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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> City of London Group Plc & Anor v Lothbury Financial Services Ltd & Ors  EWHC 3148 (Ch) (08 November 2012)
Cite as:  EWHC 3148 (Ch)
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Fetter Lane, London, EC4A 1NL
B e f o r e :
| (1) CITY OF LONDON GROUP PLC
(2) CITY OF LONDON PUBLIC RELATIONS LIMITED
|- and -
|(1) LOTHBURY FINANCIAL SERVICES LIMITED
(2) MICHAEL PADLEY
(3) ELIZABETH MOSS
(4) SIMON ASTLEY
(5) PETER PHILIP WOOD
(6) JOHN GARY MIDDLETON
Rupert Higgins (instructed by Ronaldsons LLP, solicitors) for the 1st, 2nd, 4th and 6th Defendants
Hearing dates: 19,20,23,24,25,26 and 27 July 2012
Crown Copyright ©
Mrs Justice Proudman : The claim
- Declarations that the business and assets of LFS are held on a constructive trust for CoLPR.
- An account (and subsequent payment) of equitable compensation for breach of fiduciary duty, framed against the second defendant as a director, against the third defendant as an employee, against the fourth defendant as a de facto director and against the sixth defendant as a consultant or employee.
- Damages for conspiracy.
- Damages for conversion/money had and received.
- An injunction to restrain passing off by LFS.
The claimants' case on the facts
"prepared to wait for these [stipulated] cash flows to materialise and that it is not our current intention of enforcing the debt...
...Similarly we are prepared to appoint [LF] as our PR adviser and offset reasonable fees against the outstanding debt."
"Subject: We don't need new furniture
Cos we have desks: AO, Peter, the one opposite Peter, Myo's, the one opposite Myo's, Spriggs/Price desk, that is 6 and there are 6 of us. We take the following: [there follows a list of items of furniture and other office chattels].
We close down [LF] on a Friday and move everything out on Saturday to new premises. CoLG come in on Monday to find the office empty...
We also have to get Graham away from doing our accounting stuff, cos he can't have access to Padley's accounts. We have to get back ups of all the accounting stuff he has done for Padley.
I can do the basic stuff, we hire Heather Parker for 4 hours per week to make sure I have done things correctly and she runs the payroll.
If we do become LFS then we have to get the clients to change contracts to LFS cos we have shitload of trouble with some clients when we went from Bankside to LF and they did not recognise that we took them and they were our clients..."
"The server is now backing up everything onto the hard disk I will double check that this has been completed successfully in the morning and email you to remove the hard disk and store it nice and safe in your hand bag. This backup will contain everything that you could possible need from that server."
The defendants' case
"the more I look at the situation it seems the obvious route but I need to know the effect on me, the team and the business."
Again, in an email to Mr Taylor a week later he said,"
'I have done nothing so far. My accountant is back from hols next week and with your advice she can then structure newco.
Once that is in place we speak to CoL and the bank. I would like your advice so that everything is done correctly."
Mr Taylor replied,
"Let me know when you are ready to liquidate, if CoL reject offer."
"the luxury to choose to stay with individual consultants is not usually one afforded to clients. It is standard practice within our business for individuals to be under restrictive covenants in their contracts of employment preventing them from taking clients with them when they leave or for working with them again for a specified period of time. ...In my experience of the industry, such covenants are usually strictly adhered to because, if they were not, it would be impossible for businesses within our industry to properly function. I am personally restricted, for example, from working with my former clients at Hansard [Hansard Communications, accompany with which the second defendant worked in a joint venture and in which Mr Reynolds worked until January 2012] for a period of 3 years following the sale of my business earlier this year.'"
"For the avoidance of doubt, the phrasing at paragraphs 16 and 19 [of the Particulars of Claim is in each occasion intended to refer to the business, affairs and any assets of the Company [LF] in its fullest possible sense and construction."
"... a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence...
The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he may not place himself in a position where his duty and interest may conflict; he may not act for his own benefit or for a third party without the informed consent of his principal."
"To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level."
"The court takes into account all the relevant factors. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title. Whether the individual had proper information (e.g. management accounts) on which to base decisions, and whether the individual had to make major decisions and so on.
Taking all these factors into account, one asks, 'was this individual part of the corporate governing structure', answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question... There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or in law. "
"I do not understand Jacob J... to be enumerating tests which must all be satisfied if de facto directorship is to be established.
He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director. "
"It is possible to obtain some guidance by looking at the purpose of the section. As Millett J said in the Hydrodam case, the liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. As he put it, those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities of the office. So one must look at what the person actually did to see whether he assumed those responsibilities in relation to the subject company."
"and the claimants have to prove that he assumed a role in the company sufficient to impose on him a fiduciary duty to the company and to make him responsible for the misuse of its assets."
Conversion/money had and received
Ultraframe (UK) Limited v. Fielding and Ors  EWHC 1638 (Ch)
"i) The fundamental rule is that a fiduciary must not make an unauthorised profit out of his fiduciary position;
ii) The fashioning of an account should not be allowed to operate as the unjust enrichment of the claimant;
iii) The profits for which an account is ordered must bear a reasonable relationship to the breach of duty proved;
iv) It is important to establish exactly what has been acquired;
v) Subject to that, the fashioning of the account depends on the facts. In some cases it will be appropriate to order an account limited in time; or limited to profits derived from particular assets or particular customers; or to order an account of all the profits of a business subject to all just allowances for the fiduciary's skill, labour and assumption of business risk. In some cases it may be appropriate to order the making of a payment representing the capital value of the advantage in question, either in place of or in addition to an account of profits."
"...it was of the first importance 'to ascertain precisely what it was that was acquired in consequence of the fiduciary's breach of duty.' Having considered the facts, and in particular the likelihood that the agency contract would have been terminated anyway, the court ordered an account of profits for a period of two years; less an appropriate allowance for expenses, skill, expertise, effort and resources contributed by the defendants."
"It seems to me, therefore, that one of the grounds on which an account may be withheld is that the taking of an account would be a disproportionate response to the gain that appears to have been made, or to the nature of that which has been misused."