Auden McKenzie (Pharma Division) Ltd v Amit Patel
| Jurisdiction | England & Wales |
| Judge | Lord Justice David Richards,Newey LJ,Lewison LJ |
| Judgment Date | 20 December 2019 |
| Neutral Citation | [2019] EWCA Civ 2291 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A4/2019/1493 |
| Date | 20 December 2019 |
[2019] EWCA Civ 2291
Lord Justice Lewison
Lord Justice David Richards
and
Lord Justice Newey
Case No: A4/2019/1493
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QB)
Mr Justice Robin Knowles
CL-2017-000697
Royal Courts of Justice
Strand, London, WC2A 2LL
Christopher Pymont QC and Ciaran Keller (instructed by Maurice Turnor Gardner LLP) for the Appellant
Andrew George QC and Victoria Windle (instructed by Byrne & Partners LLP) for the Respondent
Hearing date: 24 October 2019
Approved Judgment
This is an appeal against a summary judgment on a claim for equitable compensation. The judgment is for £13,149,479, with interest at 2.5% pa compounded annually, making a total of £15,884,230.
The appellant, Mr Amit Patel, was a director of the first claimant, Auden McKenzie (Pharma Division) Limited (the company). He and his sister, the second defendant, founded the company in 1999 and they were at all material times the sole directors. Both worked in the business, Mr Patel as managing director and Ms Patel as operations director. Between them, they directly or indirectly owned all the shares in the company.
Mr Patel accepts that between 2009 and 2014 he caused the company to pay an aggregate amount of £13,763,452 against sham invoices raised purportedly for “research and development” (the Payments). The company received no value for these payments. They were made in order to extract funds from the company in a way that would evade the payment of corporation tax by the company and the payment of income tax by Mr and Ms Patel (collectively, the Shareholders).
Mr Patel caused the sham invoices to be raised by three companies incorporated in Dubai. Those companies retained between 5% and 10% of the invoiced sums and, as Mr Patel accepts and asserts, paid the balance, on the instructions of Mr Patel (or of Mr and Ms Patel), to their personal bank accounts, to them in cash and to third parties for the purchase of an apartment in New York and for goods and services supplied for their personal use. Ms Patel denies knowledge of, or any complicity in, any breach of duty as regards the payments from the company or their subsequent application. She has served a detailed defence, and no application was made for summary judgment against her.
By a share purchase agreement dated 23 January 2015 (the SPA), the second claimant (Actavis Holdings UK Limited) (Actavis) agreed to purchase the entire share capital of the company for an initial consideration of £323.5 million, with further amounts payable under earn-out provisions. On 29 May 2015, Activis assigned all its rights under the SPA to the third claimant (Chilcott UK Limited) (Chilcott) which completed the purchase on the same day.
Following investigations by HMRC, Mr Patel made disclosures between 1 May and 26 November 2015 to HMRC, which resulted in a settlement under which the Payments were treated as undeclared remuneration and he paid £14.6 million to HMRC, in respect of income tax and National Insurance contributions on that deemed income, and corporation tax which, on the agreed basis, would have been payable by the company, together in each case with interest and penalties. HMRC confirmed that there would be no tax implications for the company's future accounting periods arising from the investigation and that the company started again “with a clean slate”. The company and Chilcott, its holding company since 29 May 2015, were not involved in or aware of these disclosures or the negotiations or settlement with HMRC.
The present proceedings were issued in November 2017. The company claims relief in respect of the Payments against Mr and Ms Patel, comprising (i) “Damages and/or equitable compensation for breach of fiduciary duties” and (ii) “An order that the Defendants hold the Extracted Sums and/or their traceable proceeds on constructive trust for the [company]”. There is also a claim for all “such further orders, accounts, inquiries and declarations as shall be necessary or appropriate in order to fully compensate the Claimants for the Defendants' wrongs”. In addition, Actavis and Chilcott claim damages for fraudulent misrepresentation and for breach of warranty, but these claims are not relevant to this appeal.
The company applied for summary judgment in the sum of £13,149,479 plus interest on its claim “for damages and/or equitable compensation for breach of statutory fiduciary duties” against Mr Patel pursuant to CPR 24.2. Mr Patel made strike-out and summary judgment applications on part of the claims brought by Actavis and Chilcott and applied for summary judgment on a counterclaim in respect of the earn-out provisions.
Mr Patel accepts, as inevitably he must, that in procuring the Payments to be made by the company, he acted in breach of his fiduciary duties as a director. He advanced two defences in opposition to the summary judgment application. First, he relied on the principle in Re Duomatic Ltd [1969] 2 Ch 365 that actions that would otherwise amount to breaches of duty by directors may be authorised or ratified by the unanimous consent of the shareholders, although given informally. Second, he asserted that, if the Payments had not been made unlawfully, the Shareholders would have caused the company to make equivalent payments to them as dividends or in some other lawful manner. Accordingly, it was submitted that the company could show no loss flowing from the Payments.
The applications were heard by Robin Knowles J on 20 to 22 November 2018. In a judgment handed down on 17 May 2019, he dismissed Mr Patel's application, from which there is no appeal, and he gave summary judgment on the company's application. In fixing the judgment at £13,149,479, credit was given in the agreed amount of £613,973 for corporation tax paid by Mr Patel as part of his settlement with HMRC.
The judge rejected Mr Patel's defence based on the principle in Re Duomatic, on the grounds that it is applicable only to honest and lawful transactions. There is no challenge to that part of the judgment.
The principal challenge on this appeal is to the judge's decision that Mr Patel had no real prospect of successfully defending the claim on the basis of his second line of defence. He also challenges the judge's decision not to reduce the amount of the judgment by reference to the corporation tax that the company would have paid if the Payments had not been made.
I deal first with the principal ground of appeal. Mr Patel pleads in his defence that, if the Payments had not been made pursuant to the sham invoices, “they would in any event have been paid by [the company] to the defendants at their instruction as properly paid dividends or bonus or other remuneration”. This is an allegation of fact that, for the purposes of the company's application for summary judgment, must be assumed to be true. Given that Mr Patel and his sister were the only shareholders and at all material times the company had sufficient distributable reserves to pay such dividends, this could not be said to be so implausible as to be discounted on a summary judgment application. That position is the stronger in view of provisions in the SPA which entitled the vendor shareholders to procure the company to pay a pre-completion dividend, provided that the company had cash balances of not less than £6 million at completion. Pursuant to that provision, a pre-completion dividend of £51 million was paid.
In its skeleton argument in this court, the company explicitly accepts that this allegation is to be assumed to be true for present purposes, and I am not aware that it took a different position before the Judge.
The Judge held that Mr Patel's allegation that sums equivalent to the Payments would lawfully have been paid to the Shareholders did not provide a defence to the claim.
In his judgment at [18] – [19], the Judge cited two short passages from Target Holdings v Redferns (a firm) [1996] AC 421 ( Target Holdings) and AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503 ( AIB), authorities on which Mr Patel strongly relies and to which I will return.
The Judge gave his reasons for rejecting the submission that the company could show no loss as follows:
“21. These arguments for the First Defendant do not assist him. The period for the factual inquiry that the authorities contemplate is now complete in a part of the case otherwise suitable for summary judgment. There is no question that the First Defendant caused loss in the amount of the payments by reason of the breaches. If the payments had not been made unlawfully then the company would still have the money “in the till”.
22. The court is as well placed now as it will be at trial to make an assessment with the full benefit of hindsight and one that takes a practical and common sense view of causation. None of the avenues to which the First Defendant now refers were in fact pursued at any point when it was in the power of the Defendants to do so, including by reversing the unlawful payments and then taking the steps to which the First Defendant refers. The availability of the avenues was as apparent at the time as it is now, and yet the Defendants chose not to pursue those avenues. It would be wrong to treat them as having been pursued. The First Defendant has no foundation for a claim that there was an obligation on the First Claimant to make a payment of £13 million. This remains the position now. These are the facts. The authorities do not invite speculation.”
Mr Pymont QC on behalf of Mr Patel criticises the Judge's reasoning. The statement at [21] that “[i]f...
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