England and Wales High Court (Chancery Division) Decisions

Alistair and Rod claim against Durmast for payment of loan notes issued in the buy-out (£70,256 and £107,500 respectively)

Durmast claims damages from Alistair and Rod for misrepresentation in the buy-out, originally said to have been fraudulent though the allegations of fraud were abandoned just before trial. The misrepresentation is said to be as to the margin charged on inter-company sales from SBF to PFC, the allegation being that Duncan understood this to be 20% but it was in fact 5%. As a result, he alleges, unknown to him PFC was effectively subsidising SBF which without that subsidy was not commercially viable. He contends that had he known the truth he would not have completed the buyout. Durmast seeks damages put at some £1.7m, though by order of DJ Kelly the issue of quantification of loss, if

A series of cross claims between Alistair, Charlotte and the company defendants relating to Alistair's employment:

Alistair claims against Durmast for unpaid salary of £111,154 and bonus or dividend payments to which he says he is contractually entitled totalling some £157,000

Alistair seeks payment by Durmast of alleged shortfalls in pension payments for his benefit of some £52,000

PFC alleges that pension contributions have in fact been overpaid by it by a similar amount and seeks recovery from Alistair and Charlotte (some of his salary and pension having at Alistair's instigation been paid to his wife)

Durmast seeks recovery from Alistair of contributions said to be payable by him to a BUPA policy (£2,983)

PFC sought recovery from Alistair of non-business expenses paid by him (£9,365). However during the course of cross examination Mr Lundie said he would not pursue these claims.

a discussion in early 2006 about whether SBF should continue to do work printing election material. This involved printing a large volume of material in a concentrated time period, typically in relation to local authority elections in May each year. Duncan said he was concerned as to whether it was financially worthwhile and about the fact that it tied up resources at SBF so that work for PFC and other customers was delayed. He said this was discussed at a management meeting when "I told Rod that to take on this election work we must make at the very least the same margin or ideally more than the SBF selling price plus 20%. Rod confirmed that the election work was worth having and that he "would invoice so that SBF's margin would be more than the intercompany margin of 20%."

when the audited accounts for 2006 were being finalised in July 2007, Duncan said he was concerned that operating profit had gone down by £30,000. He had said at a management meeting that "PFC could outsource and did not need SBF to be successful on its own, SBF appeared to be a white elephant, that we should look at scaling back or closing down the factory. Rod and Alistair were both adamant that SBF was worth preserving and they both stated that SBF could maintain the 20% intercompany margin."

Similarly when the 2007 audited accounts were produced in May 2008, there had been a disappointingly small increase in SBF's operating profit. He raised this is at a management meeting and "I specifically asked both of them about the future and viability of SBF as PFC had outsourced work and had no issues that could not be overcome… Rod responded that with the 20% intercompany margin SBF was viable, worth keeping and we should continue running it within the group. On that basis I said at the meeting that as long as we maintained the intercompany margin at 20% level SBF still looked to be a viable business based on the figures for that year and what they both told me."

When discussing the purchase by SBF of a second Hunkeler printing machine in or around September 2006 at a cost of about £140,000 "I said that any additional work generated to make use of the second Hunkeler machine must make a minimum margin of 20% on the trade price that we could get without it [i.e. the price at which the work could be outsourced] in line with the intercompany margin. Rod told me that he would be able to sell capacity and make a minimum margin of 20%". Similarly when considering SBF buying a Rototek press "I said to Rod that there was no point investing in the press if we did not make at least the 20% intercompany margin as we were achieving this margin as a minimum from orders we placed with trade suppliers for colour printing work."

Immediately after the Château Impney meeting Duncan said that he, Alistair and Rod had all gone back to PFC's offices at Droitwich. He said that Alistair and Rod had been annoyed with him that the sale would not proceed "but I said that based on the 2008 management accounts it showed that SBF had turned the corner and was a good little business. I said that with the 20% intercompany margin the factory was working as a stand-alone business and I

When Rod bought him the statutory accounts for 2008 for signature in March 2009 "I took the opportunity to discuss with him the 20% intercompany margin in detail… At no point did Rod correct me on the intercompany margin… I said to Rod and Alistair that the SBF accounts showed it was now a viable business, I referred to the PFC/SBF margin at 20% and pointed out that this meant PFC was no longer subsidising SBF to the same level as previous years … Rod agreed …".

At about the same time he had had discussions with Alistair to try and persuade him to stay with the business after the buyout in which he "told Alistair that because he knew PFC was a strong business and now we know SBF with the 20% margin is holding its own that he should really rethink and stay with the company."

When considering in April 2009 whether to take in-house an enclosing operation (i.e. insertion of material into envelopes) comprising equipment and operatives who previously carried on a separate business as subcontractor to SBF "I specifically stated that with lasering and data processing intercompany margins at 20% we could justify bringing this in-house as PFC consistently marked up enclosing by 80% to 100% so it would add to SBF's profitability… Neither of them informed me that the 2008 figures or the earlier figures were actually based on a 5% intercompany margin ".

It is evidently the case that the offer made by the third party purchaser was a combined offer for the business as a whole, and it was put to Duncan that since they had not attributed any importance to the level of the inter-company margin, and he had agreed to buy on the same terms, it cannot have made any difference to him either. Mr O'Neill said he had been asked what the figure was in the course of the third party due diligence; he had said it was 5% and the purchasers had evidently not been concerned. Duncan said he did not believe this and was sure that if the purchasers had known the true figure "they would have run a mile". But there is no reason to doubt Mr O'Neill's evidence that he gave a true explanation of the inter-company system and in any event if he had not done so, or had not even been asked, it is impossible to believe that the accountants who performed the due diligence would not have been able to work out for themselves what the percentage was from the available accounts, as described above. Duncan in my view was seeking to assert a likely concern on behalf of the external purchasers in order to support his own case, but he had no evidence for it and the scenario he was forced to create was implausible.

Documents from HCW advising Duncan on the purchase also suggest that Duncan did not address the viability of SBF as a separate business in that process; there is no reference to the transfer pricing and only a note that there will be a need to "split the proceeds between the two companies". The late disclosure included a number of other documents addressing the terms of the deal; these are all on the basis of a single price for the combined business. It is true that there is a page noting how the split was done, by reference to the respective net assets of the two companies, but this is only by way of support for the division settled on. There is also a profit forecast prepared by Mr O'Neill for submission to potential lenders; this shows projected profit for each trading company and a consolidated figure. If anything this emphasises that it was the consolidated picture being presented; both the actual figures for 2008 and projected figures for 2009 show payment of a management fee from PFC to SBF, on top of the payment for inter-company sales, and that without that fee SBF taken alone would be loss making.

Duncan expressed shock and dismay that the inter-company invoices were prepared by hand and not recorded on the normal sales or purchase ledgers of either company, such that they had to be incorporated in some way at the end of the year to move from the year end management accounts to the separate company statutory accounts. This he said can only have been done to conceal

Duncan's professed long term concern about the viability of SBF is in my view wholly inconsistent with the fact that after the buyout he continued the operation exactly as it was before, including the inter-company accounting system, for another three years. During that time he was in overall control and could at any time have asked Mr O'Neill for financial information to confirm whether SBF was performing well or badly, or whether it would be advisable to consider switching to a model of outside purchasing. Evidently, he did not. If he had been so concerned about the inter-company margin that he had worked it into management discussions and other conversations on numerous occasions up to and including his consideration of the set of accounts that, on his account, persuaded him to pursue the buyout, it is not credible that once the buyout had happened he ceased to mention it and took no steps to verify what he thought he had been told.

When the question was asked, in the email exchange with Mr O'Neill shortly before the administration recorded above, the tenor of those emails is in my judgment wholly inconsistent with Duncan believing that the margin was and had always been 20% and, as he maintained in his evidence, being shocked and angry when he discovered this was not so. Given that he knew all along the overall system of accounting by retrospective discounting on aggregate sales value, if he knew or thought the discount rate was 20% he would not have needed to make the initial enquiry at all, but at most to ask for confirmation about the rate. When told it was 5%, he does not respond to Mr O'Neill with any anger or disbelief, or even say that he thought the rate was 20%. His immediate concern is not to challenge the accuracy of the figure but to see if he can "maintain/demonstrate" that the balance it results in has been discharged through the bank sweep. When (presumably) it becomes apparent that will not work, he tells Mr Darlaston of his alternative method of eliminating the debt by creating extra or replacement invoices. In doing so he does not say he has discovered Mr O'Neill had been invoicing wrongly in the past, or at a rate different from what he understood to apply. He does not describe the new invoices as being to correct an error or show what he had always thought was the position. The basis of the new invoices is said to be "our average margin on outsourced work", ie not a rate that he understood had previously been in force but one he thinks can now be justified. Although Duncan said he was seeking to contain his anger and not display it to Mr O'Neill by challenging him for not doing what he should have, there would be no reason not to say to Mr Darlaston that the new invoices were necessary because he had only just found that Mr O'Neill had produced the old ones incorrectly.

The late disclosure also contains no evidence of any such surprise; it includes an email from Mr O'Neill to Duncan on 20 February 2012 saying that if the transfer price was to be adjusted retrospectively SBF would be justified in invoicing for staff costs it bore for personnel who, he said, worked only for PFC, which he put at £489,000 pa. Mr Darlaston says he cannot argue with this, and notes that it would justify the "original" pricing structure, without which SBF "would not have been a viable business long ago. This is the problem with looking at individual aspects of a business in isolation rather than assessing it as a whole". This would seem to confirm that up to that point the business had been regarded as one whole rather than two parts. He comments further that the effect of introducing the revised pricing would be to generate a huge differential in profitability of the two companies and raise the prospect of enquiry by creditors as to why the basis had changed and whether the directors should have realised earlier that SBF was as unprofitable as it now appeared to be. He is plainly commenting as to the credibility of a change of treatment on the eve of insolvency, with no reference to it being justifiable as restoration of a position Duncan had always understood to prevail.

Duncan does not seem to have raised the supposed deception until some months after the insolvency of SBF, when Rod began to press for resumption of loan note payments. These had been stopped in February 2012, no doubt because of Durmast's financial difficulties, and at a meeting with him in November 2012 it seems Duncan accused Rod of what Rod described (see letter at p 454) as "withholding information about the internal company transfer" which Rod said "mystified" him. Duncan went on to say in a letter of 10 January 2013 (p456) that "we were under the impression" that the intercompany discount was 20% and that Rod had not "corrected this assumption". His solicitors on 26 March 2003 (p462) said that Duncan and Alistair (who must have been the "we" referred to) had both understood the rate was 20% and this "was the basis on which all investment decisions were taken". At this stage, Duncan had not fallen out with Alistair, so presumably must have been seeking to present him also as having been misled by Rod, but it is utterly implausible that the inter-company rate can have been fixed by Rod as director of SBF without the knowledge and co-operation of at least someone on the part of PFC, and if Duncan was maintaining his ignorance that would have to have been Alistair.

Duncan's position shifted in 2014 when he had fallen out with Alistair also and began to assert that Alistair should receive less remuneration "in light of the overstated profitability of SBF" (p489). He asked Alistair to write off £57,000 due on his loan notes for the same reason. Thereafter Duncan asserted that Alistair had been, rather than a fellow victim of deception by Rod, a party with Rod to deception of himself. This chain of events in my view is most consistent with Duncan, at best, magnifying his own previous lack of interest in the inter-company transfer price into a supposed concealment of it and using

On 18 March 2010 Mr O'Neill, evidently responding to a query, told Duncan (p426) that salaries totalling £89,034 had been or would be paid in the year to June 2010 between Alistair and his wife, and continued "Therefore £30,966 for £120,000. £30,966 for 13.5% = £198,412 for 86.5%". This evidently was to show the amount of dividend that would have to be paid to Alistair to reach a total of £120,000, so implying he recognised an expectation that this total would be paid, and the corresponding dividend that would imply on Duncan's shares.

On 23 March 2010 Duncan emailed Mr O'Neill (p427) to say that "At the AGM on 18 March the Board approved a dividend for the 2009 financial year of £458,756. This is to be paid as follows: Alistair £30,966 now, the remainder

On 3 December 2010 (p429) Duncan emailed Mr O'Neill, apparently to advise him of imminent cash requirements, saying "As mentioned mid/end Jan my tax will be £101,280 plus Alistair's 2nd half of dividend (£120k less salary from memory)…".

In September 2014 (p489) when Alistair was pressing for payment of amounts he regarded as overdue, including shortfalls on the annual amounts of £120,000, Duncan said he was "prepared to make the 'salary' up to £120k" for the period to April 2014 but thereafter "you accept a reduction in the 120k to take into account the benefit you receive as a result of payment via dividend as opposed to through the payroll".

Prior to the proposed sale to third parties he received two sets of contributions by PFC towards personal pension policies.

A total of £848.66 pm was paid to an arrangement administered by Brown Shipley. This was paid partly in respect of himself and partly in respect of his wife, for the same reasons as his salary was partly paid to her, and consisted of employee contributions of £376.81 and £137.39 respectively which were deducted from their payroll salaries (£514.20 total) plus employer contributions of £334.46 pm. Similar payments were, he said, made in respect of the other brothers.

In addition payments of £500 pm were made to a second arrangement. Again, he said, similar arrangements were in force for the others. That was denied by Duncan, though Alistair was able to produce at the hearing a document apparently showing that Duncan did in fact have a similar arrangement. Alistair was criticised for producing this as late and selective disclosure, but in my view his explanation that he had not regarded it as something he needed to look for until Duncan (wrongly) denied the arrangement was persuasive.

When Duncan had made clear he would not go along with the proposed third party sale, he and Rod had instructed Mr O'Neill, without disclosing it to Duncan, to make additional monthly payments of £450 for each of them towards their personal pensions. He said that they regarded this as "punishment" for Duncan having frustrated the deal for his own ends.

Thus immediately before the buyout PFC was paying £334+£500+£450 (£1284) monthly towards his pension.

The solicitor who had previously acted for the business, Hilary D'Cruz, acted for all parties in the buyout. She prepared the draft service agreement between himself and Durmast. He had seen it and discussed the arrangements briefly with her but not paid the document much attention beyond confirming the salary stated was the same as his existing rate. She had told him (as he understood from discussions with Duncan) that apart from the change of employer all his existing terms would remain the same. She had said this was because "there would be a TUPE transfer". He relied on this and believed this was so in any event because his statement of terms acknowledged continuous employment from 1982.

Accordingly he was entitled to continuing company payments of £1284pm.

Alistair is entitled to continuation of employer pension contributions in the amounts paid prior to the Chateau Impney meeting, and to any employee contributions deducted but not paid over to the pension provider, but

He must pay back or give credit against this for any increased amounts actually paid by way of employer contribution after the date of that meeting.