Blenheim Carpets Company Ltd v Foster
| Jurisdiction | England & Wales |
| Judge | Mr Robert Ham, QC,Robert HAM, QC |
| Judgment Date | 06 August 2004 |
| Neutral Citation | [2004] EWHC 1955 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC O3C03302 |
| Date | 06 August 2004 |
[2004] EWHC 1955 (Ch)
Mr Robert Ham, Qc, Sitting As A Deputy High Court Judge
Case No: HC O3C03302
Mr Michael Roberts (instructed by the Law Partnership) for the Claimant
The Defendant in person (assisted by Mr James Brunton of Nockolds)
Hearing dates: 12–14 July 2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is a claim by Blenheim Carpets Company Limited ("the Company") against a former director, Steven Peter Foster, for £64,908.08 allegedly due on a loan account with the Company. There is a counterclaim by Mr Foster for unpaid commission of £100,587.80.
The sum claimed is made as follows:
| Sums paid to Mr Foster between 1 April 2002 and 31 January 2003 | £29,385.89 |
| Sum paid by cheque in the last week of January 2003 | £500.00 |
| Charges to Mr Foster's Company credit card for his private benefit | £663.32 |
| Re-debiting of deficits on Mr Foster's loan account for 2000–01 & 2001–02 | £29,000.00 |
| £64,908.08 |
The counterclaim is for 5% of the net profits of the Company from 1986 onwards.
Background facts
The Company is in the carpet retailing business.
In the early 1980s Gary May, the controlling shareholder of the Company, and Mr Foster worked together at Allied Carpets where Mr May was a carpet fitter and Mr Foster an assistant manager. Also at Allied Carpets at the time was Peter Injac, who was then an estimator.
Mr May left and started his own business, with his wife Lyn, and in March 1984 the business was incorporated as the Company with 1,100 issued ordinary shares of £1. One share was issued to Mrs May, and the remainder to Mr May. They both became directors. Mr May invested £10,000 of his own money in the business.
In 1985 or 1986 Mr Foster joined the Company as a salesman. At first he was an independent contractor, but it was always planned that he would become a shareholder and director. In due course, Mr May sold 100 shares in the Company to Mr Foster at their par value, and Mr Foster was appointed a director
On 1 October 1986 the Company and Mr Foster entered into a service Agreement ("the 1986 Agreement") drawn up by Solicitors under which the Company employed Mr Foster as production and sales director. Under Clause 3 of the 1986 Agreement Mr Foster was entitled to a salary of £21,000 – to be reviewed annually – and a commission equivalent to 5% of net profits of the Company as certified by its auditors. By Clause of the 1986 Agreement Mr Foster entered into restrictive covenants binding him for two years after his employment with the Company came to an end.
For many years after Mr Foster joined the Company there was a very close working and personal relationship between Mr May and Mr Foster. As Mr Foster put it, they ran around together like wildcats and lived out of one another's pockets. So far as the outside world was concerned the Company was a 50:50 partnership between the two of them.
The Company's financial year ran to 31 March, and shortly after 31 March 1987 the Company's financial controller estimated that its profit for the preceding year would be about £22,000 and that Mr Foster would be entitled to about £550 in commission for the 6 month period since the 1986 Agreement. Mr Foster expressed disappointment and dissatisfaction with the commission arrangement. In the event, the commission provisions of the 1986 Agreement were not operated. Instead, Mr Foster was paid a bonus of £6,000 and his salary was increased to £27,000.
The commission arrangements were not mentioned again until 2003. Indeed, Mr Foster himself told me that he did not look at the 1986 Agreement again until after he had left the Company's employment, and no claim to commission was made before the Company made the present claim.
In the years after 1987 Mr Foster's salary rose again. It went up to £35,000 in 1988–89, and then in the following year to £55,000, before falling back to about £45,000 during the early 1990s. The changes in Mr Foster's salary did not follow the pattern of annual reviews laid down by the 1986 Agreement.
From about 1988 the Company's accounts were dealt with by Shah Allybokus, a chartered certified accountant. For the first three years he was employed by another firm, but from 1991–6 Mr Allybokus had his own firm, S.M.R. Allybokus & Co, and thereafter his own company, Abacus of London Limited. Mr Allybokus provided a package of services, acting not only as accountant and auditor but also providing payroll support, preparing directors' personal tax returns and arranging for the Company to pay their tax on their behalf.
In 1990 Mr Injac, who had briefly worked for the Company in 1987, joined it as an independent contractor, with responsibility for the fitting side of the business.
The Company began to pay dividends, and in the year ended 31 March 1991 Mr Foster received £5,454 by way of dividend. From around 1991 Mr Foster began to receive payments of £750 per month on account of dividends on his shareholding in the Company while Mr May received payments on account of £4,000 per month. The Company paid the tax on the dividends on behalf of both of them.
Mrs May was on the Company payroll from the outset and in the year 1990–91 Mr Foster's wife, Gillian, also went on the payroll. Thereafter she received a small annual salary until her husband left the Company. Mrs Foster did not work for the Company, but Mr Allybokus had suggested to Mr Foster that, as she did not have a job, part of Mr Foster's salary should be paid to her to take advantage of her personal allowance for tax purposes.
In 1995 there was a further change in the way Mr Foster was compensated for his services to the Company. The nature and effect of this change is a central issue in this case, to which I shall return in detail below. At this stage, it is enough to say that Mr Foster's salary was reduced and he began to receive a higher proportion of his overall remuneration in the form of dividends. But Mr Foster continued to make drawings from the Company in addition to his salary. In the books – or, to be more precise, the computerised accounting system – of the Company these drawings have been debited to Mr Foster's loan account. The essential question is whether Mr Foster is liable to repay those drawings to the extent that the Company did not declare a dividend covering them. As before, the Company paid the tax on the dividends payable to Mr May and Mr Foster.
It appears that the new arrangements had been agreed by 10 May 1995, for on that date the Company in general meeting passed a special resolution increasing the authorised share capital of the Company from £10,000 to £1,000,000 by the addition of a further £990,000 divided into 990,000 Ordinary B shares of £1, carrying no right to attend or vote at meetings or to participate in any surplus on a winding up.
On 10 August 1995 the Company held a general meeting at which it was resolved:
"3) … that in future dividends will be declared on the Ordinary 'B' Shares only, and all ordinary shareholders hereby forfeit their entitlement to dividends …
) … that the following 'B' shares be allocated and issued:
Mr G.F. May 540 Ordinary 'B' shares
Mr S. Foster 360 Ordinary 'B' shares
5) … that the company will be entitled at any time to redeem these shares at cost giving fourteen days notice"
The minutes of the meeting were signed by Mr May, Mr Foster and Mrs May. The effect of the arrangements was that dividend income would be shared by Mr May and Mr Foster in the proportions 60:40.
Under the new arrangements Mr Foster and his wife in fact drew about ££4,225 each month.
Each year after the Company's annual accounts were finalised a decision was made about the level of dividends to be paid, and the dividends paid were credited to the directors' loan accounts. The only documentation that I have seen relating to the declaration of dividends consisted of what purported to be general resolutions of the Company, made at a meeting attended only by Mr May in his dual capacity of director and secretary of the Company and purporting to waive the requirement for notice of the meeting. For the first few years the new arrangements ran smoothly as the dividends declared covered the drawings that had been made. But, as I shall explain in due course, problems arose in relation to the years 2000–01 and 2001–02 in the case of Mr Foster.
In the meantime, the relationship between Mr May and Mr Foster had become less close, in part because from 1996 Mr Foster was working on his own running the Company's most profitable showroom, at Pimlico Road in Chelsea, while Mr May was at head office on the other side of London. Mr Foster appears to have become dissatisfied because Mr May had, as he saw it, become less interested in the business and was taking too much out of the Company. But despite this, Mr Foster expected to spend the rest of his working life with the Company and Mr May and he continued to be friends and to have great trust in one another.
There was also a change in the board of the Company, when Mr Injac was appointed as a director in 1997. However, he was not provided with any financial information and found that Mr May made all the decisions in respect of the running of the Company as if he were a sole trader rather than an officer of a company, even in respect of matters which were Mr Injac's primary responsibility. This is consistent with the resolutions purporting to declare dividends to...
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