to anybody else’s in the sense that he could sign cheques by himself.  Everybody else had to sign cheques with a co signatory.  

42.	As to his reference in the fax to 86%, he argues that this is a headline figure, in reality the 86% referred to in his fax had not gone, because the new contract to be inevitably signed with Excel would see some of that work come back.  He points out that OFM was also tendering for other work but he admits that that other work would not have produced in the necessary time scale the cushion to help the Company. 

43.	Mr Brown admits that an Excel contract of sufficient magnitude was necessary to replace the Volvo contract but the fact is that he was confident that would materialise.  His oral evidence is that he did not think there was even the possibility of insolvency, but of course it has to be said that does not sit wholly comfortably with his evidence that that prospect was one of the reasons for approaching Bramley Carrington and getting Mr Jones on board.  His evidence is that the payments made of £1,300,000 or whatever payments were actually made to him as well as the £375,000 to Miss Clothier and £130,000 to the school were not prejudicial to the Company.  The Company had surplus funds and the decision to distribute them was Mr Jones’s.  Indeed Mr Brown said that a distribution to that extent had been factored into a recent business model in respect of the Company (which I have not seen) and would not create a cash flow problem.  

44.	In answer to Mr Lewis he recognised that making the payment took away something of a buffer from OFM and indeed I have to say it would be difficult in my view to suggest otherwise.  £1,300,000 is a lot of money in the context of a Company of this size, and in the context of what Mr Brown acknowledges was a deteriorating performance from the year end 2005 position.

45.	I note in passing that the £1,300,000 is actually in excess of current creditor claims in the liquidation which are just short of £900,000.  In any event of course the Company did, as it happens, enter into insolvency by way of administration in December 2007.  Before that on the 7th February 2007 as I think I have already mentioned both Defendants were reappointed as directors.  On the 3rd March 2007 Mr Jones resigned, his job of renegotiating the Excel contract had been done and it is fair to say Mr Brown indicated that he did not in any event like Mr Jones’s management style.

46.	On 22nd August 2007 Miss Clothier resigned again.  On 31st October 2007 (five weeks or so before administration) the Company made that final payment to Mr Brown of £151,833 odd.  His evidence given this morning is that this equated to monies he had lent the Company many years before.  It was repaid to him apparently in the context of a discussion about putting Mr Brown in a position to fund a prepack of OFM’s business if OFM were forced into administration.  

Conclusion as to the facts as regards Mr Brown

47.	Let me say at this stage I have no doubt that despite what Mr Brown now says, and says in his final submissions, that the notification to him in 2005 of the termination of the Volvo contract was seen by him at that time as a very serious and detrimental development for his Company.  

48.	I say that notwithstanding the fact that I acknowledge that these contracts had been terminated and renegotiated in the past and it was something to be expected every now and again.  I say it because that is what Mr Brown himself recognises in his defence at paragraph 27, where he says that it is true for a limited period the announcement of termination from Volvo represented very serious consequences for OFM.  

49.	He emphasised that it was only for a “limited period”, during the course of his oral evidence he drew particular attention to the use of that phrase.  The consequences were limited because he was getting assurances from Volvo that they would still deal with OFM, and that OFM may end up with more work than before by reason of their taking over the technical department, and the possibility of working for Ford as a whole rather than just for Volvo, Ford being as I understand it Volvo’s parent company.

50.	However, it was clear that by the end of 2005 that things were not working out with Volvo as expected and that by March 2006 a completely different structure had been proposed by Ford.  I have in mind the fact that by then Ford were talking about OFM becoming only a second tier supplier reliant on work from Excel who were the first tier supplier. I remind myself that even Mr Brown was not clear how things would develop, one of his reasons for bringing on board Bramely Carrington.

51.	The spectre therefore of insolvency was clearly in Mr Brown’s mind even then, if his statement paragraph 19 which I have already quoted, is to be taken at face value, albeit that it might to him only have been a distant and dim spectre.  In addition his own evidence was that the corporate performance was not improving, on the contrary, from the year end 2005 it was deteriorating, and that was actually before the Volvo had actually expired.  In addition he had clearly recognised that the loss of the Volvo contract without anything in its place would reduce turnover by 86% and that would normally result in the demise of a company, and he acknowledged that the Company was fighting to survive.

52.	It is I have to say as plain as a pikestaff under the circumstances that certainly by mid 2006 if not before, this Company’s future was in the balance; certainly until a contract was signed by Excel in late 2006.  It may well be that the draft circular to shareholders written by Mr Jones only a matter of days after his arrival was written without full possession of the nuances of this business and the facts.  But it seems to me to be far from naive, on the contrary it seems to show a grasp of reality.  The fact is that the Company’s fate at this stage, August 2006, was largely in the hands of Excel.
 
53.	It is difficult under those circumstances to see how Mr Brown could realistically have thought that a positive outcome was inevitable.  I note that as late as July 2006 when indeed he was still a director of OFM Excel were not guaranteeing a long term relationship with OFM.  I note at page 154 of the bundle there are minutes of a meeting of 18th July between Colin Stokes of Excel and Craig Williams of OFM.  Colin Stokes is reported to have stated that he would not rule out a long term relationship should both parties be able to agree terms.  But that is hardly a watertight assurance of an ongoing relationship.  

54.	Mr Brown argues that this forensic analysis does not actually reflect the general view as to the future of the company at the time.  After all, he says, Mr Jones was a professional and was indeed one of a host of professionals and that nobody stood in the way of any payments now under challenge.  That in itself he argues is an indication that the future of OFM was not regarded as tenuous.  

55.	Indeed he argues that, the picture that I have is an incomplete picture, because I do not have all the evidence because OFM has not actually complied with its disclosure obligations in particular to disclose some favourable business plans drafted at about this time.  He is of course a litigant in person and one cannot expect him to be as familiar with the rules as a lawyer would be.  To that extent of course latitude must be allowed to him, but it is a fact that there are remedies if a party to litigation does not feel that the other side is disclosing all the documents which they ought to disclose.  Mr Brown has not availed himself of those remedies although clearly he has undertaken some research because he has a very good grasp of what documents it is incumbent on a party to disclose that is not only documents supporting ones case but also those adverse to one’s case.  It would not have been hard for him to establish that there is a process available to require the Claimant to produce the favourable business plans to which he eludes, or if they cannot, at least to explain what has become of them.  But he has not taken that step.  The latitude to be extended to a litigant in person van only go so far and I must decide the case on the evidence before me.

56.	On the basis of that evidence notwithstanding the points that Mr Brown makes I have no hesitation in concluding that this Company’s fate was far from clear and was very much in the balance right up to the end of 2006.  

Consequence of such findings of fact

57.	Of course the consequences of that finding are dependant to a large extent on Mr Brown’s status within OFM and whether he owed fiduciary duties to it.  Clearly he did when the payment of £151,000 odd was made on the 31st October because he was a de jure director, and it is fair to say that payment was made to him at a point where even he admitted that insolvency was a real possibility, and he was in discussions about a prepack. 

58.	But what was his status when other payments were made?  Did he have a fiduciary duty to the Company as a de facto director?  

59.	It is as well to set out the characteristics which might be relevant to a determination of whether somebody is a de facto director or not.  The two most recent cases where I am told that has been considered are a Supreme Court decision of Holland –v- HMRC [2010] UKSC 51 and UKLI Ltd Secretary of State for Business, Innovation and Skills –v- Chohan [2013] EWHC 680 (Ch).  In the former case the Court felt unable to lay down a definitive test for establishing when somebody is a de facto director but did give some guidance.  In the latter case Mr Justice Hildyard at paragraph 41 sets out a useful distillation of what the authorities have come up with in terms of an assessment of whether somebody is a de facto director.  Making it clear that it is not every one of these factors that has to be established and that there is inevitably some overlap between them.  

60.	I have condensed these to take account of the fact that it is now very late in the day and the court is shortly to close for the day:

“1) The de facto director must presume to act as if he were a director.  
2) He must be or have been in point of fact part of the corporate governing structure and participate in directing the affairs of the Company in relation to the acts or conduct complained of. 
3)  He must be either the sole person directing the affairs of the Company or a substantial or prominent influence and force in so doing as regards to the matters complained of, influence is not otherwise likely to be sufficient. 
4) An indicia as to whether a person has undertaken function other indication, it is whether the person concerned has undertaken functions or acts such as to suggest that his remit to act in relation to the management of the Company is the same as if he were a de jure director. 
5) The functions he performs and the action to which the complaint must be such as could only be undertaken by a director, not one which could properly be performed by a manager or other employee below board level. 
6) It is relevant whether the person was held out as a director or claimed or purported to act as such, but that is not a necessary requirement and even that may not be sufficient.  
7) His role may relate to part of the affairs of the Company only as long as it is that part that is complained about.  
8) Lack of accountability to others may be an indicator as also may be the fact of involvement in major decisions.  
9) The power to intervene to prevent some acts on behalf of the Company may suffice.  
10) The person concerned must be someone who is more than a mere agent, employee or advisor.”

61.	Mr Brown says that he meets none of these indicia.  Mr Lewis says that the evidence is that he meets quite a number of them.  Mr Brown says that once Mr Jones became a director and he resigned he was basically excluded from making major decisions.  That is one of the indicia that I have just referred to.  In particular he says he was not involved in any meetings with Excel to discuss the shape of the contract with it which was to be such a crucial plank in OFM’s future.  Indeed, not only does he say that he was not invited to those meetings, he says that he was excluded from them. 

62.	He points out for example that at B179 there is an email of 29th September 2006 setting out an agenda for a meeting at Excel.  He was copied in on it but it is clear that he did not attend at it.  And insofar as any mileage is made of the fact that he was copied in on it, he says that he was copied in on thousands of emails as indeed were others in the business and the fact that he was is neither here nor there and does not indicate any specific responsibility, which would put him in the shoes of a director. 

63.	It has to be said that it appears that even when he was a director though he did not attend all the meetings with Excel.  There is an email of 18th July 2006 at 153 which make that clear.  It is the email in fact that I have already referred to.  Mr Brown says that is because it was really a meeting about administrative, rather than strategic, things and therefore his attendance would not be necessary.   However, the minutes suggest that strategic matters were discussed; I have already made reference to Excel touching upon the future of any relationship with OFM.  

64.	On the other hand, it is fair to say that Mr Brown along with Mr Jones was the primary recipient of another email of the 15th December 2006, which is at page B194 of the bundle, which clearly suggests he had been involved in a previous meeting the previous Wednesday which involved some discussion about the future of OFM.  It specifies that some numbers had been crunched by a consultant, Christopher Smith, who believes that losses to the end of the financial year were going to be about £84,000.

65.	It is important to note that this email and that number crunching is broadly coincident with the payment of £375,000 to Miss Clothier and some significant payments to Mr Brown himself.  And it is also clear that there is an implication that the meeting on the previous Wednesday to which this email refers, discussed the Company’s future generally because in it Mr Smith says, and I quote:

“On this basis I believe that the Company should continue.”

66.	In any event, going back to Mr Brown’s assertions, he argues that he was abroad a lot which in itself is contraindicative of being in the position to act as a director.  But of course, he lived in Spain when he was a director and he travelled back and forth.  He argues that his views were ignored which is a contraindication of the status of a director.  For example, at paragraph 36 of his witness statement he cites his refusal to agree to Mr Jones receiving a bonus having negotiated the OFM contract but Mr Jones taking it anyway.  On the other hand it seems to be clear that Mr Brown felt that it was open to him to veto the bonus which suggests a perception by him at least of a position of some influence in the Company.  

67.	Mr Brown says that the staff were notified that he was stepping down as a director when Mr Jones came on board and indeed so were Volvo and I have the evidence of Andrew Jones about Mr Brown’s status at A59 paragraph 9.  

68.	Mr Andrew Jones is not here to give evidence, apparently because Mr Brown is not able to afford to pay for his attendance, bearing in mind that he is a senior human resources consultant.  I will deal with the weight under the circumstances to be attached to his evidence shortly. 

69.	What evidence is there, therefore, to suggest that he was a de facto director?  I refer in part to paragraph 30 of Mr Lewis’s skeleton argument from paragraph 30.

a.	 First, Mr Brown specifically approved and authorised the Company making substantial payments to Miss Clothier and to St Edwards School.  That is clear from the fax of 14th December (193) to which I have already referred on numerous occasions, Mr Brown was invited to approve and did approve the payment for £375,000 to Miss Clothier. Further, after his resignation as a director he remained on the bank mandate.  The documents in connection with this are in bundle C at 304 to 316. 

b.	After his resignation not only did he remain the only person entitled to sign cheques by himself without a co signatory but that that was specifically reconfirmed when the bank mandates were updated following Mr Jones’ appointment as a director. 

c.	Mr Brown continued to receive the same salary of £200,000 a year as when he was a de jure director.  

d.	He was copied into emails regarding important meetings and clearly participated in them as indicated for example by the document of 15th December at page 194 of the bundle. 

e.	He was privy to cash forecasts and financial information in relation to the Company.  

f.	The draft shareholder’s report 22nd September 2006, I have already referred to it.  I think it was actually dated August, but I could be wrong, which talks about options available to directors and shareholders. Mr Lewis points out that at that time there was only one de jure director, Mr Jones yet the report refers to “directors”

g.	In addition, there is the juxtaposition between Mr Brown’s resignation and other events.  In September or October 2006 a firm of accountants, PKF, had written to HMRC for approval for the share buyback which I have already mentioned.  It is acknowledged by Mr Brown that in the context of the share buyback there was a tax advantage in his not being a director and he resigned a month or two before this letter was sent, but it has to be recognised less than a month or so after he was advised that resignation was important from the tax point of view. He was reappointed on the 7th February 2007 only 20 days after a summary from PKF of HMRC’s treatment of the buyback (at page 218), although I acknowledge that PKF had been told about how HMRC were going to treat the buyback for tax purposes in November, (see page 188). 

h.	He was expected to approve the share buyout by the Company, I emphasise a share buyout by the Company, and that he did so.   

i.	The fact that he felt able to at least attempt to veto a bonus payment to the Managing Director, albeit unsuccessfully.

j.	Additionally, it seems to me that the resignation of Mr Jones itself is instructive.  This morning it was Mr Brown’s evidence that he fell out with Glynn Jones:

 “I did not like his management style.  The view was that we should replace him and bring in Nicholas Riley.” 

This in itself suggests a deal of influence in his management of the Company, because one of the reasons Mr Jones went was because Mr Brown did not like his management style. Additionally, Mr Brown resumes his directorship very shortly afterwards and only 6 months from having first resigned a as director.

k.	Finally, there is the fact that OFM actually paid Mr Brown approaching £1,000,000 either directly or indirectly in about a three month period from September 2006 if one includes the money to St Edwards School.  It is a significant sum in the context of this Company.  Even Mr Brown accepts that it took away a buffer from the Company.  It seems to me likely that a de jure director under those circumstances would not normally have made such a payment even at a time when the Company had not actually signed a contract with Excel and the fact that it did so is indicative of Mr Brown having influence and power in relation to the Company commensurate with the sort of influence and power one would expect of a de jure director. 

70.	Applying these factors and the indicia set out in the UKLI, I have concluded that Mr Brown was indeed a de facto director during those periods when he was not an official de jure director. 

71.	As regards Mr Andrew Jones’s evidence, Mr Jones is not here.  His evidence cannot be tested by cross-examination.  That affects the weight to be attached to it as does the reason for his non attendance.  As I have said, it is because Mr Brown is not in a position to pay his fees for attending.  It is worthwhile pointing out that the Court Rules themselves limit the amount of fees that are recoverable by way of expenses from a witness who attends under a Court subpoena. It is inappropriate to attach a significant amount of weight to Mr Jones’s evidence in the circumstances of this case and certainly not enough weight to displace the conclusions that I have reached as to Mr Brown’s status.

72.	So having found that he was a de facto director, when not a de jure director, was he in breach of the fiduciary duties that he would, of course, have owed even as a de facto director in receiving the £884,000 and paying the school fees? 

73.	I am wholly satisfied that these payments were a breach of his fiduciary duties in that capacity. Even Mr Brown admits that the removal of substantial monies from OFM caused the Company to lose a buffer and in my view it was a vital buffer.  Losing it was not in the interests of the Company.  It was even less in the interests of the Company in the position in which it found itself when the majority of these payments were made, i.e. at a time when no Excel contract had been signed and the Volvo contract was due to expire on the 12th January 2007. 

74.	I am fortified in that view by my conclusions that even on his own evidence Mr Brown pulled £152,000 out of OFM in October 2007 when he felt that insolvency may be on the cards and wanted to provide himself with funds possibly to fund a prepack.  It shows scant regard to the interests of the company’s creditors to remove that sort of money at that time.  In addition he approved a payment of £375,000 to Miss Clothier in respect of her shares but has no idea how that sum was arrived at. 

75.	In addition, all these payments are over and above his salary.  The Articles of Association (recited at paragraph 33 of the particulars of claim) require resolutions for such payments. There is no evidence of any resolutions for the payment of these additional sums.  Under those circumstances they are ultra vires the Company, by which I mean outside the Company’s power. He did not raise it but insofar as that gives rise to a Duomatic issue I will deal with that when I deal with that issue so far as Miss Clothier is concerned. 

76.	As far as the school fees are concerned it is £130,000 not only in respect of school fees accrued but also school fees yet to accrue.  And it is a cheque signed just weeks before the Volvo contract expires.  All the issues and matters that I cite in respect of the other payments to Mr Brown apply equally in respect of this payment to the school. 

77.	He admits he had a liability for school fees.  He admits under those circumstances this money was paid for his benefit in that it discharged his liability.  It is clear to me that it should not have been paid in the circumstances and that paying it breached his obligations to the Company as a de facto director.  And once again, in any event, it appears to be ultra vires the Company and it should be returned. 

78.	I really have no hesitation, therefore, in concluding that the Claimant is entitled to a declaration that it seeks in relation to Mr Brown and to order the return of £884,239.25 plus £130,000 in respect of the school fees from Mr Brown.  

79.	Finally, in reaching that conclusion and in the event that he may think I have overlooked them I have taken account of the following factors.  His contention that the Company failed due to unforeseeable reasons associated with Excel’s conduct which could not be envisaged in 2006 when all these payments were made.  But his own evidence is that he never saw Excel as being a particularly ethical firm.  And therefore it seems to me this possibility should to have been factored in to his approach to the cash reserves of the Company. 

80.	Secondly, that he does not accept that he received all the money but it is however what the Company’s records show and he does not deny that he may well have done.  And thirdly, that there is a letter dated 24th January 2007 which he did not refer to but which Miss Clothier did (page 205 of the bundle) which suggests that the Company was in profit at year end 2006 and indeed to October 2006,.  All that can be said about that is that it is based on management accounts and it has to be set against the email to which I have already referred of 15th December from a business consultant apparently rated by Mr Brown, namely Christopher Smith, who suggests that the position to the year end April 2007 will be a loss of £84,000. 

Miss Clothier

81.	I now turn to Miss Clothier in relation to school fees.  I think I can deal with this very briefly.  There is no evidence that she was responsible for school fees.  Her evidence that she signed nothing with the school to that effect was not challenged.  There is no evidence from the school that she was liable for school fees.  Nor was her evidence that she did not know about the payment of this payment to the school actually challenged.

82.	The claim is put on the basis that the money was a loan to her and was recorded as such in the Company’s books.  But there is no other evidence that she was aware about this payment or when it was made.  It is difficult to see as a matter of law how it can be regarded as a loan to her.  Nor is there evidence that I can see that she would have known that the payment would have been a breach of any duties owed by her husband.  

83.	Her evidence was that Mr Brown painted a rosy picture of the Company’s prospects.  And I accept that might have been convincing to her.  She was not a director, de jure or de facto, when these payments were made.  It is not suggested that she was.  The onus of establishing that she is liable with her husband to repay the school fees is on the Claimant and in my view he has not discharged it. 

84.	I need not deal extensively with the alternatives put by Mr Lewis in paragraphs 52 and 53 of his skeleton.  I do not accept that any consideration for this payment was required to move from her in all the circumstances.  And it is difficult to see how in the circumstances she can be a constructive trustee of funds not received by her, certainly in the absence of any evidence that it was to discharge a debt which she was liable in law to pay. 

85.	As for the £375,000, I have already set out briefly how this claim is put.  It is first suggested that it was a loan to Miss Clothier against the background of a buyback of her shares by the Company.  Alternatively, it was a payment made for shares, the shares were not received.  There has therefore been a failure of consideration that cannot now be remedied because the Company is in liquidation, and the money should be returned. 

86.	The only evidence that it was a loan is that it appears in the Company’s books as one.  But in my view that is not enough.  It seems to me that there is no other evidence to support a loan and on the Claimant’s own case it is difficult to see how it is suggested that this could be treated as a loan.  

87.	What they say is that the £375,000 was actually paid as a result of or in anticipation of a share buyback.  But that would not make it a loan in my view any more than the advance payment for an airline ticket or a train ticket is a loan to an airline company or a train company.  It is merely an upfront payment made prior to delivery of the service or item contracted for.  If the item or service is not supplied the action is not on a loan, it is for money had and received and/or, so far as it is different, an action for total failure of consideration. That has of course been pleaded and therefore I turn to that issue. 

88.	Very briefly the sequence was that it is acknowledged that it was a good idea to have Miss Clothier out of the Company as a shareholder in the light of the domestic situation that prevailed.  Her evidence is that she had discussions about this with Glynn Jones and that on 1st November 2006 she indicated that she was prepared to sell her shares back to the Company for £375,000. 

89.	She then says that she signed something at OFM’s offices in April 2007 which finalised the transfer insofar as it had not already been finalised but there have been no documents produced to support that.  It is clear that the Company did not regard the transaction as having been in place in November or indeed in January, February or March and even part of April.  I refer to B189, an email of the 12th December, to Glynn Jones from Mr Brown which simply says that broadly speaking she is on board with the overall plan to sell the shares.  That of course is some six weeks after this letter of the 1st November has been sent.  It is not consistent with the letter because it does not say that she is specifically going to do it and that she is broadly on board.  

90.	Miss Clothier’s reaction to that is that she has not seen this email, she was not copied in.  She cannot be responsible for what other people are saying in their emails to each other.  At B212 there is another email of the 31st January, this time from PKF to Mr Brown, which once again is premised on the proposition that a transfer has not yet taken place it seems but once again the same points are raised by Miss Clothier, she was not copied in on this email, she knows nothing about it. 

91.	At B218 there is a letter dated 27th February 2007 to Glynn Jones from PKF which asks if the Company wants to proceed with the share sale arrangement.  This too suggests that it has not yet taken place.  At B265 there is an email to Mr Brown from Capital Law, a solicitors’ firm dealing in corporate issues, which gives the distinct impression that they were awaiting eagerly instructions in relation to this because they were: “seeking clarification on what the document should say.”
The evidence suggests that that was not followed up by Mr Brown and that Capital Law were not further instructed. 

92.	At B266 there is a letter dated 20th April 2007from Boodle Hatfield, who I think are Mr Brown’s matrimonial lawyers, which suggests that an agreement has yet to be made.  As I have said, Miss Clothier’s point in relation to all these is that she has not received these, she was not copied in.  She thought all the Is were dotted and the Ts crossed and that she had done everything that she could be expected to do and thought that she was no longer the owner of these shares. 

93.	She deals with this in her witness statement which starts at A62, although in fact it is fair to say that while she remembers a meeting with her divorce lawyers and Mr Brown’s divorce lawyers of April 2007, she does not say in her witness statement that she signed any document then finally dotting Is and crossing Ts, I refer to paragraph 13 of her witness statement.  Nevertheless, her point is that by April at the latest as far as she is concerned, everything was done and dusted and she had signed over her interest in the shares. 

94.	In fact, it appears that that was not the case.  The liquidators cannot turn up any stock transfer form.  Additionally, she remained registered as a shareholder at Companies House, certainly as at 27th February 2007 as revealed by a search, page 129. 

95.	It is also interesting to note that her letter of 1st November gives the impression that the capital gains on a buyback would be met by the Company in the near future.  There is no evidence that capital gains tax has been paid as one would expect if the transfer had taken place.  Certainly Miss Clothier has not paid any and there is no evidence that the Company has, albeit I except that a specific search for information bearing on that has not been undertaken because that question only arose during the course of this hearing.  

96.	Further, the point made by Mr Lewis is that there has been no compliance with the requisite formalities under the Companies Act 1985 as I have already mentioned which require that in order for a company to purchase its own shares certain requirements have to be undertaken.  They are set out at bundle A page 41.  They form part of the reply to the points of defence of the Second Respondent.  And I do not intend to read them out, time does not permit but they are at paragraphs 5.6.3 of that document. 

97.	It is not in dispute that those requirements have not actually been complied with.  But Miss Clothier says that that does not matter because she prays in aid the principle in Re Duomatic to which I have referred. 

98.	It was analysed by the High Court in 2010 in the case of Secretary of State for Business, Innovation and Skills -v- Doffman [2010] EWHC 3175.  The principle in Duomatic is that:

“Where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the Company assent to some matter which a general meeting of the Company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

99.	But there are three limitations to the Duomatic principle which are best, I think, set out in Doffman at paragraphs 38 and subsequently.  The first is that there must be informed consent by the shareholders, they are required as Lord Justice Hoffman as he then was put it in Re D’jan of London Ltd:

“The shareholders should have, whether formally or informally, mandated or ratified the act in question.  It is not enough that they probably would have ratified if they had known or thought about it before the liquidation removed their power to do so.”

100.	 The point made by Mr Lewis is that there is a requirement for all the shareholders to consent.  There is a third shareholder here, namely the Fyfield Discretionary Trust, which owns 25% of the shares, and there is an independent trustee in the shape of Mrs Julie Pope in respect of that shareholding.  It is acknowledged that she was not appraised of this payment or this buyback arrangement and she and the trust under those circumstances have not consented to it. 

101.	Miss Clothier says that Miss Pope is only one of the trustees and that in fact she and her ex-husband are also trustees and that they consented and that is enough.  But I do not accept that.  It seems to me that all the shareholders of which Mrs Pope is clearly one, even though she holds her shares beneficially for others, all the shareholders have to consent and she has not even been consulted much less consented.  

102.	But if I am wrong on that there are further limitations on the Duomatic principle. It will not extend to an unlawful distribution.  Unlawful it does not mean illegal in the sense it is against the criminal law, it just means that it does not comply with statute.  

103.	In Aveling Barford -v- Perion, once again a decision of Mr Justice Hoffman, as he then was, the view was taken that it was not appropriate to allow Duomatic to ratify or to confirm the actions of a shareholder or the shareholders in a case where a company, 

“The company cannot without the leave of the Court or the adoption of a special procedure return its capital to its shareholders.”

This is particularly apposite because a buyback by the Company of its own shares is akin to that. 

“It follows that the transaction which amounts to an authorised return of capital is ultra vires and cannot be validated by a shareholder ratification or approval.  Whether or not the transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it, the Court looks at the substance rather than the outward appearance.”

104.	So the point is that where there are statutory requirements that need to be observed in order for something to be effective, you cannot get circumvent that on the principle of Duomatic.  Clearly there were relevant statutory requirements for share buyback as set out in Section 143, 164 and 169 of Companies Act1985. 

105.	So it seems to me that Miss Clothier’s argument flounders on the second limitation as well as the first but even if I am wrong in that there is a third limitation which precludes Duomatic principles being applied where the Company has financial difficulties.  Kinsela -v- Russell Kinsela Ltd, 1986 Australian case is authority for that proposition. It was recognised in paragraph 45 of Doffman 

“It has been said that the interests of creditors can intrude and the application of the Duomatic principle can accordingly be barred even when a company may not strictly be insolvent”

106.	 In Colin Gwyer Associates -v- London Wharf, Mr Leslie Kosmin QC sitting as a Deputy High Court Judge put the position as follows:

“Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors’ money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.” 

107.	And in a similar vein, Mr Justice Park in MDA Investment Management said:

“When a company whether technically insolvent or not is in financial difficulties to the extent that its creditors are at risk, the duties which the directors owe to the company are extended so as to encompass the interests of the company’s creditors as a whole.”

108.	Or course, Miss Clothier is not a director, but these payments were made to her by directors on behalf of the Company and it seems that under those circumstances they are caught by the exceptions to Duomatic and are ultra vires the Company.

109.	There were clearly enormous doubts about the solvency of OFM when the £375000 was paid and I need not repeat therefore why I take the view that this payment was affected by the third limitation in Duomatic as well as the other two limitations.

110.	I mention earlier that I would consider whether Duomatic provides any assistance for Mr Brown concerning the payments made to him absent the formal resolutions required by the Articles of Association. It seems to me that the principle is displaced by the absence of the consent of all shareholders and the effect that the payments had on creditors i.e. the first and third limitations on the principle as set out above.

111.	In any event, and returning to Miss Clothier, on the question of the failure of consideration, the fact is that an analysis of events clearly demonstrates that the shares appear still to belong to Miss Clothier because the formalities for their transfer had not been complied with and that situation cannot now be rectified.  In short, OFM has received nothing for its money and is entitled to it back.

112.	Accordingly, I am driven to the conclusion that the Claimant is entitled to judgment against Miss Clothier for £375,000 on the basis that there has been no consideration for the payment to her of that sum. 

113.	There will accordingly be judgment for the Claimant against Mr Brown for £884,239.68 plus £130,000 and against Miss Clothier for £375,000.