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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 >> Youlton v Charles Russell (a firm)  EWHC 1032 (Ch) (13 May 2010)
Cite as:  Lloyd's Rep PN 227,  EWHC 1032 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| DAVID ALFRED YOULTON
|- and -
|CHARLES RUSSELL (a firm)
Ben Hubble QC and Emilie Jones (instructed by Barlow Lyde & Gilbert LLP) for the Defendants
Hearing dates: 8th,9th,10th,11th,14th,15th, and 18th December 2009
Crown Copyright ©
Mr Justice Warren :
The background in brief
a) It was said that Mr Spencer and Professor Snell had no authority to enter into the Apportionment Agreement and Mr Spencer had no authority to enter into the 2002 Side Letter. It was alleged that it was not possible to rely on the usual ostensible authority of a CEO and a director. This was because they in fact had no authority and at the time of the Apportionment Agreement, three of the directors, Professor Youlton, Professor Snell and Mr Lyons, were directors of S&W. Although that position had changed by the time of the 2002 Side Letter, Professor Snell remained a director.
b) The three director Trustees were in breach of their fiduciary duty as there was an obvious conflict of interest. This had not been disclosed to the board of S&W in accordance with its Articles of Association (see Art 85 Table A) and section 317 Companies Act 1986.
c) Apparent acts of confirmation of the agreement (eg participation in the appointment of surveyors under the Apportionment Agreement, provision of information, payment of fees) were ineffective because they were not ratified by the board or the shareholders.
a) A declaration that S&W was bound by the Apportionment Agreement.
b) A declaration that the surveyors were entitled to proceed with their determinations.
c) Payment under the Interim Award.
d) A declaration that the 2002 Side Letter was binding.
e) Specific performance of it, alternatively damages.
The present claims
a) The scope of CR's duty and breach of their duties in 2001 and 2002.
c) Causation and loss.
"I remember going into a separate room at one stage with Wayne Clark and David Youlton and informing David Youlton that he may have a claim against Charles Russell but that I could not advise him or the other Trustees in relation to it. This was on the basis that I would have expected a solicitor to have ensured that the other side had the necessary authority to enter into the transaction. I said that a settlement with the Company would not preclude David Youlton or the Trustees suing Charles Russell."
The relevant facts in more detail
A. Events prior to 8 May 2002
"This [scheme of works] was undertaken by Snell & Wilcox's in-house team of architects and builders. These works were commissioned and paid for by Snell & Wilcox but were, without the knowledge or agreement of the Trustees, subsequently charged in full to the SASS Pension Fund by way of offset to rent and reimbursement. The S&W finance department was managing the SASS's finances until 2002. I only became aware of this in 2001 when I was about to leave the Company and discovered that there was no money in the Pension Fund.……. We also discovered that some work on other properties carried out by Snell & Wilcox had also been wrongly charged to the Trustees. In total some £2.7 million had been charged to the Pension Fund. This came as a huge shock and a serious concern given that the Pension Fund represented the primary source of my future income."
"significant level of adjustment to be made between landlords' responsibilities and tenant fit-out at Southleigh Park (we are taking separate advice on this issue from the company's property surveyor and the company's quantity surveyor…..). When we have established the true level of under-funding we will be in a position to discuss with the company how this shortfall is to be made up."
"Southleigh Park tenant fit out to be settled through use of jointly agreed professionals whose recommendations shall be binding on both parties"
"I have spoken to Andy [Mr Williams] re the side letter on Southleigh Park. As suspected, he has advised that as the issue concerns the value of the fund all the Trustees need to agree to this process taking place. As such, the safest route is to arrange for a Board resolution of the Trustees to allow David [Professor Youlton] to agree the contents of the letter with John Spencer on their behalf rather than signing the letter individually….."
The Apportionment Agreement
"Compromise Agreement – Escrow Arrangements
We refer to the compromise agreement proposed to be entered into on the date hereof between Snell & Wilcox Limited (S&W") and you (the "Agreement"). You and S&W hereby agree that the Agreement and all documents ancillary thereto which may be executed by Snell & Wilcox Limited shall be deemed to be held in escrow, and the Agreement and all such documents and all matters to be effected thereby, shall be conditional on the approval of the Agreement and such documents, and the matter referred to therein, by the board of S&W.
We hereby undertake to seek to procure a meeting of the board of S&W within 7 days of the date of this letter to seek such approval."
" – everything signed - Bd approval. Weds last week
- copies of all signed docs".
i) It referred to the Lease and to the desire of the Trustees to complete the refurbishment of the west wing of the premises (that is to say the main building on the Property). It recorded that the Trustees wished to ensure, before incurring further expenditure on that refurbishment, that S&W would remain as a tenant for a further period after expiry of the Lease.
ii) It was recorded that, in consideration of the Trustees agreeing to vary the terms of the Lease (and conditional on completion of Advent's acquisition of its majority stake) S&W agreed to:
"1. Enter into a deed of variation amending the terms of the Lease as follows:
(b) [S&W] is to be allowed to underlet the whole or appropriate parts of the Premises at an open market rent and without the current restrictions so as to strike a fair balance between the requirements of the tenant but having regard to the landlord's wish to preserve the reversionary value. The parties agree to ask Jeremy Young of Young & Butt to advise.
(c) that the rent review outstanding from 2001 be settled and that the rent review pattern be amended to provide rent reviews in March 2004 and March 2009.
2. Enter into a reversionary lease for a period of seven years from 25 March 2010 in respect of the whole of the Premises……."
Events after May 2002
"confirm our agreement to clear away all the minor issues still outstanding from the Compromise Agreement and indeed the Advent Sale Agreement. We should then only be left with the split of costs between Landlord and Tenant and issues relating to the conversion of the West Wing and completion of the site at Southleigh Park House."
"….As the lease was being negotiated it became apparent that the pension scheme would not be able to charge rent on the renovated West Wing until the next rent review in 2009. In order to deal with this the Scheme Manager had requested a clause be inserted in the lease to allow a review to increase the rent on the West Wing on practical completion of the refurbishment.
As a counter to this the tenant requested the removal of the RPI clause in the rent review and also the removal of the "put" clause in the repairs and maintenance covenant. It was confirmed by the Valuing Surveyor that if the Trustees agreed to this it would be detrimental to the value of Southleigh Park House.
As a result of the above factors it is AGREED that the Scheme Manager should proceed with the completion of the lease extension without pursuing the interim rent review of the West Wing. This would establish the rent for Southleigh Park at March 2005 under the RPI provisions of the old lease at £345,000".
i) It was arguable that the provisions of clause 1(b) of the 2002 Side Letter were too uncertain so as to render it unenforceable. He expressed the view, but only on balance, that such argument ought to fail.
ii) It was not possible to sever clause 1 and 2 so as to uphold part.
iii) S&W did not have the better case of i) but did have the better argument on ii).
iv) Accordingly, the 2002 Side Letter is more than likely to be held to be a valid rather than an invalid contract.
"We are both looking into the abyss of huge legal and other professional costs and a major distraction for those at S&W who are responsible for and focussed on preparing the company for sale and enhancing its profitability…
….Whatever you are being advised by your Lawyers, we have been advised by our lawyers after Counsel's Advice, that there are no substantive legal issues outstanding over which we could not expect to get Judgment.
…We must now put it to bed or see each other in court."
"DY said that he did not think that [S&W] have been financially strong and the latest accounts are not encouraging, although it is understood that the situation is improving. However, the venture capitalists wished to sell the company in 6 to 9 months time and it is therefore in their interests to try and settle this dispute rather than have an unknown liability in the background….".
"... On the apportionment agreement I did not actually consider that there was really any potential problem other than the company law point because on the apportionment agreement that had been - if it were a valid contract there was no other reason to invalidate it. There was this argument about an interim award having been issued and therefore in some way that rendering the surveyors redundant but I did not -- I did not myself consider that had any particular chance of success. So on the apportionment agreement it seemed to me the company law points were the only issue..."
i) S&W would accept its responsibility for repair work to the demised premises.
ii) But in relation to the West Wing, the Trustees would carry out repair works at a cost of about £1 million with contribution from S&W of 50% of the costs capped at £500,000.
iii) The Trustees would undertake landscaping works with a contribution of £50,000 from S&W.
iv) S&W would meet the award made under the Interim Award (£590,000) and a further £330,000 towards overcharging in respect of architects' fees.
v) The rent review would be settled as of March 2007 at £450,000 with subsequent reviews on a 4-yearly basis. And the new lease would run to 2021.
"However, rather than aggressively pursuing performance of the Agreement, DY had attempted to help the Company's cash flow/financial position…
There was delay but only because he was trying to help the Company. DY confirmed that he was having meetings with Simon Derry who was requesting that DY did not pursue the Agreement as the Company had financial difficulties and could not afford to pay as yet…"
i) Mr Clark pointed out that S&W had said that they did not want to be involved in legal arguments; the Mediation would therefore be a commercial settlement. Professor Youlton, however, considered that there was no way an acceptable settlement could be reached without the weight of the legal argument being demonstrated.
ii) Mr Todd took the view that not all of the legal arguments should be rehearsed at the Mediation. It was the main points which should be made. With regard to the authority point, he said that there were lots of arguments each way.
iii) The note records Professor Youlton as confirming
"that the key issue is whether the company has got any money. The company is currently trading profitably but has recently been refinanced. They were paying Advent 13% on loans but he hopes that it has been refinanced through banks at a proper rate. There is also some restructuring going on. We also know that Advent has pulled out of all electronic businesses. In order to help with any settlement, the trustees would need to seek cash up front, but not promises in the future. It is essential that they get money in the pension fund in order to allow them the opportunity to be able to retire. A deal needed to be structured which either [sic] allows an exit before two years time because David Youlton does not think that Snell & Wilcox will be in business then, and they need a lump sum into the fund to allow that trustees to retire."
iv) Professor Youlton is recorded as saying that he would like S&W to buy the building in order to reach a settlement.
i) Mr Todd expressed the view that the case had to settle. The company law points would cause problems because of Professor Youlton's control and lack of documents. There was nothing to show that Mr Spencer had authority to conclude the agreements. The Trustees would also need to establish that the Board knew of Professor Youlton's and Professor Snell's interests under the trusts of the Scheme. These matters were addressed in more detail but I do not need to go into that.
ii) Mr Todd said he had been instructed to advise on the company law aspects of the dispute. The answers would depend on the facts and on what the witnesses say and what documents are disclosed.
iii) In relation to affirmation of the agreements, Mr Todd considered that there were good arguments based on acts of performance of the agreements but the court could find that there were not sufficient acts of affirmation.
iv) Mr Todd considered on balance that the Trustees should win on the company law issues but this was dependent upon proving that either Mr Spencer or Professor Snell had actual authority to execute the Apportionment Agreement or the 2002 Side Letter. Those, of course, were very significant qualifications. He repeated an "on balance" view later in the consultation.
v) In addition, there was a need to establish that the board knew of Professor Youlton's and Professor Snell's interests under the Scheme.
vi) On the affirmation point, Mr Todd considered that the Trustees had good arguments, but it was not as clear cut as Professor Youlton would like to think it was.
vii) Professor Youlton said that the Trustees would walk away from the mediation unless the 2002 Side Letter was implemented with a lease extension to 2017. The problem, he said, was that the company could go broke so the Trustees would want to know what was going to be paid immediately. It is worth quoting from one paragraph of the note:
"MT confirmed that the company could be in a worse state next May as he had seen the last accounts. DY said that they have refinanced. They have changed the direction of the company…… What put S&W into difficulties in the late 90s was when the market turned from analogue to digital and now it is high-definition. The buyer's profile in the industry have changed. S&W is now positioned in the market in a new position and his opinion is that it will struggle and be in trouble very shortly."
viii) Mr Lyon commented that all that is relevant is whether they have any cash at the bank. He considered that the company would come into the Mediation having to fund any settlement through a loan.
"DY said as far as he is concerned, the trial [sic] leads back to Charles Russell, because if they lose, then Charles Russell will get sued. If Charles Russell allowed the document to be signed without the requisite authority, then there will be problems."
"MT confirming that there was obviously a conflict between CR and the trustees. JM had asked who should have satisfied who. MT advised that both sides should have ensured that there was binding authority. We do not know whether this was done in this case. As a firm CR need to look into this….. DY is saying that he is going to ensure that if the trustees go down on the company law points, he will make sure that CR is on the hook……
With regards to tomorrow [the Mediation], it was agreed that there is a conflict in the circumstances which have arisen today, and CR will not be able to advise the trustees if it is in their interests to settle. Any advice in relation to settling will need to be left to WC and MT. It will be down as far as they are concerned to a financial matter not a legal matter."
The 2008 Note and the written notes
"….It was clear that through the 90s, the company grew the sales, but in doing so, the costs and the debt levels significantly grew. 5 or 6 years ago, when the Apportionment Agreement was entered into, Snell & Wilcox were bleeding badly. The deal with Advent was about saving the company. PF joined the company 3 years ago, when it was still struggling. In the last 2 years, the sales of the company have again grown. However, because of the debt, they are still trading with losses. At the end of March 2007, there was £20m losses. The company has, over a period of a decade, gone in and out of cash crises…. They have secured some additional funding by refinancing, which is not quite complete. They need to trade with adequate headroom for the next 12 months…. In context, the level of claim being put to the company is simply not able to be met by the company, which is severely limited in its capacity…."
"(a) They want to park them
(b) The are not taking a point on the lease
(c) They agree the "put and keep""
"£250,000 is sufficient for the pension lump sums. They [the Trustees] will also require the balance of the arrears [a reference to rent] to be paid. In terms of figures, JM confirmed that this was £263,278 with interest at £158,000. This makes £421,858….If you add £250,000 to this, this makes £671,859. So DY confirmed we are £400,000 adrift from where we want to be. JM indicated that on their calculations, if you are taking the apportionment agreement through and getting a final award, it should be approximately £2.7m.
DY said that provisionally they had said that they would settle for £1m, but as a minimum, they would settle for (a) £1m (b) Lease extension (c) Rent at £450,000"
"BR reported that they are apparently £20 million in debt. DY said that apparently in five years, they have taken the debt from £17 million to £20 million, despite having downsized. BR reported that they have taken huge hits from the US. These are big loss figures. There is a net current debt of £11 million. There is a long term £2.5 million figure and £9 million of preferentials. BR's biggest concern was £15 million of creditors. DL did not know that they had not been paying suppliers. DY would like a breakdown of who the debt is due to…..
…BR reported that they say that they have written off £4 million from US subsidiaries……..
MT reported that the bank debt is mainly at 1%. DY was saying that the Advent debt had been at 15%.
DY said that the other thing which came out of the meeting is that we can forget about the shareholding. They owe Advent huge sums by way of dividends etc. They are hoping to get a moratorium on the debt from the banks. If all of what he says is true, then someone is failing appallingly. He said that margins are just over 50%, so they have gone down by 10%. The most they ever turned over was £37.5 million which was last year. A lot of the information given had to be taken at face value, but DY didn't think that there was anything obvious that they could have manipulated.
DL pointed out that the point they are making is whether we want the company like this as a tenant. DY said it did not matter. We have said to them that the Lease is a deal breaker. We have said that it's still a deal breaker because we need to be able to value the fund. If they go broke, they will be paying rent until they go broke. DL thought they could be making the figures look more grim. BR thought that the figures won't be manipulated to a very high degree at all."
"WC confirmed that he has reiterated on a number of occasions that the money is simply not there. WC pointed out to DY that insofar as he is wanting the sort of figures that our offer leaves them to think, then he is simply not going to get these.
DKH asked about the merit of looking at a structured payment. WC thought that if the state of their finances is to be agreed, then we need to question what we would achieve if we carry on pushing on. Surely we need to try to improve the offer that they have made.
DY thought there was a tax loss in the company worth at least £25 million. He has decided he does not believe them. He thinks there are too many adjustments in their figures. He heard someone had offered £50 million and they turned it down. They have offered us £900,000 last time and now we are at £250,000. There is no scope for agreement here where the Trustees are supposed to be protecting the assets of the pension fund…..
PB [the Mediator] pointed out that if the company goes bust, they will lose everything. PB said the options are to do a deal today, or to carry on and go to Court. Whether we win or lose at that stage, they may still go bust. The main problem is if what they are saying is true, we could end up with them not refinancing. DY did not think that Advent would walk away.…
RS said if what they were saying about their finances is true, we should take the offer and run. If not, it may be critical. He asked whether there was any scope to look into the figures now.……
DL confirmed that he has explained to JM the discussion that they have had. We have got £500,000 on the table which goes if we walk away. They're clearly strapped for cash…. We will not be able to get the cash that we want now. JM thought there may be cash in the future.
DL said we could get Liss Mill, their perception is, it's worth a lot less than it is for us. They would not then need to pay out cash and as they are having problems paying suppliers, they are obviously in serious problems. DL knows that at least one of the suppliers who has got £500,000 outstanding and has agreed to a payment of £50,000 per month. The cash issue is very real. There might be a bit of fiddling around the £250,000 figure [a sum S&W had offered] but not much…..
WC said that PB needs to go back and say that clearly they have cash flow problems and tell them a flavour of the other options and let them consider these."
"DY's first comment was they have got nothing.
DY has spoken to PF who is adamant that they will not move. They can't.
He says the rent review is extortionate and they will not agree.
DY had offered a third party arbitrator and PF had confirmed they would only go to £250,000.
DY had pointed out that they had previously offered £900,000 but PF said this was when they were trading profitably. The overheads are now so high. They have been told it will cost £250,000 to go to Court so they have offered £250,000. PB said it would in fact be much more than this.……….
DY confirmed the only offer is (a) £400,000 now; (b) £400,000 when the company is sold.
MT indicated that in relation to a 10 day trial they should be looking at costs of £1 million between them easily, or £750,000 each. "
i) S&W were not interested in a 15 year lease extension; it should be for 10 years (thus expiring at the date which would have applied had the 2002 Side Letter been promptly implemented;
ii) A choice was given on rent reviews: either RPI increases and open market rent reviews in 2009 and 2013 or open market rent in March 2007 and a review in 2013 [this is probably a mistake for 2012 which is the date which appeared in the final agreement and which Mr Todd recorded in his note of the terms made at the Mediation];
iii) Payment to the Trustees of £250,000 within 28 days;
iv) Payment of a further £250,000 on sale [of the company] or in 3 years together with interest;
v) Everything else as agreed (for instance, payment of the £177,000 and interest in respect of rent arrears but nothing agreed in relation to dilapidations).
"DY confirmed that they [ie S&W] are choosing to spend their money in other ways. They have won by attrition. They simply do not have the money"
i) The main reason was that the typed-up note should make sense; this meant that she chose not to include certain passages of the manuscript notes which were either incomplete (because she had been unable to keep up with that part of the discussion) or did not make sense upon a subsequent reading of the manuscript notes.
ii) On a number of occasions, Professor Youlton used expletives to reinforce his opinion on various issues. Not having included these in her manuscript notes, she did not consider it necessary or appropriate to incorporate them into the 2008 Note itself.
iii) In order to give as full a picture as possible, she also included certain passages in the 2008 Note which she had summarised in shorthand in her manuscript notes, which appears in Mr Clark's notes or which did not appear in the manuscript notes but of which she has a "very clear recollection".
"A. Professor Youlton then left the room to go and have a cigarette outside, and as far as we were aware Peter Fredericks was then talking to him at the time. There was then obviously a gap in time where most of the trustees remained in the room where I was, and to a certain extent I think, you know, there was the impression that, well, maybe something might happen here. There had been discussion about Liss Mill and, you know, whether we could throw something into the equation to help, to help the negotiations. So when Professor Youlton came back to the room, I distinctly remember his opening gambit, which was quite shocking not only because of the language being used but mostly because it was a real "right, okay, we don't really have anywhere to go here".
Q. That is what you recall him saying, "We don't have anywhere to go here"?
A. No, sorry, that is what I am saying the flavour of it was. I recall him saying as –
Q. We don't have to use the words because we now know them. What specifically do you recall?
A. I have just told you what I recall. I recall him coming back into the room, having gone for his meeting with Peter Fredericks, and saying, "They have got fuck all."
Q. Yes. Now, you don't recall the detail though of the passages I have just read out?
A. I don't recall, remember each and every thing that he said now, no, but I would have written down, in so much as I could, when he came back into the room, as I always had done throughout the mediation, what was being said at that time so when Professor Youlton came back in, I would have written down in so much as I could what he had said.
A. I didn't, however, write down his opening gambit. I was quite surprised by what he had said. All the trustees were looking around and then I took a detailed note of what he said after that."
"Q. This was an important comment, wasn't it? This was an important comment by Professor Youlton, wasn't it?
A. There had been discussion about whether they could pay over a period of time. The trustees, I think, wanted them to be -- wanted the monies to be paid –
Q. We agree about that.
A. -- whatever they settled on to be paid quickly. I don't know why that note isn't in -- why that comment isn't in here.
Q. Can I suggest why it is an important comment – because you won't answer the question whether it is an important comment. It is an important comment because one way round the actual perceived financial difficulties of the company would be that they pay money over time. That is what Professor Youlton had suggested to Mr Fredericks and Mr Fredericks had simply said, "No". That's important, isn't it?
A. Yes, but that's not how I -- I didn't leave it out because I thought that was -- I don't know why it's not in there."
"Q. Do you recollect returning into the room and saying, in extremely forthright language, that the company didn't have anything, the company had nothing?
A. I categorically refute that I said either of those things, that they have got nothing or -- they were adamant they will not move, they can't. I categorically refute that. Categorically. No ambiguity in my memory at all about that. On other things I'm prepared to allow my memory to be, you know, flawed but on that I absolutely am sure. I never did that.
Q. So what were your words to the group when you returned?
A. I can't remember but they certainly weren't that. I mean I got the impression from Peter, as I said to you, that they were not prepared to go further. It's nothing to do with whether they could or couldn't; they were not prepared to, because they'd come to an agreement, I suppose, at board level, and he was instructed that they would only pay up to the level of costs, and after that they were not prepared to go any further. And it was prepared to pay, not afford to pay. That was the point he made to me. And the fact that they felt they had the winning hand and they would win at trial."
i) The agreed terms were in full and final settlement of
a) All claims made in the action;
b) All claims arising out of the Apportionment Agreement, the 2002 Side Letter and the Lease (but excluding matters arising after the date of the agreement and matters arising from the Schedules of Dilapidations already served). It is not disputed that there would be a rent review as of March 2007.
ii) A new lease from 2010 to 2017 was to be entered into in the form of the draft annexed. This provided for a single rent review on 25 March 2012.
iii) A deed of variation amending the terms of the Lease was to be entered into to deal with permitted use and under-letting.
iv) S&W was to pay £250,000 plus VAT by 11 October 2007.
v) Rent arrears of £177,000 plus VAT were to be paid by the same date.
vi) A further sum of £250,000 plus VAT was to be payable on the earlier date of 13 September 2010 and the date on which a majority of the shares in S&W were subsequently sold as detailed in clause 6 of the Schedule.
vii) Certain works were to be undertaken by S&W to the external fabric of the West Wing in accordance with a programme to be agreed between the parties or, in default of agreement, determined by an expert.
"given the further significant legal costs that could have been incurred in taking the matter to trial and importantly the financial position of Snell & Wilcox Limited".
Duty of Care: to whom was any duty of care owed?
i) The original instructions to CR clearly came from Professor Youlton in relation to his severance terms. It was in the course of the determination of the terms of severance that Professor Youlton's concerns about the Scheme were raised. In that sense, the Apportionment Agreement and the negotiations leading up to it arose out their original retainer. Mr Holder accepted that both agreements arose out of the retainer.
ii) Professor Youlton had a personal interest in the well-being of the Scheme since it was to be the main, if not the only, source of his retirement income. He therefore had a personal interest which needed looking after by his own lawyers. Suppose, for instance, that the Trustees as a body had gone to separate solicitors; Professor Youlton could still have retained CR to ensure, on his behalf, that the solicitors advising the Trustees were adequately protecting his interests. There is nothing surprising about CR remaining under a duty of care to Professor Youlton personally. Mr Holder accepted – he could hardly deny it – that Professor Youlton would be personally affected.
iii) CR took their instructions in relation to the Apportionment Agreement from Professor Youlton; they appear to have had no contact with the other Trustees apart from Professor Snell and their contact with him was not in his capacity as a trustee.
iv) CR's bills in relation to their advice and work concerning the Scheme were sent to and paid by Professor Youlton up to and including the time of the Apportionment Agreement. The bill in 2002 was to be divided with Professor Snell (but not the other Trustees) but this related to work on the disposal of their shares to Advent.
v) Professor Youlton thought that he was acting in his own capacity. Mr Holder accepted that he regarded Professor Youlton personally as his client in acting in relation to both agreements.
i) The former, so far as relevant to the present case, allows the addition of a new claim but only if it arises out of the same facts, or substantially the same facts, as a claim in respect of which the claimant has already made a claim in the proceedings. The decision of the Court of Appeal in Goode v Martin  1 WLR 1828 establishes that CPR 17.4(2) is to be read as allowing a new claim where it "arises out of the same facts or substantially the same facts as are already in issue on" in an existing claim. Thus a claimant can rely on facts and matters pleaded in a defence as part of the "facts and matters…in issue".
ii) The court may also allow an amendment to alter the capacity in which a party claims if the new capacity is one which that party had when the proceedings started or has since acquired.
iii) CPR 19.5, so far as relevant to the present case, allows the addition of a party only if that addition is necessary. That will be so where the claim (ie the original claim) cannot properly be carried on by the original party unless the new party is added.
Breach of Duty
i) "Conclusion or amendment of contracts by virtue of which the Company enters into obligations in excess of £100,000 in individual cases other than in the normal course of business".
ii) "Legal transactions of any nature between the Company and its executives, shareholders including spouses, relations, relations-in-law of executives or shareholders".
iii) "Initiation, conduction and termination of legal disputes with a value in litigation exceeding £100,000 or of legal disputes which are of fundamental significance to the Company".
"But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular."
i) The board had expressly reserved certain matters to itself. For reasons already given, the Apportionment Agreement and the signing of the 2002 Side Letter fell within those reserved areas.
ii) Professor Snell was at the meeting when this reservation was resolved upon, making it difficult to see how he could have thought that a board resolution would not be necessary had they thought about it. If I am right in my finding that Professor Youlton, too, was present, then the same applies to him.
iii) The Apportionment Agreement was executed on 24 August 2001 as was the 2001 Side Letter. Given the circumstances set out in the preceding two paragraphs and given the contents of the 2001 Side Letter, it would have been a steeply uphill task for the Trustees to persuade the court that any unconditional agreement had been entered into in terms of the Apportionment Agreement. Professor Youlton and Professor Snell are surely to be taken to know (even if they did not in fact appreciate) that a board resolution was necessary.
iv) There was, as we know, no board resolution approving the Apportionment Agreement. It might have been argued against S&W on behalf of the Trustees that the rule in Turquand's case should be applied in the context of the escrow condition being fulfilled or, a contract coming into being in the first place: see paragraph 275 above. In other words, information from S&W to the effect that the Apportionment Agreement had become unconditional should be capable of being relied upon by a third party.
v) There are difficulties with this argument, at least so far as I can take account of them.
a) There is no evidence about who provided to Professor Youlton or Ms Manson the information that any of the suite of documents had been approved by the board.
b) Even if such information was provided (which would have been true in relation to the principal documents concerning Professor Youlton's severance terms), there is no evidence to show whether or not it was couched in terms which could reasonably be taken as covering the Apportionment Agreement.
c) Professor Youlton was chairman of the board and knew, or ought to have known, that there was no board resolution approving the Apportionment Agreement. The Trustees, include him among their number, thus giving rise to arguments that the Trustees could not, consistently with his duty to see compliance with the restrictions on the authority of the CEO, take advantage of the Apportionment Agreement.
d) So far as concerns the 2002 Side Letter, the Trustees' were not, perhaps, as exposed as they were in relation to the Apportionment Agreement. By this time, Professor Youlton was no longer a director and might have been able to take advantage of the rule in Turquand's case. But even if that is so, the fact that Professor Snell remained on the board still left the Trustees exposed to the technical point.
i) In a substantial matter, a board minute is good practice, with the qualification that this might not be so in some cases, for instance in relation to compromise agreements resolved before a board meeting was held.
ii) He knew that the rule in Turquand's case does not apply to "insiders" (although the precise meaning of that word was not explored with him). Curiously, he said that Professor Youlton was not a director at this time (ie 2001) which was of course true from the end of August 2001 but it was not true when the Apportionment Agreement was executed by Mr Spencer, Professor Snell and himself on 24 August. It was only by virtue of the documents signed on that day that Professor Youlton agreed to resign.
iii) He accepted that the validity of a company entering into an agreement was something which would be checked once the terms had been negotiated and agreed.
iv) He was taken to the Apportionment Agreement. It was suggested to him that any competent lawyer seeing Professor Snell's execution of it would have flagged that there may an issue of conflict to be sorted. He replied that he would expect it to have been resolved in the board minute.
v) He accepted, in the light of the 2001 Side Letter, that he "would have anticipated that it [ie the various documents referred to] would have been necessary to come out of escrow".
vi) He accepted that, with hindsight, it would have been prudent to have obtained a copy of the board minute. Mr Evans put to him that this should have been done. He replied "I can say with hindsight, yes. At the time I don't think we were doing anything wrong".
i) The Apportionment Agreement would have been approved by the board of S&W and would have been a valid agreement not vulnerable to the Want of Authority Defence.
ii) The 2002 Side Letter would have been slightly differently worded and would have created a valid and enforceable contract.
The financial state of S&W
Burden of proof on impecuniosity of S&W
"…the defendant had to plead the issue of the original defendant's impecuniosity, and had an evidential burden. As the defendants had satisfied this, the burden or proof rested on the claimant. The judge held that such impecuniosity would have had an effect on the likely settlement obtained.."
|Operating profit (before exceptional items)||(2,451)||(553)||1,782||3,434||887||1,791|
|Profit Before tax||(10,765)||(3,674)||527||1,463||(5,566)||(2,105)|
|Net Current Assets (Excl Preference shares)||2,749||(1,483)||(2,491)||(9,895)||(10,058)||(10,066)|
The position shown here is in contrast to the impression given by Mr Fredericks at mediation.
i) There are references in the documents to the fact that Advent were going to sell. There is, for example, the attendance note of the conference with Mr Clark on 6 April 2006 when Professor Youlton informed the meeting that the various venture capitalist wished to sell S&W within 6 to 9 months.
ii) Advent's preference shares were converted to ordinary shares to prepare the holding company for sale.
iii) Professor Snell was able to say, and I accept, that not long after the Mediation serious negotiations were taking place with Dolby, the well-known United States electronics enterprise, for the acquisition of S&W. The sale figure being discussed at board meetings was £55 million. Professor Youlton says he was told, and I accept this part of his evidence, by Mr Tasker (who was head of technical sales at S&W) that S&W were discussing with Dolby an acquisition for as much as £75 million. Nothing came, in the end, of that negotiation and so I must be careful about treating a figure discussed at a board meeting or elsewhere as being a true reflection of the value of the S&W. But it shows that there was interest at a substantial sum demonstrating the worth of the underlying business at least.
iv) Professor Snell said in his oral evidence, which I accept on this point, that he knew of a proposed sale at a good price in the summer of 2008 and where the price being talked about was £50 - 70 million.
v) In the end, Advent did dispose of a considerable part of its shareholding as part of a merger with Pro-Bel Ltd in March 2009, retaining an investment in the merged company (as to which see further at paragraph 342 (iii) below). I am satisfied on the totality of the evidence that although described as a merger in the sense that the businesses merged, the result of the transaction was that Advent sold part of its interest and returned money to its investors.
i) The directors' report contains the usual remarks about allocation of resources for pure research giving rise to the applied research required for the development of new and existing products. The directors believe that this ongoing investment of resources will enable S&W to maintain its position as one of the market leaders in the industry. The report proceeds to inform the reader that "the 9 month period saw another successful progression: the Kahuna switcher continued to win significant market share and the range of infrastructure products also grew year by year".
ii) It is stated that:
"Following on from the separation of the Contents Repurposing business unit last year, the Company has performed extremely well since focussing on its Broadcast business as demonstrated in the significant improvement in profitability in a shorter reporting period."
iii) Other paragraphs paint a bullish picture going forward, especially in the light of the acquisition by Oval (2194) Ltd (now Snell Corporation Ltd) in February 2009. The passage throws a little more light on what might have been meant by the £72 million merger in the press release. It is revealed that Snell Corporation Ltd also acquired Pro-Bel with the intention of bringing the businesses of the two groups together. Snell Coporation Ltd "obtained funding of approximately £75 m by way of institutional and bank debt. A result of the transaction was that the bank borrowings were fully paid down being replaced with funding from Snell Corporation Ltd".
iv) This is not, in my view, the report of a board of directors with any concern about the future viability of the company.
v) An operating profit of £8,344,000 before exceptional items is shown with a profit on ordinary profits before taxation of £7,007,000. The exceptional items show on the debit side restructuring and redundancy costs and onerous lease provision and on the credit side a profit on the sale of Liss Mill. The net position is a debit of £503,000. After utilising losses, there is no tax shown, resulting in a profit after exceptional items for the 9 month period of £6,504,000. This compares with the (pre-tax) loss for 2007-8 of £2.1 million. Turn-over was up, on a yearly basis extrapolating from the 9 month period on a pro rata basis from £36.7 million to £44 million.
vi) Net current liabilities had reduced from £7,887,000 to £3,699,000 and the net liability position after provisions and unfunded pension obligations had reduced from £12,722,000 to £6,218,000 (the liability including a provision of £681,000 (all of which presumably relates to the Property)).
vii) Research costs were down compared with the previous year. This reflects the shorter accounting period, and the transfer of the Content Repurposing business referred to above.
"was always inherently profitable, as the Claimant has maintained. It adds support to the Claimant's submission [the five reasons given below at paragraph 343 to 354] as to why S&W was inherently valuable and in reasonable shape."
"Did they have any money? A business that's generating £35/36 million worth of turnover is creating and generating that amount of money. They make decisions on how to spend that money. And they have a £20 million administrative cost of which approximately 30% related to research and development, something in the region of £6 million. If they were in serious financial difficulty, and they were running out of cash, one option would be to cut back on that R&D cost. That R&D cost relates to future earnings not to the current earnings. And I would think that that was probably quite an important issue at the time; that they weren't cutting back on those costs."
"Yes. It was always the case. Advent had in excess of £20 million tied up in company. They wouldn't lightly put that at risk. And that's just in terms of what they had invested in there. There is other value within the company as well, in terms of its intellectual property."
"This came as somewhat of a surprise given that at Board Meetings I was getting a very different picture. I had actually told the other Trustees and their legal advisors at the conference the day before that Snell & Wilcox's turnover was continuously improving and what I was hearing at Board level were optimistic reports about the prospects for a successful sale. At no time during the Board Meetings did anyone suggest that the Company was at financial risk or in any financial danger."
"Q. Did you have a clear understanding of the financial position of the company year on year or is that simply not your bag?
A. I had a clear impression, but no more than that, in that when things were difficult you knew. You know, research expenditure was cut back and so forth. So I had a good impression but I wouldn't say it was an exact one because understanding balance sheets and such like is not my strength.
Q. As a matter of impression, the company was making losses year on year over the period 2004 through to 2007; that's correct, isn't it?
A. I don't think that's true, no. No, we were in fact -- in order that the company could be merged in the way it was, we were doing quite well. I mean, much better than was -- at the board meetings, the issue was not how do we survive, ever; it was making sure our costs were kept to a minimum and we grew the business."
Causation and Loss
"The Trustees would not have settled on the terms which they did were it not for the doubts about the two agreements. It was the risk that they might not win the action which the Trustees had brought against S&W coupled with the risk of costs (the risk of not recovering if they were successful and the near certainty of having to pay if they were unsuccessful) which forced the Trustees to settle on the terms which they did. If the two agreements had not been vulnerable, those risks would not have been present. The defences raised in the action (the Want of Authority Defence and the Unenforceability Defence) would not have arisen at all and summary judgment would have been obtained on the Interim Award. Specific performance of the 2002 Side Letter would have been obtained with the result that the rent reviews could have been implemented. Further, the extension lease would have been granted enabling the Trustees to value their reversionary interests with the benefit of that extended lease."
i) A company can be balance sheet solvent and show an operating profit but, at the same time, be facing difficulties in meeting its liabilities as they fall due. To describe such a company as having "cash-flow" difficulties is entirely apposite.
ii) A company may be in worse condition than that, but not terminally ill. It might be having the same difficulties as the first company, but also be balance sheet insolvent. Ignoring the possibility that there are valuable assets (such as IP rights) which are not reflected at their real value in the balance sheet, the board of this company might have been able to produce a business plan which satisfies its backers and bankers that it will be able to trade out of its difficulties in a period of time. It is certainly the case that this company has "cash flow" difficulties, but it would not be entirely apposite to describe all of its problems in that way.
iii) A company may be much sicker than that. Whilst not yet subject to a winding-up petition and able to stave off its creditors and to continue to trade (without breach of the law) it may be in a position where it has to say to a creditor C that payment of C's debt would bring the company to its knees and result in a winding-up. It would not be apposite to describe that sort of case as amounting only to "cash flow" difficulties.
i) The first is that the Trustees court action seeking declaratory and other relief against S&W was necessary only because of the availability as real arguments of the Want of Authority Defence and the Unenforceability Defence. If it had not been for those defences, the action would not have been necessary. It is true that S&W might nonetheless have declined to comply with the Agreements but it would not have had, for reasons already given, any defence with any real prospect of success to a claim for specific performance of the 2002 Side Letter. S&W would not have been entitled to refuse co-operation in the apportionment exercise: if it had done so, the Trustees would have had a strong claim to summary judgment for immediate payment of the Interim Award. And they would, in any event, have known that the Interim Award would certainly become due in the future.
ii) The consequence is that when the Trustees decided to enforce their rights under the two Agreements in 2006, they would have been in a far stronger position than they in fact found themselves. They would not have found themselves under pressure, in September 2007, to obtain an extension lease, pressure which was an important factor in pushing them into the Settlement Agreement.
iii) The second central point is that the Mediation was convened principally to settle the action which the Trustees had brought. It was not concerned with dilapidations; nor was it convened to deal directly with the amount of rent which would be paid on the rent reviews provided for in the Lease or in the extension lease envisaged by the 2002 Side Letter.
iv) The only reason why this particular mediation took place was because the Trustees had brought an action against S&W. If that action had not been necessary, there would have been no mediation to resolve the issues in the Trustees' action. If there had been some sort of dispute resolution process out of court, it would have been against the background of clearly enforceable agreements and would, if it had taken place at all, been very different from the Mediation itself.
i) The implementation of the Apportionment Agreement.
ii) The interpretation of the "put and keep" clause in the Lease.
iii) The completion of the works to the West Wing of the Property.
iv) The actioning of the lease extension (this is the dispute about the 2002 Side Letter).
v) The review of maintenance issues outstanding at the Property.
vi) The question of the rent review due for March 2003.
Going into the Mediation and the Mediation itself
i) The merits of the claim.
ii) The costs of taking the matter to trial. The costs would, it is common ground, have been substantial. Figures of £400,000 - £800,000 to take the matter to trial (in addition to what had already been incurred) were mentioned. The precise figure does not matter: the sums were, on any basis, significant to the Trustees whose pension fund would be at risk.
iii) The delay in reaching a conclusion if the claim were fought. Some of the Trustees wanted to retire.
iv) S&W's financial state.
"MT confirmed that in his view, this had to settle. Otherwise costs will increase and there will be a huge trial, on the basis that this matter involves lots of complex issues. DY had far too much control. The company law points will cause problems because of DY's control and the lack of documents. There are also huge issues of fact. The other side are only accepting that Spencer had actual authority to negotiate, but no one had authority of any type to sign. We have seen no documents at this stage to show that there was authority. We have only seen some board minutes."
"Whether or not we win depends on the facts as have pleaded them and whether we can establish those. If we do not do so, then we will lose…..Mr Todd said that the burden of proof is actually on us because of the absence of board minutes showing actual authority – so we need to show ostensible authority…."
"As I've said to you, repeatedly, in this cross-examination, there is no evidence anywhere that anybody other than remarks made by me in passing that have been referred to in notes taken by your client, is there any evidence that Peter Fredericks, the Chief Executive, anybody else, ever mentioned -- apart from lawyers, ever mentioned this problem of financial jeopardy of the company. It's always cash flow, cash flow, cash flow........ I said to you before, that the company had a financial problem. It was backed by a very wealthy venture fund who were continuing to invest in it. And I think it was choices they made about how their balance sheet was constructed and the debt that they were establishing and the fact that they would one day capitalise it and liquidate the ordinary shareholders, as they did. I don't think there is anything other than that that's in this."
i) 17.03.2004: This does not strike me as indicating a concern about S&W going into liquidation. It is the sort of question any landlord might ask given the long-term nature of the tenant's obligations. Indeed, if the Trustees had concerns about, and only about, cash-flow it would make the question even more relevant to ask in case current difficulties escalated into unmanageable problems resulting in liquidation.
ii) 22.03.2005: again, I make the point that the lease created long-term obligations. Cash-flow difficulties could result in covenant default on loan obligations giving rise to the appointment of a receiver. This does not mean that the landlord anticipates that the tenant is about to suffer a receivership still less that its financial state is such that liquidation is impending. It is true that Mr Young, in his informal valuation dated 29 July 2005, values the Property on the basis that there are concerns about the financial standing of the tenant. But that is not something which Professor Youlton denies in the light of the available accounts which did not paint a rosy picture.
iii) 13.09.2005: Although Professor Youlton doubts that he would have said quite what is recorded, I see no reason to think that the note is inaccurate in recording that he was "prepared for war" or that the possibility of liquidation was mentioned. These were not considered responses. They came when Professor Youlton had learned that S&W was not going to enter into the extension lease in accordance with the 2002 Side Letter and might be seen as a somewhat emotional reaction. But what he also said was that he wanted to reach an agreement and look at the matter commercially. That is not indicative of a serious concern that S&W was staring disaster in the face or even of serious financial difficulties rather than cash-flow difficulties. The commercial deal might require S&W being allowed time for payment; it might require a reduction in the amount claimed; or, in relation to the 2002 Side Letter, it might require a variation of its terms. None of that is to say that the Trustees' perceptions of the company's financial difficulties were such as to lead them to a settlement such as they eventually entered into.
iv) 19.1.2006: Mr Evans points out that the note refers to compliance by S&W "at this time". Professor Youlton says that this is again a reference to cash-flow difficulties and I am bound to say that the language of the note (which is all I have to go on) points strongly to that conclusion. This makes sense since S&W was already facing exceptional cash-flow problems as a result of the settlement of the Patent Dispute, requiring it to find £2 million over the next 2 years. Since the Interim Award had been made by this time, and since Professor Youlton and Ms Manson saw as much as £2 million in total being recovered by the Trustees, it is easy to see that the resulting position might have been seen by S&W as "intolerable pressure".
But even accepting that immediate enforcement would have forced S&W into liquidation, it does not follow than an accommodation could not have been reached under which, over a period of time, S&W's obligations would not have been met in full. In any case, it is not easy to see why financial pressures would have precluded the execution of the lease extension although it may have been necessary for S&W to renegotiate the terms of the rent review provisions and in particular the dates of review.
v) 14.03.2006 and 23.03.2006: I do not understand why this is said to indicate a concern that S&W might become insolvent. Insurance was a prudent course to consider. It is not clear who first brought up the question of insurance, but even if it was Professor Youlton, the discussion with Ms Manson shows that Ms Timmings (of CR) thought the proposal was a good one "because there was the risk that Snell & Wilcox could default in their payment of the apportionment payment over the five year period and there was otherwise no security to cover this". A concern about what might happen as long as 5 years away does not lend any support to the suggestion that anyone at that meeting thought an impending liquidation was looming or that S&W's financial situation was so dire that a 5 year payment period was pointless. There was not a hint at this stage that the Trustees should take what they could get and run.
vi) 05.04.2005: This item relates to the conference with Mr Clark. It is interesting to see the note in its original stage being amended to water-down what Professor Youlton had been recorded as saying. It may have been Mr Clark who made the changes. In any case, it is the final version which is likely to be the more accurate reflection of the flavour of what was said. Even if Professor Youlton had had input into the changes, the changes surely are more reflective of his state of mind than hyperbolic words possibly used at the meeting. I accept of course, and I imagine Professor Youlton does too, that there were concerns about the financial state of S&W in the sense that the accounts disclosed a weak position; but (a) matters were improving and (b) the venture capitalists were looking to exit their investment. As to (b), it would therefore be in the interests of S&W to settle the dispute: this is not an expression of any sort of desperation to settle the dispute on whatever terms might be offered for fear of finding something worse.
vii) 26.06.2006: This letter is entirely consistent with the existence of concerns about cash-flow and certainly does not indicate such a serious financial position as would force the Trustees into the settlement which they in fact made.
viii) 21.12.2006: That the company was not given the resources to grow in an emerging market does not indicate a concern about its finances. Indeed, the expression of hope that new investors would have the necessary vision suggests a faith in what was already there.
ix) 01.03.2007: The passage is also set out at paragraph 145 above. The point here is that "the company could not afford to pay as yet". Again, the focus is on temporary difficulty with no concern being expressed about the long term prospects let alone a concern that the company was facing immediate insolvency.
x) 21.05.2007: This refers to cash-flow problems; no doubt they were exacerbated by the "record monthly order" requiring a "record number of materials" to manufacture the order requirements. The fact that Dolby had dropped out could well indicate problems – but whether those were problems simply about price, or about technical aspects of the products, or about finance it is impossible to say. It is interesting to note Professor Youlton's perception (although I do not think anything turns on it) that the Dolby deal fell apart because the venture capitalists would not let the engineers talk to each other. I perhaps paraphrase unjustly when I say that a brilliant synergistic merger was prevented by financiers who did not understand the business.
xi) 29.06.07: This refers to a note of the first consultation with Mr Todd. This really gets CR nowhere in my view. There is reference to the hope that "we will recognise that they don't have very much, so we wouldn't get a lot out of this action". I do not read that as an acceptance that "they don't have very much" or, even if that is wrong, it is certainly not an acceptance that there will be a problem if Advent put more money in – as it was Professor Youlton's view that they would, a view which was eventually vindicated.
xii) 17.8.2007: This relates to the consultation of Mr Todd and Mr Clark. Professor Youlton has serious issues about this part of the attendance note. I make a number of observations and findings:
a) Professor Youlton perceives it as ambiguous, confusing and in some respects wrong. One concern relates to his "confirming that the key issue is whether the Company has got any money". If he did say that, he clearly did not mean it in the abstract since the company was trading profitably. At most it could mean enough money to meet the Trustees' demands immediately or enough money to give certain of the Trustees the opportunity to retire. In that sense, the terms of any settlement which could be reached with S&W would necessarily turn on what S&W could pay and when it could pay. It is quite impossible to read into this paragraph of the note, even if it is accurate, a suggestion that the Trustees would recover only that which the company could be forced to pay immediately.
b) It is curious that Professor Youlton would have said that the Trustees would need to seek cash up front but not promises in the future (ie all the cash would be needed up front). This was not the approach he took when making offers in 2006 nor was it the basis on which the eventual settlement was reached at the Mediation, which provided for payments in the future. It is not easy, in any case, to see how the phrase "In order to help with any settlement" fits into what was being said. That would suggest that it would be S&W which would want to make immediate payment with no promise in the future, presumably in order to make it "clean" for the venture capitalist's exit. But even ignoring that phrase, it is not possible to read the note as saying that all of any recovery must be cash up front. Surely what the note is properly to be seen as recording is that the Trustees need enough cash up front to enable some of them to retire and that promises in the future alone would not be enough.
c) Mr Haines' manuscript note of the same meeting does not help in these aspects as it contains nothing at all corresponding to the passage in the full attendance note prior to "A deal needs to be structured".
d) The sentence beginning "A deal needs to be structured…." is tantalising because it contemplates an alternative ("which either….") but does not go on to provide one. The reference to "an exit before two years" is ambiguous since it could refer to an exit by Advent or possibly disengagement between the Trustees and S&W. The word "exit" is appropriate to the former and can be seen used in that sense elsewhere in the documents. It is a curious word to use in relation to the Trustees and S&W and has not been used in that sense anywhere else so far as I am aware. This suggests that the reference is to an exit by Advent.
e) That reading does not, however, fit wholly comfortably with the phrase "because David Youlton does not think that Snell & Wilcox will be in business then". That could be taken to indicate that the "deal" refers to a deal between the Trustees and S&W and that "exit" refers, rather oddly I think, to some sort of disengagement between the Trustees and S&W. But that is itself problematical since it is not at all clear what such disengagement would involve or how it would qualify as an "exit". It cannot mean the bringing to an end of all ongoing relations since the Trustees were clearly not contemplating the Lease coming to an end: that had never been mentioned as part of a possible compromise.
f) Mr Haines' note reads:
Structure deal exit 18-24 months
+ money in fund in case liquidation
+ forfeit lease"
g) That note takes one no further in relation to what "exit" is being referred to. I might add that anyone who has seen the whole of Mr Haines' note would see that it is sparse in the extreme and does not cover a lot of the ground: this is not a criticism since Ms Deuchar was taking a full note and Mr Haines' jottings may be seen more as an aide memoire. It might be said that the reference to liquidation shows concerns on the part of the Trustees about the financial position of S&W. It is interesting to observe, however, that Ms Deuchar's note of this part of the meeting makes no mention of liquidation making it possible that Mr Haines is using the word as short-hand for "not being in business".
h) As to not being in business, I think that it would be wrong to infer that Professor Youlton thought that S&W would not be in business because it had gone bust; it could equally well be because Advent had sold out and S&W had been restructured. Mr Haines records the word "liquidation". We know that Professor Youlton did refer to liquidation at other meetings and the possibility of liquidation was always recognised. That is not to say that it was seen as a probable occurrence. In any case, Mr Haines has not noted down any period of time in relation to liquidation, in contrast with the 2 years recorded by Ms Deuchar in relation to S&W not being in business. It would be quite wrong to take some words from one note and other words from another and link them together in the way most disadvantageous to the Trustees. This is particularly so given the absence of the alternative which I have mentioned.
i) My conclusions are (i) that "exit" is to be read as a reference to an exit from its investment by Advent, something which Professor Youlton had all along been saying was the way in which venture capitalists work (ii) that little significance can be attached to the use by Mr Haines of the word "liquidation" in the sense that a reference to a possible liquidation does not demonstrate a serious concern about the financial position of S&W.
j) Professor Snell was asked questions about this meeting. The questions and answers were really in the context of the accuracy of the note of the meeting. He could not answer for Professor Youlton, but his evidence about his own views, which I accept, is that he did not think that S&W would go out of business in two years although it,
"might be part of a bigger company or it might own another -- there would be change because that was -- we didn't expect to go out of business."
xiii) 17.08.2007 and 29.08.2007: neither the action points not the Ernst & Young letter (which was only presented to the Trustees at the Mediation) show that S&W was about to go out of business. The latter does, perhaps, show that there were concerns which might go beyond immediate cash flow. There is nothing to suggest concerns of the sort which would lead a creditor of S&W to accept less than was due to it (rather than come to terms about a period of payment) where the creditor's legal rights were clear. The financial position might, on further investigation, be shown to be such that, even given time, a particular creditor's claim was so large that it simply could not be paid. But these documents do not establish that things had come to that pass or even that there was a serious concern that they would do so by virtue of the Trustees' claim.
xiv) 11.09.2007: this relates to the pre-Mediation consultation with Mr Todd and Mr Clark at which all the Trustees, Mr Rogers, Mr Haines and Ms Deuchar were present. The passages set out by Mr Hubble must be put in context.
a) Just before the first passage he sets out, is a record of a discussion about the lease extension. The Trustees' position was that they would not move on the 2002 Side Letter if S&W would not move either. Mr Clark asked if this issue would then be parked leaving the other issues open in the Mediation to be resolved. The note records:
"Mr DY said that we would then walk away because it is so fundamental to him, RS, JW and DY have to make a decision as to whether to value as is, take a risk, or bail out. The question is who can afford it more…… This is a hard call. DY said that he would be prepared to agree £1 million being paid into it. [The note continues with the passage set out by Hubble]".
b) It is impossible, I think, to view this part of the note as reflecting a concern that S&W was actually about to "go broke". Everyone knew that the company was facing some difficulties and the possibility of insolvency was contemplated. That is why Professor Youlton was insisting that at least part of the Trustees' claim - £1 million - should be paid in cash immediately (something which was nowhere near achieved in the actual settlement); but if it had been suggested during this part of the exchanges which are recorded in the 2008 Note that the Trustees would walk away with £1 million and nothing more (that is not, say, the abandonment of the 2002 Side Letter and any further claim) Professor Youlton would have given a clear negative response.
c) As the note records further down the page, his bottom line was the lease extension, agreement on the rent and cash into the fund. The financial state of the company was, no doubt, a factor in the thinking ("The question is what state the company will be in next May") but it is to my mind important to remember that this discussion about settlement was being conducted against the background of the challenges being made by S&W to the Apportionment Agreement and the 2002 Side Letter. The discussion cannot be seen in isolation as a discussion about the financial state of the company being such that the Trustees could press only for £1 million (or any other figure) because it could not afford more. Moreover, the bottom line includes the lease extension and rent reviews. If Professor Youlton was seriously concerned that S&W was on the verge of collapse, it would have made no sense to hold out for these elements of his bottom line if, by doing so, the Trustees were to lose the opportunity of receiving a substantial immediate cash sum.
d) The passages also need to be put in the context of other things which are recorded later. In particular, Mr Todd said that, having seen the last accounts, the company could be in a worse state by next May in response to which Professor Youlton made observations about S&W's position in the market, referring to its refinancing. He is then recorded in the note as saying that the company "will struggle and be in difficulty very shortly". The words "very shortly" do not appear in Ms Deuchar's manuscript notes. Moreover the typed-up notes omit this "Continue 2 have strong values – 1 yr – 18 months then find themselves w/o [the last word is then illegible]". I do not consider that I can attach any weight to this part of the note in support of the suggestion that the company was in imminent danger of collapse. This is especially so since Professor Snell's evidence, which I accept, was that he did not think that S&W would struggle and be in trouble very shortly.
e) Moreover, Professor Snell said in his witness statement that it came as something of a surprise to him to hear that S&W might not have the money to fund a settlement due to cash flow problems and heavy indebtedness since he was getting a very different picture at Board Meetings. He says that he told the Trustees and the legal advisers at this meeting on 11 September 2007 that turnover was continuously improving and that he was hearing at board meetings optimistic reports about the prospect for a sale, although this is not recorded in the note. No-one suggested, at board meetings, that the company was at financial risk or in any financial danger. I accept Professor Snell's evidence about what he was told, what he believed and what he told the Trustees and their advisers.
f) Professor Youlton is also recorded as saying (as he agrees he did) words to the effect that "In the worst case scenario, the company goes broke". It seems to me that that really captures the flavour of all this discussion; consideration was being given to various scenarios of which the insolvency of S&W was simply one.
xv) I have carried out this detailed analysis because of the way in which both Mr Hubble and Mr Evans have picked on phrases and sentences here in support of their own cases. It is an analysis which has to be carried out, but it is important not to lose sight of the proverbial wood for the trees. I have read the whole of the attendance note from beginning to end a number of times and read certain pages several times. I have formed the clear overall impression that Mr Todd's advice was sensibly cautious and qualified. Nobody in receipt of that advice would think that his case was other than full of risks; indeed, he would know that Mr Todd's advice was qualified by his reference to the facts about which, to be clear, he knew no more than he was told by his clients. The Trustees knew that they would have a hard battle at trial and could well lose – after having spent a great deal more money and suffered a great deal of delay, not to speak of anxiety.
xvi) 11.09.2009: I do not find Ms Manson's note of any assistance at all in addressing the perception of the Trustees about the financial position of S&W.
xvii) 09.2007: I deal with particular aspects of Mr Fredericks' notes in preparation for the meeting in a moment. These notes must be treated with some care when it is sought to derive from them some indication of the difficulties facing S&W. Whatever his notes may say, it is only what he actually said at the Mediation which is relevant in any way to the state of mind of the Trustees concerning the financial state of S&W. A submission that Mr Fredericks notes are indicative of the actual state of the company is one which I view with a considerable degree of circumspection. They were notes prepared by a gentleman for the purpose of advocating the cause of S&W; he would be bound to paint as gloomy a picture as possible within the constraints of honesty.
i) Professor Youlton says he was influenced by the weakness on the merits and by the risk about costs. The need to change solicitors following the identification of the conflict of interest was seen as a daunting prospect and was a factor in the decision to settle.
ii) Ms Manson was not one of the Trustees but had a role in the settlement because Professor Youlton left the ultimate decision whether to settle to her. She says that she saw the merits and costs exposure as important issues and was worn out by the battle. She was concerned about the continuing toll on her husband's health. Her attitude is neatly encapsulated in the following exchange with Mr Hubble, which I accept as an honest opinion of her views:
"Q. Isn't what was happening that Mr Fredericks was identifying the financial difficulties the company was in; Mr Lyon, who had inside knowledge of the company, was indicating problems with suppliers; and the mediator –
A. That doesn't mean the company is terminal.
Q. No, but it means the trustees have to make a decision about whether they accept what's on offer, or push on and risk losing everything?
A. We weren't seriously going to push on when we were being told we had a weak case and we had Michael Todd telling us it would cost us 700,000 to go ahead. He was advising us against it. So it's very difficult to negotiate when you're actually being told to settle. We couldn't actually have that last card and say "We'll see you in court." That was far too risky."
iii) Professor Snell thought that the merits, the costs, the need to appoint new solicitors and delay were all important factors in the decision to settle. Three of the four trustees had been waiting for some time to retire and he understood that until settlement was reached (on the Apportionment of costs, the lease extension, the rent review and repairs to the West Wing) it was impossible to value the fund. To his mind it was the uncertainty of the eventual outcome, the costs, the risk of indebting the Fund and putting back retirement by years if the Trustees lost the case which were more important than the ability of S&W to pay, a factor which to him was the least important.
iv) Mr Wilcox's main concern was that his retirement would be put back for years since there was not a good enough case and the costs were so high.
v) Mr Todd advised that the settlement terms should be agreed. His recollection as expressed in his witness statement was that this was because of his view of the prospects of success, the cost of taking the matter to trial and recovery in the light of S&W's financial position. It should be noted, however, that his clear advice, as recorded in the first paragraph of the attendance note of the consultation on 11 September was that the case had to settle, otherwise costs would increase and there would be a huge trial (in relation to which the merits were only on balance in favour of the Trustees). For Mr Todd, by the time of the actual settlement, it was a mix of the three factors which I have just mentioned. He accepted that he might have questioned with Professor Youlton that, even if S&W had been in a better position that it was representing, it would have been worth the risks which he, Mr Todd, had highlighted in taking the matter to trial. "That is certainly the sort of advice that I might well have given. The commercial decision is then for the client to take". Sound advice, one might think.
vi) Mr Hubble, unsurprisingly, wishes to paint Mr Todd's advice about the financial state of the company in the most pessimistic of lights. Thus he says in his closing submissions that Mr Todd gave clear evidence that he considered the company to be in acute financial difficulties both in the long term and the short term. It is true that Mr Todd considered the financial difficulties which he did perceive as long term and short term. But it is clear that he was speaking only of what could be derived from the figures which Mr Fredericks produced: as he said
"….my recollection was that we could not undermine the figures and that it looked on the basis of the information we were shown as if the company was in acute financial difficulties…..
……we didn't have any financial -- I didn't -- I personally didn't have any financial information which I could put to Mr Fredericks to test the information he was giving. So it's just a question of here's a piece of paper setting out figures. Now ask some questions about it. Which is what we did. I didn't have the background knowledge about the way the company was financed in the past, and so it's a bit like not having any material to put in cross-examination. You just do it cold. Somebody says, "This is my evidence" and you've got to try and undermine it without having anything positive to put or to undermine that -- that case. So we didn't have any information -- any figures to put to him and say, "That can't be right, can it? Because."
vii) Mr Rogers' impression was that the Trustees had no appetite for continuing litigation given the merits, cost and the need for new solicitors. His impression was that the consultation the day before had undermined the Trustees' confidence. He pointed out to the Trustees that losing the case and being liable for costs of £700,000 could easily delay their retirement by years.
viii) Mr Clark considered that the merits (the company law issues more than the landlord and tenant issues), costs and financial position of S&W were all factors for the Trustees, although the last was not, he readily agreed, a factor for Professor Youlton. Mr Clark's evidence is particularly strong because, in his witness statement, he retracted what he had said in an earlier statement in July 2009 where he had said
"The settlement was driven by commercial realities as opposed to legal merits. The Trustees obtained the best deal which they were ever going to obtain on the day and it was clear that it would have made no practical difference to the eventual outcome even if there had been no argument at all on the legal issues."
ix) I would add here that I think it highly unlikely that the Trustees would have settled on the terms of the Settlement Agreement if Professor Youlton had opposed it rather than left the decision to Ms Manson. It necessarily follows that in the hypothetical mediation envisaged by Mr Hubble, there would be no settlement unless Professor Youlton had agreed (which he clearly would not have) or would have left the matter to his wife; I doubt the she would have agreed given her reluctance even to agree these terms at the Mediation itself. I accept, of course, that the Trustees could make a decision by a majority under the Rules of the Scheme, but I find the suggestion that they would positively have opposed Professor Youlton somewhat far-fetched.
"Having been intimately involved in the Company's financial affairs over so many years I was aware that the Company had a substantial value which far outweighed that represented by the net assets disclosed in the published accounts. At no time did I believe the majority shareholder in the holding company, Advent, would allow this value to be lost."
i) S&W needed to reduce its immediate exposure being under "intolerable financial pressure" if it had to meet all of its obligations "at this time". Those obligations included not only its financial commitment under the Apportionment Agreement but also its liability in relation to dilapidations as well as its (apparently disputed) obligation to put the West Wing into a state of good repair. I am not sure that S&W would, if push had come to shove, actually have disputed its obligations in relation to the West Wing, but it said that such an obligation was never intended and was making noises about rectification.
ii) The Trustees wanted as long an extension lease as possible in order to maximise the value of the trust fund of the Scheme. It was perceived that the Property with the benefit of a lease with a reasonably substantial term would be more valuable than the Property subject only to the Lease. The reason this increase in value was wanted was not just for its own sake – the Trustees could probably have waited for that – but was to maximise the value for tax purposes in the light of the complex provisions relating to tax-free lump sums and other matters. They also needed some cash up-front in the light of the wish of three of the Trustees to retire in the short-term. It should be noted, however, that the Trustees were content with payment (with interest) over 5 years. That, together with the rent, would be the only immediate cash so that in year 1, the Trustees would receive no more than £120,000.
iii) This, then, was a package. It would not be right to focus on the proposal in relation to the Apportionment Agreement in isolation and to say that the Trustees were prepared to settle their claim under that Agreement for the amount of the Interim Award.
"With regard to trading anything for the Lease Extension which by right they are obliged to sign anyway, seems to be greatly disproportionate. We are trading something which is arguably already our right, for what?....."
"We need to show we were mistaken. The documents do not show this. The documents say the trustees were paying. We need to show a change of mind."
i) Mr Hubble observes that much is made of the fact that, subsequent to the mediation, S&W was the subject of refinancing and arguments about the actual financial position of S&W, rather than the position as perceived by the Trustees (and their advisors) at the Mediation. He clearly implies that the perception, rather than the reality is what is important. He is right to say that in relation to what took place at the Mediation and whether it was right to settle on the basis which was eventually agreed. But, for reasons already given at length, the Mediation is not the right starting point. If one asks the correct question – What would the Trustees have done if the Apportionment Agreement and the 2002 Agreement had been clearly valid? – then, although it is necessary to focus on what the Trustees would have perceived in this hypothetical world, what they would have perceived is likely to have been informed by reality and certainly more informed and challenged that was the case at the Mediation.
ii) Professor Youlton relies on the fact that S&W was able to refinance in 2007. Mr Hubble says that it paid dearly for Advent's £4.5 million guarantee, being charged some 20% (ie. £900,000) per annum; but the really significant evidence on this aspect comes, he says, from Mr Fredericks' August 2007 Management Accounts (produced pursuant to CR's witness summons shortly before trial) which show an increase of net debt of £1,406,000 as against a budget of only £952,000. Those management accounts relate, however, to Snell & Wilcox (UK) Ltd not to S&W. It is not possible to be confident in any respect about what these management accounts tell the reader about S&W. There was, in any case, this exchange between Mr Hubble and Mr Rogers:
"Q. [the increase in net debt] at the same time suggests that the company was performing worse than its budget?
A. That's what you would draw from those figures. They're for five months. What I do know about this business is that it is often the sales are driven by large contracts and they can come in at different parts of the year, and it is very difficult to predict when they will come in. So you can have a slow start to the year and then you can have things pick up later on, with large contracts coming through, and that may well be why they were behind on the budget at that time. What I do know is that when you look at the year as a whole, that their figures were growing on the previous year and that they were reporting operating profits as well."
That timing point is well-made by reference to the budget figures. For the period to date, the budget was £952,000 whereas the budget for the full year was only £166,000.
iii) Mr Hubble refers to S&W's tax loss of £75 million. Ignoring the possibility of group relief (which was not available because no group company had profits against which to offset the loss in any given year) such a tax loss is only valuable if a profit is subsequently generated against which it can be set off. Mr Hubble says that this was something that S&W failed to do to any material effect; although I note that the most recent accounts, which were introduced after the hearing had finished, show that such setting-off is taking place. He also says that Professor Youlton was aware of this at the time of the settlement and accordingly any effect which it had on his perception of the financial position of S&W must be taken to have been taken into account in the Trustees' decision to enter into the settlement on the terms agreed. I do not know if Professor Youlton's knowledge of tax at that time was such that he realised that this loss was available and if so how use could be made of it.
iv) Much of the debt on the balance sheet relates to preference shares, with dividends/interest being rolled up as S&W did not have distributable profits out of which dividends could be paid; but that does not affect the reality of the position, namely that S&W and Snell & Wilcox (UK)) were in acute financial difficulty. I think I have said enough in this judgment about that aspect already.
"The fallacy in the rent claim is, assuming that because one waves a wand as soon as you start doing causation, you can go back in time and say: well actually the rent review in March 2004 would have included the west wing, would have included the other buildings on the site, and they would be treated as being 'rentalised' for the purposes of the rent claim."
"As a further result of the 2002 Side Letter, if properly drafted and executed, the Trustees would have been able to and would have raised monies in or about 2006 by selling the Property, alternatively using the extended Lease as security. They are no longer able to do so, or do so on satisfactory terms, by reason of (a) the fact that the remaining term of the Lease (as extended) is 9 years (in 2007) not 11 (in or before 2006; and (b) the fall in commercial property prices. The Trust has lost about £1.2m as a result thereof, but claims only £386,000 representing the difference in value between a lease with 11 and 9 years remaining."
i) There would not have been a sale unless and until the extension lease had been granted. There was no attempt to sell the Property prior to late August 2005 when the validity of the 2002 Side Letter was first challenged. Quite clearly it would have made no difference to that even if the 2002 Side Letter had been properly drafted.
ii) The term of the extension lease was to expire in 2017 under the 2002 Side Letter. The extension under the settlement agreement did precisely that although by the time of the Mediation, it was over 5 years after the date of the 2002 Side Letter and only something over 9 years was left to run.
iii) It is part of Professor Youlton's case that, if the 2002 Side Letter had not been defective, the Trustees would before the end of 2007 have achieved the grant of the extension lease and successfully marketed and sold the property. I say the end of 2007 because Mr Evans adopts this date in his closing submissions when he says that no sale was possible after 2007.
iv) In this scenario, the Trustees would have had to persuade S&W as part of some compromise to take the lease extension or to have obtained an order for specific performance with that order being completed. They would then have had to market the Property. And they would have had to find a buyer and exchange contracts. Even assuming that, absent the possibility of asserting the invalidity of the 2002 Side Agreement, S&W would eventually have agreed to take the lease extension, that clearly would not have happened for some time after the end of August 2005. It would have been highly unlikely, I consider, that the lease extension would have been completed before Easter 2006.
v) Let it be supposed, then, that the Trustees had granted the lease extension by the beginning of April 2006. That would leave the following problems facing them:
a) First, the dilapidations issue. There were significant dilapidations in respect of which a schedule had been served on S&W. There was also the problem of the West Wing which was in a state of disrepair. There was a real dispute about whether the "put" part of the "put and keep" covenants could be relied on however strong the Trustees might have perceived their case on this. These issues would have to be revealed to a purchaser.
b) Mr Evans accepts that the dilapidations would have damaged the value at any time but says that even if they had not been rectified, that in itself would not prevent a sale. Indeed, Mr Young acknowledged unsurprisingly that to get best value one would need to complete the Works to the West Wing and to ensure that the dilapidation schedules were dealt with. No doubt Mr Evans is right in that these matters would not prevent a sale: a "fire sale" is always possible and forced sales often occur in the real world where lenders seek to enforce their securities. But in the present case, I find it very unlikely that the Trustees would have sold the Property without these matters having been resolved at the very least by making sure that the West Wing was watertight and that, if not actually dealt with, the dilapidations would be dealt with in a way satisfactory to a purchaser. These Trustees were never, I think, going to sell their major asset at an undervalue.
c) The Trustees themselves were not going to invest further in improvements particularly completion of the West Wing. Probably they could not afford to do so, but their attitude is demonstrated in the minutes of their meeting on 8 December 2005:
"6. Southleigh Park further investment
The meeting was informed that no further investment was sensible until the dilapidations issue had been addressed. If the Trustees were to expend money on the property without following the process set out in the lease then this would compromise their position in seeking recovery of the costs from the tenant."
d) I feel confident in saying that the Trustees would not have marketed the Property until the dilapidations issues had been resolved. This is not a matter of a balance of probabilities. It is to my mind highly improbable that the Trustees would have done so.
e) The second problem facing the Trustees would have been the scope of the rent review under the extension lease and the new pattern or review prior to 2010. I have already discussed the problem at length in addressing the rent claim. Even on the assumption that the Trustees had achieved the grant of the extension lease and the changes to the pattern of the rent review, it is an entirely different question whether, in the course of so doing, they would have achieved resolution of the rent review issue. It is again highly unlikely that they would have marketed the Property while that issue remained in dispute.
vi) Eventually, all these disputes would have to be resolved, either by way of agreement or by litigation; I see no reason, however, to think that the dilapidations dispute would have been dealt with in time for a sale to proceed during 2007. Indeed, the indications are all to the contrary. In particular, that issue was not brought into the Mediation and was not resolved at the time. Nor is it at all clear that the issue of rent for the West Wing on a review would have been speedily resolved.
i) The first issue relates to what the Trustees have lost. What they have lost, it is alleged, as a result of CR's breach of duty is the opportunity to market the Property. As with the rent claim, I consider that this aspect of the claim is all to do with chances and nothing to do with a balance of probabilities. It is necessary to assess the chance that the Trustees would have achieved a lease extension and change in rent review pattern in time to market and sell the Property before the end of 2007; it is not an all-or-nothing depending on whether the Trustees can show, on a balance of probabilities, that they would have done so.
ii) The second issue relates to what the Trustees would have done assuming that they would have achieved a lease extension. If, as a matter of fact, they would not have marketed the Property, then no loss flows from the fact that the lease extension was not granted until after the Mediation. But that issue is to be decided on a balance of probabilities since it is a question of what the Trustees themselves would have done which is not in any way dependent on the actions and decisions of third parties.
ii) The "put and keep" covenant.
iii) Whether or not rent for the West Wing was to be taken account of on rent reviews.
iv) The effect of the Interim Award in relation to recoveries under the Apportionment Agreement.
i) Dilapidations. This issue was a serious area of dispute. But it was not dealt with in the Mediation and the settlement agreement did not resolve the dispute. There is no more reason to think that the hypothetical mediation which Mr Hubble says would have taken place would have dealt with dilapidations any more than the actual Mediation did. It seems to me, therefore, that dilapidation ought not to feature in any way in the recoverable costs which Professor Youlton seeks. It follows from that that, to the extent to which the costs actually claimed, include costs referable to the dilapidations issue, they should be removed. As to that, I doubt very much that any significant part of CR's fees were incurred in relation to this issue after October 2005 once the Uncertainty Defence has been raised and minds were concentrated on enforcing the 2002 Side Letter and then the Apportionment Agreement. The costs claimed in respect of CR only relate to those incurred after 25 October 2005. However, the bulk of Shoosmith's fees and some of Mr Clark's fees to relate to dilapadations and are not, in principle, recoverable (but see further below). Mr Clark's fees included part of the total of Counsels fees of £94,700 invoiced through CR and also included £2,000 invoiced through Shoosmiths. I would like to hear further argument when handing down this judgment about the detail of what should be disallowed.
ii) The "put and keep" covenant: There is little doubt in my mind that time and expense would have been spent on this issue even if there had been no dispute about the validity of the two Agreements.
iii) The issue whether rent on the West Wing should be included in a rent review would, I think, have been an important issue needing to be resolved and on which significant expense would have been incurred.
iv) The effect of the Interim Award would also have featured in any settlement negotiations, mediation or litigation. However, for reasons already given, S&W's case here was weak and it is not easy to see that much cost would have been incurred in relation to it.
v) Nonetheless, all of points ii) to iv) taken cumulatively would have had to be resolved either by agreement, mediation or litigation. The settlement agreement reached at the Mediation meant that no further expense would need to be incurred in relation to them. It is in principle correct, I consider, that credit should be given against the costs claimed (including the costs which are attributable to those issues but after stripping out the costs attributable to dilapidations) for the expense which would have been incurred in resolving those disputes even if the two Agreements had been valid.
vi) How, in principle, that credit ought to be assessed is not entirely easy. Resolution of the disputes might have taken place by agreement or by an alternative dispute resolution process (such as mediation) or by litigation. An agreement prior to mediation or litigation would have been achieved at considerably less expense that mediation or litigation. A mediation, if it had taken place would, in my view, have been a simpler, shorter and cheaper process than the Mediation itself. Litigation, of course, would have been likely to be far more expensive but just as the parties in fact avoided litigation, I consider that the prospect of the disputes actually going to trial would have been very small.
vii) My view is that I should take into account all of these possible routes to resolution and take account of the relative likely costs of each route. The likelihood would have been, I think, that the issues would all have resolved without the need for a trial although, as actually happened, the Trustees may have had to commence proceedings. Whether a full blown mediation would then have taken place or whether the parties would have been able to settle more informally is not clear. And, of course, the actual costs of either route as compared with the costs actually incurred are not at all clear. I will deal with the actual discount when considering each aspect of the costs which Professor Youlton seeks to recover, later.
i) The general point is made in relation to these fees that a substantial part of them would have been incurred in any case given the inevitability of dispute and the likelihood of mediation. Accordingly Mr Hubble says that a substantial proportion of the fees charged by CR, who were instructed in the dispute in any event, would have been incurred in any event.
ii) He reminds me that the Unenforceability Defence and Want of Authority Defence were raised at different times. In particular, the latter was not raised until 19 October 2006 and accordingly no sums charged by CR prior to that time can have been in any way related to those points. I agree with that in relation to costs incurred in respect of the Apportionment Agreement. But for the 2002 Side Letter, the position is different since the Unenforceability Defence was raised earlier, on 16 September 2005. I conclude that, to the extent that Professor Youlton's claim includes any costs raised in respect of the 2002 Side Letter for work done prior to 16 September 2005 and in respect of the Apportionment Agreement prior to 19 October 2006, such charges are irrecoverable as damages.
iii) Mr Evans points out that the costs claimed in respect of CR's invoices relate to work after 25 October 2005. But that does not meet the objection by CR that the cost of work done in relation to the Apportionment Agreement after that date but before 19 October 2006 should not be recoverable. Mr Hubble's point is I consider a good one and the claim must be appropriately adjusted.
iv) The reverse of this argument must not be overlooked. If the actual expense incurred by the Trustees prior to those dates left out of account in assessing damages, the cost of obtaining that advice must be left out of account when it comes to ascertaining the expense which the Trustees would have incurred in any case if the two Agreements had been valid. Otherwise the Trustees would in effect be paying for the same advice twice.
v) I do not understand Mr Hubble to say that any of CR's own fees would not be recoverable on the basis that they exceed what would be allowed on a standard taxation of those costs. Mr Evans has made some submissions on the basis that such a suggestion is made. If the suggestion is made, I reject it. There would be something offensive about allowing a solicitor, whose conduct resulted in his client paying him fees which should never have been incurred, to reduce the recovery by arguing that his bill was larger than was reasonable on a standard basis assessment.
vi) I would like to hear further submissions on the impact that the conclusions at ii) to iv) above have on the figures and how Mr Hubble's general point is to be reflected.
i) CR owed a duty of care to both Professor Youlton and to the Trustees.
ii) CR were in breach of those duties.
iii) Professor Youlton is to have permission to amend the First Action to assert the Trustees' claim which has been assigned to him.
iv) Damages are to be assessed on the basis of the lost chance of settling or enforcing the Trustees' claims had the Apportionment Agreement and the 2002 Side Letter been valid in accordance with the section of my Judgment headed "Quantum".
v) In order to arrive at a final figure, Counsel may wish to make further submissions as indicated in the judgment.
C provides instructions to D regarding the terms of variation of the Lease, the maintenance of the premises and the allocation of the cost of the works:
"David [Youlton] asked what the position would be if SW [the Company] was to go into liquidation and what impact this would have on sub-tenants. He asked whether we could be ensured that if SW did default on its lease or became insolvent, the head lease would revert to the trustee?"
BR writes to D instructing that the Trustees do not agree that the subleases should only terminate if the Company surrenders the lease:
"...this would present the landlord with a difficult situation in the event that SW were to go into receivership."
Meeting at C's house attended by, amongst others, David Haines (DH) of D. D's note records:
"David [Youlton] commented that he was 'prepared for war'. He was conscious that by pursuing the Company this could result in it being placed in liquidation, but that his primary concern is to maintain his pension fund.
David appreciated that commercially we should look to reach agreement with the Company and this he was fully prepared to do at this stage. He appreciated that this could be a complicated and expensive legal battle, which he would prefer to avoid if possible. However, he appreciated that this would depend upon the attitude of the Company."
Manuscript note of DH:
"S+W - financial diffs
50% [drop in] head count
CEO - trying sell
If so, due diligence issues"
Rear of D
Without prejudice meeting between PF of the Company and C/BR. Heads of Terms drawn up by C after the meeting record:
"In discussions with Snell & Wilcox Finance Director, it became clear, if Snell & Wilcox was to fully comply with all its obligations to the Snell & Wilcox SAS at this time, this would put the company under intolerable financial pressure."
Meeting between DH and Claire Timmings of Charles Russell and DY/JM. D's attendance note records:
"1.4 Discussing with Jill Manson (as David Youlton had left room) as to whether an insurance policy would be available to cover the default in payment on the apportionment payment from SW..."
Meeting between Shoosmiths (David Sanderson), DY, JM and BR (D not involved). Shoosmiths' attendance note records:
"In addition to the above, the fund would want the Company to take out an insurance policy in relation to the £580,000 just in case the Company were to go bust."
Conference with Counsel, WC, attended by DY, JM, BR and David Sanderson of Shoosmiths (D not involved). Shoosmiths' (David Sanderson's?) manuscript notes record:
"They are not good for the money. Latest a/cs are not pretty. They want to sell in 6/9 months and therefore they have an interest to settle."
Draft meeting note, which appears to have been circulated to DY/JM and WC, states:
"DY said that he did not think that Snell & Wilcox were good for the money as the latest accounts were not encouraging. However, the venture capitalists wished to sell the company in 6 to 9 months time and it is therefore in their interests to try and settle this dispute..."
This draft has been amended in manuscript as follows:
"DY said that he did not think that Snell & Wilcox have been financially strong as the latest accounts were unencouraging, but it is understood that the situation is improving" (underlining added to denote manuscript amendments).
Final version records:
"DY said that he did not think that Snell & Wilcox have been financially strong and the latest accounts were not encouraging, although it is understood that the situation is improving. However, the venture capitalists wished to sell the company in 6 to 9 months time and it is therefore in their interests to try and settle this dispute..."
N/64; see also N/41 as to circulation for approval
Letter from DY to Simon Derry of the Company:
"I have attempted to find an amicable solution in the context of shared interests and in light of Snell & Wilcox's financial position...
...the Trustees have been patient and sympathetic to the Company's situation and its need to put a new management team in place and restructure its finances and workforce..."
Letter from DY to Simon Derry:
"To have had insufficient financial resources to adequately grow the company at such an important moment in the digital HD TV switchover process, must have been very disappointing for you Simon. I sincerely hope that whoever buys S&W will have the financial resources and vision to support you in the investment the Company needs..."
Meeting attended by DH, DY, JM and BR, to review the Company's Defence and Counterclaim:
"DY confirmed that there was no delay in the Trustees seeking a remedy... However, rather than aggressively pursuing performance of the Agreement, DY had attempted to help the Company's cash flow/financial position... There was delay but only because he was trying to help the Company. DY confirmed that he was having meetings with Simon Derry who was requesting that DY did not pursue the Agreement as the Company had financial difficulties and could not afford to pay as yet..."
Note taken by JM of telecon with DH:
"6. S&W Sale
Dolby dropped out & no more news, suggests problems. Also hear cashflow problems - even being able to pay suppliers so parts for £5.5m order in June (record monthly order)"
Letter from DH to DY:
"Unfortunately, and whilst I hope I may be wrong, the company appear to be seeking to put obstacles in the way of a mediation, and this may be linked to the reports as to its financial position (e.g. an inability to make any payment to you at this point in time)."
Note taken by D's ND of meeting with Counsel, MTQC:
"David [Youlton] said that S&W had put themselves on the market and made a real mess of it. It looks as if the only way that they will stay ahead of the game is to get Advent to put more money into the company. They are hoping either that this goes away or that we will recognise that they don't have very much, so we wouldn't get a lot out of this action"
D's attendance note of conference with WC and MTQC, attended by DY, JM, RS & DL, and DH & ND of D:
"David Youlton confirmed that they key issue is whether the Company has got any money. The company is currently trading profitably but has recently been refinanced. They were paying Advent 13% on loans but he hopes that it has been refinanced through banks at proper rates. There is also some restructuring going on. We also know that Advent has pulled out of all electronic business. In order to help with any settlement, the trustees would need to seek cash up front, but not promises in the future. It is essential that they get money in the pension fund in order to allow them the opportunity to be able to retire. A deal needs to be structured which either allows an exit before two years time because David Youlton does not think that Snell & Wilcox will be in business then, and they need a lump sum into the fund to allow the trustees to retire...
DY indicated that if the company goes broke in two years, the trustees will get the building back and they have been told that it will cost approx £1.4m to do it up..."
Manuscript note of D's DH:
"DY - deal
Structure deal exit 18-24 months
+ money in fund in case liquidation
& forfeit lease ...
* RS - get co's latest accs
DY/DL c £40m turnover
Action Points produced by ND (of D) after the conference. Includes that RS is to try to obtain a copy of the latest company accounts.
Ernst & Young letter, as auditors, to the Company, presented to the Trustees by PF at mediation:
"As you are aware, we are not in a position to sign off our audit report to the annual financial statements from which the profit and loss account and balance sheet have been extracted as we still have to audit the recoverability of intercompany debtors and conclude on our going concern review once the parent company, Snell & Wilcox (UK) Limited has completed the current refinancing exercise, and they have not yet been approved by the Directors."
Pre-mediation con with MTQC and WC. All trustees, BR and CR's DH & ND present. ND's attendance note records:
"The problem is that the company could go broke, so they would want to know that [the £1m figure canvassed by DY] is going to be paid in now...
The question is what state the company will be in next May.
MT confirmed that the company could be in a worse state next May as he has seen the last accounts. DY said that they have refinanced...
S&W is now positioned in the market in a new position and [DY's] opinion is that [the company] will struggle and be in trouble very shortly.
DL said that he has no comment on where the company is going. All that is relevant is now and do they have any cash in the bank. He thinks that they will come into the mediation having to fund any settlement through a loan...
DY confirmed that in the worst case scenario, if the company goes broke. It is irrelevant if they have the [lease extension]. If in 2009 the company goes under they have got their pensions established...If they go broke after they have got the valuation and the lump sums, it may not be such a bad thing. Valuation is very important."
JM's manuscript note of the con on 11.09.2007 appears to state:
"Problem will co be [sound] in May next year"
Note that in the typed transcript of these notes produced by JM at F1/282 the word which appears to be "sound" in the manuscript notes is transcribed as "sold", but D queries this and in evidence JM accepted that this was not clear [Day 2, p. 74, line 7 - p.74, line 13].
Manuscript notes of PF on behalf of the Company in preparation for the mediation:
"Bleeding heavily at turn of century
A company with a clear lack of governance and also structure
I joined company 2 years after Advent & the Company was still struggling with costs, profitability & cash.
Although returned to operating profit over last years with YoY sales growth a very heavy debt burden (£19.9m on 31/3/07) means net liabilities have increased
Recent major difficulties paying suppliers which has included rent payments
Close to completing a refinancing to increase available cash to restructure company and fund trading over next 12 m
In context of the level of claim it should be noted by all parties that the company is limited in its capacity to incur any significant some [sic] outside its planned trading headroom in the short term"
Mediation before Presiley Baxendale QC. ND's attendance note records as follows in relation to the period after DY, BR, DH and MT have their meeting with PF of the Company to discuss finances:
"BR reported that they are apparently £20 million in debt. DY said that apparently in five years, they have taken the debt from £17 million to £20 million, despite have downsized. BR reported that they have taken huge hits from the US. These are big loss figures. There is a net current debt of £11 million. There is a long term £2.5 million figure, and £9 million of preferentials. BR's biggest concern was £15 million of creditors. DL did know that they had not been paying their suppliers...
DY said that the other thing which came out of the meeting is that we can forget about the shareholding... If all of what he says is true, then someone is failing appallingly...A lot of the information given had to be taken at face value, but DY didn't think that there was anything obvious that they could have manipulated...
...DL thought they could be making the figures look more grim. BR thought that the figures won't be manipulated to a very high degree at all...
...WC confirmed that he has reiterated on a number of occasions that the money is simply not there. WC pointed out to DY that insofar as he is wanting the sort of figures that our offer leaves them to think, then he is simply not going to get these...
...DY...has decided he does not believe them. He thinks there are too many adjustments in their figures...
...RS said if what they are saying about their finances is true, we should take the offer and run. If not, it may be critical...
...DL confirmed that he has explained to JM the discussions they have had....They are clearly strapped for cash...The cash issue is very real. There might be a bit of fiddling around with the £250,000 figure but not much...
...8.50pm ... DY and PF in a room together...
...DY returns at 9.00pm.
DY's first comment was they have got nothing.
DY has spoken to PF who is adamant that they will not move. They can't....
...DY said that in his view they are walking away from here with nothing.
DL agreed, but the company that they are dealing with has nothing to give. They all know that...
DL confirmed he thinks litigation is pointless and if they went to litigation, the chances of getting anything are almost nil. RS agreed this as did JW..."
D/204 et seq.