Paul Wells v Cathay Investments 2 Ltd
| Jurisdiction | England & Wales |
| Judge | Simpkiss |
| Judgment Date | 04 November 2019 |
| Neutral Citation | [2019] EWHC 2996 (QB) |
| Date | 04 November 2019 |
| Court | Queen's Bench Division |
| Docket Number | Case No: QB — 2019 — 001942 |
[2019] EWHC 2996 (QB)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
His Honour Judge Simpkiss (sitting as a deputy judge of the QBD)
Case No: QB — 2019 — 001942
Chris Quinn (instructed by Simons Muirhead and Burton LLP) for the Claimants
Edward Levey and Nick Daly (instructed by Dentons UK and Middle East LLP) for the Defendants
Hearing dates: 22 nd to 26 th, 29 th and 30 th July 2019
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.
Introduction
The Claimants bring this claim for damages for wrongful dismissal and for declarations that they did not act in material breach of their Employment Agreements with the Second Defendant and are entitled to be paid a fair value for their shares in the Second Defendant. They allege that the sole reason for their dismissal was to enable the First Defendant to avoid paying them the fair value of their shares in the Second Defendant under option agreements. There are also issues about the enforceability of restrictive covenants in the Claimants' employment and shareholder agreements with the Second Defendant.
Introductory Background
The Second Defendant is a transport and logistics business. Its chairman was until the transactions referred to below, Mr. Paul Solari, the father of the Second Claimant. He and Mr. Geoffrey Osgood were the directors, resigning on 18 th January 2017.
In 2007 the First and Second Claimants commenced employment with the Second Defendant, then called Unitas. It was incorporated in 2011. Mr. Daniel Stokes was the Financial Controller of the Second Defendant.
In 2016 the First Defendant approached the Second Defendant with a view to purchasing it. On 20 th January 2017 the transaction went ahead with various agreements being entered into:
a) The Share Purchase Agreement (“SPA”);
b) The Employment Agreements (“ EA”)
c) The Put and Call Option Agreements (“OA”)
d) The Shareholders' Agreement (“SHA”).
Mr. Kevin Johnson and Mr. Ben Chaing were and are directors of the First Defendant. On 18 th January 2017 they were appointed the sole directors of the Second Defendant and this remains the position.
At the time of these transactions the shares in the Second Defendant were held as follows:
a) Mr. Solari Snr: 41%;
b) Mr. Geoffrey Osgood: 48%;
c) Mr. Dan Stokes, the financial controller of the Second Defendant: 1% given to him by Mr. Solari Snr shortly before the transaction;
d) The Claimants: 5% each.
In the transactions Mr. Solari Snr, Mr. Osgood and Mr. Stokes agreed to sell their shares to the First Defendant. The Claimants retained their shares, but entered into the OAs. They continued their employment with the Second Defendant and entered into the EAs. Mr. Osgood continued with the Second Defendant on a part time consultancy basis.
The Claimants were employed by the Second Defendant throughout 2017 and 2018. On 2 nd January 2019 they exercised their put options, requiring the First Defendant to purchase their shareholdings for a Fair Value. Under the terms of the EAs once a notice had been served in exercise of the Put Options, that Claimant's employment by the Second Defendant was automatically terminated 3 months after notice.
The parties were unable to agree the value of the shares and the Second Defendant instigated disciplinary proceedings against the Claimants. These resulted in the termination of their respective employments on the grounds of gross misconduct on 22 nd March 2019. On 28 th March 2019 the Second Defendant's solicitors gave notice to the Claimants that they were in Material Breach of the terms of the OAs and that they were required to transfer their respective shareholdings to the First Defendant at nominal value. The Claimants appealed under the disciplinary process, but the appeals were dismissed.
The Agreements
The Share Purchase Agreement (“SPA”)
This agreement was made between Dan Stokes, Geoffrey Osgood, Paul Solari Senior (the “Sellers”); the First Defendant (the “Buyer”) and the PNC Global Logistics (UK) Limited (“the Subsidiary”).
By Clause 2 of the SPA each seller agreed to sell to the buyer the shares that they owned. The consideration was set out in Clause 3 and divided into Initial Consideration and Deferred Consideration. The Initial Consideration was agreed at £3,194,066. Clause 3.3 provided that the amount to be paid on completion was the balance after deducting from this sum various other sums. These included:
a) The Suggero Indebtedness (£438,416 owed by Suggero369UK Ltd to the Second Defendant);
b) A director's loan of £88,584 owed by Geoffrey Osgood to the Second Defendant;
c) The loan of £522,000 owed by Ticco Foods to the Second Defendant;
d) The Retained Consideration;
e) All other deductible amounts set out in the Completion Statement.
The Deferred Consideration was provided for in Schedule 6 of the SPA and was limited to a maximum of £2,100,000. There were two periods during which Deferred Consideration might arise. Each could give rise to a liability for the Second Defendant to make further payments to the Sellers if Group EBITDA during each period exceeded the EBITDA target for that period. If the Group EBITDA during each period fell below £1,000,000, then the Sellers were liable to make payments to the First Defendant of a Shortfall Payment. Group EBITDA was defined as the aggregate of EBITDA for the Group during the relevant period, and Group was defined as the Second Defendant and the Subsidiary.
The EBITDA target for the First Deferred Consideration Period was £1,050,000 and for the Second Deferred Consideration Period was the higher of the First EBITDA target and the actual group EBITDA during the First Deferred Consideration Period provided it was no higher than £1,400,000.
Schedule 8 makes provision for calculating the Retained Consideration. For example, if there is a Shortfall payment due, this can be set off against the sum retained or if there is a Leakage Payment due from them as defined in Clause 8. It is not necessary for me to go into any further detail at this stage.
Clause 6 sets out the warranties that the Sellers gave to the Buyer. These are set out in more detail in in Schedule 3 and in the Tax Warranties.
Clause 6.7 provides an express warranty that the Sellers have made due, diligent and careful enquiries of each other and of the First Claimant before giving each warranty or making the statement made in the Disclosure Letter.
Finally, Clause 11 sets out various restrictive covenants entered into by the Sellers.
Schedule 3 sets out the warranties, which included at 5.1.3 a warranty that the Locked Box Accounts gave a true and fair view of the state of the Second Defendant at the Locked Box Date and of the results for the period ended with that date or the Accounts Date as appropriate. The Locked Box Date was agreed as 30 th June 2016 and the Accounts Date 30 th March 2016.
The Employment Agreements (“ EA”)
The Claimants were retaining their shareholdings in the Second Defendant as they believed that following the take-over, the Second Defendant would prosper and they would therefore increase the value of their shares. Mr. Kevin Johnson, a Director of the First Defendant, said that although the First Claimant's name appears in the SPA and that he may initially have intended to sell his shares, this would not have been agreed by the First Defendant, as they wanted some continuity in the senior management.
For statutory purposes the date of their employment by the Second Defendant was agreed as having started on 2 nd July and 3 rd December 2007 respectively. Their respective salaries were £82,700 and £81,100 respectively. They were based at the Second Defendant's premises in Egham.
It was expressly provided that the Second Defendant was required to give three months notice of termination of their employment in writing. Similarly, the Claimants could terminate their employment on three months notice. If either party exercised the put or call option under the OA, then they were deemed to have given three months notice of termination of employment on that date, unless notice had already been served for an earlier period.
It was expressly provided that the disciplinary rules regarding any disciplinary action that might be taken against the Claimants were set out in the employee handbook. The appeal process was also set out in the employee handbook.
There was dispute about whether the Claimants saw any handbook at the time of entering into the EAs and, if so, which version – the 2015 or 2016 version? The Defendants also contended at the start of the trial that the version of the handbook produced by the Claimants had been “ doctored”. This allegation was withdrawn following the evidence. It was potentially relevant to the allegation that the Second Claimant was in serious breach of his EA because there is an express term in the 2016 version that (a) the email or internet system should not be used for on-line gambling or accessing or transmitting pornography; and (b) the transmission of confidential information (grounds B, C and D). Gross misconduct is defined as including: Serious misuse of the Second Defendant's email/internet. There is a warning that a breach could lead to dismissal. This was a change from previous versions of the handbook.
I am satisfied that the March 2016 version was the subsisting version at the time of the EAs. Whether the Claimants read it is unclear, and unlikely. There is no evidence that it was actually...
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