Pearce v European Reinsurance Consultants & Run-Off Ltd
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR. JUSTICE HART,Mr. Justice Hart |
| Judgment Date | 12 July 2005 |
| Neutral Citation | [2005] EWHC 1493 (Ch) |
| Docket Number | Case No: HC04C04048 |
| Court | Chancery Division |
| Date | 12 July 2005 |
[2005] EWHC 1493 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr. Justice Hart
Case No: HC04C04048
Mr John McDonnell QC and Mr Grant Armstrong (instructed by Beaumont and Son) for the Claimant.
Mr Mark Simpson (instructed by Simmons & Simmons) for the Third Defendant.
Hearing dates: 29, 30 th June 2005
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.
Mr. Justice Hart
This is an application by the third defendant ("BDO") pursuant to CPR Part 3.4(2)(a) and Part 24.2 to strike out the claim against them on the basis that it is bound to fail, alternatively for summary judgment on the basis that it has no real prospect of success.
The claim is brought against three defendants, namely European Reinsurance Consultants and Run-Off Limited ("ERCRO"), Christopher Norman Palmer ("Mr Palmer") and BDO.
To explain the background to, and nature of, the claim it is necessary to proceed on the basis that the allegations contained in the Particulars of Claim are true. This application has proceeded on that basis. It should be made absolutely clear at the outset that this is purely an assumption made for the purposes of the application. If the action proceeds to trial (and it is the object of this application to prevent it doing so against BDO), it is likely that some of the background and many of the allegations will be disputed. The precise areas likely to be in dispute are not clear because BDO has not yet pleaded to the claim. All that follows by way of apparent narrative is therefore no more than a summary of allegations which are made in the first 208 paragraphs of the Particulars of Claim.
The background to the claim is that ERCRO was effectively a two-man quasi-partnership company engaged in providing a specialised service to reinsurers. The quasi partners were the claimant and Mr Palmer. Their shares were held 50:50 by them and their wives. As chairman Mr Palmer had a casting vote. In early 2001 Mr Palmer and the claimant fell out, and the claimant presented a petition for winding up of ERCRO on the just and equitable ground. The claimant informed ERCRO's principal client of his intention to present that petition before presenting it. That provoked a claim by ERCRO against the claimant for an injunction restraining him from communicating confidential information to third parties. In April 2001 the claimant was removed as a director of ERCRO. Some negotiations took place in the summer of 2001 for a purchase by Mr Palmer of the shares held by the claimant and his wife but these did not result in any agreement. In July 2001 the claimant gave notice of discontinuance of his winding up petition.
On 5 th September 2001 there commenced the train of events which have led to the present claim. Under Article 14(h) of ERCRO's Articles of Association it was open to Mr Palmer as sole director to enforce the retirement of the claimant as a shareholder by resolution, with a consequent triggering of the procedure for transfer of shares contained in Article 14(a)-(c) of those articles. The effect was that the claimant was deemed to have served a notice of his desire to transfer the same at a price certified by the auditor pursuant to the provisions in Article 14(c) as "the sum which in his opinion represents the fair value of the shares comprised in the transfer notice as at the date of the transfer notice". For these purposes the auditor was to act as an expert and the fair value of each share comprised in the deemed transfer notice was defined as "its value as a rateable proportion of the total value of all the issued shares of the company and shall not be discounted or enhanced by the reference to the number of shares referred to in the transfer notice". On 5 th September 2001 Mr Palmer as sole director of ERCRO resolved accordingly and at the same time resolved under Article 14(c) to instruct BDO, who were the auditors of ERCRO, to certify the fair value of the claimant's shares. The claimant was notified of this resolution on the day on which it was made, and, on a date which is at present unclear but which the claimant appears to allege to have been shortly after the resolution, BDO were instructed to undertake the valuation of the claimant's shares (and those of his wife which had been similarly dealt with by resolution) pursuant to Article 14(c) of the Articles of Association.
On 15 th October 2001 ERCRO obtained an order against the claimant in respect, inter alia, of the costs of the discontinued winding up petition and in respect of its own proceedings. As a result orders were made in sums of £11,000 (assessed costs of the hearing) and £25,000 (a payment on account of the costs of the petition). Subsequently statutory demands were served by ERCRO in respect of those sums which the claimant unsuccessfully sought to set aside. A bankruptcy petition was then, on 19 th December 2001, presented in the Brighton County Court, and on that petition a bankruptcy order was made, in the claimant's absence, on 26 th February 2002.
The claimant had been hoping to resist the bankruptcy petition on the ground that the value of his shares exceeded the petition debt and that ERCRO therefore had security for that debt. Mr Palmer, however, prevailed on BDO to send a letter to Brighton County Court dated 22 nd February 2002 which was designed to convey the impression that, apart from the sums in respect of costs owed by the claimant to ERCRO, its liabilities exceeded its assets and that the claimant's shares thus had no value. The letter was drafted by Mr Palmer. The bankruptcy order was, in the event, made in the absence of the claimant and despite his application for an adjournment. BDO knew, or ought to have known, that the statements in its letter were untrue and/or misleading as to ERCRO's financial position. The claimant appealed the bankruptcy order, but pending the hearing of that appeal (which was not heard until 27 th June 2002) his assets vested in the Official Receiver.
On 8 th April 2002, ERCRO and/or Mr Palmer wrote to BDO requiring them to proceed with a valuation under the Articles immediately and insisting that it was unnecessary for BDO to seek representations "from all purported interested parties" before completing the valuation process. BDO then formed the intention of preparing a letter which purported to give the appearance of a certificate of fair value under the Articles but which was not in fact such a certificate, concealed from the claimant the instructions which it had received from Mr Palmer and then prepared and sent a letter dated 12 th April 2002 which gave the appearance of a certificate of fair value under the Articles. The letter valued the claimant's shares at £10,400 (£400 per share). BDO was aware that its letter was intended or likely to be used by ERCRO in the appeal against the bankruptcy order. The claimant contends that the shares should have been valued as worth in excess of £350,000.
ERCRO thereupon acted on the letter dated 12 th April 2002 by transferring the claimant's shares to Mr Palmer for £10,400. ERCRO informed the claimant of the fact of the sale by a letter dated 16 th April 2002. The claimant disputed that BDO had taken his views into account in arriving at their valuation and Mr Palmer therefore drafted a letter for BDO to send to ERCRO who forwarded it to the claimant asserting inter alia that BDO had considered items 20 to 23 of a written statement made by the claimant dated 23 rd March 2002, and a paper prepared by the company in support of its opinion that the shares should be valued at par or alternatively at an extremely low value "as part of the overall process in arriving at our opinion of value". That was misleading since BDO had had neither of those two documents until supplied with them under cover of a letter dated 20 th May 2002. Further correspondence between Mr Pearce's solicitors and ERCRO on the one hand and between them and BDO on the other hand, resulted in continued representations by ERCRO that the letter dated 12 th April 2002 was a certificate of fair value by BDO in accordance with Article 14(c) and no denial by BDO that that was the case. On 24 th June 2002 BDO confirmed that "we will stand by our valuation of 12 th April 2002 in full".
The appeal against the bankruptcy order came before Lloyd J. on 27 th June 2002, when counsel on behalf of ERCRO relied on the valuation as a conclusive certificate of value under Article 14(c) of the Articles of Association. For reasons which appear from his judgment given on that day Lloyd J. allowed the appeal, discharged the bankruptcy order and remitted the petition be re-heard, at the same time transferring the proceedings to the High Court. In short, those were reasons (1) that the petition, which was in terms based only on the statutory demand for £11,000, was inaccurate in stating that there was no security for the debt; (2) that an issue had existed with regard to the value of the shares which the District Judge had probably not fully appreciated, and that he ought not to have taken into account the BDO letter of 22 nd February without an adjournment; (3) that there had been material before the District Judge in the debtor's grounds of opposition filed in accordance with Rule 6.21 which called for determination; and (4) that he was wrong to have drawn adverse inferences from the debtor's absence in the circumstances and from his not having put in sworn...
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...where HH Judge Behrens QC looks at the state of the authorities. He starts with the decision of Hart J in Pearce v European Reinsurance [2005] EWHC 1493, [2005] 2 BCLC 366 at paragraphs 22 to 29, which itself contains a review of the authorities up to that time and where Hart J refers to a ......
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