MR. JUSTICE FLAUX :
- The claimant, to which I will refer as Lonrho, acquired six million shares (equivalent to 43 percent of the share capital) in the first defendant company (to which I will refer as Norse) pursuant to a share subscription agreement dated 31st October 2006, by which Lonrho invested $6 million in the company. The second defendant is the chief executive officer and a director of Norse. The third defendant, who is the wife of the second defendant, was a director of Norse at the time that the share subscription agreement was entered into and at least as recently as 22nd February was being held out as the managing director of Norse.
- Under the restructuring of the company that was contemplated by the subscription agreement, the second and third defendants were to hold eight million B shares between them. The share subscription agreement was made between Norse and the second and third defendants (who were described as the warrantors) and Lonrho. As the name suggests, the company was in the business, inter alia, of the charter and leasing of aircraft in Africa.
- Under the agreement, Lonrho had the right to nominate a director of the company who was to be the chairman of the board. At the times relevant to the present dispute, it has been Mr David Lenigas, who is the chairman of Lonrho. The second and third defendants were to have the day to day management of the company. However, clause 8 of the agreement contained provisions whereby Lonrho were to be kept fully informed of all aspects of the business. In particular, clause 8.1, as relevant, provided as follows:
"Provision of information and ongoing obligations.
Each warrantor separately undertakes to LAH that whilst he or she is a director of the company, he or she shall procure and the company undertakes to LAH that the company will and will procure that each member of the group will...
8.1.3 Furnish LAH to such an extent and in such form and detail as it may from time to time reasonably require, with particulars of any matter concerned with and arising out of the activities of the group and keep LAH informed of the progress of the business of the group and provide such information and such access to the officers, employees and premises of the group companies as LAH may reasonably require."
Clause 8.5 then provided as follows:
"In the event of any breach of the provisions of clause 8.1 and on giving prior written notice to the company and the warrantors, LAH shall be entitled to appoint a firm of accountants, at the company's expense, to examine the books and accounting records of any member of the group and to produce such accounts and other information as LAH shall request and the company shall provide and shall procure that each other member of the group provides all information requested for such purpose, together with full and unrestricted access to all books, records, personnel and premises of the group."
- The present dispute concerns these two clauses and their interpretation. I should add that by clause 26 of the agreement, it was subject to both English law and the exclusive jurisdiction of the English courts. Lonrho has become concerned about the way in which the second and third defendants (to whom I will refer as the Avnits) have run the business and specifically in relation to three matters, although these are by no means exclusive. Firstly, the fact that a company which had a projected forecast for the first twelve months of a profit of $2.4 million ended up making a loss of over $1 million. Indeed, the financial state of the company now is so parlous that it would appear on the latest information that the loans have been called in by the banks and, as Mr Avnit put it, that the company is about to implode. Secondly, that there may have been irregularity, or worse, in the use of the finances. Thirdly, that it was not immediately apparent to Lonrho what their $6 million had been used for in circumstances where schedule 11 of the agreement set out how the subscription monies were to be utilised. However, it was evident to Lonrho at least that they had not been used or not entirely used for the purposes set out in that schedule.
- It was in those circumstances that Lonrho sought the agreement of the Avnits to the appointment of Deloitte Touche South Africa (to whom I will refer as Deloittes) as forensic accountants who would go into the premises of the company – the premises, as I understand it, are on the same compound or estate in Johannesburg as the private residence of the Avnits – to examine certain categories of records of the company that I will detail below. The Avnits refused such access and, accordingly, on 10th January of this year, Lonrho wrote two letters, one to the company and one to the Avnits. I will read the relevant passage from the letter to the company:
"Pursuant to clause 8.1.3 of the subscription agreement dated 31st October 2006, we require you to confirm access will be provided by the company forthwith for our appointed agent, Deloitte, to inspect the documents and records of the company. We further require you to provide confirmation of where the $6 million paid by LAH to the company for the LAH A shares is currently held and/or how such sum has been applied by the company. We now look forward to hearing from you by twelve noon on Monday, 14th January 2008, failing which we shall construe your failure to provide the confirmation and information requested as a breach of clause 8.1.3 of the subscription agreement."
- The letter to Mr and Mrs Avnit referred to the fact that from the company's web site, Mrs Avnit was described as the managing director. That she was, therefore, considered as being held out as a de facto director of the company and continues as director of the company under clause 8.1 of the subscription agreement, dated 31st October 2006:
"You have undertaken to LAH that you will procure that the company will, inter alia, furnish LAH with such information and such access to the offices, employees and premises of the group companies as LAH may reasonably require."
The letter then attached the letter of the same date to the company and required the same two confirmations that had been sought in the letters of the company, namely confirmation that access would be provided to Deloitte and confirmation of where the $6 million funds paid by Lonrho had gone.
- There having been no positive response to those letters, on 14th January, Lonrho served notices under clause 8.5 of the company on both Mr and Mrs Avnit and the company. As far as those are concerned, I need only read the relevant passage in which Lonrho says:
"In the circumstances, we consider that the company is in breach of clause 8.1.3 of the subscription agreement. We hereby give notice under clause 8.5 of the subscription agreement that LAH has appointed Deloitte to examine the books and accounting records of the group as defined in the subscription agreement. We require the company to produce such accounts and other information as Deloitte shall request and to provide and procure that each other member of the group provides all the information requested for such purpose, together with full and unrestricted access to all the books, personnel, and premises of the group."
- Still no access was provided and it was in those circumstances that Lonrho made an application to His Honour Judge Mackie QC on 13th February for orders that, inter alia, all three defendants should immediately provide to Lonrho and its nominated officers and to Deloitte, full access to all the documents and records of the first defendant. Although that application was ex parte, in fact, the defendants had had notice, albeit at short notice, and had been able to instruct Howes Percival. Mr Louis Flannery, a partner and solicitor advocate of that firm, attended. The learned judge made the order sought.
- The original position of the defendants seems to have been that they were not going to challenge the order, although they did not comply with it. However, in the event, possibly as a consequence of developments in parallel proceedings in the British Virgin Islands to which I will return, they did indicate that they wished to challenge the order of Judge Mackie. They made an application on 29th February to adjourn the original return date and for a suspension of the order which was granted by Mr Justice Teare, pending the matter coming back before the court on 11th March. It was in those circumstances that it came before me the day before yesterday.
- Before dealing in more detail with the factual background, I should stress one matter. Last Thursday, 7th March, Lonrho served no fewer than eight witness statements in response to the defendants' evidence which had been in the form of witness statements of their solicitor, Ms Kane. The statements served by Lonrho included detailed statements from their chief executive officer, Mr White and from their finance director, Mrs Jean Ellis. Mr Salim Moollan, who appeared for the defendants, quite rightly said that it had been impossible to deal with all this material and respond to it in the time available. He urged me not to decide issues which clearly might turn on contested evidence, which could only be decided at a trial hereafter. I agree with him about this in principle and I have essentially limited the factual findings I will make to matters which are clear from the documents before the court. Having said that, there are certain matters which if not incontrovertible are sufficiently established that I can be confident, to the requisite degree, that the claimant is correct on the central issue for the purposes of this application.
- Mindful of not endeavouring to decide matters which are contested, I propose to limit what I say about the history of the relationship. However, it is clear from the documentary evidence that by the end of October 2007, Lonrho was concerned about the loss that had been made and about the cause of the problems which the business seemed to be facing. It had appointed a gentleman called Captain Tony Petiuger, as acting general manager, and a Mr Ken Kirkpatrick had also undertaken investigations with Captain Pettinger and also with Mrs Ellis. Mr Avnit seems, at that stage, to have been broadly co-operative with Lonrho and its proposals, although there is a dispute about how much information was provided in practice.
- On 8th October 2007, Mr Avnit said in an email that the company was in a cash crisis. The company had produced a proposed budget on an assumption that there will be a further investment from Lonrho of $3 million, although Lonrho had never agreed to that. I should add in parenthesis that in addition to the $6 million, Lonrho had provided, in fact, additional finance to the company already. This was in the form of a $1 million interest free loan to purchase an aircraft; a $800,000 short term loan in relation to the Anglo Gold contract, which is a contract that only lasted for a while; and a further injection, I think, of $400,000 in September 2007. In addition to those sums, Lonrho had lent $500,000 to Mr Avnit personally to fund certain litigation he was involved in. Repayment of that was extended until the end of August 2007 but the sum was not repaid, in circumstances which caused some acrimony between Mr Avnit and Mr Lenigas. However, in the event, it was agreed instead that Mr Avnit would pledge an additional eight percent of the shareholding to Lonrho, which would make them a 51 percent shareholder. Eight percent is the equivalent to 1,120,000 shares. In fact, the pledge agreement which was signed referred only to 800,000 shares and there are proceedings for rectification of the pledge agreement which are pending in South Africa.
- On 16th October 2007, the finance director of Norse, Mr Mike Benfield, sent an email to Lonrho, including to Mr Kirkpatrick and Ms Ellis, saying that the company desperately needed a further cash injection. It needed $2 million to sort things out and he said that any transfer above 600,000 this week would be greatly appreciated. On 22nd October, Ms Ellis sent Mr White an email expressing her concern about Norse in these terms:
"As discussed, I am becoming increasingly concerned over Norse. It has been very difficult to get a true picture of the businesses which I believe is partly as a result of the complicated historical structure of the group and the reorganisation of the business into the new structure. Mike and his team have struggled to put the new corporate structure in place, given all the other procedures they have faced. It will be very difficult to make any decisions as to future structure without having a full understanding of the current legal and financial structure. Given the urgency of this, I would like to undertake a detailed internal audit of Norse as a matter of urgency. We really need a forensic accountant for this."
- About an hour later, Mr White sent an email to Mr Avnit and Mr Benfield, which said:
"Given the slow progress and uncertainty that exists, it would be irresponsible for Lonrho as a public company to make decisions in regard to Norse without a clear empirical understanding. To this end, I am calling for an immediate external independent forensic audit of Norse and its subsidiaries to fully understand the historic application of shareholders funds. Hopefully, with this signed off, then a way forward will become clearer."
- I should add that although it is not articulated in his email, perhaps for obvious reasons, Mr White was also concerned at that time about whether or not there were financial irregularities at Norse. He had heard from a gentleman called Mark Havercroft – he was the head of Lonrho Hotels, who operated from office space at Norse's offices in Johannesburg – that cash was leaving the Norse offices in paper bags. Although the defendants have not had an opportunity to answer this, I have no reason to suppose that it is at least not what Mr White was told, nor any reason to suppose that it did not cause concern. This is obvious from the letter that the director of Deloittes, Mr Prins (who was instructed), sent to Mr White on 25th October with the proposal of a forensic examination of the company. In that letter in the second paragraph, he says this:
"You advised [that is Mr White] that you are concerned about the affairs of the Norse Air group, a 51 percent subsidiary of Lonrho, as a result of certain allegations of impropriety. You indicated that you accordingly require an independent and objective forensic investigation into the affairs of Norse."
- What was then proposed by Deloittes was what was described as a 'scoping exercise' to see what was required in terms of investigation, which would be conducted by a gentleman called Ryno Pepler, who was a senior manager of Deloittes. Mr Pepler and Mr Prins had a meeting with Mr Avnit and Mr Benfield at Norse's premises on 2nd November. Mr Pepler has produced a witness statement, which was one of the statements served at the end of last week. However, he also prepared a note of that meeting which he sent to Mr White and I will read, for present purposes, two paragraphs from that note:
"We advised Avnit and Benfield that Lonrho had appointed us to conduct a forensic investigation into the activities of Norse Air and that the reason for our appointment was stipulated by Lonrho as 'concerns in general.' No specific allegations or concerns were provided to us. Avnit and Benfield expressed their extreme surprise and dissatisfaction with our appointment and advised that apart from the current strained relationship between Lonrho and Norse Air, they are not aware of any specific reason that may have prompted Lonrho to institute this forensic investigation. They also feel aggrieved by the negative connotation to a forensic investigation and view it as a possible attack on their integrity. [I drop down a paragraph and read on] Avnit further speculated that our appointment may relate to Norse Air's application of the $6 million capital injection. He alluded to a delay during the conclusion of the deal last year and how circumstances changed, resulting in a greater than expected proportion of the $6 million being used to repay creditors. In this regard, Benfield mentioned the retrospective processing of accounting entries to have an affect on their take on balance sheet dated 31st October 2006 (which raises some red flags from a potential fraud perspective)."
- As this note subsequently records, Mr Pepler was provided with the management accounts of the company for the period of December 2006 to September 2007, which were accounts that Mr Avnit had been providing to Lonrho anyway, pursuant to the obligations under clause 8.1.1 of the subscription agreement. There was then a misunderstanding. Mr Benfield's resignation as the finance director was announced and it was originally thought by Mr Pepler and thus by Lonrho that this was as a result of the investigation. However, it appeared that, in fact, Mr Benfield had already tendered his resignation on 1st October, although Mr Avnit had not told Lonrho about this. Mr Pepler, in due course, wrote a letter of apology to Mr Benfield. Lonrho proposed the replacement of Mr Benfield with a Mr Robert Scott, an experienced chief financial officer. However, Mr Avnit would not agree and, at one stage, was proposing Mrs Avnit (who has no obvious financial experience) to be finance director of the company, a suggestion which was only likely to increase Lonrho's consternation.
- On 21st November, Mr Prins wrote to Mr White setting out what he suggested should be the scope of the investigation and what it should entail. Again, I do not propose to read out that entire letter. However, it included (a) a review of the utilisation of the subscription monies, whether it was utilised in accordance with the parties' agreement and the fact that hat would entail the review of various documents, including creditors' ledgers and proofs of payment and (b) an assessment of the possibility that company funds may have been siphoned off through the use of subleased planes, for example, where the subleased plane is an undisclosed asset of a Norse Air shareholder.
- It is submitted on behalf of the defendants that Mr Avnit and Mr Benfield were prepared to co-operate with the Deloittes audit at this stage. However, whether that is correct or not, that was not the Lonrho or Deloittes perspective at the time. Mr White sent an email on 23rd November in which he said to Mr Avnit:
"I am concerned that I have received a note from Deloittes that they have not been given open and free access to the corporate records to push on with the audit. I think this sends a very disturbing message to the directors and shareholders. I sincerely hope this is just a misunderstanding. Please could you confirm, by return, and copy in Deloittes that they are free to access all corporate records as they see fit. That they have full and transparent access to all documents and flight records that they deem necessary and that they may visit the offices as they see fit."
- Mr Avnit's response was that Mr Benfield had given him a preliminary briefing and he was unaware that they were holding back on any information. He asked though to see a copy of the mandate letter provided to Deloittes. In fact, Mr Benfield had sent Mr Pepler a spreadsheet on 22nd November, which was said to show the destination of the $6 million invested by Lonrho. Mr Benfield suggested to Mr Pepler a phone call in which he could take Mr Pepler through the document. Mr Pepler did not ring Mr Benfield, but he did meet Mr Benfield at the company's premises the following day. However, it appears that before that meeting took place, Mr White had sent Mr Avnit a copy of the mandate letter. That elicited a response from Mr Avnit in which he said:
"I have just finished reading the mandate letter given to Deloittes and I firstly need to point out that we had no idea that this was the mandate given and we certainly did not sign off on this mandate. The mandate is based on accusations of fraud by me, Nadja, Mike and possibly others. This is a very serious matter and I will be briefing my attorneys on Monday to guide us as to how we should respond. We have always been open and transparent in our dealings with our non-executive directors and Lonrho as a shareholder. However, where we are accused of fraud, this introduces some very serious legal issues. I have no doubt my lawyers will request the basis for the justification of these allegations and the forensic audit. These unjustified allegations and the forensic audit are not in the interests of Norse and, once again, significantly contribute to the mistrust between ourselves and Lonrho."
- It was very clear from that that Mr Avnit was not happy about the audit and, indeed, not prepared to agree with it. That elicited a response from Mr Lenigas, in which Mr Lenigas said, amongst other things, that Norse had not answered all the questions that had been put to Lonrho's satisfaction. He said:
"We have been attempting to understand the Norse business in the finest detail so we can ascertain what is going wrong in order that we can make a judgment on what is actually going wrong to our satisfaction. Once we feel comfortable with the issues, we are happy to inject further funds. It is your responsibility to ensure we gain full comfort with the accounts so we can understand the business and so we can make an educated decision on where funds are required for Norse and as to what quantum."
- As I say, on that day, 23rd November, a meeting took place between Mr Pepler of Deloittes and Mr Benfield, following which Mr Pepler sent Mr White an email in which he says this:
"We have had a meeting with Mr Mike Benfield. He is very sensitive about our audit and does not want to expose us to his accounting staff. Apparently, our presence will raise questions that he is not prepared to answer. He has given us transaction listings and copies of bank statements and asked that we flag these transactions which we require supporting vouchers for, which he will then provide us with. He basically does not want us to work on site. This is a problem for a number of reasons. If we have to route all our requests through Mike, he will have detailed knowledge of our work, which we do not want. Also, without implying that he would do such a thing, he will be in a position to tamper with or fabricate documents and records. It is therefore important that we work on site and have free access to accounting records and staff. If not, our chances of finding anything incriminating will be limited."
- On 30th November, Lonrho gave Norse notice that its board had passed a formal resolution to demand the immediate repayment of the loans provided by Lonrho to Norse. On the same day, Lonrho received a letter from Bowman Gilfillan, Johannesburg attorneys instructed on behalf of the Avnits, which indicated that they would not permit the Deloitte audit. Lonrho then received a curious offer from an entity called Papi Capital Partuers to purchase all the shares in the company for about a third of par. They thought this was someone friendly to the Avnits. Although that is denied by the Avnits – I certainly cannot decide the point today – it is, nonetheless, the case that when contacted, Mr Papi seemed to know nothing about this business which would warrant his offer.
- On 6th December, Mr Lenigas wrote to Mr Smit at Bowman Gilfillan stating, amongst other things, as follows:
"You say in paragraph 11 of your letter that your clients will not, in any way, support the ongoing operation of the forensic audit. I assume from this statement that your clients will also not attempt to prevent the continuation of the audit. In any event, as a director of the company, I am entitled to access to the books and records of the company and to engage the assistance of duly qualified professionals to assist in their inspection. For the record, I will personally be paying for this forensic audit. Under the circumstances, I am requesting Messrs Prins and Pepler of Deloittes to contact Avnit directors to arrange to continue with their audit. I will also ask that they provide Avnit with a list of the books and records that they will require at least in the first instance."
- On 10th November, Mr Pepler then emailed Mr Avnit saying this:
"We have been instructed to go ahead with our audit and, for this purpose, we require access to or copies of the following documents and records, all of which is required for the period of November 2006 to date:
(1) Vouchers in support of Mike Benfield's summary of the application of the $6 million – 'ZAR usage up to 22nd January 2007.'
(2) Debtors/creditor's agent.
(3) Log book s for IL76 and G111 aircraft.
(4) Customer invoices for above aircraft issued by Norse.
(5) Invoices issued by airports OR Tambo and Rand Airport to Norse in relation to above aircraft.
(6) All Norse Air bank statements, locally and abroad.
(7) Norse Air and its division's detailed general ledger. Please note that after we have completed our review of the above, we may request further documents. The above list is therefore not a final list."
I note that although he said that he might request more documents at a later stage, this request was fairly focussed and it cannot be said to have been very wide or indeed very onerous.
- Mr Avnit's response on 13th December was as follows:
"The forensic audit is a significant unresolved issue, particularly given the way the audit has been positioned. The audit has not been agreed to by the board."
That is clearly a refusal to permit the audit to take place or to provide Mr Pepler with the seven categories of documents that he had requested.
- Matters then escalated. The Avnits sought to give an option notice to exercise so-called drag along rights under the subscription agreement in respect of the Papi Capital office. Proceedings were then commenced by Lonrho in the British Virgin Islands in which, on 22nd December of last year, Lonrho obtained an ex parte order, firstly, restraining Norse from altering the shareholding in the company and, secondly, ordering the company to provide full access to Lonrho's nominee directors, a reference of course to Mr Lenigas, to the documents and records of the company.
- That order was not immediately complied with so that on 8th January, Lonrho wrote and said this:
"As you are aware, it has been necessary for Lonrho Africa (Holdings) Limited to obtain an order in the High Court of Justice, British Virgin Islands, to compel the company to provide full access to all documents and records maintained by the company. We now require you as directors of the company to procure compliance with the order by allowing Deloittes immediate unfettered access to the company's documents and records in order to conduct their forensic investigation. Given the failure of the company to comply with the BVI Business Companies Act 2004, (the Act) and in clause 8.13 of the subscription agreement dated 31st October 2006, I believe it is necessary to reiterate the restrictions on your conduct as directors of the company and the board of directors of the company under the memorandum and articles of association."
I should add that although that letter refers to "8.13" it is clearly a reference to clause 8.1.3 and, indeed, Mr Moollan accepted that that must be the case.
- That letter was followed by the letters of 10th January to which I have already referred and that elicited a response from Mr Avnit on 13th January, in which he said:
"I want to deal with one point in your letter of 10th January where you refer to clause 8.1 of the subscription agreement and Lonrho's right to information. Your letter clearly reflects a key aspect of this right in that the demand for information must be reasonable, which we have argued at length is not reasonable. Thus, we reject this demand on the basis that it is unreasonable."
- It was that that led to the notices served under clause 8.5 of the subscription agreement on 14th January and which were not complied with, necessitating the application to Judge Mackie. Just to complete the picture, several loans have now been called in by the banks and the position, as I was told by Mr McParland on behalf of Lonrho, is that some $11.5 to $12 million of indebtedness has been called in immediately, which makes it all the more critical, if possible, that the current impasse is resolved sooner rather than later.
- The defendants made an application in the British Virgin Islands to discharge the order that had been made on 20th December. On 25th January of this year, the court did vary the order to provide that Mr Lenigas could obtain the documents and records he was seeking but could only use them in his role as a director of Norse and could not hand them over to Lonrho on the basis that to do so might breach his fiduciary duty to Norse as a director of that company.
- A subsequent hearing took place last Friday, 7th March at which, as I understand it, the judge in the British Virgin Islands indicated that she would vary that order to allow Mr Lenigas to hand over the materials to Lonrho. However, she suspended any such variation pending this court's determination of the present application. It appears that the forensic accountants instructed by Mr Lenigas, who I think are called Invest Management, have been receiving certain documents requested, as it was put, 'in dribs and drabs' but they had been working offsite and had not been working at the premises.
- I turn now to the grounds upon which Mr Moollan for the defendant submits that the order of Judge Mackie should never have been granted. The principal ground is that there was no breach by the defendants of clause 8.1.3 of the subscription agreement and hence no entitlement, on the part of Lonrho, to serve a notice under 8.5. The basis for this is three points: firstly, it is said the obligation to provide information etcetera in clause 8.1.3 does not encompass a situation where Lonrho is demanding a forensic audit because to so conclude would render clause 8.5 otiose. That is, says Mr Moollan, the provision which is concerned with putting in accountants and clause 8.1.3 is concerned simply with the provision of specific information. Secondly, it is submitted that the information that has been sought is not reasonably required because Lonrho is seeking to obtain it for an illegitimate purpose, namely a fraud investigation it wishes to conduct and, ultimately, Lonrho's own desire to take over the company. It is submitted that this purpose is supported by the fact that although Lonrho says it wants to find out what has happened to the $6 million it invested, it already has all the information it needs in that regard in the form of the management accounts provided on a monthly basis, together with a spreadsheet provided to Lonrho's representatives on 22nd November last year. Thirdly, it is submitted that Lonrho cannot cure any defects in its clause 8.5 notices by relying upon other subsequent alleged breaches of clause 8.1 which it now seeks to raise.
- Dealing with those matters in turn, firstly, I agree with Mr McParland for the claimant that the first point demonstrates a misunderstanding about how clause 8.1.3 and clause 8.5 fit together. Nothing in clause 8.1.3 restricts the means through which the claimant may require information to be provided, or the agent it may employ in that regard. Indeed, Mr Moollan accepted that, in principle, Lonrho could employ an accountant or auditor to conduct the relevant investigation just as a re-insurer would employ a firm of re-insurance consultants or investigators to conduct inspections under a books and records clause in a re-insurance contract, rather than engaging in the exercise itself. What Mr Moollan says is that what clause 8.1.3 does not justify is a blanket request to see all the company's documents and that blanket request can only come in at the clause 8.5 stage.
- As I see it, there are two answers to that point. Firstly, this is not a blanket request or at least not exclusively so. The email of 10th December from Mr Pepler makes it clear that seven categories of specific documents are being sought and, in my judgment, the refusal by the defendants to comply with that is the clearest possible breach of clause 8.1.3 by the defendants. Mr Moollan sought to avoid that conclusion by alighting on a sentence in Mr White's statement which says that when the attorneys' letter was received, the audit was suspended. Accordingly, says Mr Moollan, it is clear that the request on 10th December was on behalf of Mr Lenigas alone. I reject that narrow and technical approach. It is clear from the email of 10th December that Deloittes were talking about the same audit which Lonrho had instructed them to carry out and that the documents sought reflected the categories of investigation they had indicated in the scoping letter that they thought should be investigated. In any event, even if the instructions were on behalf of Mr Lenigas, he, in turn, was acting on behalf of Lonrho, as the fact that the British Virgin Island's proceedings were commenced in the name of Lonrho makes clear. Furthermore, Mr Avnit did not interpret this as a request by Mr Lenigas as his own response to it makes clear.
- Secondly, clause 8.5 is a clause which provides remedies following breach and also provides that, at the company's expense, the firm of accountants will be instructed. Clause 8.1.3 is at an earlier stage and I agree with Mr McParland that it is in wide terms and that its commercial context of a shareholder who does not have day to day management does not support putting any such restriction on it as the defendants contend for.
- As for the point that Mr Moollan makes about the alleged purpose, it seems to me that provided that the request that is made is reasonable, in other words, what the Lonrho requires is reasonable (not an oppressive demand for every document at short notice), the motive for which Lonrho required it is irrelevant. However, even if that were wrong, I consider that the information sought by Lonrho through Deloittes, its appointed agent, was such as Lonrho reasonably required in order, firstly, to satisfy itself that the company's directors were running the business properly and there were no financial irregularities. Secondly, to find out what had happened to the $6 million in relation to which I simply do not accept that Lonrho knew the position from the information it had already as at 23rd November and, thirdly, to find out why the company was making a loss. That information was all reasonably required to enable Lonrho to make business decisions in relation to its future involvement with the company, including whether to make a further major investment, which Mr Avnit was seeking from Lonrho without being prepared to provide the information that was sought. That that was the overriding consideration from Lonrho's perspective is made quite clear by Mr Lenigas' response to Mr Avnit in the context of Mr Avnit's reaction to the mandate letter, a response which I quoted earlier in this judgment.
- Whether Lonrho also wants to decide whether to buy the Avnits out is neither here nor there, in my judgment, and that would, in any event, be a legitimate purpose for requiring the information. Therefore, in my judgment, it was reasonably required and the attempt by the defendants to fetter the circumstances in which and the purposes for which Lonrho can seek the information is misconceived.
- I agree with Mr Moollan to this extent that Lonrho cannot justify the 8.5 notice by reference to subsequently discovered breaches. That would only justify a fresh 8.5 notice. However, that is an academic point since there was the clearest possible existing breach of clause 8.1.3 at the time that the notices were served. Accordingly, in my judgment, the notices served on the defendants on 14th January were valid notices under clause 8.5.
- I deal next with the points made by Mr Moollan as to why it is not appropriate to grant an injunction against the individual defendants, the second and third defendants. He submits that clause 8.5 is only directed at the company and not at the warrantors and he submits that the third defendant had ceased being a director so she was not in breach of clause 8.1.3. Therefore, no order should be made against her. That first point is, of course, technically correct. However, given that it is the Avnits who have the day to day management, on whose premises the offices are located, and it is they who are refusing to co-operate, it seems to me entirely appropriate for the court to make an injunctive order against them under Section 37 of the Supreme Court Act 1981 in order to ensure that this court's orders are complied with.
- As far as the third defendant is concerned, again I am satisfied that as the website entry demonstrates, at least until very recently she was being held out as the managing director of Norse. She is therefore a de facto director so that Lonrho has, in any event, a sufficiently arguable case against her to justify the relief which it has sought.
- I turn to the issue as to whether the injunction should be continued, referred to compendiously as the balance of convenience. The correct test as regards the granting of interlocutory relief in circumstances such as this is essentially common ground between the parties, which is the four step test first proposed by Mr Justice Chadwick in Nottingham Building Society v Eurodynamics Systems Limited [1993] FSR 468, adopted by Lord Justice Phillips in Zockoll Group Limited v Mercury Communications Limited [1998] FSR 354, as follows:
"(1) The overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be wrong.
(2) The court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage may well carry a greater risk of injustice if it turns out to have been wrongly made than an order which merely prohibits action, thus preserving the status quo.
(3) It is legitimate to consider whether the court does feel a high degree of assurance that the claimant will be able to establish his right at trial.
(4) Even where the court is unable to feel such assurance, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory stage. Those circumstances will exist where the risk of injustice if the injunction is refused sufficiently outweigh the risk of injustice if granted."
- As I see it, the court is concerned here primarily with (3) and (4). I should say straight away that I do feel a high degree of certainty that Lonrho is correct in its case and that the defendants are in breach of clause 8.1.3 and that thus, Lonrho was entitled to serve the 8.5 notice, which it did and that Lonrho would establish that as necessary at any trial. However, even if I did not feel that high degree of certainty, it is appropriate to continue the injunction in this case.
- The balance of convenience is tilted very firmly in favour of Lonrho, as I see it, for the following reasons. Firstly, if this order is not made and complied with, there will be no question of Lonrho being able to take an informed decision about the future of the company. I rather suspect that it may be too late anyway but, at all events, it seems to me that Lonrho are entitled to put in Deloittes, pursuant to clause 8.5. They are entitled to have that entitlement protected by an order of this court which, as I understand it, is capable of enforcement in South Africa. There was some suggestion in Mr Moollan's submissions that the court should not make an order because it would not be capable of enforcement. That is the sort of point which if, as was the case here, it proves to be factually incorrect, only convinces the court that the relevant defendants should indeed be injuncted. I should add here that it was also urged upon me that it was not necessary for the court to make this order, or to continue with this order, in circumstances where the court in the British Virgin Islands is proposing to vary its own order to enable Mr Lenigas to hand over to Lonrho the materials which Mr Lenigas' accountants have received and have been receiving, as I have said, on a piecemeal basis. It seems to me that that is not satisfactory from Lonrho's perspective, first of all because, as I have just said, it is essentially a piecemeal exercise and as Mr Pepler had said in his communications with Lonrho after his meeting with Mr Benfield, it is important that the exercise that is to be conducted is conducted in situ at the premises of Lonrho.
- Secondly, it seems to me that there is a risk that, if this court does not continue the order of Judge Mackie, a rather unedifying Mexican standoff will occur between this court and the British Virgin Islands court as to which order takes effect. Therefore, it seems to me that this is an order appropriate for the court to make.
- Thirdly, damages would clearly not be an adequate remedy for Lonrho. Norse is in a very parlous financial state and, by the defendants' own admission, requires a major capital injection if it is to survive at all. Such hope of it doing so probably rests with Lonrho having an opportunity to make an informed decision. The personal defendants' own property is heavily mortgaged and they would have had to sell it to repay the personal loan of $500,000 which was not repaid. I see little scope for them honouring any damages award which might be substantial if Lonrho's investment, which together with the subsequent loans approaches $8 million, proves to be irrecoverable.
- In contrast, in the unlikely event that the court concluded at trial that the injunction should never have been granted, Lonrho is clearly able to pay any damages, if any. Indeed, it is difficult to see what substantial damages the defendants could have suffered as a result of the order. Thus, in my judgment, the balance of convenience plainly is in favour of continuing the injunction granted by Judge Mackie.
- As all too often happens on applications to set aside ex parte orders, specifically injunctions, the defendants allege that Lonrho had failed to make full and frank disclosure to the court on the occasion of the hearing before Judge Mackie. Indeed, initially, this involved allegations by the defendants' solicitors impugning the personal integrity of the claimant's counsel. Although those have now been unreservedly withdrawn, those were allegations which should never have been made; they were quite improper. On analysis, the allegations made about non-disclosure consist of failure on the part of the claimant to draw the attention of the court to matters which formed part of the defendants' case on the facts, such as the outcome of the meeting on 24th October, which allegations by the defendants are not accepted by the claimant and are in dispute. This is not, in truth, a failure to make full and frank disclosure at all. Obviously, if a claimant knows exactly what a defendant says, he has to inform the court about it. However, the obligation to be candid on an ex parte application does not extend to trawling through documents and materials, anticipating what points might be taken by the defendants on the facts, in circumstances where, by definition, those matters are going to be hotly disputed. Therefore, in my judgment, there is nothing in the suggestion that there has been a failure to make full and frank disclosure.
- In conclusion, this order was made properly by Judge Mackie against all the defendants and it is appropriate that is should be continued until trial or further order. It follows that the suspension imposed by Mr Justice Teare should be lifted and the defendants are under the obligations to comply with this order immediately.
MR. McPARLAND: My Lord, thank you. In the circumstances, we will draw up a short minute of order and give it—
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: —to your Lordship for consideration.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: There are now some subsidiary issues in relation to the question of costs.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: I do not think there is a dispute about whether or not the defendants should be liable to pay costs.
MR. JUSTICE FLAUX: Well, there cannot be a dispute, can there, Mr Flannery?
MR. McPARLAND: But there is—
MR. FLANNERY: (inaudible).
MR. JUSTICE FLAUX: No.
MR. McPARLAND: There are issues regarding the question of the standard of taxation, or assessment of costs, whether it should be on a standard basis or an indemnity basis. There is also the question, my Lord, given the latest guidance from the Working Party Proposals as to whether or not proposing to provide a summary assessment, for which a note has been provided by my solicitors...
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: My Lord, if I may deal with the first matter. This is on the question of professional conduct and it is a matter which is, of course, taken into account in the assessment of any costs orders. One of the key issues on the question of conduct is whether or not a defence should have been maintained.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: With the greatest respect to the defendants and their representatives, as your Lordship and Judge Mackie held, this was the clearest possible breach of clause 8.1.3 in circumstances where the only proper course would have been for them to comply with the requirements of the contract at 8.5. Judge Mackie pointed out that it would have been reassuring to him if he had heard anything from the Avnits as to what was the commercial basis for their stance, or what was their real defence.
MR. JUSTICE FLAUX: Yes. Well, other than simply being obstructive for obstruction's sake, which of course inevitably gives rise to the obvious suspicions which your clients have had.
MR. McPARLAND: Yes and with the greatest respect to them, in all the evidence that has been provided, nothing has ever been said. The technical points have been taken with regard to the scope of 8.1.3, which were misconceived, and 8.5.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: The conduct of the case is such, in relation to the improper points of allegations that have been raised. However, also your Lordship will have seen that, in fact, my clients were required not only to perform a massive task initially to get the injunction together, trying as best they could in the time to provide all the available information… When the defendants had refused to obey the order and refused to comply with the directions that they have requested themselves for service in evidence, we ended up, in effect, fighting an expedited trial and providing information to prevent the hearing on the 11th being turned into a situation where the court would not be able to do justice to either party. So the materials we have to provide and your Lordship will have seen the amount of work that was required…
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: There were 25 bundles of documentation (inaudible).
MR. JUSTICE FLAUX: In other circumstances, were it not for what seems to me to be urgency, firstly because, from what you tell me, I suspect it may already be too late for this company to survive, but there plainly is an urgency. Secondly, because of the parallel proceedings in the British Virgin Islands… Otherwise, one might have been tempted to say expedited trial and orders to continue in the meantime and to be complied with in the meantime. I suspect that if and when this order is complied with, it is not going to be a five minute job.
MR. McPARLAND: No.
MR. JUSTICE FLAUX: But that option was not open to me, although it went through my mind at one point. So I follow your submission that it was necessary to put this material before the court.
MR. McPARLAND: So we would invite your Lordship to do two things. One is to order that the assessment be based, whether summary or subject to a detailed assessment, on the indemnity basis. This was a very hard fought indefensible defence.
MR. JUSTICE FLAUX: So you say costs on an indemnity basis. I am right in saying, am I not, that the rule on indemnity costs is such that it is really not… There used to be a suggestion there had to be, effectively, improper conduct.
MR. McPARLAND: That has been removed.
MR. JUSTICE FLAUX: I am not sure that is—
MR. McPARLAND: Your Lordship will find the actual provisions at 11.68 of the current volume of the White Book on the notes of these matters. There is no question that arises of improper conduct.
MR. JUSTICE FLAUX: Yes, the improper conduct is a sort of (inaudible) case, but—
MR. McPARLAND: Yes. Well, I am also helped, my Lord, by the observations of Mr Justice Langley, as he was, at 11.70 in a case called Amoco (UK) Exploration.
MR. JUSTICE FLAUX: Yes, I remember that case.
MR. McPARLAND: It is the third paragraph up. If a commercial party embarks upon or brings upon itself and pursues large scale litigation, it results in a resounding defeat involving the rejection of much of the evidence adduced in support of its case. That provides a proper basis on which to award costs on the indemnity basis.
MR. JUSTICE FLAUX: Yes. Well, that, of course, was after quite a lengthy trial in which the judge found that the defendants failed, I think I am right in saying, on every point.
MR. McPARLAND: I would not (inaudible) to get involved in a large Dutch bank, if I remember correctly, but the provision here is that this was an indefensible position. The proper course and the proper commercial course would be to agree to the order being performed after 13th February. However, instead they have chosen to pursue every point, including matters that are terribly time consuming, tracking down the South African rules of procedure for service of documents and the like, never mind the issue we have had to deal with as regards going through each of the allegations of misrepresentation of the case and producing the evidence. These showed that, from your Lordship's judgment, the assertions made in Ms Kane's witness statement on behalf of Mr Avnit could not take the matter into a position where Judge Mackie's judgment could be challenged.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: So we would ask for indemnity basis, my Lord. As for the question of summary assessment, we have the new guidelines of figures up to £250,000 if the court would be more minded to deal with that at this stage. Your Lordship has a note from Mr Goodwin—
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: —which I hope your Lordship has had time to see.
MR. JUSTICE FLAUX: Yes, urging me to make an order now.
MR. McPARLAND: Well, yes. At the end of the day, my Lord, we are in your Lordship's hands because we appreciate they are going to try and challenge these figures, but Mr Goodwin is here if need be, under the new direction, to answer any questions that you may have about these sums but they reflect what was required to be done.
MR. JUSTICE FLAUX: The other way in which I know other judges of this court deal with this sort of point is to make a substantial order for an (inaudible) payment because it is sometimes said… Well, the trouble is I do not know what Mr Flannery is going to say but the usual line, in my experience, is that if you have got a bill that can be divided in three and multiplied by two is to suggest that you take two thirds of the figure. So I suppose if this bill is regarded as baldly £180,000, you say £120,000—
MR. McPARLAND: Yes.
MR. JUSTICE FLAUX: —by way of summary assessment and I suppose if I were satisfied on an indemnity basis, I might say more.
MR. McPARLAND: Yes.
MR. JUSTICE FLAUX: But it may be that another way of looking at it is to say that you should have a substantial amount now, otherwise the matter should go off to detailed assessment.
MR. McPARLAND: Well, my Lord, we would be content with that but, of course, we are conscious of the new Working Party Guidelines, hence our preparation. However, if your Lordship was to decide that a payment on account should be made (inaudible) a detailed assessment, then Mr Flannery and his costs draftsman can make any points to the costs judge as they think appropriate.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: The actual figures amount to—
MR. JUSTICE FLAUX: Yes, I have got the figures. Leaving entirely to one side your fees, yours and Mr Toms' fees, which are a relatively small proportion, one is looking at essentially 130 to your solicitors.
MR. McPARLAND: Well, 70 percent of the overall total is £161,722, which is often the figure associated with what is recoverable on a standard basis (inaudible).
MR. JUSTICE FLAUX: Where are we now?
MR. McPARLAND: I am combining the 173 plus the original… There are two bills, my Lord.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: So it is 57. The grand total is £231,031.99.
MR. JUSTICE FLAUX: Give that to me again.
MR. McPARLAND: £231,031.99 and the—
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: Roughly calculating the 70 percent basis it is £161,722.39.
MR. JUSTICE FLAUX: Right.
MR. McPARLAND: It is often a rough and ready guide that you can just… Actually, the Working Party makes the point in Mr Justice Aitkin's paper that that is the figure that most solicitors would advise would be recoverable if successful on a standard taxation.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: Approximately two thirds, 67 or 70 percent. So, my Lord, if your Lordship wishes to adopt the position that was more common until 1st February, we would ask you to make an order on the indemnity basis, subject to detailed assessment, with an interim payment on account within 14 days. A figure that reflects that is approximately £160,000.
MR. JUSTICE FLAUX: Yes.
MR. McPARLAND: Thank you, my Lord.
MR. JUSTICE FLAUX: Thank you. Yes, Mr Flannery?
MR. FLANNERY: My Lord, I am hopeful (inaudible) on this side is going to take a bit of steam from the situation. I cannot offer too much resistance to an order being made on the indemnity basis.
MR. JUSTICE FLAUX: No, I am afraid you cannot.
MR. FLANNERY: My Lord, I would be wasting your time if I did.
MR. JUSTICE FLAUX: It is not intended as a criticism of you or your counsel who, if I may say so, presented the matter very fairly and attractively but the fact is that your clients have not got much of a case, I am afraid.
MR. FLANNERY: We had a resounding defeat, my Lord and we take it on the chin.
MR. JUSTICE FLAUX: Yes.
MR. FLANNERY: If I could, with that initial concession, just update your Lordship as to what happened following the judgment on Tuesday. I was notified as my assistant came out of court. Within five minutes, I was on the phone to Mr and Mrs Avnit to relay the judgment and to advise them in no uncertain terms that they had to comply immediately. The following day, Mr Peplar (this was yesterday)—
MR. JUSTICE FLAUX: Yes.
MR. FLANNERY: —Mr Peplar turned up at the offices of Norse Air and, probably a bit to his surprise, was not met with any resistance whatsoever and told he could have what he wanted, go where he wanted. I think he was so taken aback that he has arranged to come back on Monday, but was then told he had better get there today, which my client…. I submit, your Lordship, my clients are entirely delighted because time is tight and it is very sad that these letters have come in—
MR. JUSTICE FLAUX: You were not here but I did say that it seemed to me that the time, and I am not necessarily criticising anybody, but the time for posturing is really over. This company is in very serious difficulties and there has to be some co-operation—
MR. FLANNERY: My Lord, my clients recognise that.
MR. JUSTICE FLAUX: —to sort it out. So I am pleased to hear what you say. Let me tell you what I am thinking, because that may help you. It seems to me that if the court is minded to make an award for indemnity costs that how costs are assessed on an indemnity basis in detail is a matter that is, in my opinion at least, beyond the abilities of a commercial judge. I think it is a matter for a taxing officer. So I will order a detailed assessment but it does seem to me that where there is an order for indemnity costs or an order for costs on an indemnity basis, the court should be looking at a very substantial payment on account. It seems to me that £160,000 is probably about right. I do not know whether you want to say anything about that.
MR. FLANNERY: My Lord, I think that is absolutely fair and £160,000, if my learned friend would accept the discount of £1,727.93—
MR. JUSTICE FLAUX: I am sure he will. Now, what about length of time for payment? Is 14 days too short? It probably is, is it not? 28 days?
MR. McPARLAND: Your Honour, 14 days is, of course, the normal order and, in the circumstances, I would be reluctant to try and extend it, given the financial position.
MR. JUSTICE FLAUX: Well, I see that but having said that, I think I will say 21 days anyway.
MR. McPARLAND: Well, I shall draw up the order for £160,000 in 21 days.
MR. JUSTICE FLAUX: Yes. Can I just indicate, because I think obviously in terms of my attention being drawn to the Working Party Report, that it does seem to me that if it is simply a question of costs on a standard basis, then I would have assessed the costs. I would probably have ordered £160,000 actually but given that I do think that this is a case for indemnity costs, I think that your clients' defence of these proceedings is unreasonable, although, as I have indicated, I am not in any sense criticising the legal advisors. There has been also a fairly serious failure to comply with the order of Judge Mackie and considerable length gone to here and elsewhere not to comply, although I am very pleased to hear that as matters stand, it seems your clients are now prepared to comply with the order. So it does seem to me that it is appropriate that the costs should be ordered to be on an indemnity basis. However, following on from that, the assessment of those costs is a matter for the Supreme Court Costs Office and so I will order an interim payment on account of those costs of £160,000, to be paid within 21 days.
MR. McPARLAND: I am obliged, my Lord and thank you, your Lordship, for giving a judgment so soon. We will ask for a transcript.
MR. JUSTICE FLAUX: Yes. I am sorry I had to sit here and recite it but I have decided that my ability to scrawl it on bits of paper was probably faster than my ability to type it.
MR. McPARLAND: Well, I am greatly obliged, my Lord, because we can pass on the information to her Ladyship in the British Virgin Islands. I hope it will reassure the court there.
MR. JUSTICE FLAUX: Right. Anything else? Mr Flannery?
MR. FLANNERY: No, my Lord.
MR. JUSTICE FLAUX: Thank you very much indeed. If I may, Mr McParland, I would suggest that the papers were taken away.
MR. McPARLAND: Yes, I am happy to say they are Mr Flannery's and he is making arrangements for his clerk to come and get them.
MR. JUSTICE FLAUX: Yes. If they can be at least removed from here for the moment because I have got another case at eleven o'clock. I will keep (inaudible) papers.
MR. McPARLAND: Thank you, my Lord.
