IN THE HIGH COURT
CHANCERY DIVISION
Thursday, 15th July 2004
Before:
Between:
-and-
Jeremy
Goldring (Isadore Goldman) for the claimant
Dominic Happe (Pictons) for the first and second defendants
The third defendant was not represented and did not appear.
1. The principal claim in this action is by Quartermaster UK Limited ("UK"), for an account of profits, against two of its directors, Mr Pyke and Mr Newson, for breach of their fiduciary duties as directors in respect of the arrangements which they made (on behalf of Affinity Limited ("Affinity") a company controlled by them) with Carlsberg-Tetley in December 2001 and/or January 2002.
2. I will begin by describing the principal individuals and companies involved in this matter. The Second Defendant Mr. Newson had been involved in the brewing industry for some years before 1990. At one time he worked for Allied Brewers. In around 1990, Mr. Newson wanted to go into business on his own account and for that purpose, in September 1990, formed a company known as Association of Licensed Free Traders Limited ("ALFT"). He formed ALFT with the First Defendant, Mr. Pyke. Before 1990, Mr. Pyke had not been involved in the brewing industry or licensed trade but had been employed in various positions in relation to insurance and finance.
3. Mr. Newson described the original business of ALFT as that of a buying group in the licensed trade. It seems that it operated on a membership basis where the members were licensees who paid a membership fee to ALFT. In return the members had the advantage of being in a buying group which could negotiate on their behalf with the brewer suppliers.
4. Mr. Pyke and Mr. Newson formed the Third Defendant, Affinity, in January 1994. All of the shares in Affinity were owned by Mr. Newson and Mr. Pyke and they were the sole directors. Affinity carried on what has been described as a funds transfer business. This business appears to have involved the collection of monies due from, for example, licensees to the brewer suppliers. As will be seen, Affinity had an important contract with Carlsberg-Tetley Brewing Limited ("Carlsberg-Tetley") but its activities were not restricted to a funds transfer business in accordance with that contract. Affinity also collected fees on behalf of the British Travel Agents Accommodation Register ("BTAAR").
5. In April 1995, Mr. Newson and Mr. Pyke formed UK, the Claimant company. In the most recent published accounts of UK before February 2001, Mr. Newson is shown as the secretary of the Company but not a director and Mr. Pyke is shown as the sole director. However, in relation to the period from February 2001, Mr. Newson appears to have accepted that he was a director of UK and, in any event, from June/July 2001, Mr. Newson was appointed joint managing director of UK. After the formation of UK, that company effectively took over most of the business previously run by ALFT. UK was formed because the name Association of Licensed Free Traders was no longer suitable for all of the customers of that company who were then to become customers of UK. It is not clear precisely what happened to the membership scheme previously run by ALFT but it seems that by February 2001, the activities of ALFT were not significant. The group buying activity of ALFT were carried on by UK after its incorporation in 1995. For this purpose, UK employed staff who were described as being active "in the field" or as "sales staff'. These staff were in contact with the .licensees who bought from the brewer suppliers. The brewer suppliers also had sales staff who dealt with the licensee so there may have been some degree of overlap between the activities of the staff of UK and the staff of the brewer supplier. UK carried on a group buying business which was not restricted to dealing in beer and other alcoholic drinks but extended to dealing in crisps, and other food stuffs and, further, various kinds of insurance services. In the accounts of UK for the year ended 30th September 2000, the principal activity of the company was described as being the provision of a purchasing service to the hotel, catering and licensed trades.
6. UK/Affinity appeared to have had the benefit of a contract with Carlsberg-Tetley before January 2000. Copies of any written contract before that date were not available at the trial and the first copy written agreement in evidence was the one entered into in January 2000. Although UK was the company that carried on the group buying business and Affinity was the company which carried on the funds transfer, business the contract entered into in January 2000 with Carlsberg-Tetley was made with Affinity rather than UK. The contract consists of one side of one page only and the terms of the contract are not particularly clear as to what was to happen under the contract. The contract is headed "Agreement for Supply of Product". The agreed product was stated to be "all alcoholic and non-alcoholic beverage". The customer group was stated to be the name of the group and its outlets with whom agreed products and prices for a term had been agreed. Carlsberg-Tetley agreed to supply all products requested where possible by the group and its outlets. The agreed price was to be the price laid down in the Carlsberg-Tetley price list. Payment for the products ordered by the customer group or its outlets was to be made by the 20 day following the month of delivery. Payment was to be by direct debit transfer from the group or its outlets direct to Carlsberg-Tetley or via a central billing arrangement with the customer group or outlet and the group or outlet's agent. The agreement stated that the Carlsberg-Tetley current standard terms and conditions for supply of goods would apply. A copy of those standard terms and conditions was not provided at the trial.
7. It is necessary to consider the period which was to be the subject of the contract with Carlsberg-Tetley. The agreement defines "Agreement Period" as meaning:
... that period of time commencing at start date of a set of agreed prices and ends upon termination of that agreed date.
The contract refers to the possibility of termination as follows:
Termination of this contract for supply to the group and or any outlet can be terminated with 28 days notice in writing by either party.
8. One interpretation of the contract with Carlsberg-Tetley is that the contract would continue until it was terminated by 28 days written notice by one party to the other. However, the definition of "Agreement Period" refers to a period of time commencing at a date which can apparently be ascertained and ending on a date which can apparently be ascertained. Other parts of the contract also refer to prices being agreed for a term. The evidence of Mr. Newson and Mr. Pyke, and also the evidence of Mr. White who was at the relevant time an employee of Carlsberg-Tetley and a signatory of the agreement of January 2000, was that the Carlsberg-Tetley financial year ran to the 4th (or possibly the 6th) January and that prices were agreed, at the longest, for a period which would end on the 4th (or possibly the 6th) January. Accordingly, the agreement which was entered into in January 2000 was referable to prices which were agreed for a period to the 4th (or possibly the 6th) January 2001. When one reached the agreed date in January 2001, the contractual rights and obligations recorded in the written agreement would simply come to an end. No notice of any kind required to be given. Accordingly, if Carlsberg-Tetley were dissatisfied with the performance of Affinity, the other party to the contract, all Carlsberg-Tetley had to do was to allow the period of the contract to expire in January 2001. Conversely, if Carlsberg-Tetley were satisfied with the working of the arrangement, Carlsberg-Tetley would negotiate with Affinity a new set of prices and terms to govern the next period from 7th January in one year to the 4th or 6th January in the following year. If a new set of prices and terms was agreed in this way, it was not in practice thought to be necessary to sign a further written agreement but simply to proceed on the basis that the written agreement which had previously been signed would continue to apply to the new set of agreed prices and terms.
9. In view of the evidence of Mr. Newson, Mr. Pyke and Mr. White and on the true construction of the wording of the written agreement of January 2000, I hold that the contractual relationship recorded in that agreement would come to an end on the 4th (or possibly the 6th) January in any year unless the parties had negotiated a further set of prices and terms by way of a renewal for a further year. Although there was no further written agreement in January 2001, there was no dispute that the arrangement with Carlsberg-Tetley continued through 2001 on the terms of the written agreement signed in January 2000. Accordingly, consistently with the above findings, the arrangements which were in place between Affinity and Carlsberg-Tetley in 2001 would have come to an end by effluxion of time on the 4th (or possibly the 6th) January 2002 unless the arrangements were renewed with Carlsberg-Tetley and Carlsberg-Tetley was not under any obligation to agree renewed terms.
10. In summary therefore, by October 2000, Mr. Newson and Mr. Pyke owned and controlled UK and Affinity and, for what it was worth, ALFT. Those companies between them carried on a group buying business and a funds transfer business and one of the important customers was Carlsberg-Tetley.
11. In October 2000, Mr. Newson and Mr. Pyke agreed certain heads of terms with a Mr. John Owen of The Carrick Trust. The heads of terms provided for the businesses run by Mr. Newson and Mr. Pyke to be taken over by a company called Beerking Limited. Under the intended arrangements, Mr. Newson and Mr. Pyke would acquire 20% of the issued share capital of Beerking and become directors of Beerking and, in return, Mr. Newson and Mr. Pyke would transfer all of the share capital of UK, Affinity and ALFT to the order of The Carrick Trust.
12. In order to carry forward the arrangements agreed upon in October 2000, a company called Quarter Master Gold Limited ("Gold") was formed on the 26th January 2001. Mr. Newson and Mr. Pyke transferred their shares in UK and their shares in ALFT to Gold. In return, Mr. Newson and Mr. Pyke between them acquired 20% of the issued share capital of Gold. There was no change in relation to the shareholdings in and directorships of Affinity. An important reason for this was that Affinity carried on a funds transfer business for a client (BTAAR) that was not involved in the licensed trade or brewing industry.
13. The intention behind the new arrangements was that Gold would be the holding company of a number of companies which now included UK and ALFT. UK would be one of the trading companies in the Quarter Master group. UK would carry on a group buying business and a funds transfer business as UK and Affinity had done earlier.
14. On the 21st February 2001 Mr. Newson and Mr. Pyke entered into separate service agreements with Gold. In the case of Mr. Newson, clause 2.1 of his service agreement referred to his employment as director of new business. His employment was deemed to have commenced on 1st February 2001 and was to be for an initial period of one year continuing from year to year thereafter unless and until either party should give to the other 12 months prior written notice. Clause 2.3 set out various duties on the part of Mr. Newson and, in particular, he was to show the utmost good faith to Gold and associated companies in all matters relating to Gold and associated companies. Clause 1 of the service agreement defined "associated company" to include a subsidiary company such as UK. By clause 3.1 of the service agreement, Mr. Newson agreed not, without the written consent of Gold, to engage in any business other than the business of the company or any relevant associated company although it appears to have been acknowledged that Mr. Newson would continue to have a "limited involvement" with Affinity. Clause 11 of the service agreement was a 12 months restriction on Mr. Newson being engaged in a competing business. Clauses 12 and 13 of the service agreement dealt with non-solicitation of customers and non-enticement of employees, respectively. By clause 15.2, Mr. Newson agreed, whenever requested by Gold, to deliver up all lists of clients' correspondence and other documents belonging to the company or any associated company. Mr. Pyke's service agreement was in essentially the same terms save that he was employed as administration director. These service agreements were with Gold rather than UK. Gold is not a party to these proceedings and these proceedings do not therefore include a claim against Mr. Newson and Mr. Pyke pursuant to the terms of the service agreements.
15. Because Affinity was not being acquired by Gold, it appears to have been recognised that it was necessary for the position between Affinity and a company in the Quarter Master group to be formally recognised. To this end, Affinity entered into a written agreement dated 22nd February 2001 with UK, as the relevant trading entity rather than Gold, as the holding company. The second recital to the agreement stated:
The Purchaser has agreed with the vendor with effect from the date of this Agreement to purchase the goodwill ("the Goodwill") of the Vendor in relation to its funds transfer business (carried on exclusively for the Purchaser) relating to the brewing industry ("the Business") on the terms hereinafter contained.
By clause 1 of the agreement, Affinity agreed to sell and UK agreed to purchase with full title guarantee the Goodwill. By clause 2, the consideration for the Goodwill was to be £ 5 plus the termination of the existing agreement between the Vendor and the Purchaser in relation to the Business. This clause confirms that before the new arrangements made in February 2001 involving Gold, Affinity had an arrangement with UK under which Affinity was to provide funds transfer services to UK. This clause is also consistent with the various companies' understanding that the business operated by Affinity was a funds transfer business and the group buying business was that of UK. Clause 3 of the agreement provided for completion involving an express assignment of the Goodwill if required by the purchaser; no such express assignment appears to have been required and the matter was left on the terms of the agreement of 22nd February 2001. By clause 4.2, the Vendor and the Purchaser agreed that from the completion of the sale neither party should owe any obligation whatsoever to the other in respect of the existing agreement between the Vendor and the Purchaser in relation to the Business.
16. Clause 6 of the agreement of 22nd February 2001 provided:
The Vendor and the Purchaser agree that following completion the Vendor shall as agent for the Purchaser continue to carry on the Business subject to such agency being terminable by either party giving at least 3 months written notice to the other prudently and in an efficient and businesslike manner the Purchaser reimbursing the Vendor in respect of all reasonable costs and expenses thereby incurred. For the avoidance of doubt the Vendor specifically confirms and undertakes there will be no mark up whatsoever in respect of the costs and expenses to be charged to the Purchaser in terms of this clause and that such costs and expenses shall so far as the Vendor is aware be in line with the costs and expenses incurred by it 12 months prior to completion of the sale in carrying on the Business with appropriate adjustments related to the volume of the Business and inflation.
17. Clause 7 of the agreement of the 22nd February 2001 provided:
7.1 For the purpose of assuring to the Purchaser the full benefit of the Business the Vendor shall not
7.1.1 at any time disclose to any person or use for any purpose and shall use all reasonable endeavours to prevent the publication or disclosure of any information concerning the Business;
7.1.2 For a period of 2 years after today's date either on its own account or through any other person directly or indirectly solicit, interfere with or endeavour to entice away from the Purchaser any person who is now or has, during the 2 years preceding today's date, been a client, customer or employee of, or in the habit of dealing with, the Vendor in relation to the Business;
7.1.3 It shall not for a period of 5 years after today's date without the Purchaser's prior written consent directly or indirectly engage in the United Kingdom in any activity which is the same as the Business or any material part thereof as it is now carried on.
18. Although the parties to the agreement of 22nd February 2001 are UK, the Claimant herein, and Affinity, the Third Defendant herein, the Claimant does not make any claim on the Third Defendant pursuant to clauses 6 and 7 of this agreement.
19. The position following 22nd February 2001 can be summarised as follows. Gold was the holding company of a number of companies including UK but Gold did not trade. UK was the relevant trading subsidiary. UK carried on what was described as the group buying business. Insofar as there was a membership scheme under which members paid a fee for membership, this appears to have been the business of UK rather than that of ALFT. Affinity did not carry on a group buying business but carried on a funds transfer business. In relation to the brewing industry, the funds transfer business of Affinity was not carried on on its own account but was carried on as agent for UK. In addition, and separate from the arrangements, Affinity carried on a funds transfer business for another client, namely, BTAAR. After February 2001, there continued to be an arrangement with Carlsberg-Tetley on the terms of the arrangement made with Affinity in January 2000. Under that arrangement, prices had been agreed for the year to 4th (or possibly 6th) January 2002. The commissions earned from Carlsberg-Tetley belonged ultimately to UK and Affinity was contractually obliged to act for UK as agent in relation to the transfer of funds to enable the commission to end up with UK. There were a number of occasions during 2001 when representatives of UK (rather than Affinity) met representatives of Carlsberg-Tetley to discuss the prices to be paid for goods supplied by Carlsberg-Tetley.
20. It is next relevant to refer to a board meeting which took place on the 6th June 2001. The minutes of that meeting are headed "Minutes of Quarter Master Gold Operational Board Meeting". The minutes are written on the headed paper of UK which had a logo involving the words "Quarter Master Gold". As will be referred to later in this judgment, there was some lack of precision in the use of terms when described Gold or UK. Paragraph 5 of the minutes of the meeting of 6th June 2001 includes the statement:
The relationship between Affinity/Quarter Master Gold should be regularised. A letter of comfort should be written from Affinity to Quarter Master Gold.
A note to this statement indicated that it was for Mr. Pyke and Mr. Newson to deal with the matter. No doubt as a result of the meeting on the 6th June 2001, Mr. Pyke wrote the following letter on the 8th June 2001. The letter appears to have been written on the notepaper of Affinity and was addressed to the directors of Quarter Master Gold Limited. The letter read:
You will find attached a copy of our trading agreement with Carlsberg-Tetley.
Bearing in mind that the respective contract was initiated before the 22nd February 2001, we did not change the traditional "Affinity-Carlsberg" relationship. However, it is recognised and intended that the benefit of the agreement with the brewery should rest with Quartermaster Gold Limited. Thus, when appropriate we shall ask that the contract be assigned to Quartermaster Gold Limited.
For the sake of continuity and administration Affinity will continue to collect the respective charges from the individual accounts forming the customer base and subsequently we will reconcile them Monthly Statement of Account with the brewery and arrange for settlement.
Although the letter referred to Gold, in view of the fact that the trading entity was UK, it might have been more accurate for the letter to have referred to UK. Leaving aside for the moment the distinction between Gold and UK, the effect of the letter appears to be at least an acknowledgement that Affinity held the benefit of the agreement of January 2000 with Carlsberg-Tetley for the relevant Quarter Master company and not for its own benefit.
21. At a board meeting on 30th July 2001, Mr. Newson was appointed joint managing director. The lack of precision in the names of the company was continued in these minutes which referred to a "meeting of a board of directors of Quarter Master Gold UK Limited".
22. Although the Quarter Master group was launched in February 2001 with rosy prospects of significant profits, the group soon ran into serious financial difficulties and by December 2001, UK, in particular, was insolvent. It is not necessary for the purposes of this judgment to examine the reasons that this change of fortunes came about. During that period, Mr. Newson and Mr. Pyke executed documents which enabled their shares in Gold to be transferred to a venture capitalist which had invested and/or had promised further to invest in the group. The financial predicament of the Quarter Master group was well known to Mr. Newson and Mr. Pyke who had, indeed, gone without their salaries for the period from the summer of 2001. On the 3rd December 2001, Mr. Newson wrote to the venture capitalist a letter which included the following statements:
I am most concerned about the financial position of Quarter Master Gold Limited.
Currently the company has over half a dozen "final notices" from creditors, including, tax obligations, BT, custom fleet etc. I have received no written or verbal guidance of your current intentions other than a guarded conversation on Friday with Roger Crosthwaite, consequently, I do not feel confident that your early declaration to support (30th November) Quarter Master Gold will be forthcoming. I have a strong suspicion that you are preparing to "phoenix" the company, and if this is the case and ALL the directors are not to be paid their outstanding dues for the past month's work and the monies that Affinity has passed to assist Quarter Master, will not be forthcoming, I feel that I am left with no choice but to call a board meeting to recommend that the official receiver be advised that the company is trading insolvent.
I am not a confrontational person and this is [a] genuine letter borne out of practical requirements and fiduciary duty.
John Pyke and myself built this company from nothing and developed it successfully for 10 years. We have been let down badly by a number of individuals and organisations trusting in their words and not questioning "the obvious". That trust has been destroyed and we are "left with nothing".
23. On the 3rd December 2001, all directors of Gold or UK were sent a memo notifying them that there would be a board meeting on 10th December 2001.
24. By 3rd December 2001, Mr. Pyke apparently on behalf of himself and Mr. Newson, had been in touch with a solicitor, a Mr. Talbot of Messrs. Pictons. On 3rd December 2001, Mr. Talbot e-mailed to Mr. Pyke a draft agreement to be entered into between Affinity on the one hand and Gold, UK and a further company in the Quarter Master group, on the other hand. The form of the document e-mailed on 3rd December 2001 was not produced at the hearing but there was made available an amended version of the agreement drafted on the 4th December 2001. The draft agreement referred to Affinity being the sole collector of payments on behalf of the specified companies in the Quarter Master group. The draft agreement provided for Affinity to continue to collect payments for those companies during the lifetime of the agreement which was to continue until determined by either party giving 60 months notice to expire on an anniversary of the agreement.
25. On the 4th December 2001, Mr. Newson and Mr. Pyke met Mr. Talbot and they discussed, amongst other things, the draft agreement of 3rd December 200 1. From Mr. Talbot's brief handwritten note of that meeting, it appears that they also discussed clause 6 of the agreement of 22nd February 2001 between UK and Affinity. They discussed the question as to whether the restrictions in that agreement were still binding. The meeting on 4th December 2001 also involved a discussion as to Mr. Pyke and Mr. Newson resigning their directorships and terminating their employment contracts. There was no very clear evidence as to the purpose of the draft agreement of 3rd and 4th December 2001 although I note that Mr. Crosthwaite the chairman of Gold and UK referred in his witness statement to being asked to sign an agreement in favour of Affinity to ratify the relationship with Affinity; he stated that he was asked to sign this agreement post liquidation and he declined to do so.
26. On the 4th December 2001, Mr. Talbot wrote to Mr. Pyke. This letter referred to the draft agreement relating to Affinity and companies in the Quarter Master group. Mr. Talbot also sent draft letters of resignation addressed to "Quarter Master Gold Limited". The letter referred to the restrictions in the service agreements of Mr. Pyke and Mr. Newson. The letter also referred to the restrictions in clause 7 of the agreement of 22nd February 2001 (between Affinity and UK). Further, Mr. Talbot suggested that Mr. Pyke and Mr. Newson could set up a new company which could compete with "Quarter Master UK Limited" once the employment of Mr. Pyke and Mr. Newson was ended. Mr. Talbot wrote:
For that reason, if you are to acquire the new business which we discussed, I would advise that it should prudently be acquired in a company other than Affinity. In this respect, there is no reason why you should not do a name swap so that the current Affinity acquired a new name and a new company acquired the name "Affinity".
Mr. Pyke and Mr. Newson and Mr. Talbot were all cross-examined about the reference in this letter to "the new business which we discussed". The witnesses did not remember, or professed not to remember, much of the detail of what was discussed.
27. Mr. Newson gave evidence that around this time and continuing up to 10th December 2001, he was trying to arrange for funding of the group to keep it trading and also considered the possibility of the group entering into a company voluntary arrangement so as to avoid liquidation. At around the same time, Mr. Crosthwaite the chairman of Gold and UK was seeking advice as to placing the company or companies into liquidation.
28. At a board meeting on 10th December 2001, Mr. Newson argued that the company or companies should be saved through a CVA. He was later to describe the meeting on the 10th December 2001 as "very emotional".
29. On the 10th December 2001, Mr. Talbot wrote to Mr. Pyke at Affinity, as follows:
Given the issues which we have been discussing over the last few days, I think it might be worth our while, in the near future, getting together to review the structure of your organisation going forward, its funding and your long-term intentions.
30. There were several relevant communications on the 12th December 2001. At 10.18am, the chairman of Gold and UK sent an urgent communication to Mr. Pyke. It seems that a similar communication was sent to Mr. Newson at a similar time. The urgent communication discussed, and dismissed, the question of a CVA and proposed a resolution to be voted on by the directors by fax or telephone. The resolution was as follows:
That Quarter Master Gold Limited encompassing ALFT Limited, Quarter Master UK Limited, Multipleleisure Limited and Kegs & Co. Limited are put into creditors' voluntary liquidation as from Wednesday, 12th December 2001.
At 11.56am, Mr. Newson sent a fax to Roger Crosthwaite and others asking that the decision be postponed until 5pm on the 12th December 2001 to allow contact to be made with a potential funder. At 13.54, Mr. Crosthwaite sent a fax to all directors stating that the potential funder would not proceed to provide funds but would talk to the receiver at a later date. Mr. Crosthwaite stated that he had agreed to leave the decision on the proposed resolution until 5pm on the 12th December 2001. Also on the 12th December 2001, Mr. Talbot, the solicitor who had been advising Mr. Pyke and Mr. Newson, sent to Mr. Pyke a draft letter of resignation as director. Mr. Pyke and Mr. Newson prepared fair copies of the solicitors' draft and at 16.58 sent their letters of resignation by fax to the offices of McClure Naismith in London. Mr. Pyke and Mr. Newson believed that McClure Naismith were the company secretary of Gold although, in fact, they had ceased to be the company secretary and had been replaced by Pictons, solicitors. The letters of resignation written by Mr. Newson and Mr. Pyke were in essentially the same terms (apart from the name and address of the giver of the notice). I will set out Mr. Newson's letter of resignation in full. It was in these terms:
To:
The Board of Directors
Quartermaster Gold Limited
Pountney Hill House
6 Laurence Pountney Hill
London EC4R OBLand
The Chairman of the Board of Directors
The Old Woodhouse
Hill End Farm
Faucheldean Road
Ecclesmachan
West Lothian
EH52 6NFI Michael Barrie Newson of [address] HEREBY GIVE NOTICE of termination of my directorship of your Company consequent upon the failure of REIT Asset Management to confirm that they had actually resolved to provide forthwith the additional funding to the Company which is required to enable it to continue to trade without being insolvent.
I FURTHER GIVE NOTICE that the Company is in breach of its obligations under the terms of my Service Agreement with the Company dated 22nd February 2001 in that it has failed to pay me the sums which are due to me in accordance with its terms and that I HEREBY ACCEPT such breach (being a repudiatory breach) thereupon terminating the Service Agreement forthwith.
Dated this 12th day of December 2001
[Signed]
Separate notices have been sent to both addressees.
31. McClure Naismith received a copy of the letters of resignation by fax from Mr. Newson and Mr. Pyke and on the following day, 13th December 2001, at 12.50, McClure Naismith sent a fax to Mr. Newson referring to the letters of resignation. The letter was addressed to Mr. Newson at "Quarter Master UK Limited". The heading to the letter read "Quarter Master Gold Limited" and the letter stated:
Thank you for your fax yesterday. Our firm no longer deal with the secretarial aspect of Quartermaster Gold Limited. I have however passed on both your and Mike Newson's resignations in Quartermaster Gold Limited to Pictons, the solicitors dealing with the secretarial work.
There was obviously an error in this letter in that it referred to "your and Mike Newson's resignations" but it was addressed to Mr. Newson rather than to Mr. Pyke. It seems however that what McClure Naismith did was to "pass on" both letters of resignation to Pictons. There is no specific evidence as to the means by which McClure Naismith passed on the letters to Pictons. In view of the fact that they sent the letter of 13th December 2001 to Mr. Newson by fax at 12.50, it seems probable that they sent the letters of resignation to Pictons by fax on the same day at around that time. If, however, McClure Naismith had posted the letters of resignation to Pictons on the 13th December 2001, the letters may only have been received by Pictons on the 14th December 2001 or possibly later.
32. The letters of resignation were also addressed to the Chairman of the Board of Directors. That was a reference to Mr. Roger Crosthwaite. Mr. Crosthwaite gave evidence at the trial and accepted that he had received the letters of resignation although there was no specific evidence as to the date of receipt. As he resided in Scotland, and as the letters were not ready for despatch until the end of the 12th December 2001, it seems likely that the letters of resignation were received by Mr. Crosthwaite not before the 14th December 2001.
33. The bundle contained two minutes relating to a Board Meeting or Board Meetings on the 12th December 2001. The first minute refers to a Board Meeting of "Quarter Master Gold Limited" on 12th December 2001 at 5pm. There are 7 directors listed as being relevant. The 7 directors included Mr. Newson and Mr. Pyke. The minute reads:
Following a fax (as agreed) proposal to the Board of Directors of Quartermaster Gold UK Limited the following proposal was voted on by facsimile and phone:
That Quartermaster Gold Limited encompassing AFLT Limited Quartermaster UK Limited Multipleleisure Limited, Kegs & Co. Limited are put into Creditors Voluntary Liquidation as from 5pm, Wednesday 12th December 2001 and that insolvency practitioners Leonard Curtis should be appointed with immediate effect and to attend to all related matters.
This was agreed with a vote of 5 - for, and 2 - abstentions.
34. On the 13th December 2001, UK gave notice of an Extraordinary General Meeting of Shareholders to be held on 9th January 2002 for the purpose of considering and if thought fit passing an extraordinary resolution as to the voluntary winding up of UK. On the same day, notice was given to creditors pursuant to section 98 of the Insolvency Act 1986 of a meeting of creditors on 9th January 2002. A similar notice to creditors was given in relation to Gold. Also on the 13th December 2001, notice was given to employees of UK terminating their employment with immediate effect.
35. Meanwhile, at some time during the 12th December 2001, Mr. White of Carlsberg-Tetley telephoned Mr. Newson. There was an issue as to whether this was the first relevant conversation between Mr. Newson and Mr. White and, in particular, it was suggested that the two had spoken on the 10th December 2001. Mr. White had been on holiday until the 10th December 2001 and I accept the evidence of Mr. Newson and of Mr. White that the first conversation took place on the 12th December 2001. I accept that Mr. White had a considerable backlog to clear on his return from holiday and did not get round to telephoning Mr. Newson until the 12th December 2001. I also accept Mr. White's evidence that the purpose of his call was to follow up certain rumours that had reached his ears that the Quarter Master group was in financial difficulties and he wished to hear more from Mr. Newson about the position. I also accept the evidence of Mr. White and Mr. Newson that this telephone enquiry was initiated by Mr. White and not the other way round. I am not able to find precisely when on the 12th December 2001 the conversation took place and, in particular, I am not able to find whether it was before or after 16.58 when the letters of resignation were faxed to McClure Naismith, if that is a relevant matter. After speaking to Mr. White on the 12th December 2001, Mr. Newson told Mr. Pyke about the conversation and it was arranged that both Mr. Pyke and Mr. Newson would meet Mr. White, and a colleague of his from Carlsberg-Tetley, on 14th December 2001. There was no particular explanation, or justification, given as to why it was necessary for both Mr. Pyke and Mr. Newson to attend this meeting.
36. At the meeting on 14th December 2001, Mr. Newson and Mr. Pyke told Mr. White that the Quarter Master companies were planning to go into liquidation. Mr. White saw that there was some risk of an interruption in the arrangements between Carlsberg-Tetley and its ultimate customers which were conducted through the medium of the Quarter Master companies. Mr. White stated that, at the meeting, he asked Mr. Newson and Mr. Pyke on behalf of Affinity to continue to service the Carlsberg-Tetley customers and to continue to collect fees in return for a management fee payable to Affinity. He said that his aim on behalf of Carlsberg-Tetley was to "roll on" the deal that had previously existed and which was due to be renegotiated by the 4th January 2002. He explained in his oral evidence that it would not have been fair on the Carlsberg-Tetley customers to cause difficulties in relation to supplies two weeks before Christmas. It was also the case that there was a considerable amount of money outstanding from the ultimate customers to Carlsberg-Tetley.
37. In his witness statement, Mr. White stated:
In December 2001 I, on behalf of Carlsberg-Tetley Brewing Limited, had no intention to renew the Agreement with Quarter Master UK Limited. The main reason for this was the financial status of Quarter Master UK Limited but there were other reasons. I personally felt insecure in the way in which Quarter Master UK Limited operated and had operated in the past. I had received lots of bad press from customers who were very disgruntled with Quarter Master UK Limited but not Affinity.
This statement was not the subject of any cross-examination.
38. Mr. White's written evidence did not distinguish between a short term arrangement from 14th December 2001 to 4th (or possibly the 6th) January 2002 and a longer term arrangement thereafter. However, in his oral evidence, he referred to a further meeting with Mr. Newson and/or Mr. Pyke in January 2002. At this meeting, he told them that things had gone well since the 14th December 2001 and that the arrangements should continue with Affinity thereafter. He was asked why Carlsberg-Tetley had chosen to ask Affinity to "roll on" the arrangement from 14th December 2001 and, if different, from January 2002. He referred to various matters in this regard. He referred to the fact that he did not want an interruption in the supply to the ultimate customers. He referred to the fact that there was a substantial amount of money outstanding from customers to Carlsberg-Tetley. He referred to the fact that he did not want a break in continuity as a result of the difficulties of the Quarter Master companies. He also referred to the fact that Affinity had had a business relationship with Carlsberg-Tetley and that relationship was not confined to the period from February 2001 to December 2001 but extended further back. He also stated that he knew Mr. Newson from earlier days working in the brewing industry although he did not particularly know Mr. Pyke. He also referred to the fact that Affinity had in place all the information on its database as to the contracts with customers which it needed so that there would be no need to transfer the instruction with ensuing disruption. It was also the case, however, that Carlsberg-Tetley had the same information as Affinity had. Mr. Newson's account of the meeting on the 14th December 2001, did not significantly differ from the account given by Mr. White. Mr. Newson stressed that he had not expected Carlsberg-Tetley to offer these terms to Affinity before he went to the meeting on the 14th December 2001. Mr. Newson also gave evidence that he and/or Mr. Pyke and/or Affinity had been approached by other suppliers who had entered into contracts with UK as a buying group. These other suppliers had wanted arrangements to continue with Mr. Newson and/or Mr. Pyke and/or Affinity but their requests had been turned down because they had continuing contracts with UK. When asked why he dealt with Carlsberg-Tetley when he did not deal with the other suppliers he said that the whole set up of brewing relationships was different and the Carlsberg-Tetley contract Was due for renewal and would not be renewed.
39. Mr. Pyke's account of the meeting on 14th December 2001 was broadly consistent with the evidence of Mr. White and Mr. Newson.
40. In the period immediately following 14th December 2001, Affinity carried on its funds transfer business as before save that it did not remit any monies for that period to UK. In and after January 2002, Affinity carried on a funds transfer business on behalf of Carlsberg-Tetley and retained the commissions which it received. Further, Affinity engaged some of the staff that had been laid off by UK to do for Affinity what they had earlier done for UK. Thus, insofar as UK carried on a buying group business which involved staff in the field being in contact with the ultimate customers, Affinity from January 2002 effectively duplicated that activity. Although the detail of this was not explored, it must have been the case that Affinity acting through Mr. Newson and Mr. Pyke negotiated prices and terms with Carlsberg-Tetley which were to apply from January 2002. On the information provided by Carlsberg-Tetley, from 6th January 2002 to 12th October 2002, Affinity received by way of commission or rebate a sum approaching £143,000.
41. On the 8th January 2002, Mr. Pyke wrote to the proposed liquidator of the Quarter Master companies. The letter referred to Quarter Master Gold Limited and subsidiary companies and stated:
Further to our telephone conversation earlier today please note that we would be most interested in making a reasonable offer for the distributable assets of the above company. Consequently we would welcome your confirmation of the assets that are available for acquisition.
There does not appear to have been any response to that request.
42. The proposed liquidator prepared a report for the creditors' meeting planned for the 9th January 2002. This report referred to UK having a trading agreement with Carlsberg-Tetley which formed the bulk of its business.
43. At the creditors' meeting on 9th January 2002, Gold, UK and ALFT Limited were placed in creditors' voluntary liquidation.
44. On the 15th January 2002, the liquidator of UK wrote to Mr. Pyke asking for information about the agreements between Affinity and UK in relation to Carlsberg-Tetley together with any agreement between Affinity and Carlsberg-Tetley. On 5th February 2002, Mr. Pyke replied stating that the contract with Carlsberg-Tetley was annual and renewable each January and any such contract ceased at the end of December [2001]. Mr. Pyke also asked as to when the liquidator would state what assets were available for sale so that Affinity might submit a bid. On the 7th November 2002, the liquidator wrote again to Mr. Pyke at Affinity and referred to clause 7 of the agreement of 22nd February 2001 and also asserted that Affinity was carrying on the same business as had been carried on by Quarter Master UK and this was a breach of Mr. Pyke's fiduciary duty as a former director. On 18th November 2002, Carlsberg-Tetley informed the liquidator of the payments that had been received by Affinity in particular in the period since January 2002 to 12th October 2002. On the 4th December 2002, Pictons, Solicitors for Affinity responded to the liquidator's letter of 7th November 2002 and suggested that there was no claim under clause 7 of the agreement of 22nd February 2001 and that Affinity had acted openly and honestly throughout. On 13th December 2002, solicitors for the liquidator wrote to Pictons stating that Affinity had received substantial sums from Carlsberg-Tetley approaching £143,000 and that the business of UK and the membership database remained with the company up to the date of the liquidation and was an asset to be realised by the liquidator. Pictons responded to that letter on the 7th March 2003.
45. Affinity's accounts for the period to 31st March 2003 stated that the principal activity of Affinity in the period from 31st October 2001 to 31st March 2003 was that of the provision of purchasing facilities to the licensed free trade.
46. On 14th April 2003 Affinity and Mr. Newson and Mr. Pyke entered into an agreement with the Pelican Buying Company Limited ("Pelican"). This agreement recited that Affinity had for some years introduced customers to the products of Carlsberg-Tetley and another supplier, Coors, in consideration of which those suppliers had paid a commission to Affinity. The agreement recited that Affinity no longer wished to conduct that business and that Pelican wished to purchase a list of Affinity customers trading with Carlsberg-Tetley and Coors on the terms set out in the agreement. By clause 1 of the agreement, Affinity by way of assigning to Pelican the benefit of the goodwill of Affinity in the business, transferred the customer list to Pelican in a paper format and on computer disc and agreed to provide to Pelican detailed information as to trading terms and prices. In return, Pelican was to pay £70,000 to Affinity. Clause 3.1 of the agreement referred to the fact that Mr. Newson and Mr. Pyke were to enter into a consultancy agreement in the form attached. Clause 4 placed certain restrictions on the future activities of Affinity. Clause 5 referred to the possibility of a claim by the liquidator of UK and by clause 8.1, in the event of such a claim, Mr. Newson and Mr. Pyke were to indemnify Pelican against all losses damages costs and expenses arising. Clause 10.1 of the agreement contained a definition of "customer list" which referred to a list of customers with, inter alia, Carlsberg-Tetley, such list to include details of the name of the business, a contact name, address, telephone number, fax number, e-mail if applicable and details of the products supplied to the customer including the quantity, dates and methods of supply.
47. Also on the 14th April 2003, Pelican entered into a consultancy agreement with Mr. Pyke and a separate consultancy agreement with Mr. Newson. A copy of the agreement made with Mr. Pyke was available at the trial. The agreement recited that Pelican wished to retain Mr. Pyke to assist Pelican in the smooth transfer of customers on the customer list already referred to on to Pelican's system of business and thereafter to help Pelican retain their goodwill and custom. Clause 2 set out the services to be provided by the consultant Mr. Pyke. Clause 3 provided for payment to Mr. Pyke of 25% of the Rebate received by Pelican during the period of the consultancy agreement (from 14th April 2003 to 13th April 2006). Mr. Newson stated that he and Mr. Pyke received some £12,000 each as payment pursuant to their consultancy agreements.
48. In re-examination, Mr. Newson stated, in relation to the membership side of the business run by UK that there would have been other buying groups interested in taking over that business and the liquidator could have received payment in respect of the same.
49. Affinity was placed in creditors' voluntary liquidation on the 14th October 2003. The report to creditors in accordance with section 98 of the Insolvency Act 1986 stated that the nature of Affinity's business was a buying company for the licensed trade.
50. Before considering the main claims against Mr. Newson, Mr. Pyke and Affinity, it is appropriate to deal with one relatively small claim against Affinity only, which does not appear to be disputed. Paragraph 13A of the Amended Particulars of Claim pleads that on or before 5th February 2002, Affinity received the sum of £18,909.87 from Carlsberg-Tetley as commission arising under the Carlsberg contract of January 2000 and in respect of the period from 9th December 2001 to 5th January 2002. It is pleaded that Affinity was liable to account for that amount to UK under the agreement of 22nd February 2001. Affinity did not appear at the trial and no amended Defence was filed in response to paragraph 13A of the amended Particulars of Claim. Further, in a letter from Pictons, solicitors for Affinity, of 7th March 2003, Pictons stated that Affinity did not dispute it had an obligation to account under clause 6 of the agreement of 22nd February 2001 until the expiry of the Carlsberg-Tetley contract. In a further letter of 24th April 2003, Pictons admitted receipt of the sum of £18,909.87 in respect of the period up to 5th January 2002. In these circumstances, I find that Affinity is liable to account for this figure to the Claimant. Although there are references in the documents to Affinity having a cross-claim which might be set off against this figure, no evidence was led on behalf of Affinity which would enable me to find that they are entitled to monies on such a cross-claim.
51. It should be noted that the commission of £18,909.87 due from Affinity to UK is not claimed against Mr. Newson and Mr. Pyke.
52. I now turn to consider the principal claim in these proceedings which is made against Mr. Newson and Mr. Pyke. I will leave the position of the separate claim against Affinity until later. UK pleads that at the meeting of 14th December 2001 attended by Mr. Newson and Mr. Pyke as directors of Affinity and by representatives of Carlsberg-Tetley, it was agreed that Affinity would replace UK in 2002 so that Affinity using certain information previously available to UK would conduct the business formerly conducted by UK and, in particular, would acquire beneficially the commission payments from Carlsberg-Tetley that it had previously received as agent, for UK. It is said that this new arrangement commenced on or about the 6th January 2002. It is further alleged that in making the new arrangements with Carlsberg-Tetley, Mr. Newson and Mr. Pyke personally exploited the benefit of the Carlsberg contract dated January 2000 and/or certain information which was the property of UK and, further, that in so doing there was a real sensible possibility of a conflict between the interests of UK and in particular its creditors and the personal interests of Mr. Newson and Mr. Pyke in that the best interests of UK were in maximising the value of its estate and business while the personal interests of the Defendants were in obtaining the benefit of the relationship with Carlsberg-Tetley for Affinity. Mr. Newson and Mr. Pyke deny that they acted in breach of their fiduciary duties.
53. There was no real dispute at the trial as to the nature of the fiduciary duties owed by a director to his company. It is convenient to describe the nature of those fiduciary duties in two ways, the first of which can be shortly described as a duty not to profit from a fiduciary position and the second can be described as a duty to avoid conflict between a fiduciary position and a personal position.
54. In relation to the first of these categories, the duty of a director is as follows. A director of a company, owing fiduciary obligations to the company, is not entitled to retain a profit which he has made, without the informed consent of the company, where the profit is made directly or indirectly from the use of the property of the company or is made in the course of the fiduciary relationship and by reason of the fiduciary position. This is so whether the fiduciary acted in good or bad faith, whether or not the making of the profit involved skill and risk taking on his part, even though the profit could not or would not have been obtained by the company itself and even though the company had not been prejudiced by, and might even have benefited from, the transaction entered into by the director.
55. The second category of case focusing on conflicts of interest, is allied to but is separate from the profit rule referred to above. A director, as a fiduciary, must not without the authority of the company, place himself in a position where his personal interests (or indeed his interest in another fiduciary capacity owed to another company) conflict or possibly may conflict with his fiduciary duty to protect the company. If he is in a position where his interests conflict with those of the company, he is obliged to prefer the interests of the company. There must be a real, sensible possibility of conflict. If, in breach of this duty, he enters into a transaction or other engagement on his own account, thereby preferring his own interest to that of the company, he is not permitted to retain the profit, to the extent that it is made within the scope and ambit of the duty which conflicts or may conflict with his personal interests (or his interests in another fiduciary capacity). It is not because he has made a profit from trust property or a profit from his fiduciary position that the director is liable under the conflict rule. Rather, it is because, being in a fiduciary position, he has entered into a transaction, inconsistent with his fiduciary duty of loyalty to the company, which has yielded the profit and he has thereby misused his position. The opportunity to make the profit may not arise from the director's fiduciary position; he might just as well as have had the opportunity if he had not been in that position but even so his liability in respect of the profit arises because of the conflict of interest. In many cases, where the conflict rule applies, the director will also have taken advantage of the property of the company or of his fiduciary position but this will not always be so.
56. I derive the above propositions of law from Keech v. Sandford (1726) Cas temp King 61, Regal (Hastings) Ltd. v. Gulliver [1967] 2 AC 134n, Boardman v. Phipps [1967] 2 AC 46, CMS Dolphin Ltd v. Simonet [2001] 2 BCLC 704 and Bhullar v. Bhullar [2003] 2 BCLC 241.
57. It may be relevant in the present case to know the period of time during which Mr. Newson and Mr. Pyke remained in a fiduciary position vis-à-vis UK. Whilst they remained directors of UK they owed fiduciary obligations to that company. Accordingly, the conflict of interest rules described above would apply throughout that period. When they ceased to be directors of UK, then prima facie the conflict of interest rules would cease to apply to their conduct: see A-G v. Blake [1998] Ch 439 at 453 and the Simonet case at [95]. The position is less straightforward in relation to the rules described above as to profiting from the property of the company or from a fiduciary position. If Mr. Newson and Mr. Pyke acquired property or had available to them the use of property, which was the property of the company and then Mr. Newson and Mr. Pyke ceased to be directors of the company but retained the property described above then it would seem that the mere fact that they had ceased to be directors of the company would not enable them to deal With the company's property for their own benefit and in disregard of the fiduciary obligations they owed the company in relation to that property: see the Simonet case at [96]. Accordingly, there will be cases where directors who have effectively resigned their directorships will continue to owe fiduciary obligations to the company in relation to the company's property retained by the directors. There is also a group of cases dealing with what has been described as a "maturing business opportunity" where former directors have continued to owe fiduciary obligations to the company in relation to such a business opportunity even after the termination of the relevant directorships: see the decision of the Supreme Court of Canada in Canadian Aero Services Ltd v. O'Malley (1973) 40 DLR (3d) 371 and the Simonet case.
58. In the present case, Mr. Newson and Mr. Pyke contend that they ceased to be directors of UK upon the service by them on UK of the letters of resignation dated 12th December 2001. As described earlier in this judgment, those letters were served (I leave open the question of the person upon whom they were served) on the 13th or 14th December 2001. UK contends that those letters dealt with Mr. Newson's and Mr. Pyke's directorships in Gold but had no effect whatever in relation to their directorships in UK, which directorships therefore continued to exist. Before discussing these contentions further, I should record that Mr. Newson and Mr. Pyke relied exclusively upon the letters of resignation for the purpose of bringing about a determination of their directorships. They did not rely upon any later communication from them to UK so as to effect a termination of the directorships. They did not rely upon any estoppel preventing UK from contending for the invalidity of the letters of resignation in relation to UK. Further, Mr. Newson and Mr. Pyke did not contend that there was any course of dealing between themselves and UK which brought about the termination of their directorships otherwise than pursuant to the unilateral letters of resignation referred to above.
59. I have set out the full text of one of the letters of resignation at paragraph 30 above. It is accepted by the parties that Mr. Newson and Mr. Pyke were able to resign from their directorships in Gold and in UK by giving an appropriate letter of resignation to the relevant company. It is reasonably simple to conclude that the letters of resignation were effective to resign the relevant directorships in Gold. This is because the letters are addressed to the board of directors of Gold. The issue between the parties therefore is whether the letters of resignation were also effective to terminate the directorships of UK in addition to Gold.
60. Starting with the contents of the letters and leaving matters of background on one side for the moment, there is next to no indication in the letters themselves of an intention to resign directorships in UK in addition to the directorships in Gold. The first named addressee specifically applies to Gold only. The second named addressee refers to "the board of directors" and does not name any company but the second named addressee would naturally be taken to be a reference to the board of directors of Gold. Each letter of resignation refers to a directorship, in the singular. Each letter of resignation refers to a company, in the singular. The second paragraph of the letter of resignation deals with a service agreement with the company and the relevant party to the service agreement was Gold and not UK. The letters appeared to have been carefully considered after taking legal advice (as there is a reference to the legal concept of "repudiatory breach"). The only part of the letter of resignation which might be said to refer to a company other than Gold is the reference at the end of the first paragraph to additional funding "to the company" to enable "it to continue to trade". On the face of the letters, that may raise a question as to the relevant background as to which company was the trading entity. If one admits that background, one would know that UK was the trading entity and Gold was the holding company. However, I regard that point taken on its own as having only slight weight as there is no difficulty in understanding the letters as referring to funding to the holding company to enable the holding company to continue to trade through its subsidiaries.
61. I next consider any relevant background which might assist in the interpretation of the letters of resignation. Prominent in the background is the fact that there was a number of relevant companies. Gold was the holding company of UK but was also the holding company of other companies in the group. It was not clearly established at the hearing whether Mr. Newson and Mr. Pyke were directors of any of these companies other than Gold and UK. A further part of the background is that earlier legal documents had distinguished between Gold and UK. The service agreements were with Gold. The assignment of the goodwill by Affinity on the 22nd February 2001 was in favour of UK. I also refer to the fact that when Pictons drafted an agreement for Affinity on the 3rd and 4th December 2001, they referred in that agreement both to Gold and UK. I do not however use this draft agreement as an aid to the interpretation of the letters of resignation as the evidence is that this draft agreement, although it was shown to UK, this only occurred after the liquidation and therefore after the letters of resignation.
62. There are certainly indications in other documents of some confusion as to the precise names of the different companies. It might be said that the picture was not one of confusion but of a general relaxed attitude whereby a phrase such as "Quarter Master Gold" might extend beyond Gold to other companies in the Quarter Master group. Documents which indicate a very relaxed attitude as to the use of names are the various minutes of board meetings of 6th June 2001, 30th July 2001, 28th August 2001, 3rd October 2001 and 16th October 2001. The letter of 8th June 2001 written by Mr. Pyke refers to "Quarter Master Gold Limited" when it may be it would have been more appropriate for it to refer to "Quarter Master UK Limited".
63. In the period immediately prior to service of the letters of resignation there were some further communications to which it is relevant to refer. The agenda for the meeting on 10th December 2001 refers to "Quarter Master Gold Limited" but the agenda was on headed notepaper which referred to "Quarter Master UK Limited" and used a logo with the words "Quarter Master Gold". Significantly, early in the day on the 12th December 2001, an urgent memo was sent to all directors of "Quarter Master Gold Limited". The draft resolution set out in that letter read as follows:
That Quarter Master Gold Limited encompassing ALFT Limited, Quarter Master UK Limited, Multipleleisure Limited, and Kegs & Co. Limited are put into creditors voluntary liquidation as from Wednesday 12th December 2001 ...
This resolution indicates that "Quarter Master Gold Limited" "encompasses" the subsidiary company but, perhaps more tellingly, the resolution identifies the separate existence of the holding company and the subsidiary companies.
64. Although there was evidence at the trial as to what Mr. Newson and Mr. Pyke believed they were doing when they sent the letters of resignation and there was some examination of Mr. Crosthwaite, the chairman, as to what he thought when he received the letters of resignation, ultimately both parties accepted that the test was not a subjective one as to the state of mind of the sender of the letters nor of the recipient of the letters but was an objective one. Both parties agreed that the relevant principles to be applied were set out in the majority decision of the House of Lords in Mannai Investment Co. Limited v. Eagle Star Life Assurance Co. Ltd [1997] AC 749. That authority establishes that the test is, indeed, an objective one. The test approved by the majority involved asking the question whether a reasonable recipient of the letter or notice would be left in no reasonable doubt as to the meaning of the letter or notice and how and when it was intended to operate. The authority also establishes that one does not read the relevant document without regard to the "relevant objective contextual scene": see per Lord Steyn at page 767G. In argument, my attention was drawn to the examples given by Lord Hoffmann, in particular, as to types of mistake that can be made where the recipient of a notice would not in the end be misled by the mistake and would understand what was intended.
65. I was also referred to the more recent decision in Lay v. Ackerman [2004] EWCA Civ 184 as this was an example of the Mannai approach being applied where there was a suggested mistake in relation to a name (rather than a mistake as to date as in Mannai itself). Further, Lay v. Ackerman is an example of a case where the mistake in the name did not invalidate the relevant notice. At paragraph 40 of his judgment, Neuberger LJ said:
The correct approach on the basis of the decision and reasoning in Mannai is as follows. One must first consider whether there was a mistake in the information contained in the notice (as there was as to the date in Mannai and there was as to the landlord, in the present case). If there was such a mistake, one must then consider how, in the light of the mistake, a reasonable person in the position of the recipient would have understood the notice in the circumstances of the particular case. Finally one must consider whether, as a result, the notice would have been understood as conveying the information required by the contractual, statutory or common law provision pursuant to which it was served.
It seems to me that the first question as to whether there was a mistake in the information contained in the notice is to be judged objectively rather than subjectively. This is in accordance with the general approach in Mannai and, indeed, the approach adopted by both members of the Court of Appeal in Lay v. Ackerman itself. In Lay v. Ackerman, Neuberger LJ considered at paragraphs 60-62 an earlier decision of the Court of Appeal in Lemmerbell Limited v. Britannia LAS Direct Limited [1998] 3 EGLR 67. This discussion included a reference to the judgment of Peter Gibson LJ in that case at page 71L, where he held that the notice was invalid because it was not obvious from the notice that there was an error as to the name in question.
66. I will now seek to apply the approach laid down in Mannai to the facts of this case. If there had been no such company called "Quarter Master Gold Limited", that would affect the approach to be adopted. If Mr. Newson and Mr. Pyke were not directors of Gold, that would again be a highly relevant matter. If the letters of resignation were wholly ineffective if one read them as referring to Gold only, that again would be material. However, it is a most important consideration in the present case that the letters of resignation were effective in relation to Gold. That immediately distinguishes this case from the decisions in Mannai and in Lay v. Ackerman where the Courts held that notices containing mistakes were nonetheless valid (the alternative being that they were of no effect at all).
67. Counsel for Mr. Newson and Mr. Pyke argued with force that there was no discernible commercial purpose. in a resignation from Gold without a resignation from UK. Further it was argued that the background included the fact that there was either confusion as to the use of the company name or, possibly, there was an acceptance that a phrase like "Quarter Master Gold" would describe the holding company and the subsidiary companies.
68. In my view, the letters of resignation were not effective to terminate the directorship of Mr. Newson and Mr. Pyke in UK. On the true construction of the notices (the detailed provisions of which are discussed above) and against the relevant contextual background (which I have described above), it does not seem to me that it would have been adequately clear to a recipient that there was a mistake in the information contained in the notice. Further, a reasonable recipient who read the letters and knew the contextual scene would either think that the letters were absolutely clear and were confined to Gold alone or might be left in real and reasonable doubt as to whether Mr. Newson and Mr. Pyke intended to resign from Gold alone or possibly from other companies as well. I do not however think that a reasonable recipient would be left in no reasonable doubt that the letters were intended to terminate the directorships of UK. Accordingly, the letters of resignation did not bring to an end Mr. Newson's and Mr. Pyke's directorships of UK which continued on and after the 14th December 2001.
69. I can now consider whether Mr. Newson and Mr. Pyke acted in breach of their fiduciary duties to UK when they made arrangements with Mr. White of Carlsberg-Tetley at the meeting on 14th December 2001 and or continued or finned up those arrangements in January 2002. As to the meeting on 14th December 2001, I have already described what transpired at that meeting. I essentially accept the evidence of Mr. White, of Mr. Newson and Mr. Pyke as to what was arranged at the meeting. Although Carlsberg-Tetley were subject to an existing contract with Affinity which Affinity held for the benefit of UK and though it is possible that all that needed to be said at the meeting was that Affinity would continue to act as agent for UK until the end of the contract in early January 2002, it seems to me that the meeting of 14th December 2001 contemplated that Affinity would take over for its own benefit the arrangements with Carlsberg-Tetley more or less straight away. If that was not intended, the position was allowed to be very ambiguous. In the event, it does not really matter whether, in the period from 14th December 2001 to early January 2002, Affinity acted properly as the agent of UK, as the only claim made by UK in relation to that period is for £18,909.87, to which I have referred above, and no claim in relation to that period is made against Mr. Newson and Mr. Pyke personally. What was contemplated on the 14th December 2001 was that if the arrangements from that day to early January 2002 were satisfactory then Affinity would from January 2002 take over the arrangements with Carlsberg-Tetley but this time clearly for its benefit not for the benefit of UK. That is what was confirmed in the event in early January 2002.
70. I have earlier described the conflict of interest rule. On the 14th December 2001, there was a clear conflict of interest between Mr. Newson and Mr. Pyke as directors of UK and Mr. Newson and Mr. Pyke as directors of Affinity. Mr Newson stated in his re-examination that there would have been other buying groups who would have been interested in taking over the membership side of the business and the liquidator of UK could have received payment in respect of the same. By January 2002, pursuant to the arrangements made with Carlsberg-Tetley, Affinity was running the business that was previously run by UK but without any payment being made to UK. Further, the ability to sell the information and goodwill of UK in relation to the Carlsberg Tetley contract is shown by the terms of the arrangements which Affinity later made with Pelican. I do not overlook the evidence given by Mr White to which I referred in paragraph 37 above, that Carlsberg-Tetley would not have renewed the contract with UK but, first, UK could have tried to obtain some benefit from the information and goodwill it had in relation to the Carlsberg-Tetley contract and, secondly, in any event, the very strict principles which apply in this area to identify a conflict of interest apply even where the company would not itself be able to take advantage of the opportunity: see Keech v. Sandford and Regal (Hastings) Ltd v. Gulliver. It seems clear that the strictness of the rule is based on public policy. If it is said that the rule is unrealistically strict, it must be remembered that a director can free himself from the obligation to account by obtaining the informed consent of the company. Mr. Newson and Mr. Pyke did not inform UK of the discussions with Carlsberg-Tetley on the 14th December 2001 or the later discussions in January 2002. Mr. Newson and Mr. Pyke did not obtain the informed consent of UK to the arrangements made by them on behalf of Affinity. In my judgment, Mr. Newson and Mr. Pyke infringed the conflict of interest rule in making the new arrangements between Affinity and Carlsberg-Tetley.
71. I will also consider whether Mr. Newson and Mr. Pyke made use of the property of UK or made use of their fiduciary position with UK in order to benefit Affinity in relation to the new arrangements with Carlsberg-Tetley. Mr. Newson and Mr. Pyke had available, through their control of Affinity, UK's database containing useful information which would help Affinity to persuade Carlsberg-Tetley to make the new arrangements with Affinity either from 14th December 2001 or from early January 2002. There was also goodwill arising out of the funds transfer business that had been conducted with Carlsberg-Tetley and that goodwill belonged to UK by reason of the assignment of goodwill on the 22nd February 2001. In my judgment, Mr. Newson and Mr. Pyke through their control of Affinity made use of the property of UK in that they made use of the information of UK and made use of the goodwill of UK in making the new arrangements with Carlsberg-Tetley. I do not regard this as a case where Mr Newson and Mr Pyke confined themselves to the use of their general fund of knowledge and expertise as was the case in Island Export Finance Ltd v. Umunna [1986] BCLC 460. In view of the fact that Affinity took on staff formerly employed by UK and those staff were "in the field" making contact with the ultimate customers, it seems to me that from early January 2002, Affinity not only carried on a funds transfer business but also carried on a group buying business interposed between the ultimate customer and Carlsberg-Tetley. It may be that the group buying business and the degree of active selling carried on by Affinity was not as intense as that carried on by UK in the period from February 2001 to December 2001 but, in my judgment, from January 2002 Affinity did not restrict itself to a funds transfer business in relation to the contract with Carlsberg-Tetley. Although the evidence was less clear, it is possible that Affinity did confine itself to a funds transfer business in the period from 14th December 2001 to early January 2002.
72. In these circumstances, Mr. Newson and Mr. Pyke did act in breach of their fiduciary duties to UK in that they used the property of UK for the advantage of Affinity, controlled by them. Further, even if Mr. Newson and Mr. Pyke had resigned as directors of UK on the 13th or 14th December 2001 and even though such a resignation was before the meeting with Mr. White on the 14th December 2001, I would still hold Mr. Newson and Mr. Pyke to be liable for the misuse of the property of UK (in the form of the information belonging to that company and the goodwill of that company) which they were able to divert for the benefit of Affinity, having access to that information by reason of their earlier fiduciary position. If that is the right analysis it is not necessary to consider the authorities dealing with the maturing business opportunity type of case although I will briefly comment on them and deal briefly with the difficult question as-to the reason why Mr Newson and Mr Pyke sought to resign their directorships in UK.
73. It is not absolutely clear whether liability only attaches in a case of a maturing business opportunity where the former director resigns with the motive of taking advantage of the maturing business opportunity for himself or for another company controlled by him. Possibly such a motive is required where the director did not, before the resignation, act in breach of duty (e.g. by preferring his own interests to those of the company before the resignation as in Industrial Development Consultants Ltd v. Cooley [1972] 1 WLR 442) and does not, after the resignation, use pre-existing property of the company which remains impressed with a fiduciary obligation to the company.
74. I have already held that Mr. Newson and Mr. Pyke did not effectively resign as directors of UK. If I had held that they had effectively resigned before they came to the new arrangements with Carlsberg-Tetley and if it then became necessary for me to determine whether they resigned with the motive of taking advantage of the business opportunity of making a new arrangement with Carlsberg-Tetley for the benefit of Affinity, I find that a difficult question to answer. It is strictly unnecessary for me to answer it. Notwithstanding the difficulty involved, in case it will be of assistance to the parties, I will express my conclusions. The circumstantial evidence and the involvement of Mr. Newson and Mr. Pyke with Mr. Talbot of Pictons as early as the 3rd December 2001 makes it inherently likely that a large part, if not all, of the motivation of Mr. Newson and Mr. Pyke in resigning their directorships was to, as they thought, free themselves from their fiduciary obligations as directors to enable them to take advantage of the possibility of making a new arrangement with Carlsberg-Tetley. As against that, however, I accept their evidence that they did not make contact with Mr. White of Carlsberg-Tetley before the 12th December 2001 and the contact that was made on that date was at the initiative of Mr. White rather than at the initiative of Mr. Newson and Mr. Pyke. Further, it was not until the 14th December 2001 (that is after Mr. Newson and Mr. Pyke thought they had resigned from UK) that the new arrangements between Affinity and Carlsberg-Tetley were discussed. I accept Mr. Newson's and Mr. Pyke's evidence that they had not expected Carlsberg-Tetley to offer to enter into new arrangements for the benefit of Affinity before the meeting of the 14th December 2001. There was also evidence that was not challenged that Mr. Newson and Mr. Pyke turned down approaches from other suppliers who had been involved with UK although the suggested distinction between those cases and the case of Carlsberg-Tetley was not particularly convincing. Mr. Newson and Mr. Pyke gave evidence as to their motives for wanting to resign as directors of Quarter Master UK. It is clear that they both felt badly let down by other shareholders in Gold and they were very disappointed by the failure of Gold in the comparatively short period from February 2001 to December 2001. They said they did not wish to be tarnished by the liquidation of the Quarter Master companies. Whether they would have avoided such tarnish by reason of such a late resignation as directors, I doubt but that was an important part of their reasoning as explained to me for wanting to resign as directors. After considerable hesitation on this point, I reach the finding that UK has not established on the balance of probabilities that Mr. Newson and Mr. Pyke resigned on or about the 12th December 2001 (or purported to resign as I have held) with the motive of diverting to themselves or to Affinity, controlled by them, the benefit of future arrangements with Carlsberg-Tetley. However, I emphasise that this discussion as to motive is not material to the result of this action, not least because I have held that Mr. Newson and Mr. Pyke did not effectively resign as directors of UK.
75. It is common ground that if Mr. Newson and Mr. Pyke were in breach of their fiduciary duties to Quarter Master UK, as I hold, then they are liable to account for the profits made as a result of that breach of fiduciary duty. It is also common ground that they are liable to account not only for personal profits made by them but also for profits made by Affinity on the basis that they effectively diverted the profits to that company: see the Simonet case. Accordingly, I direct an account of the profits properly claimable from Mr. Newson and Mr. Pyke being their personal profits and the profits made by Affinity by reason of the breaches of fiduciary duty. I will not attempt to identify the sums which it will be payable upon the taking of such an account but it may be helpful to indicate how matters appear at present on the evidence at the trial. Affinity earned commissions from Carlsberg-Tetley and also received a capital sum from Pelican pursuant to the agreement with Pelican on the 14th April 2003. In so far as those payments were attributable to the arrangements made with Carlsberg-Tetley in December 2001/January 2002, then the profit element in those payments is to be determined on the taking of an account. Mr. Newson and Mr. Pyke made personal gains in that they received payments from Affinity and payments for consultancy services provided to Pelican. Again, insofar as the profit element of those payments is derived from the arrangements made with Carlsberg-Tetley in December 2001/January 2002, they are to be determined on the taking of an account.
76. I will next consider whether Mr Newson and Mr Pyke should be allowed a sum to reflect their efforts in earning the profits which are identified on the taking of such an account. In this context I have considered the judgments of Wilberforce J and of the Court of Appeal in Phipps v. Boardman [1964] 1 WLR 993 and [1965] Ch 992 and the decision of the House of Lords reported as Boardman v. Phipps [1967] 2 AC 46. Since that decision the question of an allowance in the case of a director of a company has been considered by the House of Lords in Guinness plc v. Saunders [1990] 2 AC 663. A suggested distinction between the facts of that case and Boardman v Phipps was put forward in the argument of counsel at pages 679-680. If that distinction had been adopted by the House of Lords, it may have been easier in the present case before me to distinguish the Guinness case and provide for a fair allowance for Mr Newson and Mr Pyke. However, counsel's distinction does not appear to accord with the views of Lord Templeman and Lord Goff, in particular. I have also considered the different approach which is adopted in Australia: see Warman International Ltd v. Dwyer [1994-1995] 182 CLR 544 and the criticisms of the Guinness case in Goff and Jones, The Law of Restitution (6th ed.) at paragraph 33-018. Finally, I have noted the comments in the recent case of Crown Dilmun v. Sutton [2004] 1 BCLC 468 at [211] - [213].
77. In my judgment, the right course for me to adopt on this question of a possible fair allowance for the efforts of Mr. Newson and Mr. Pyke in earning the profits that will now be payable to UK is to apply the approach of Lord Goff set out in the Guinness case at page 701 D-E, to the effect that the exercise of this jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees (or directors) in any way to put themselves in a position where their interests conflict with their duties as trustees (or directors). Applying that approach, I hold on the facts of the present case that the fundamental principle should prevail that a director is not to benefit from his breach of fiduciary duty and that no allowance is to be made. I also bear in mind that this is not an "exceptional" case; the mere fact that UK would not itself have otherwise received all of the benefits from the Carlsberg-Tetley contract does not, so far as reported cases go, make this case anything out of the ordinary. Further, this is not a case where the directors demonstrated any special skills or took unusual risks.
78. Mr. Newson and Mr. Pyke point to the fact that they did not receive their salaries for some months in 2001 and ask for the amounts due to them to be set off against their liability to UK. The short answer to that point is that the -salaries are due from Gold and not from UK and, accordingly, there is no right of setoff.
79. As Affinity is now in liquidation, I can deal with this shortly. The claim is not put on the basis that one can lift the veil of incorporation and treat Affinity as the same as Mr. Newson and Mr. Pyke. The claim is based upon Affinity's "participation" in the matters which have led to Mr. Newson and Mr. Pyke being in breach of fiduciary duty. Alternatively, it is said that Affinity was in receipt of the proceeds of the breach of fiduciary duty in circumstances where it is now unconscionable for it not to pay over those proceeds to UK: see BCCI (Overseas) Ltd v. Akindele [2001] Ch 437. In relation to the second way of putting the claim, the knowledge of Mr. Newson and Mr. Pyke as directors of Affinity is to be imputed to Affinity. Mr. Newson and Mr. Pyke knew all the facts which gave rise to their breaches of fiduciary duty. In those circumstances, it is in my judgment unconscionable for Affinity not to be liable to pay over to UK the sums it received. In the Simonet case, Lawrence Collins J at [103] - [104] seemed to prefer an analysis which held the director's other company liable on the basis that the other company participated in the director's breach of fiduciary duty. I have more hesitation in adopting this analysis as the basis of liability for Affinity (at any rate without considering whether Affinity was dishonest in accordance with the approach in Royal Brunei Airlines v. Tan [1995] 2 AC 378) but on the understanding that the claim against Affinity is restricted to the profits received by Affinity, I need not consider this analysis further as I have already held Affinity liable to account for the profits received by it as a result of the breaches of fiduciary duty in December 2001 / January 2002.
80. Mr Pyke and Mr Newson are liable to account for the profits made by themselves and by Affinity arising out of the arrangements made with Carlsberg-Tetley in December 2001 and January 2002. Mr Pyke and Mr Newson are not entitled to receive an allowance for their efforts in earning those profits. Affinity is liable to account for the profits received by it and arising out of the arrangements made with Carlsberg-Tetley in December 2001 and January 2002. Affinity is also liable to account for the sum of £18,909.87.