Quantum Advisory Ltd v Quantum Actuarial LLP
| Jurisdiction | England & Wales |
| Judge | Keyser |
| Judgment Date | 05 May 2020 |
| Neutral Citation | [2020] EWHC 1072 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: E50CF007 |
| Date | 05 May 2020 |
[2020] EWHC 1072 (Comm)
HIS HONOUR JUDGE Keyser Q.C.
sitting as a Judge of the High Court
Case No: E50CF007
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN WALES
CIRCUIT COMMERCIAL COURT (QBD)
Cardiff Civil Justice Centre
2 Park Street, Cardiff, CF10 1ET
Guy Adams (instructed by Stuart Brothers Solicitors) for the Claimant
Andrew Butler QC (instructed by Acuity Legal) for the Defendant
Hearing dates: 4, 5, 6 & 7 February 2020
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.
HIS HONOUR JUDGE Keyser Q.C.
JUDGE Keyser QC:
The Background
The story begins with a company called Quantum Advisory Limited; it was not, however, the same entity as the company that now bears that name, the claimant, and I shall refer to it as Old Quad. Old Quad carried on business as a provider of administrative, actuarial and related services, primarily for defined benefit pension schemes. It had been formed in 2000 by a group of people who had worked together at PricewaterhouseCoopers: Martin Coombes, Peter Baldwin, Andrew Reid-Jones and David Deidun. Mr Coombes was the single largest shareholder and the managing director.
In 2004 Old Quad was instrumental in setting up a second company, Renaissance Pension Services Limited (“RPS”) to carry on a similar business. RPS was a joint venture between Old Quad and a team, led by Robert Davies and including Mark Vincent and Stuart Price, who had been colleagues at Bacon & Woodrow. The principal shareholders in RPS were Old Quad and Robert Davies. The company was incorporated on the basis that, after an initial three-year period of business development in which RPS would attract its team's former clients, there would be a merger of the businesses of Old Quad and RPS into a single entity. Meanwhile, all engagements with RPS's clients were formally entered into by Old Quad, which then accounted to RPS for an agreed proportion of the fee income.
A third company, Quantum Financial Consulting Limited (“QFC”), was set up in 2000 for the purpose of undertaking regulated financial services work associated with the pensions consultancy and administration work carried out by Old Quad. For regulatory reasons, Mr Coombes was the majority shareholder in QFC, but there was an understanding that his shareholding was held on trust for Old Quad.
These three companies—Old Quad, RPS and QFC—are conveniently referred to as the legacy companies, and their clients as the legacy clients.
By 2007 two particular matters fell to be addressed. First, there was the intended merger of the businesses of Old Quad and RPS. Second, however, the interests and ambitions of those involved in the legacy companies had begun to diverge. In particular, while Mr Coombes, wanted to diversify, the other directors and shareholders wanted to focus on developing the existing business. For this and other reasons, it was agreed that there would be a reorganisation of the businesses. The particular difficulty that this presented was that the value of Mr Coombes' shareholding in Old Quad was such as to make it unaffordable for the others to buy him out. It was also thought that, regardless of affordability, great difficulties would attend attempts to fix a price for any buy-out. A method of reorganisation was devised to get around that problem.
The gist of the reorganisation was as follows (it is explained in considerable detail in a letter dated 14 November 2007 sent by Mr Coombes to HMRC requesting clearance under tax legislation). The business of the legacy companies would be continued by a new entity, which would seek to develop and expand it. However, the goodwill of the existing legacy business would be ringfenced: the legacy clients would remain the clients of the legacy companies or their assigns, but they would be serviced on behalf of the legacy companies by the new entity, which would then receive a fee representing the cost to it of providing the services to the legacy clients. Thus the new entity would not receive any profit element for servicing the legacy clients. Instead, the benefit to the new entity was that it would receive a turnkey business: it would take over all of the staff of the legacy companies and have the full use of their premises and equipment and the Quantum brand name, as well as having an established client base on which to build new business. Thus it would be enabled to develop its own business without the usual costs and risks associated with starting a business from scratch.
It was originally intended that this basic model would be put into effect at the same time in respect of all legacy companies. In the event, however, it was implemented in two stages, dealing first with the unregulated business of Old Quad and RPS and later with the regulated business of QFC. This is not of fundamental importance to the case, although it does mean that different agreements govern the regulated and unregulated businesses.
The new entity for the purposes of this arrangement was a limited liability partnership, Quantum Actuarial LLP. This is the defendant; I shall refer to it as “the LLP”. The substance of the arrangement was put into effect as regards the unregulated business in April 2007, but it was formalised by a written agreement (“the Services Agreement”) entered into between Old Quad and the LLP on 1 November 2007. The Services Agreement provided that the work relating to the pensions consulting, actuarial, administrative and investment services that Old Quad provided to its legacy clients would be carried out by the LLP and that Old Quad would pay to the LLP 57% of the fee income received from those clients, a percentage calculated to represent the LLP's costs of servicing the legacy clients. The LLP was given the right to use the Quantum brand and the premises, personnel and equipment of the existing business. The Services Agreement contained provisions restraining the LLP from acting for Old Quad's legacy clients on its own behalf. The terms of the Services Agreement will be considered in some detail below.
The other side of the reorganisation was carried out between 31 December 2007 and 2 January 2008. The claimant, which was then called Pascal Company Solutions Limited and was wholly owned by Mr Coombes, bought the entire issued share capital of Old Quad and of RPS. Then the entire business and assets of Old Quad and RPS were transferred to the claimant, subject to outstanding liabilities. And the claimant and Old Quad swapped names: the claimant changed its name to Quantum Advisory Limited, and Old Quad changed its name to Pascal Company Solutions Limited. At this point, Old Quad and RPS effectively drop out of the story. Old Quad was dissolved on 25 May 2011. I shall refer to the claimant as “New Quad”.
The regulated business of QFC was dealt with in substantially the same way. However, because the conduct of the business was subject to regulation by the Financial Services Authority and because clients' engagements had to be with an entity that was authorised by the FSA, there was a delay while the LLP obtained authorisation; and it was necessary to arrange matters between QFC and the LLP in such a way that the LLP would be acting for clients on its own account. Accordingly, in February 2009 the LLP and QFC entered into the Introducer's Appointed Representative Agreement (“the Introducer's Agreement”), under which the LLP was obliged to pay to QFC 43% of the net commission or other fee income it received in respect of the provision of investment advice and insurance mediation services to the legacy clients who had been introduced to the LLP with the intention that it should provide such services to them. The Introducer's Agreement was novated between New Quad and the LLP by a deed of novation dated 31 March 2011, and QFC dropped out of the picture. The result, accordingly, is that the LLP provides regulated services to the legacy clients but accounts to New Quad for the profit element of the fee income; so the LLP provides the services to the legacy clients on what is intended to be, for it, a break-even basis.
The Dispute
New Quad and the LLP conducted their affairs according to the Services Agreement and the Introducer's Agreement without any real difficulty for a number of years. In view of some of the arguments advanced in these proceedings, this simple fact is worth noting at the outset.
However, the arrangement to which the two agreements gave effect bred dissatisfaction, if not resentment, on the part of those concerned in the LLP. The principal reason for this had been foreseen in 2007 by Mr Coombes, who had remarked on it at the time in an email to Mr Baldwin: with the passage of time, the advantages conferred on the LLP by the structure of the reorganisation (that is, the provision to it of a turnkey business) featured less prominently in the thoughts of the members of the LLP than did the fact that the LLP was carrying on a significant part of its business activities on a basis that provided profit to New Quad but none to itself. A further reason for the dissatisfaction may possibly have been the perception that retention of 57% of the fee income from the legacy business was not, after all, or was no longer, sufficient fully to cover the costs of servicing that business.
Therefore in 2018 the LLP took advice from solicitors and counsel as to the terms of the Services Agreement and, more specifically, as to...
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