Cobbetts Llp and Another v Mark Reginald Stuart Hodge
| Jurisdiction | England & Wales |
| Judge | THE HON MR JUSTICE FLOYD,Mr Justice Floyd |
| Judgment Date | 22 April 2009 |
| Neutral Citation | [2009] EWHC 786 (Ch) |
| Docket Number | Case No: HC07C03026 |
| Court | Chancery Division |
| Date | 22 April 2009 |
[2009] EWHC 786 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: The Hon Mr Justice Floyd
Case No: HC07C03026
Thomas Lowe QC and Julian Greenhill (instructed by Cobbetts LLP) for the Claimants
John Randall QC and Shakil Najib (instructed by Anthony Collins Solicitors LLP) for the Defendant
Hearing dates: January 26 th– 30 th, February 2 nd, March 11 th 2009
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.
Mr Justice Floyd:
The first claimant, Cobbetts LLP, which is a solicitors' limited partnership, came into existence as a result of a merger of the business of the second claimant, Lee Crowder (“LC”) and another firm, Cobbetts in 2003. By this action the claimants seek to recover from Mr Mark Hodge, the defendant, shares in one of LC's clients, Envirotreat Limited (“EL”). They allege that the shares in EL were obtained by Mr Hodge, at a time when he was an employed partner of LC, in breach of duties he owed to LC not to profit personally. Accordingly, the claimants allege that the shares in EL are held on trust for the claimants, and that they are entitled to an account from him of the benefit he received from them.
Mr Hodge denies the claim on a number of grounds. Firstly he says that the acquisition of the shares was not a breach of any duty he owed to LC. In particular as an “employed partner” he was not subject to any of the express duties of partners contained in LC's partnership deed. His admitted duties of good faith and fidelity as an employee did not prevent him from acquiring the shares. Secondly he says that he obtained the consent of LC to the acquisition of the shares, with the result that the claimants are not entitled to complain now of something which they sanctioned at the time. Thirdly Mr Hodge says that the shares were given to him as remuneration for future work which he would do in his own capacity. Finally he says that, if he is found liable for the return of the shares, he is entitled by counterclaim to equitable allowances for the amounts paid by him for the shares; and for the time and skill expended by him in enhancing the value of the shares. The only issue of quantum which is now before me is that relating to the first of these allowances.
The factual background
Mr Hodge's engagement with LC
Mr Hodge was offered the position of “employed partner” with LC with effect from 26 th April 1999 by a letter from Mr Muth of LC dated 19 th April 1999. The letter attached a copy of LC's partnership deed (“the Deed”). The letter stated that Mr Hodge was to:
“(a) observe all rules of professional conduct which apply to you in any capacity;
(b) observe the firm's practices and procedures set out in the office manual…; and
(c) observe the relevant provisions of the Deed.”
The letter pointed out that, for taxation purposes, employed partners had been employed on a Schedule E basis, but that Mr Muth had no objection in principle to Mr Hodge being dealt with on a Schedule D basis. The letter provided that in the event of an inconsistency between the letter of appointment and the Deed, the letter should prevail.
Mr Hodge's letter of appointment provided for payment by means of a salary plus commission payments on newly introduced business. This is a factor relied upon by the claimants in support of their argument that Mr Hodge was in law a partner rather than an employee. In his second and third years, however, Mr Hodge was paid a much enhanced salary without a commission.
The relevant provisions of the Deed are as follows:
“Definitions and interpretation
1. …..
“ Employed Partner” has the meaning given to it in clause 8.
“ Equity Partner” means a Partner who has contributed to the capital of the Partnership.
“ Junior Partner” means a Partner who is entitled to a fixed share of the Net Profits in any Accounting Period but excludes any Partner who is an Equity Partner
“ Partners” means the parties hereto and any other person or persons admitted to the Partnership (including a Junior Partner) who agree by entering into a deed of accession (substantially in the form in Schedule 3 or in such other form as the Partners may from time to time agree) to be bound by the terms hereof …. but specifically excludes an Employed Partner and references to a “ Partner” shall be construed accordingly.
“Partnership” means the Partnership formed by the Partners under this agreement as varied at any time….
Employed Partner
8. The Partners may, subject to the agreement of a special majority, appoint a person as an employee of the Partners who is to be known, and held out, as a partner (an “Employed Partner”). An Employed Partner shall not be required to contribute to the capital of the Partnership and shall not be entitled to:
(A) share in the Net Profits; or
(B) attend meetings of the Partners; or
(C) take part in the management or conduct of the Partnership; or
(D) sign any cheques relating to any account in the Firm Name; or
(E) any sum in excess of the remuneration and other benefits stipulated in such Employed Partner's contract of employment.
An Employed Partner will at all times be an employee of the Partners and shall be entitled to…[provisions for an indemnity]”
Clause 20 provided for the duties of Partners: for example to devote all their time to the Partnership, to promote the Partnership Business and to declare gifts. Clause 22 provided that Partners should not engage directly or indirectly in any business other than that of the firm.
Envirotreat Limited
EL was a client of LC, engaged in the business of remedying land pollution. The directors and principal shareholders were a Mr Neil McLeod and his wife Karen McLeod. Karen McLeod was closely involved in the running of the firm: she and her husband operated closely together as a team. The technology operated by EL was the subject of patent protection in the name of the McLeods. There was an informal licence in favour of EL.
Over the years, EL had had difficulties raising sufficient capital to expand its business. In due course, in about August 2000, the company approached BDO Stoy Hayward (“BDO”) to prepare a report on its solvency, but BDO's insolvency department passed the matter on to a corporate finance partner with a view to seeing whether finance could still be raised. BDO considered a number of approaches to raising finance. Ultimately, EL instructed BDO to compile a Private Placing Memorandum (“PPM”). The accountant at BDO with principal responsibility for the PPM was Mr Alan Ward.
Mr Ward was anxious to point out in his evidence that it was not BDO's function to act as a broker. Nevertheless is quite clear that BDO were active in sending out summaries of the investment opportunity and, subsequently, the PPM.
Mr Ward recommended that Mr Hodge of LC be instructed to act in relation to the sale of the shares, and introduced Mr Hodge (with whom he had worked previously) to EL.
Before the PPM could go ahead, EL needed to restructure its relationship with a company called Rowe Technology. Rowe Technology had enjoyed exclusive sales and marketing rights in respect of the EL business. In addition it had rights with respect to the raising of capital. The existence of the relationship with Rowe Technology in this form represented an obstacle to the PPM.
LC's letter of engagement was dated 23 rd October 2000 and addressed to Mr and Mrs McLeod. It confirmed that LC had been asked to act in relation to (a) the sale of minority shares in EL; (b) the re-negotiation of existing agency arrangements; (c) the subscription for new shares in the company as part of a primary funding round and (d) the licensing of IPR. Mark Hodge was to have day to day conduct.
LC's letter of engagement did not expressly require LC to assist in finding investors. But LC had an established ethos of “adding value” for clients wherever possible, and, as part of this, had a practice of introducing clients to investors whenever appropriate. Mr Hodge was aware of this practice.
The fundraising was intended to benefit from the Enterprise Investment Scheme, so that investors subscribing for shares would be eligible for tax relief, provided they remained invested in the company for three years.
It was the view of the McLeods, recorded for example in a letter from Mr Ward to a potential investor in October 2000, that the value of EL was approximately £3m. The value of the company was attributed largely to the patents it held.
In the course of 2001 LC assisted EL with the negotiations with Rowe Technology. This also involved a restructuring of EL. Mr McLeod was nevertheless looking to the future. On 26 th April 2001 he emailed Mr Ward of BDO with his thoughts after visiting a Roadshow organised by OFEX, a competitor market to the AIM which had clearly excited his interest. He communicated his view that one of the five key elements for achieving a successful flotation was the need to bring on board appropriate personnel at board level, an element which he described as “absolutely essential”.
The PPM
In October 2001 BDO informed LC that they (BDO) were now looking to raise £500,000 of finance for the company.
Also in October 2001, Mark Hodge was told that there was no prospect of his becoming an equity partner in LC. As a result, he gave six months' notice of his resignation from the firm. In consequence his engagement would cease in April 2002. He continued to work for LC, including working on the EL file, during his period of notice.
By November 2001 EL was running on...
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