Paul Richards and Another v I P Solutions Group Ltd

JurisdictionEngland & Wales
JudgeMrs Justice May DBE
Judgment Date22 July 2016
Neutral Citation[2016] EWHC 1835 (QB)
Docket NumberCase No: HQ15X04419
CourtQueen's Bench Division
Date22 July 2016

[2016] EWHC 1835 (QB)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Mrs Justice May DBE

Case No: HQ15X04419

Between:
(1) Paul Richards
(2) Keith Purves
Claimants
and
I P Solutions Group Ltd
Defendant

Mr Richard Leiper (instructed by Clyde & Co) for the Claimants

Mr Chris Quinn (instructed by DMH Stallard) for the Defendant

Hearing dates: 1 July, 4 – 7 July 2016

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.

Mrs Justice May DBE Mrs Justice May DBE

Introduction

1

On 29 July 2015 the Claimants (respectively "PR" and "KP") were summarily dismissed from their service with the Defendant ("the Company"). At the time of their dismissal PR was the CEO and KP the Sales Director; each held a 30% shareholding. Just under 9 months later, on 18 January 2016, the Company required the Claimants to transfer their remaining shareholding for the nominal sum of £1, under the "Bad Leaver" provisions of the Company's Articles of Association.

2

In these proceedings PR and KP challenge the legitimacy of those two events and seek relief, including a declaration that their dismissal was wrongful, damages and a further declaration that they continue to hold their shares in the Company.

Background and outline of events

3

In 2001 the Claimants founded a business called IP Solutions (IPS). IPS was and is a unified communications provider, integrating a range of communication technologies under one umbrella solution delivered via a hosted cloud platform. The business prospered. By 2014 IPS had won a number of industry awards, employed 20 people and had an annual revenue of some £8million.

Investment – Project Spur

4

In 2014 the Claimants decided to take their business to market, where it received considerable interest. After examining the various options open to them (e.g. outright sale to a trade buyer or part-sale with investment for further development) they entered negotiations with a private equity house, Livingbridge ("LB"). The deal became known as Project Spur. In broad terms LB was to provide investment and to become equal shareholder, with each of the Claimants, in a holding company which would acquire the shares in IPS. The deal concluded on 3 December 2014 when the Claimants sold their shares in IPS to the Company for just under £2million each, at the same time acquiring a 30% shareholding.

5

A key component of Project Spur was the financial forecasting model constructed during negotiations and adopted as a performance tool for the purposes of the investment. The use of such models is commonplace in private equity investments, enabling the investor to track the progress of its investment and to set expectations for the value of the target business. For the purposes of the investment in this case, the model was constructed using the services of a specialist consultancy, Oakley Ltd ("Oakley"), who worked together with the Claimants and with an in-house analyst at LB, Mo Aneese ("Mr Aneese"). The Claimants provided and warranted existing sales figures and expected growth targets, around which the model was built by Oakley in conjunction with Mr Aneese. The model underwent several iterations over the course of the negotiations with the final version being incorporated into the agreement and known as "Spur 57". Crucially, the Spur 57 model included a test for determining whether or not a management bonus would be payable in any quarter-year, as to which see further below.

6

Upon the investment and transfer of their shares in IPS, the Claimants were appointed directors and became employees of the Company under a service agreement. A fellow founder, Andrew Lindsell ("ALind"), who had held a lesser shareholding in IPS also transferred his shares to the Company and he too became a director and employee. LB was represented on the Board by one of its senior investment managers, Paul Morris (PM"), appointed as the non-executive investor director. A further LB employee, Amy Yateman-Smith ("AYS"), was involved in overseeing the business on behalf of LB together with PM. AYS attended Board meetings but was not appointed as a director until the meeting on 29 July 2015 at which the Claimants were dismissed.

7

The post of Finance Director at the Company was filled initially by Rory Webster ("RW"). RW's appointment was temporary, lasting until the end of February 2015. A new Finance Director, Niall Daly ("ND"), started with the Company on 1 April 2015. An independent non-executive Chairman, Andrew Lockwood ("AL"), was located and introduced by LB and appointed to the Board with effect from 30 April 2015.

8

The investment deal generated a voluminous quantity of contractual documentation, the vast majority of which remained unexamined by counsel before me. However certain provisions of two documents in particular were relevant to the issues which I had to decide, being the Company Articles of Association and the Service Agreements for each of PR and KP.

Company Articles of Association

9

The Company Articles of Association agreed at the time of the investment contained specific provisions for the transfer of shares upon the event of any shareholder "leaving" the Company. Of particular relevance in this case are the following definitions and articles:

" " Bad Leaver" means:

(a) a person who ceases to be an Employee:

(i) where the person terminated his contract of employment with his employing company other than in circumstances constituting him a Good Leaver (provided that sub clause (i) shall not apply to Paul Richards and/or Keith Purves and/or Andrew Lindsell);

(ii) in circumstances where he is dismissed, or his employing company was entitled to dismiss him, for a reason justifying summary dismissal (other than where such circumstances would otherwise constitute a Good Leaver event); or

(iii) ceases to be an Employee for whatever reason and who, whether before or after he ceases to be an Employee, was or is in breach of clause 9.1 of the Investment Agreement (undertakings by the Managers); or

(b) a person who remains as an Employee but becomes entitled by reasons of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company, and who was or is whilst an Employee in breach of clause 9.1 of the Investment Agreement (Undertakings by the Managers).

" Good Leaver" means:

(a) a person (other than a Bad Leaver) who ceases to be an Employee where such cessation occurs for one of the following reasons:

(i) that person's death; or

(ii) illness or disablement of that person giving rise to permanent incapacity to continue in employment; or

(iii) the termination of that person's employment by his employing company:

(A) in circumstances that are determined by an Employment Tribunal or Court to be or amount to wrongful dismissal (and for the avoidance of doubt, this shall exclude any finding of unfair dismissal); or

(B) for reasons of redundancy; or

(iv) that person terminating his contract of employment with his employing company in circumstances where he has reached the age of 65 and is retiring; or

(b) a person who ceases to be an Employee where the Board with Investor Consent resolves that such person is to be treated as a Good Leaver in the circumstances where such person would not, but for this provision, be a Good Leaver; or

(c) an Employee (other than a Bad Leaver) who remains an employee but becomes entitled by reason of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company;

together with, in each case, any other person who becomes a Leaver as a consequence thereof

" Leaver" means:

(a) any Employee who is a shareholder who ceases to be an Employee for whatever reason;

(b) any person who becomes entitled to any shares:

(i) on the death of a Shareholder (if an individual);

(ii) on the receivership, administrative receivership, administration, liquidation or other arrangement for the winding up (whether solvent or insolvent) of a shareholder (if a company); or

(iii) on the exercise of an option after ceasing to be an Employee;

(c) any Shareholder holding Shares as a nominee for any person who ceases to be an Employee;

(d) any Employee who remains an Employee but becomes entitled by reason of illness or disablement giving rise to permanent incapacity to receive benefits under the permanent health insurance scheme of the Company or any other Group Company;

17.3 Transfers in respect of Leavers

Within the period commencing on the relevant Leaving Date and expiring at midnight on the date falling 9 months after such date, the Investors may direct the Company by an Investor Direction immediately to serve a written notice on a Leaver notifying him that he is, with immediate effect, deemed to have served one or more Transfer Notices in respect of such number and class of his Leaver's Shares as is specified in the Investor Direction (the " Sale Shares").

18. TRANSFER ARRANGEMENTS

18.1 In the event that a Shareholder is deemed to have served a Transfer Notice, the provisions of Article 19 shall apply to the Sale Shares and such Shareholder shall be obliged to transfer its shares in accordance with this Article 18 (the " Sale Price").

18.3 Save as otherwise set out in these Articles the Sale Price shall be:

18.3.1 in the case of a Good Leaver, the Market Value;

18.3.2 in the case of a Bad Leaver, £1 in aggregate for all the Sale Shares…"

The Claimants' Service Agreements

10

The Claimants were each employed by the Company under identical...

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4 cases
  • Paul Richards v Speechly Bircham LLP
    • United Kingdom
    • Queen's Bench Division (Commercial Court)
    • 29 April 2022
    ...her judgment dated 22 July 2016, Mrs Justice May DBE, determined that they had been wrongfully dismissed (“ the Liability Judgment”: [2016] EWHC 1835 (QB)). The result meant that the Claimants ought to have been categorised as Good Leavers. On that basis they claimed to be entitled to rece......
  • Daniel Lee (in his personal capacity and as Trustee of the Westerby Private Pension – D M Lee) v Gsquare Capital II LP
    • United Kingdom
    • Chancery Division
    • 30 November 2023
    ...remains unsettled and open to further development. 70 The first authority to which I was taken, Richards v IP Solutions Group Ltd [2016] EWHC 1835 (QB), may be of only limited utility, because the Judge in that case (May J), indicated that her comments concerning the penalty doctrine were ......
  • Paul Wells v Cathay Investments 2 Ltd
    • United Kingdom
    • Queen's Bench Division
    • 4 November 2019
    ...case can gross negligence”. 78 Mr. Quinn referred me to the decision of May J in Richards and Purves v IP Solutions Group Ltd [2016] EWHC 1835 (QB) where he summarises the test to be applied in determining gross misconduct and also the meaning of “ material breach”. At paragraphs 34 and 35......
  • Miss L Stock v J White: 3314613/2019
    • United Kingdom
    • Employment Tribunal
    • 27 December 2020
    ...without notice for a minor and inadvertent breach of its customer's security requirements. 16. In Richards v IP Solutions Group Ltd [2016] EWHC 1835 (QB), the clause in question referred to a “material” breach. It was held that that word (“material”) was intended to qualify the nature or se......
2 firm's commentaries
  • Case On Bad Leaver Provisions And Directors' Duties
    • Canada
    • Mondaq Canada
    • 20 October 2016
    ...recent High Court judgment on (1) Paul Richards (2) Keith Purves v I P Solutions Group Ltd [2016] EWHC 1835 (QB) offers key learning points both for private equity investors and for the founders of the businesses in which they invest. These relate in particular the need for management bonus......
  • Private Equity - Autumn 2016 Newsletter
    • United Kingdom
    • Mondaq UK
    • 19 October 2016
    ...leaver provisions and directors' duties A recent High Court judgment on (1) Paul Richards (2) Keith Purves v I P Solutions Group Ltd [2016] EWHC 1835 (QB) offers key learning points both for private equity investors and for the founders of the businesses in which they invest. These relate i......
2 books & journal articles
  • Contract law reform: Legislators or judges – or both?
    • South Africa
    • Juta Acta Juridica No. , August 2021
    • 23 August 2021
    ...to the debtor, where in either case the debtor’s obligat ion or the creditor’s power 59 R ichards and Purvis v IP S olutions Group [2016] EWHC 1835 (QB). 60 See fur ther LA DiMatteo ‘An exa mination of judic ial reasoning – whe n a penalt y is not a penalty’ (2017) 85 Geor ge Washington LR ......
  • Contract law reform: Legislators or judges – or both?
    • South Africa
    • Juta Acta Juridica No. , August 2021
    • 23 August 2021
    ...to the debtor, where in either case the debtor’s obligat ion or the creditor’s power 59 R ichards and Purvis v IP S olutions Group [2016] EWHC 1835 (QB). 60 See fur ther LA DiMatteo ‘An exa mination of judic ial reasoning – whe n a penalt y is not a penalty’ (2017) 85 Geor ge Washington LR ......

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