Square Mile Partnership Ltd v Fitzmaurice McCall Ltd
| Jurisdiction | England & Wales |
| Judge | MR. JUSTICE MANN,MR JUSTICE MANN,Mr Justice Mann |
| Judgment Date | 18 January 2006 |
| Neutral Citation | [2005] EWHC 1565 (Ch),[2006] EWHC 236 (Ch),[2006] EWHC 22 (Ch) |
| Docket Number | Case No: HC04C02628 |
| Court | Chancery Division |
| Date | 18 January 2006 |
[2005] EWHC 1565 (Ch)
Mr. Justice Mann
Case No: HC04C02628
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
MR. A. TRACE Q.C. and MR. R. MORGAN (instructed by Messrs. Reynolds Porter Chamberlain) for the Claimant.
MR. M. GADD (instructed by Messrs. William Blakeney) for the Defendant.
Hearing dates: 5 th, 6 th and 9 th May 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 Mann:
Introduction
The claim which started these proceedings is a claim on the assigned benefit of a debt owing between companies which were formerly in the same group. That claim is agreed, and the real dispute in this case is on the counterclaim. The basis of it is a badly drawn share sale agreement relating to the shares of Robert Bruce Fitzmaurice Ltd ("RBF").
The defendant, Fitzmaurice McCall Limited, was the ultimate holding company of what I will call the RBF Group. It held the share capital of Robert Bruce Fitzmaurice (Group) Limited ("Group"). Group in turn held most of the shares of RBF; so far as it did not own all the shares it bought them in immediately before the share sale transaction on which the counterclaim is based. By the time of that sale it owned all the shares in RBF. RBF itself had one subsidiary, namely Fitzmaurice Marine Limited. It needs to be mentioned only because it is referred to in the share sale agreement. On 31 st May 2002, Group agreed to sell, and did sell, all the shares in RBF to the claimant company ("Square Mile"). As at that date, a substantial sum of money was owed by the defendant to RBF – the sum exceeded £580,000. Square Mile has taken an assignment of that debt; that is the claim which is made in the claim form and which is admitted by the defendant.
The share sale agreement contains what the defendant maintains is a price adjustment clause which is said to operate in the event that RBF's audited balance sheet as at 31 st May 2002 demonstrates that RBF had a positive net worth. It is said that the amount of the debt owed to RBF by the defendant gave it a positive net worth of roughly the amount of that debt (with some adjustments which I do not need to go into here) and that accordingly Group was entitled to seek a sum equivalent to the amount of that net worth. Group has assigned its claims under the share sale agreement to the defendant.
Thus, each of the claimant and the defendant make their claims as assignees. Nothing turns on that; it just makes the overall picture a little more difficult to paint. The essence of the counterclaim is that the debt owed to RBF by the defendant was an asset which was left in the company and which inflated the amount of its net assets by about the same amount; since the bargain between vendor and purchaser was that there would be no net assets left in the company, that bargain entitled Group (and now the defendant) to claim the amount of those net assets.
The terms of the share sale agreement
The business of RBF was that of an insurance broker at Lloyds, until shortly after the events in New York on 11 th September 2001. In 2002 it transferred its new business and renewal activities to other brokers, and was left in run-off. As a broker it maintained separate accounts containing certain client monies which were known as IBA accounts. I am told they are in the nature of trust accounts, though RBF's financial statements do not treat them as such.
The share sale agreement is dated 31 st May 2002 and is made between Square Mile as purchaser and Group as vendor. The subject of the transaction was all the 500,000 £1 nominal shares issued by RBF; the price was £50,000; and completion was to take place (and took place) on the same day. It contains familiar clauses as to what is to be delivered up by way of documentation. Clause 4.3 provides:
"4.3 The vendor shall procure that at completion:
4.3.1 All indebtedness owing as:
(a) between the Vendor on the one hand and RBF and the subsidiary on the other hand (or vice versa);
(b) between RBF and the Subsidiary on the one hand and any of the directors or employees or former employees or RBF and/or the Subsidiary, except as provided in the accounts to the Last Accounts Date;
is repaid or otherwise discharged or waived (whether such indebtedness is due for payment or not)."
The Subsidiary is the single subsidiary of RBF referred to above.
Clause 6 is headed "Obligations concerning Robert Fleming, Audited Accounts and Tax". The first two sub-clauses refer to the transfer of business to Robert Fleming and are not material. Clause 6.3 is the clause on which the counterclaim is based, and is one of the two clauses essential to the counterclaim. It reads as follows:
"6.3 The vendor has prior to this Agreement removed certain assets from RBF on the basis of the Management Accounts and if the Audited Accounts when available show that any adjustment exceeding £1,000 is required each Party remains liable to the other Party to pay to the other Party such sum as shall be shown by the Audited Accounts to be due to the other party."
"Management Accounts" is a defined term and is defined in clause 1.1 as "the unaudited accounts prepared by RBF for 13 months from 1 st May 2001 to 31 st May 2002." There were in fact no such accounts. As will appear, there were some management accounts which dealt to a limited extent with profit and loss up to the end of April, but there was nothing else which might have fallen within the description. The Audited Accounts is another defined term; it means the audited financial statements for RBF for the 13 months ending 31 st May 2002, to be prepared by RBF's then auditors Baker Tilley at the Vendor's expense.
It will be noted that clause 6.3 anticipates that the Audited Accounts would show something to be "due" to one party or the other. Clause 6 contains no express benchmark by which the amounts due can be measured. The defendant says that the benchmark is provided in clause 14. This clause is headed "Proper Law and Construction", and clause 14.1 provides that this is an English law contract. Clause 14.2 is the other clause which is central to this action:
"14.2 This Agreement sets out the entire bargain and understanding between the Parties in connection with the sale and purchase of The Shares and other matters provided for in this Agreement and that prior to this Agreement the Vendor has caused RBF and the Subsidiary to transfer to the Vendor (or elsewhere as directed by the Vendor) the accumulated net worth of RBF and of the Subsidiary (excluding the IBA assets and the IBA Fund less the IBA liabilities) but including (without prejudice to the generality of the foregoing) all reserves, all brokerage paid to RBF prior to the date of this agreement, all interest earned and all investments (other than the lease of the Property)."
The various references to IBA assets, the IBA Fund and IBA liabilities are all references to the IBA matters to which I have referred. I set out the definitions later. The reference to the lease of the Property is a reference to the lease of the premises from which RBF traded, which was due to expire on 28 th September 2002. As will appear later on when I consider the arguments of the various parties, Mr Gadd for the defendant says that "accumulated net worth" means net assets, and what this clause was designed to reflect was an intention that RBF should be left with no net assets, that is to say that its assets should balance its liabilities. This is said to provide the benchmark against which the assessment and calculation required by clause 6.3 can be made. Mr Trace QC for Square Mile does not accept that.
The factual background
Before turning to consider the dispute on construction, I need to set out something of the factual background. There was a dispute as to the extent to which I could have regard to this, as a result of which some of the evidence that was going to be given was no longer advanced. However, certain of the events are relevant, not least because they indicate what it was that Group did by way of "moving" assets from RBF before the sale as described in the sale agreement.
The sale of the continuing business to Robert Fleming took place in April 2002. Once that had been done, the business of the company would have comprised the collection of premiums for insurances placed prior to run off, and the payment of premiums to those insurers and the handling of some claims. Mr McCall, who was a director of RBF and the principal shareholder in the defendant, gave evidence of what his thinking was in relation to this. RBF could have continued to handle the run off work, it could have paid a specialist to do it or it could be sold so that a third party would take over the responsibility for achieving it. He dealt with various potential purchasers and eventually negotiated a successful deal with Square Mile. Most of the negotiations were conducted by Mr Rupal, another director of RBF and of Group. He negotiated with Mr Mackay and Mr Murley on behalf of Square Mile. They came to meetings at RBF's offices on various occasions and inspected RBF's books and accounts. The negotiations started at the end of February 2002. Quite when the deal in principle was made was not clear on the oral evidence, but it probably does not matter. It was obviously some time before, but probably not long before, the date of the share sale agreement. Mr Mackay prepared some calculations which showed his thinking as to the price that was being paid and what he thought he was buying; those calculations were before me but it seems to me that in accordance...
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