Scott and Another v Scott
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Asplin |
| Judgment Date | 05 October 2012 |
| Neutral Citation | [2012] EWHC 4186 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: IHC 698/12 |
| Date | 05 October 2012 |
[2012] EWHC 4186 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Rolls Building
7 Rolls Buildings
Fetter Lane
London EC4A 1NL
Mrs Justice Asplin
Case No: IHC 698/12
MR P EPSTEIN QC appeared on behalf of the Claimants
MR J MILFORD appeared on behalf of the Defendant
This is an application for an interim injunction arising from the retirement of the defendant from a veterinary business. The business was originally carried on in partnership and a partnership deed was entered into between the claimants and the defendant, dated 4 July 2004. It contained an arbitration clause at clause 20.5. It also contained buyout provisions should a partner retire and, at clause 19, restrictions which apply to an expelled or retired partner. Essentially the restrictions were that the outgoing partner could not, for a period of three years from the date of the retirement, without prior written consent of the partners, practise within a ten-mile radius of the business premises, as they then were, of the partnership as a partner, assistant, locum, deputy or in any other way or act for a client of the partnership or do anything which might destroy or impair the value of the goodwill of the practice. Nor could the person use knowledge or identity of the affairs of a client or solicit a relationship with employees of the practice. The area covenant excluded, however, the city of Cambridge. I ought to say just Cambridge; it did not precisely say the city.
On 18 June 2010 it was agreed that the business be transferred to a company, essentially for tax purposes. It had been suggested by the partnership's accountants and it was to take effect at the end of July. An agreed case summary for the purposes of the proceedings in Cambridge County Court, to which I shall refer, states that the partnership did transfer its business to a newly incorporated limited company and was left with freehold properties from which the company traded. This was also reflected in the letter of 13 July 2010 from Mark Thompson, the solicitor instructed to deal with the matter on behalf of the partnership by the accountants. He states:
"… you have decided to set up a new company ("Newco") to which you will transfer the business and certain assets of the existing partnership with effect from close of business on 31 st July 2010 … The property will be retained by the existing partners and they will enter into a property-owning partnership agreement."
There was no new partnership agreement. However, it seems to be accepted that the former partnership was not dissolved. Each partner became a director of the company and I was informed that each was paid in accordance with the previous equity proportions but by way of dividend. Only one share was issued and it was held by the defendant. The question arises about the capacity in which it was held, whether as partnership property or on trust for each of the directors. There were draft contracts of employment containing different restrictions from the partnership deed but the company documentation, including an anticipated shareholders agreement, was never completed and the contracts remained in draft. However, the drafts contained restrictions on an outgoing employee which were for a period of 12 months and were less onerous in relation to client contact than those which had been in the partnership deed. I was referred to emails by which the second claimant and the defendant, apparently on her own behalf and that of the first claimant, had commented on the drafts prepared by the solicitor and there was no reference in those comments to the lesser nature of the restrictions in the draft employment contracts. As I say, neither was there a substantive comment in relation to them at all. The claimants say that the understanding was that the restrictive covenants in the partnership deed would continue and this is denied by the defendant.
It is accepted that the business continued on the ground much as usual. In any event the defendant severed her connection with the business by means of a letter dated 10 May 2011 which referred to "retirement under the provisions of our partnership agreement". The retirement letter was accepted by the claimants by a letter of 16 May 2011 on company notepaper and it referred specifically to an interest in the company itself.
The business was valued, including goodwill, in accordance with the partnership deed, albeit that the defendant's solicitors made it clear in correspondence that the application of those provisions were as a matter of convenience and not by way of concession, whereas the claimants say that this basis may be significant. The valuation sheet for that valuation appears to make no particular distinction between the company and the partnership and the case summary in the county court proceedings states that they were treated as one for the purposes of the valuation. The valuation took place and revealed a figure of £491,000-odd due to the defendant but a dispute arose and payment of the instalments of the amounts due has not taken place. I should say that the instalment provisions were also in the partnership deed. In fact, as I have already mentioned, the defendant commenced an action in the Cambridge County Court for payment of what she said was due to her as a result of the valuation and she said agreement and a declaration as to the enforceability of the restrictive covenants. However, those proceedings have been stayed and the issues in relation to the procedures for payment of the retirement monies and the enforceability and effect of the restrictive covenants have been referred to arbitration although it seems that the only step taken so far has been the appointment of the arbitrator.
In the particulars of claim in the county court proceedings there were references to the first claimant having breached his fiduciary duty to the partnership and an exercise of the option under clause 18 of the partnership deed to purchase partnership capital and goodwill. The sum of £491,000-odd arising from the valuation is also characterised as the defendant's share of capital of the partnership. I accept that, of course, the valuation process proceeded under the partnership deed for convenience and that those references in part may be attributable to that process. However, that is the way in which it is described in the defendant's particulars of claim.
The defendant wishes to commence business as a veterinary surgeon within a ten-mile radius of the present premises of the original business and has obtained planning permission for a particular property although she has not exchanged contracts on it. It is also suggested that she may employ someone who may have been a former employee of the business, although I was not provided with much detail in relation to that. It is likely that she will treat former clients of the business given the location of her proposed premises.
In summary, Mr Epstein, on behalf of the claimants, says that there is a serious issue to be tried as to the form of the restrictive covenants which were intended to apply after the business had been transferred to the company and their enforceability. He says, therefore, and submits that there is a serious issue in the form of the question of fact as to whether the partnership deed covenants were intended to continue to apply despite the transfer of business or, to put the matter another way, whether there was a serious issue as to whether it should be implied that there was an agreement between the former partners that those provisions continued and he suggested that that implication might have been contained in a shareholders' agreement. He makes the application pursuant to section 44(3) of the Arbitration Act 1996 under which an injunction can be granted if the case is one of urgency and the court may make such orders as it thinks necessary for the purposes of preserving evidence or assets.
Mr Milford accepts that nothing in those powers prevents the court from making orders which involve preliminary determination of contractual rights of the parties and he referred me in this regard to the case of Cetelem SA v Roust Holdings Ltd [2005] 1 WLR 3555. He says that there is no serious issue to be tried as to the remaining nature of the partnership business and the restrictive covenants. There are no relevant assets with which the arbitration is concerned which could be protected for the purposes of an injunction under section 44. He accepts this is a mirror argument to his no serious issue to be tried point. Mr Epstein relies alternatively on section 37. However, Mr Milford says that that does not apply.
In summary, Mr Milford says, on behalf of the defendant, that the covenants no longer apply or that there is no partnership business to be protected or, alternatively, if they do continue they are for the benefit of the company, which is not a party to the action. He therefore submits that there is no serious issue to be tried. He also says that the contemporaneous documents are contrary to the witness evidence of the claimants to the effect that they understood and intended the covenants in the partnership deed would continue to protect the business, that such a formulation fails to distinguish between the business of the company and that of the partnership, and that either the covenants cannot be read into an implied shareholders agreement or that the partnership is not able to enforce the covenants which protect a business which has been transferred away...
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