Interactive Technology Corporation Ltd v Jonathan Ferster and Others
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Asplin |
| Judgment Date | 16 February 2015 |
| Neutral Citation | [2015] EWHC 393 (Ch) |
| Date | 16 February 2015 |
| Court | Chancery Division |
| Docket Number | Claim No. HC-2014-000256 |
2015 EWHC 393 (CH)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
7 Rolls Buildings
Fetter Lane
London EC4A 1NL
Mrs Justice Asplin
Claim No. HC-2014-000256
Mr R Snowden QC and Mr N Dougherty (instructed by DAC Beachcroft LLP) appeared on behalf of the Claimant.
Mr C Freedman QC and Mr B Shaw (instructed by Herbert Smith Freehills LLP) appeared on behalf of the Defendants.
Monday, 16 February 2015
(10.30 am)
(As amended by the court)
. This was the return day hearing, in relation to a freezing injunction and search order and property preservation order (collectively referred to as "the orders") first made by Birss J on 21 November and subsequently amended by orders of Warren J on 23 November 2014, Arnold J on 26 November and Mann J of 4 December 2014. There were also two consent orders made by Arnold J on 1 December and 2 December 2014.
. The matter came before me in relation to three issues: first, to determine whether, and to what extent, the orders should be continued; second, an application for security for costs made by the defendants; and, third, to consider a further application by the claimant in relation to matters arising in relation to the execution of the search order.
. In fact it is not possible to deal with the security for costs application because the evidence is not complete and, in any event, there would not have been time to deal with the matter adequately. In addition, Mr Snowden, on behalf of the claimant, does not wish to proceed at present with the further application in relation to investigation of alleged deletions from the first defendant's, Mr Jonathan Ferster's, laptop after all.
. The underlying matter to which the orders relate involves allegations of breach of fiduciary duty, fraud and dishonest misappropriation of assets, made by the claimant, Interactive Technology Corporation Limited (the company or ITC), by the first defendant, Mr Jonathan Ferster (Jonathan). The second to fourteenth defendants (the corporate defendants) are all companies in some way directed by or owned — the correct characterisation of the relationship is in dispute — by Jonathan. Claims are also made against the corporate defendants as a result of and which flow from the alleged defaults by Jonathan. Jonathan and his brothers, Mr Stuart Ferster and Mr Warren Ferster (to whom I shall refer individually as "Stuart" and "Warren" and together as "Jonathan's brothers") are all directors and shareholders of the company. The company, as claimant, is directed in this matter therefore by Stuart and Warren.
. The relevant background is as follows. In 2004 an oral agreement (the oral agreement) was entered into by the brothers regarding the creation of a new business venture. The terms of the oral agreement are one of the key issues in dispute. However, what is undisputed is that, subsequent to this agreement, the company was incorporated in 2004 and an online gambling or gaming business was established (the gaming business). Whether the gaming business was a business of the company or of the second defendant, World Online Software NV (WOS), is a matter at the heart of the dispute as it is currently framed. Be that as it may, what is clear is that the gaming business was run primarily by Jonathan from 2005 until December 2014 (the relevant period) with some provision of information to Jonathan's brothers for at least some of that time. During that time the gaming business appears to have been successful and Jonathan was able to award himself pay in excess of £6 million over that period, as well as other sums approximating £1 million each for Jonathan's brothers. It is alleged that these wages, or remuneration awards, were excessive and were supplemented by misuse of expenses. It is further alleged that the resultant lifestyle of Jonathan is what led Jonathan's brothers to have suspicions about the running of the company and the gaming business and set in train the events which have led to the hearings.
. I should note that the defendants dispute that this matter really concerns accusations of dishonesty and contend that it is being used by Jonathan's brothers as part of a mechanism to extract payment from Jonathan in respect of a buy-out of Jonathan brothers' shares in the company. I understand that a separate application under section 994 of the Companies Act 2006 is being brought by Jonathan against Jonathan's brothers in this regard.
. It is common ground that the idea of becoming involved in gaming business arose in late 2004 and that this led to the company being incorporated on 9 December 2004 and that the brothers were each appointed as directors. At this point there was only one subscriber share which was held by Jonathan on trust for the brothers and Mr Binnes in equal shares. In early 2005 WOS was established by Jonathan. WOS is 99 per cent owned by Jonathan. WOS is the entity which holds the Curacao gaming licence under which the gaming business operates. In 2007 Mr Binnes left the business and shares were allocated so that each brother held one-third of the company.
. Jonathan's case set out in his evidence and now in his defence, dated 6 February 2015, is that there was an oral agreement between the brothers that the gaming business would be the sole preserve of Jonathan and that the activities of the company would be restricted to providing ancillary services to the gaming business. It is stated that this structure was decided upon based on advice received from Tarlo Lyons, a firm of solicitors, regarding the legality of operating gaming business from the United Kingdom. Jonathan's case is that the gaming business is the business of WOS and that he holds his shares in WOS both legally and beneficially.
. It is said that payments received in respect of the gaming business are received and made by at least some of the corporate defendants and in fact WOS does not have a bank account. The reason for this arrangement, it is suggested, is that payment processors will not deal with companies which appear to be gaming companies.
. It is also said that payments received by the corporate defendants are then remitted to the company which holds them on behalf of WOS. It is said that since 2012, at least, these have been treated as loans from WOS to the company and that on an annual basis, at the financial year-end, a charge made by the company to WOS in respect of the ancillary services provided to it is set-off against the loan or extinguishes it. Under this arrangement it is pleaded that the profits of the gaming business are themselves paid into the company and then disgorged as dividends or wages to the brothers.
. I should note in passing that it is not pleaded that there is any contractual or other obligation which requires the profit allegedly generated by WOS in the course of the gaming business to be paid into the company in full or otherwise.
. This account is disputed on behalf of the company which maintains that from the start and at all times the gaming business properly belonged to it and that the shares in WOS owned by Jonathan are held in trust for the company. I think it is fair to say that claimant has not at this stage committed itself to a full account of the role of the corporate defendants which appears to me to be understandable given the situation with disclosure of papers with respect to those entities.
. However, for present purposes the claimants seem to accept that at least some of the corporate defendants have some role in the gaming business and that payments have been channelled through some of those companies' bank account which have been described as being held on trust for the company, something to which I shall return.
. Whatever the terms of the original agreement, it appears that in fact until very recently the gaming business was treated as owned by the company in its accounts.
. In 2012 an asset purchase agreement was entered into by the company and signed on its behalf by Jonathan which purported to transfer the gaming business to WOS for the consideration of around £826,000. A supply of services agreement was also entered into on the same date as a result of which the company purportedly provides ancillary services to WOS.
. It is the claimant's case that the asset purchase agreement and the supply of services agreement were entered into fraudulently under cover of a fabricated board minute in order effectively to transfer the value of the gaming business from the company to Jonathan. In answer to this, the defendants submit that the historic accounting treatment was incorrect and that Jonathan was advised by the company's Chief Financial Officer, Mr Hosker, that the correct way to remedy these errors and to make sure that the paper matched the reality was to execute the two agreements. Jonathan now says that this itself was an error, that the agreements were unnecessary and that a restatement of accounts would have been the correct approach. He also admits that he had fabricated the board minute in which it is stated that all three brothers approved the two agreements on behalf of the company.
. I should add...
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Interactive Technology Corporation Ltd (Claimant/ Respondent) v Jonathan Ferster and Others
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