Phillip Roberts (as Liquidator of Onslow Ditchling Ltd) v Peter Frohlich and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 18 February 2011 |
| Neutral Citation | [2011] EWHC 257 (Ch) |
| Docket Number | Case No: 5437/08 |
| Court | Chancery Division |
| Date | 18 February 2011 |
[2011] EWHC 257 (Ch)
Mr Justice Norris
Case No: 5437/08
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Stephen Davies QC and Christopher Brockman (instructed by K & L Gates LLP) for the Claimant
Jonathan Russen QC (instructed by Barker Gillette LLP) for the Defendants
Hearing dates: 5 October to 15 October 2010
Onslow Ditchling Ltd ("ODL") was created as a special purpose vehicle to acquire 6.3 acres of former quarry land at Ditchling ("the Site") and to develop it as 30 industrial and trading units to be disposed of on a freehold basis. The individuals behind ODL where the First Respondent ("Mr Frohlich") and the Second Respondent ("Mr Spanner"). They were ODL's executive directors and each was the holder of a £1 share in ODL (the entire issued share capital). Beyond subscribing for a share Mr Frohlich did not significantly contribute to ODL's working capital; Mr Spanner lent some £36,000 to procure reports necessary for the obtaining of bank funding.
ODL conducted its activities entirely upon borrowed money. In order to acquire the Site it (i) borrowed £126,000 from Brantridge Holdings Ltd ("Brantridge") (a company in the ownership and control of a Mr Towning, who also personally lent some money to pay fees and expenses in relation to obtaining other borrowing) and (ii) arranged a term loan of £437,000 with the Bank of Scotland ("HBoS") ("the Site Loan"). There was still a shortfall; and that was bridged by Mr Frohlich and Mr Spanner selling to Easier plc ("Easier") for £100,000 the exclusive right to negotiate to acquire shares in ODL. In order to fund part of the development of the Site ODL arranged with HBoS a facility with a limit of £1.5 million ("the Development Facility").
ODL acquired the Site on the 24 June 2004. The intended main contractor for the development on the Site was Fitzpatrick Contractors Ltd ("FCL"). Certain works relating to the levelling of the Site and to site access had to be undertaken before the development could begin, and that was immediately put in hand. When that was arranged FCL, as instructed by ODL's quantity surveyors ("Castons"), began to assemble materials and to commence work on the development of the units themselves under a formal "letter of intent" pending signature of a JCT "Design & Build" contract. There was then a dispute between ODL and FCL as to the basis upon which the formal contract contemplated in the letter of intent would proceed: was it intended to be a "fixed- price contract"? Or was it intended to be a "cost plus contract"? The dispute was not resolved. FCL were not paid for the whole of the work they had already done: and in the light of that, and of the dispute over the formal contract, at the end of November 2004 they suspended further work. On 15 September 2005 an adjudicator awarded FCL about £1.6m (subject to adjustment) in respect of work done but not paid for. On 19 September 2005 Mr Frohlich and Mr Spanner appointed administrators of ODL. The administrators sold the Site (ODL's only real asset) for £1.65m in February 2006 and repaid HBoS the Site Loan, the balance on the Development Facility and interest (in the aggregate sum of £1.42m). The exit route from administration was a liquidation under paragraph 83 of Schedule B1 Insolvency Act 1986. The administrators appointed the Applicant ("the Liquidator") as liquidator: he had been investigating matters at the behest of FCL since the start of the administration. The Liquidator received the £25,000 that was the proceeds of the administration of ODL's assets. Putting the FCL claim at the lowest figures used in the administration there was a deficiency as regards unsecured creditors of about £900,000: using the figure determined in the adjudication it is much higher. Besides FCL (by far and away the largest), the unsecured creditors include the professionals who were engaged on the development and in the disputes that arose, and Brantridge.
In these proceedings the Liquidator of ODL seeks relief under two headings. First, he seeks a declaration that Mr Frohlich and Mr Spanner are guilty of misfeasance and breach of duty as directors of ODL by causing, procuring or permitting ODL to commence the development when they knew or ought to have known that it was speculative, inadequately funded, and bound to fail. The legal foundation of this head of claim is said to be that Mr Frohlich and Mr Spanner each owed (i) a fiduciary duty to ODL to act in what they honestly believed was in its best interests; (ii) a duty to ODL at common law to exercise reasonable skill and care in acting as directors, and (iii) "a duty, at a time when ODL was insolvent or insolvency was reasonably foreseeable, to have regard to the interests of creditors".
In essence, the factual case advanced is that Mr Frohlich and Mr Spanner:-
(a) permitted ODL to commence a project which it is to be inferred they did not honestly believe was in the best interests of ODL because it was speculative, insufficiently funded, and had no realistic prospect of being funded:
(b) deliberately misled HBoS by misdescribing the nature of the development as being undertaken under a fixed price contract for the construction of units that were pre-sold:
(c) permitted ODL to enter into a contract with FCL knowing that there was inadequate existing funding and that any injection of capital from Easier plc was dependant on a conditional contract (whose conditions Mr Frohlich and Mr Spanner knew or ought to have known were unlikely to be capable of performance) so that there never was any realistic prospect of there being sufficient funding to pay FCL:
(d) caused or permitted FCL to continue to work on the Site after the prospective deal with Easier PLC had lapsed: and
(e) caused ODL to commence building works and incur liabilities without first satisfying themselves as to the nature of the contractual arrangements under which the development was to be carried out.
The second head of claim is for wrongful trading in breach of section 214 Insolvency Act 1986 (" IA 1986"). Under this head the Liquidator alleges that Mr Frohlich and Mr Spanner knew or ought to have concluded or around 1 July 2004 (or alternatively on or around 1 September 2004) that there was no reasonable prospect that ODL would avoid going into insolvent liquidation.
If either of those heads of claim is made out then specific sums are sought in respect of the misfeasance and breach of duty, and/or a contribution to the assets of ODL is sought under section 214 IA 1986. At this trial I am concerned only with whether either head of claim is made out: if it is, then the consequences of that conclusion are to be worked out at a subsequent hearing.
The witnesses called on behalf of the Liquidator (Mr Saunders, Mr Waller, Mr Jollie and Mr Elders) and the Liquidator's agent himself (Mr Russell) were all straightforward witnesses, seeking to do their best to recall the events in question. The recollection of the FCL witnesses was sometimes assisted by Minutes of meetings; and it was not significantly coloured by the fact that they were former employees of FCL which, as the major creditor in ODL's liquidation, stands to gain if the action succeeds. As I shall note, some of the evidence at trial differed from evidence given on an earlier occasion: but I have given due weight to that. Despite being well tested in cross-examination I find their evidence generally reliable.
The Liquidator's agent (Mr Russell) could, of course, not speak directly to the events in question: but he dealt fairly with the points put in cross-examination and in general presented a balanced view. Thus, even though it is the Liquidator's case that there was wrongful trading from about 1 July 2004, Mr Russell readily said in cross-examination that he could not say that, as at 30 June 2004 ODL should have been wound up because the company was solvent on a balance sheet basis and provided that it did not make commitments which it could not fund on a cash flow basis then it would remain solvent. Again, in the liquidation he did not admit the whole of FCL's claim to proof, but exercised an independent scrutiny. So it would not be right to treat the Liquidator simply as FCL's stooge.
Mr Frohlich is a qualified accountant with extensive experience of acting as a director in property companies (going back to 1968). He has previous experience of the development of industrial property units. He produced an impressive CV. He did not come to Court to mislead me: but his recollection was of little assistance and generally unreliable. He denied knowledge of much, denied receipt or sight of many of the key documents, denied responsibility for the creation of significant financial documents and asserted that he did not avail himself of the opportunity to examine the documents in ODL's files or to speak with Mr Spanner (on what was really the only currently active project on which they were together engaged). On the other hand he professed recollection of events of which there is no trace in the contemporaneous documentary material. Mr Frohlich said that at the end of 2001 he had been involved in an accident; that in 2002–2003 he was taking medication and having treatment and (at trial and for the first time) that he was at times "illucid" and would not have trusted his own judgment; and in 2005 underwent a severe neck operation. This, he said, would account for vagueness during the relevant period. I do not accept that the events which Mr Frohlich identifies had the impact upon him which he asserts: had it been so he would surely have said so earlier so that the truth could be tested. But even on his own account his evidence is...
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