Interactive Technology Corporation Ltd (Claimant/ Respondent) v Jonathan Ferster and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Tomlinson,Mr Justice Keehan,Lord Justice Moore-Bick |
| Judgment Date | 28 June 2016 |
| Neutral Citation | [2016] EWCA Civ 614 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 June 2016 |
| Docket Number | Case No: A3/2015/1098 |
[2016] EWCA Civ 614
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MRS JUSTICE ASPLIN
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moore-Bick
(Vice President of the Court of Appeal, Civil Division)
Lord Justice Tomlinson
and
Mr Justice Keehan
Case No: A3/2015/1098
Alan Gourgey QC and Nigel Dougherty (instructed by DAC Beachcroft LLP) for the Claimant/Respondent
Andrew Thompson QC and Ben Shaw (instructed by Herbert Smith Freehills LLP) for the Defendants/Appellants
Hearing date: 24 May 2016
Approved Judgment
This interlocutory appeal concerns the duty of full and frank disclosure which rests upon applicants applying without notice for the grant of freezing orders and property preservation and search orders. The nature of this salutary duty is well-known as is its extent and the likely consequence of a failure to observe it. This appeal raises no issue of principle but simply calls into question a judge's essentially factual assessment that there had in this case been no such failure.
The dispute underlying this appeal is a falling-out between brothers, due to be resolved in the Chancery Division in a 23 day trial currently being heard by Morgan J. The issues debated on this appeal, which we heard and dismissed on Tuesday, 24 May 2016, fall within a very small compass. It is difficult to resist the conclusion that the bringing of the appeal, ultimately of benefit only to the lawyers instructed to conduct it, who did so with great skill, had more to do with amour propre than with the realities and the requirements of the litigation. Such is often sadly the case when friends and relatives fall out.
The Claimant/Respondent Interactive Technology Corporation Ltd, hereinafter "ITC", is owned in equal shares by three brothers, Jonathan, Warren and Stuart Ferster. ITC claims that, in 2005, it began trading as the operator of online gaming websites. Although all three brothers are directors, the business was from the start managed by Jonathan, who is the First and principal Defendant and the principal Appellant. Since 2007 Warren and Stuart have played no active role in the running of the business.
In the course of time it appeared to Warren and Stuart that ITC was funding for Jonathan a more lavish lifestyle than that which they enjoyed. By September 2014 they were prompted to enquire into the business of ITC. It is their case that they discovered that ITC had been systematically defrauded by Jonathan. In particular it is said by Warren and Stuart that:
i) Jonathan had established a web of companies, both in England and overseas, namely the Second to Fourteenth Defendants, which he claims to own to the exclusion of ITC or his brothers;
ii) One such company is the Second Defendant, World Online Software NV, hereinafter "WOS", incorporated in Curacao. This company held the gaming licence on trust for the benefit of the business conducted by ITC;
iii) By an Asset Purchase Agreement signed in May 2013 but backdated to January 2012, Jonathan secretly purported to cause ITC to transfer substantially all of its principal assets to WOS, and purported to cause ITC to enter into a Supply of Services Agreement to facilitate the future operation by WOS of the business previously owned by ITC.
It is common ground that in order to give effect to this last transaction Jonathan fabricated a board minute of ITC purporting to record a meeting at which all three directors had been present and had approved the transaction. It is accepted that no such board meeting took place and that Warren and Stuart were ignorant of the contractual arrangements hereinbefore described. It is also seemingly Jonathan's case that, as the controller of WOS, he could simply cause WOS to terminate the sales and marketing arrangements with ITC, resulting in ITC having no substantive business and no source of income, with Jonathan, as the claimed beneficial owner of WOS, remaining as the ultimate beneficiary of the valuable gaming business.
The contention of ITC in this litigation is that these transactions were effected by Jonathan without any authority and in manifest and dishonest breach of his fiduciary duties owed to ITC and that they are accordingly void and of no effect.
It is also said by Warren and Stuart that since 2009 Jonathan has caused ITC to pay to himself about £3.8 million by way of unauthorised remuneration. That is sought to be recovered in this litigation.
The Third to Fourteenth Defendants are companies that conducted no business of their own but acted as conduits or depositories for funds generated by the online gaming business of ITC or to hold other assets, such as licences, used in that business.
On 22 September 2014, shortly after Warren and Stuart had confronted Jonathan with his alleged wrongdoing, about £1.25 million was transferred from ITC to the Seventh Defendant, a company of which Jonathan is the sole beneficial owner. Warren and Stuart say that this was done in order to place the funds beyond the control of ITC and thus, indirectly, themselves.
The current trial before Morgan J will determine not only ITC's claims against Jonathan and the other defendants but also Jonathan's petition under section 994 of the Companies Act 2006 alleging unfair prejudice against Stuart and Warren. The case is therefore both a claim by a company to recover its property and/or compensation from an errant director and from those who have received that property and a shareholders' dispute.
On 21 November 2014 ITC applied without notice to Birss J in the Chancery Division for a freezing and property preservation order and for a search and seizure order against the Defendants. Jonathan was of course the principal target of these orders and it was at his home that the search and seizure order was executed on 24 November 2014, and also at ITC's offices.
On the return date in February 2015 Asplin J had to consider various matters including whether and to what extent the orders should be continued. One relatively small part of the argument before her was concerned with the question whether the orders should be set aside on the ground of material non-disclosure by ITC in obtaining them. The judge concluded that there had been no material non-disclosure before Birss J. It is against that conclusion that the Defendants appeal on three distinct grounds, permission on that limited basis having been granted by the single Lord Justice.
Ground 1
Before Birss J ITC relied, inter alia, upon an affirmation made by Sydney Fulda, a partner in its solicitors, DAC Beachcroft LLP. Paragraph 35 of that affirmation read:
"35. As a result of the above, I consider that if the Respondents were put on notice of this application the First Respondent would realise the potentially severe impact the ultimate claim may have against him (and the other Respondents he controls) and would take steps to dissipate assets of the Company and, indeed, his own assets. I believe that unless the Search Order is given some effective sanction, there is a serious risk that the First Respondent would take immediate steps to ensure that anything that was incriminating or unfavourable to him or the other Respondents would be concealed or destroyed."
ITC also relied upon an affirmation made by Warren Ferster which recorded that he had read Sydney Fulda's affirmation in draft. It is alleged by the Defendants that ITC failed to reveal to the court that Jonathan's brothers did not believe that there was any risk of destruction of documents, as Warren would in due course inform Jonathan on 13 January 2015.
On 13 January 2015 there took place a board meeting of ITC attended by all three brothers and by Catherine Emanuel, an Associate at Herbert Smith Freehills LLP, the Defendants' solicitors and by Victoria Bates, an Associate at DAC Beachcroft LLP working under the supervision of Mr Fulda. The meeting was recorded. Perhaps unsurprisingly it was acrimonious. Police officers had accompanied the supervising solicitor when executing the search and seizure order. Jonathan considered that, apart from anything else, his brothers' actions had damaged and were continuing to damage the business. Jonathan also maintained that there had been no need "to go behind his back" for a search or freezing order. He maintained that he had been providing information as requested both before and after the meeting of 22 September 2014 which had precipitated the removal of £1.25 million from ITC.
One of the topics which arose in heated discussion at the board meeting was...
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Interactive Technology Corporation Ltd (Claimant) (1) Jonathan Ferster (Defendants) (2) World Online Software N.v (a company incorporated in Curaçao) and Others
...that they would give their reasons later for their decision. Those reasons were given in judgments handed down on 28 June 2016: see [2016] EWCA Civ 614. 131 On 8 to 10 June 2016, the parties attended a three-day mediation in relation to this dispute. The parties did not reach a settlement ......