Giles v Rhind
| Jurisdiction | England & Wales |
| Judge | HIS HONOUR JUDGE RICH QC |
| Judgment Date | 24 October 2003 |
| Neutral Citation | [2003] EWHC 2830 (Ch) |
| Court | Chancery Division |
| Docket Number | 9600484 |
| Date | 24 October 2003 |
[2003] EWHC 2830 (Ch)
His Honour Judge Rich QC
9600484
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2
CLAIMANT appeared in PERSON
DEFENDANT appeared in PERSON
Tuesday, 21 October 2003
This is an assessment of damages for breach of contract in accordance with the order of Mr Kalipatis sitting as a deputy judge. His order is dated 9 February 2000 and was that:
"The defendant pay to the claimant damages to be assessed for breach of a written contract, dated June 1990, and breach of the contractual duty of confidence contained in it and the court declares that the defendant's breaches of contract and breach of contractual duty of confidence caused Netto to divert its business away from Sunny Hill Foods Limited."
Paragraph 2.5 of that order directs that there be a trial on the issue of what damages should be paid by the defendant and that at that trial the determinations of fact set out in paragraph 1, which I have just read, and a declaration of this order should not be subject to challenge.
Before such trial proceeded, a preliminary issue was, however, raised as to whether the damages claimed were recoverable, having regard to a decision of the House of Lords which followed the making of that order. In that decision it had been held that a loss claimed by a shareholder against a wrongdoer, which would be made good if the company enforced its full rights against that wrongdoer, is not recoverable by the shareholder directly from the wrongdoer. That issue of recoverability was determined by the Court of Appeal in a judgment dated 17 October 2002. The background facts are conveniently set out in paragraphs 2 to 15 of Lord Justice Waller's judgment He said in paragraph 2:
"Mr Giles and Mr Rhind were formerly directors and shareholders of a company called Sunny Hill Foods Limited ("SHF"). SHF had been formed by them in 1987, at which time they each held approximately 50 per cent of the issued shares, 12 shares being issued to a third person who does not feature further in the story. The principal activity of SHF was to run a business concerned with the manufacture of cooked meats suitable for use in pizzas, ready meals or canned products.
"The business was a success and in July 1990 the company was able to attract a range of capital support from an organisation called APA Ventures ("APAX"). This enabled SHF to expand by acquiring a cooked meat business based in Northampton. APAX invested £1.285 million, receiving in return a quantity of ordinary shares, preference shares and convertible unsecured loan stock. Others, including a family trust, invested a further £27,500. Existing shareholdings were divided into 1 penny ordinary shares. Mr Giles in result held 19,900 ordinary shares, Mr Rhind 18,900 ordinary shares and the third party 1,332 ordinary shares. The shareholding of Mr Giles and Mr Rhind represented approximately 20 per cent of the issued ordinary share capital.
"The directors also subscribed for convertible unsecured loan stock carrying interest of 18 per cent. Mr Giles became the holder of £81,333 of the stock. The stock was redeemable at the option of a director on or before 10 June 1997 or convertible at the stated rate into ordinary shares of 1 penny each. Mr Giles was appointed managing director of SHF, Mr Rhind the commercial director, a Mr Hancock was appointed chairman and Mr Freedman was also appointed to the board.
"By the terms of APAX's investment in SHF, the acquisition of a Northampton business and the alteration of SHF's shareholdings and other changes made necessary by this development in the company's fortune were enshrined in a subscription of shareholders' agreement and a sale agreement, each dated 11 June 1990. At the same time Mr Giles and Mr Rhind entered into service agreements with SHF under which they were entitled to remuneration and, as I understand it, pension rights.
"Since it was a term of the subscription and shareholders' agreement to which APAX, Mr Rhind, Mr Giles and SHF were parties, that: 9.1, each of the parties agrees to keep secret and confidential, not to use disclose or divulge to any third party or to enable or cause any person to become aware of (except for the purposes of company's business) any confidential information relating to the company, including —[there then followed a list of various matters.]
"Clause 9.2 contains restrictions on the part of Mr Giles and Mr Rhind, expressed to be for the purpose of protecting APAX's investment in the business concerning their involvement in other businesses after their employment by SHF should cease. Matching provisions in substantially similar terms were contained in the service agreements entered into by Mr Giles and Mr Rhind. As a result of the relocation from Northampton the business of SHF progressed, the turnover increasing from approximately £4.5 million to £12.5 million by the year ending March 1994. It initially traded at a considerable loss but by March 1993 it was operating at a small net profit.
"It was alleged in paragraph 9.2 of the statement of claim in the action between Mr Giles and Mr Rhind that part of the confidential information belonging to SHF was the fact that SHF had a large lucrative contract with Netto Food Stores Limited for the supply of cooked meat and that the future solvency of SHF would depend largely on the continuance of that contract. That paragraph was expressly admitted by Mr Rhind in his amended defence.
"Unhappily, by the beginning of 1993 the relationship between Mr Rhind and Mr Giles had broken down. In March 1993 the board of SHF decided Mr Rhind would have to go. He did so, ceasing from March 1993 to be in the company's employment but continuing as a shareholder and director. Terms for Mr Rhind's resignation included a termination payment of £32,000 and his written acceptance of certain provisions of his service agreement and all material provisions of his subscription and shareholders' agreement would continue.
"In June 1993 Mr Rhind set up his own food business, operating through a company called Bedfield Foods Limited. In September 1993 before Mr Giles or, one assumes, APAX had any knowledge of Mr Rhind's plans, Mr Rhind sold his shares, only slightly fewer than Mr Giles' holdings, to APAX for £331,000, £11,000 having been paid off by SHF, and having achieved payment for his shares Mr Rhind then, in breach of his covenant with SHF, APAX and Mr Giles, in effect stole the business of SHF.
"The details are set out in the judgment of Mr Michel Kalipatis QC sitting as a deputy High Court judge when he gave judgment for liability in this action. He found, in effect, that Mr Rhind had masterminded the diversion of the Netto contract from SHF to a company, MW Foods Limited, making use of the confidential information of SHF. Having regard to the admission by Mr Rhind of the importance of the Netto contract, there can be little doubt that he intended by his conduct to destroy the SHF business and the value of any investment which APAX and Mr Giles had in that business.
"In March 1994 SHF launched proceedings against Mr Rhind, MW Foods Limited, and Bedfield Foods Limited and two other individuals who were former employees of SHF. The writ in that action set out a claim for injunctive relief against the individual defendants and also claimed damages for breach of contract together with an order for delivery up of such confidential information as they had. SHF applied by summons in that action for interim injunctive relief but the matter never came on for hearing. On 15 April 1994 SHF was placed in administrative receivership. At this stage Mr Rhind was stoutly denying any involvement in the misuse of confidential information and stoutly denying any involvement in MW Foods Limited. Thus, in that action, as noted by Mr Kalipatis in paragraph 37 of his judgment, Mr Rhind swore an affidavit stating: 'I should make it clear that I am not and never have been a director of nor a shareholder in MW Foods and have never been involved in MW Foods' activities.' Mr Kalipatis found that that cannot be a truthful statement.
"An application was made for security of costs and it seems that again, according to the judgment of Mr Kalipatis, APAX was not willing to put up the security. As a result, SHF did not have the money to pursue the action and SHF discontinued that action in June 1994. The consent order provided for discontinuance on the basis that it precluded SHF from bringing any further action against any of the defendants in respect of his claims in the action.
"It was in that context that Mr Giles began this action in January 1996. He alleged breaches of the shareholders' agreement, so far as there were covenants in his favour, and asserted that he had suffered loss and claimed for the value of his shares in the business and for the remuneration unparticularised which he otherwise would have earned. Mr Rhind initially put in an uninformative defence making no admissions but ultimately, by an amended defence, asserted that he had not breached any covenant in the way alleged by Mr Giles. Mr Rhind also asserted that Mr Giles would be estopped from bringing proceedings by virtue of the discontinuance of the action by SHF and the terms of the order obtained therein. There was no assertion that the loss and damage claimed by Mr Giles would in any event be irrecoverable.
"The trial on liability came on before Mr Michel Kalipatis QC. Mr Rhind continued to suggest that he was not in breach of any covenant and that he was not a party to the using of confidential information for the purposes of persuading Netto to terminate their contract with SHF and a contract with...
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