City of London Group Plc and Another v Lothbury Financial Services Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Proudman |
| Judgment Date | 08 November 2012 |
| Neutral Citation | [2012] EWHC 3148 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC10C03878 |
| Date | 08 November 2012 |
[2012] EWHC 3148 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building
Fetter Lane, London, EC4A 1NL
Mrs Justice Proudman
Case No: HC10C03878
Michael Booth QC and Mark Watson-Gandy (instructed by Gardner Leader LLP, solicitors) for the Claimants
Rupert Higgins (instructed by Ronaldsons LLP, solicitors) for the 1 st, 2 nd, 4 th and 6 th Defendants
Hearing dates: 19,20,23,24,25,26 and 27 July 2012
The claim
This is the trial of an action against personnel involved in the running of Lothbury Financial Limited ("LF"), a company which traded as a financial public relations ("PR") consultancy, and against a company called Lothbury Financial Services Limited ("LFS"). On 29 March 2010 LF was placed into administration by an order of the Court on the application of the claimants.
The claim is for declarations, accounts, damages and injunctive relief for alleged breach of fiduciary duty, passing off, conversion, money had and received and conspiracy. By an Agreement dated 3 August 2010 LF's administrators have assigned LF's residuary rights of action to the claimants.
On 2 April 2010 the second claimant ("CoLPR"), a company of which the first claimant ("CoLG") is the parent, bought the business, name and assets of LF from the administrators for the sum of £91,000, only to discover, the claimants allege, that the cupboard was bare. In short, it is said that former directors and employees of LF committed serious acts of misfeasance in a conspiracy to milk LF by transferring its business to LFS, which had been formed a year previously with that transfer in mind.
The claimants claim that the defendants misappropriated client contacts, confidential information and the business opportunities afforded by LF's client list. It is said that they conspired together systematically to hive out LF's business.
The remedies sought fall under five heads:
• Declarations that the business and assets of LFS are held on a constructive trust for CoLPR.
• An account (and subsequent payment) of equitable compensation for breach of fiduciary duty, framed against the second defendant as a director, against the third defendant as an employee, against the fourth defendant as a de facto director and against the sixth defendant as a consultant or employee.
• Damages for conspiracy.
• Damages for conversion/money had and received.
• An injunction to restrain passing off by LFS.
It is an integral part of the claim that LFS was formed with the intention of being utilised in this way. The claimants' case is not that the conduct of the individual defendants at the time of the administration crossed the line of what was proper for a director, consultant or employee; instead the allegation is that the financial collapse of LF and the transfer of business to LFS was the aim of a conspiracy between everyone involved in LF down to and including the office administrator.
It is said that LFS was deliberately set up in competition with LF, that the business, moneys and contracts of LF were transferred to LFS and funds were diverted, that LFS was passed off as LF and clients were told that LF had changed its name to that of LFS in order to secure transfer of the business. Similarly it is alleged that clients were told that they were to pay their debts to LFS under the pretence that LFS's bank details were the new account details of LF, that domain names were registered for LFS which belonged to LF, that LF's files and data were accessed remotely and transferred to LFS, and that LF continued to trade while insolvent.
LFS is the first defendant. The second defendant, Michael Padley, ("Mr Padley") was at the material times LF's sole director and shareholder. The fourth and sixth defendants, (respectively "Mr Astley" and "Mr Middleton") were both consultants to LF providing PR consultancy services to LF through companies unrelated to LF, respectively Corporate & Financial Communications Services Limited ("Corporate & Financial") and St Swithins PR Limited ("St Swithins"). The third defendant, ("Ms Moss") was employed by LF as its office administrator. She did not attend the trial and, although she has filed a defence and Mr Higgins of counsel lodged a skeleton argument on her behalf as well as on behalf of the 1 st, 2 nd, 4 th and 6 th defendants, her solicitors came off the record at the start of the trial. The action has been settled against the fifth defendant, ("Mr Wood"), and he has neither been represented nor taken any part in the trial.
The claimants' case on the facts
The claimants' case is heavily fact-reliant in order to demonstrate the alleged conspiracy to milk LF in favour of LFS. Mr Booth QC and Mr Watson-Gandy, counsel for the claimants, called LF "Oldco", and LFS "Newco", and submitted that LFS traded under a name deliberately designed to suggest a formal link between the two companies which did not exist. It is alleged that misrepresentations were made to LF's clients to persuade them to move to LFS such as that the bank account was moving, the name was being changed, there would be no one left at LF to service clients, that Ms Moss took information away with her and that LF's server was accessed remotely for the benefit of LFS.
The defendants answer these allegations in the following way. It is said that LFS was a company set up as a vehicle through which to operate non-PR business, specifically by assisting small companies to move into the AIM market. Mr Padley acted as a consultant to LFS on the understanding that LF would receive the PR work. Until the administration there was a clear dividing line between the two companies and their businesses. There were only a few payments made by clients to LFS prior to 7 April 2010 and those were not for PR work. In any event, Mr Eric Anstee ("Mr Anstee"), CoLG's Chief Executive, undertook a full due diligence exercise before CoLPR's purchase.
The defendants say that the background is more complex than that adverted to by the claimants. In 2008 Mr Padley utilised LF to acquire a financial PR business run by CoLG. In the summer of 2009 LF was in financial difficulties (the principal debt being a debt to CoLG in respect of the acquisition cost for the business, (Mr Padley felt he had "bought a pup")) and Mr Padley sought advice from an insolvency practitioner, Mr Jamie Taylor, a partner at Begbies Traynor. As a result of that advice a 'pre-pack' administration was on the cards and that possibility remained live in February and into March 2010.
Mr Padley's preference was nevertheless to try to rescue LF by renegotiating terms with CoLG. He was, it is said, trying to protect the business for the benefit of LF's creditors. On 19 January 2010 Mr Padley received a letter from Mr Anstee, which Mr Padley regarded as affording significant comfort, in particular that CoLG was,
"prepared to wait for these [stipulated] cash flows to materialise and that it is not our current intention of enforcing the debt…
…Similarly we are prepared to appoint [LF] as our PR adviser and offset reasonable fees against the outstanding debt."
Mr Padley says that the PR work went elsewhere and CoLG had no intention of honouring the terms of that letter. As a result, LF could not trade out of difficulty. Instead, by an application dated 23 March 2010 CoLG sought the appointment of administrators. There is plainly a very great deal of bad feeling on both sides between Mr Anstee and Mr Padley.
It is accepted that misrepresentations were made by Ms Moss as to LF's bank account and name. However, Mr Padley's case is this was merely as a result of overzealousness on her part and no-one relevant was misled by or relied on them. The true position was explained to the administrators. There is no evidence that any documents were ever deleted from the server.
It is admitted that Mr Padley did take payment personally from clients in some instances. For example he took shares in Amur Minerals Corporation ("Amur") and Avia Investments plc ("Avia"), both in the autumn of 2009. However, these payments were properly recorded in Board Minutes and Mr Padley says they were taken in lieu of unpaid salary. While it is true that at this stage Mr Padley was worried about cash flow, the claimants' insistence that he should have reported his agreement to take shares "to LF" is unreal as he was at that stage the sole shareholder and director of LF and was working towards a management buy-out.
The claimants rely on an exchange of emails on 3 February 2010 in which a change of location is discussed, culminating in an email of 4 February 2010 from Ms Moss to Mr Middleton and Mr Ashley in the following terms:
"Subject: We don't need new furniture
Cos we have desks: AO, Peter, the one opposite Peter, Myo's, the one opposite Myo's, Spriggs/ Price desk, that is 6 and there are 6 of us. We take the following: [there follows a list of items of furniture and other office chattels].
We close down [LF] on a Friday and move everything out on Saturday to new premises. CoLG come in on Monday to find the office empty…
We also have to get Graham away from doing our accounting stuff, cos he can't have access to Padley's accounts. We have to get back ups of all the accounting stuff he has done for Padley.
I can do the basic stuff, we hire Heather Parker for 4 hours per week to make sure I have done things correctly and she runs the payroll.
If we do become LFS then we have to get the clients to change contracts to LFS cos we have shitload of trouble with some clients when we went from Bankside to LF and they did...
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...ingredients of the alleged conspiracy by TC. Euro be pleaded.” 65.3 In City of London Group plc v. Lothbury Financial Services Ltd [2012] EWHC 3148: “[74] … First of all, as is evident from David Richards J's judgment in McKillen, the particulars of claim must properly plead and particulari......