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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Brown & Anor v Bennett & Ors [2001] EWCA Civ 1352 (27 July 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/1352.html Cite as: [2001] EWCA Civ 1352

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mr Justice Neuberger)

		Royal Courts of Justice Strand London WC2 Friday 27th July, 2001

1. LORD JUSTICE ALDOUS: The claimants, Mr and Mrs Brown, seek from this court permission to appeal from the order of Neuberger J of 18th October 2000. Technically I believe that their application is out of time, but for the reasons that will appear later on in this judgment that is not a ground which I consider to be relevant to matters before me.
2. The application of Mr and Mrs Brown was supported by two written submissions, the latest being received by the Civil Appeals Office on 17th July 2001. I have also had the advantage of oral submissions by Mr Brown made by telephone, as he is now resident in the United States of America.
3. The facts behind these proceedings go back to the 1970s. At that time a company called Pinecord Ltd was established by Mr and Mrs Brown with a Mr and Mrs Ryan. In 1978 Mr and Mrs Brown bought out the Ryans and developed the business into a retail clothing and jewellery business, trading under the name Oasis. In early 1988 Maurice and Michael Bennett, who are the first and second defendants, were introduced to the Browns and in August of that year terms were drawn up and agreed whereby the Bennetts would lend money to Pinecord through a finance company owned by them. Subsequently the Bennetts acquired a small shareholding from Mr and Mrs Brown with an option to acquire a further 39%. In 1989 a seven-year plan was agreed between the directors of Pinecord aiming, amongst other things, to concentrate on fashion retailing and to increase the number of retail outlets in prime locations. In 1989 Alan Patrick Croft and Associates ("APA") agreed to subscribe for shares in Pinecord. Thereafter the shareholding was 43.2% held by the Browns, 36.8% by the Bennetts and 20% by APA.
4. In 1989 fresh banking facilities were obtained from the Midland Bank. The conditions were that there would repayment forthwith if there was a breach of two covenants in particular, namely that the net capital resources of Pinecord should not fall below £2 million and that Pinecord's borrowing should not exceed 90% of its net capital resources.
5. By the end of that year the management accounts showed that the business was struggling and by February 1990 it was clear to the board that the company was in breach of its banking covenants. In an endeavour to put that right, in March 1990 Pinecord raised a further £1 million by a rights issue and the issue of convertible loan stock. The company continued to trade unprofitably and the accounts for May 1990 showed the six-month losses as being over £1 million. In July 1990 the Browns resigned from the board. They believed that they were forced to resign by the Bennetts and APA. However, the Browns nominated Mr Steven Kane as their representative.
6. In August 1990 at a meeting with Mr Michael Bennett the bank expressed concern over the level of losses and breaches of the banking covenant. It required a further £1 million to be raised and that an accountant's investigation into viability should be carried out. Binder Hamlyn were duly commissioned to carry out that investigation. A month later Pinecord started to breach the second banking covenant. That of course concerned the bank, which offered to continue support on condition that there would be a £1 million cash injection and a reduction in the overdraft by the end of the month. Further facilities were provided by the bank in October on condition that £500,000 was raised by way of a rights issue. The issue of new shares by conversion of convertible loan stock reduced the Browns' holding to 33.88%.
7. In November 1990 Binder Hamlyn reported. They recommended, amongst other things, substantial cost-cutting. They said that the head office costs were too large for the size of the organisation.
8. Attempts were made to expand the business and negotiations took place to acquire 25 stores from Next Plc. If the Next deal had gone ahead, it seems that APA would have injected £1.5 million and the Bennetts would have put up a £500,000. However, that never happened. Even so, in November 1998 APA paid £1.5 million into the bank. It went to reduce the overdraft of £2.35 million.
9. In January 1991 APA informed Pinecord that it was no longer prepared to fund the proposed £2 million injection that was needed at the end of the month, and Messrs Du Buisson and Sykes were appointed administrative receivers by the bank. Those receivers sold the goodwill and other assets for £1.53 million to a company formed and funded by the Bennetts. Three years later that company was floated on the stock exchange with a market capitalisation of £70 million and PE ratio of 15%. It was later listed on the London Stock Exchange with a market capitalisation of £77 million.
10. Some time later Pinecord was put into liquidation pursuant to a petition presented by the receivers because the company was insolvent.
11. I have set out in general form the background to these proceedings which were started in 1996 by Mr and Mrs Brown. There resulted a number of applications that came before the court over the next few years, including an appeal to this court. The proceedings were ultimately set down to come on for hearing in October 2000.
12. The action had been originally undertaken by Mr and Mrs Brown with the assistance of legal aid and therefore they were represented by solicitors and counsel. However, legal aid was not granted for the trial. Thus they did not have the help of counsel. It followed that when the action came before the court Mr and Mrs Brown appeared in person.
13. The pleadings were voluminous, but the Browns' claim had three main heads all based upon deficiencies of the defendants. First, it was alleged that the Bennetts had set out to drive Pinecord into receivership in breach of their fiduciary duty to the Browns and/or Pinecord. Further, the remaining defendants had dishonestly assisted in this with a view to enabling the Bennetts and others to acquire the assets of Pinecord at a low price from the receivers. In that way the defendants had cut out the Browns. Second, it was alleged that the defendants, who were at some time directors of Pinecord, had conspired together to commit breaches of their duties as directors, no doubt with a view to driving Pinecord to or close to receivership or assisting in that aim. APA and the other defendants were parties to that conspiracy. Third, the defendants who had been directors of Pinecord had acted in breach of their duty owed to Pinecord and/or had acted negligently in the management of Pinecord's business, and that also had caused and resulted in the sale of the business.
14. By the time of the trial Mr and Mrs Brown had put forward a number of contentions as to what had been the defendants' strategy for putting Pinecord into financial difficulties. Basically one was argued at the trial, namely that the defendants had deliberately or negligently failed to reduce head office expenditure. The Browns alleged that it was obvious well before the publication of the Binder Hamblyn report that savings were needed to enable the company to continue. In essence it was alleged that the defendants had dishonestly on negligently acted so as to put Pinecord into financial difficulties with the aim of acquiring the assets cheaply and thereby depriving Mr and Mrs Brown of their share of the company's assets. It was further sought to be alleged that the defendants had been dishonest, or negligently, in failing to acquire the necessary finance to enable Pinecord to trade on.
15. As I have said, Mr and Mrs Brown represented themselves. They gave evidence and at the end of the claimants' case counsel for the defendants submitted that Mr and Mrs Brown had not made out their case against any of the defendants. In effect counsel submitted that, having heard the evidence called on behalf and given by Mr and Mrs Brown and having listened to their submissions, none of the defendants had a case to answer. That submission prevailed before the judge. The judge said this:

"In order to succeed in the instant application, a defendant must show that on the basis of the evidence and arguments now before the Court the Browns' case against him, whichever way it is put, has no reasonable prospect of success - see the decision of the Court of Appeal in Blinkhorn v Hall, 13th April 2000. To seek to dismiss such substantial and complicated claims as those in the present case at half time is, on the face of it at least, a bold application, particularly bearing in mind that the Court of Appeal has allowed an appeal by the Browns against a decision striking out part of the claim against Mr Sarson (see Brown v Bennett [1999] 1 BCLC 649).

It seems to me, however, that this is a case which is bound to fail against all of the defendants. The claimants have simply not made out their case. As I have mentioned, that case is that the Bennetts and APA (with the assistance or connivance of the other defendants) dishonestly, in breach of fiduciary duty, recklessly or negligently, sought or conspired to drive the Company into, or near, receivership from 1999 onwards. More specifically, as argued before me, at least in opening, their case raises two allegations. The first is the failure to reduce head office expenditure from late 1989 until the Company went into receivership (or possibly until about October 1990). The second is the failure to raise £500,000 by way of a rights issue between July 1990 and January 1991. I shall deal with these two alleged failures in reverse order."

16. The judge then went on to deal with those two allegations and, as he said in the passage that I have read, he came to the conclusion that the Browns' case was bound to fail. However, before coming to those reasons and the matters raised by Mr and Mrs Brown, I must record that the judge held that he did not regard the Browns as reliable witnesses. He said:

"I am afraid I do not regard the Browns as reliable witnesses. It is entirely natural that they should feel great disappointment and unhappiness. The Company which they had built up and into which they had ploughed so much money and effort went into receivership and they lost everything that they had put into it. Directors of the Company, the Bennetts (who were also shareholders) and Mr Scott were able to join in a purchase of most of the Company's assets from the receivers at what has turned out to be a very beneficial price; £1.5 million for the assets, compared with the value on flotation years later of £70 million."

17. The judge came later to consider the submission by counsel on behalf of the defendants that Mr and Mrs Brown had conducted an increasingly and vehement vendetta against the defendants and every professional involved in the company. As to that the judge said:

"It is inappropriate to go into detail, but regrettably those observations appear to me to be generally justified.

I do not know, and I do not need to decide, whether Mr and Mrs Brown have simply become unbalanced because of what happened between October 1989 and February 1991. Whatever the cause, the consequence is that they have, at least in connection with this matter, lost touch with rationality. They may also be motivated by malice and the desire to do everything they can to get back at those who they feel have been responsible for, or profited by, their misfortune.

Whatever the reason, Mr and Mrs Brown's evidence on matters obtaining to Pinecord and its demise have been so overborne by these sorts of feelings that I am afraid I regard their evidence as seriously unreliable."

18. The application for permission to appeal contains just six grounds. They were expanded at considerable length by the skeleton arguments that have been placed before the court. Mr Brown in his oral submissions drew attention to a number of them. I will deal with those matters that were raised, perhaps not in the order relied upon by Mr Brown.
19. First, Mr and Mrs Brown point to the fact that they were unable to call as a witness Ms Tracey Callaghan of Baker Tilley. She was an accountancy witness that had been engaged by Mr and Mrs Brown to give evidence on their behalf. She had provided a written report, as was required by the order of the court. But shortly before the trial it became clear that the Legal Aid Board was unwilling to pay her fee. She therefore intimated to the Browns that she would not be prepared to attend court to give oral evidence. In response, Mr and Mrs Brown served her with a witness summons. She applied to the judge to have that set aside. That application was successful, with the result that she was not called to give oral evidence. That were not appealed. That appeared to put Mr and Mrs Brown in difficulty, but as it turned out that difficulty was not realised as the judge admitted her statement and took it into account when deciding that Mr and Mrs Brown had not made out their case. When so doing he rightly directed himself as to the standard of proof and assumed that what was said in Ms Callaghan's statement was correct. Thus the inability to call Miss Callaghan cannot provide Mr and Mrs Brown with a ground of appeal.
20. However, Mr Brown takes it further. He says in his skeleton argument that if Miss Callaghan had come to give evidence she could have supplemented her report in a number of ways. But the Browns were under a duty to put forward her report as a complete report. Mr and Mrs Brown also suggest that the judge had chosen to protect an expert witness from embarrassment. But she was the witness that they intended to call, and therefore she would not be subject to cross-examination by them.
21. Today Mr Brown drew to my attention Wolfgang Mauer v Austria (1997) Application No: 00016566/90, a decision of the European Human Rights Court. He said it established that it was a fundamental of a fair trial that he should be allowed to examine Miss Callaghan, particularly as so much hinged on the clarification of her accounting data. That case in my view has no bearing upon the matter. Here was a witness to be called by Mr and Mrs Brown. Her report was put in as a complete report to stand as her evidence, and as such it was taken into account by the judge. There was no application to put in any further written evidence and the judge was entitled to take into account her report in coming to his conclusion.
22. Second, Mr and Mrs Brown attacked the refusal by the judge to put the defendants to their election before considering the defendants' application that they had no case to answer. To support that attack they referred me to a number of authorities which caution against the course that was taken by the judge. In particular Mr Brown referred me to the recent case of Boyce v Wyatt Engineering TLR, 14th June 2000. He referred me to this extract:

"(1) The course adopted by the judge in deciding the case without putting the defendants to the election of adducing evidence, had to be approached with caution. Where a defendant was put to an election and evidence was adduced, that was the end of the evidence either way. When no such election was sought the trial judge was required to decide the facts of the whole case after hearing just one party's evidence. (2) In that respect, despite the Civil Procedure Rules 1998, and the powers of the case management, there remained in force the principles outlined in Alexander v Rayson [1936] 1 KB 169, that it was not right for a judge of fact to express a view on the evidence, until the evidence was completed. (3) If no election was extracted, there remained the risk of an appeal against the merits, and if successful, a retrial. Such was avoidable if the defendants were put to an election."

23. Clearly the statement of the law in such cases as Alexander v Rayson still apply now the Civil Procedure Rules are in force. There is always a risk of increasing the costs of litigation if a party is not put to election. It may be that it would have been better if the judge had put the defendants to their election, but he did not. However, the question of whether there should be permission to appeal must depend upon whether the judge was right to conclude as he did, not whether he was right to conclude that it was not necessary to put the defendants to an election. If, as he concluded, the Browns had not made out their case, then it could not have been right to allow the action to continue, even though, that course aws one which could lead to substantial extra cost if the judge proved wrong.
24. In my view, the judge had under the CPR a duty to manage the action in the most appropriate way, and his decision to decide the case without putting the defendants to election was one which he was entitled to take. It was the right one if, having considered his judgment, this is a case in which there should not be permission to appeal.
25. Third, Mr and Mrs Brown contend that they were unable to present their case properly because they were refused an adjournment to enable them to have time to prepare their case. It is an unfortunate fact that it only became clear that legal aid would not finance their legal representation at the trial about five days before the trial was due to start. However this was a case with which Mr and Mrs Brown had be concerned with for many years. It had been hanging over the defendants for a long time as well. Thus the judge had to take into account the difficulty that Mr and Mrs Brown were placed in by the refusal of the Legal Aid Board to fund their legal representation and the effect of an adjournment upon the defendants.
26. Today Mr Brown drew to my attention that for some of the time during the trial he was giving evidence and therefore could not be involved in the administration of the case, and during that time his wife was not well. I accept that must have been the position. But again the case needed little running when he was giving evidence. It is a difficulty that a litigant in person always has and is an unfortunate factor in this case. However, the judge had a difficult decision to make. Here was an application for an adjournment in a case that had been hanging around for some years, having been started in 1996, relating to matters which were becoming stale. In those circumstances he had to weigh the difficulties of the Browns up against the fact that major attacks were made upon the credibility and actions of the defendants and that had also been hanging over their heads for a considerable length of time.
27. I cannot find any fault in the way that the judge exercised his discretion. It was a decision for him and this court would not interfere unless he had taken into account matters that he should not have taken into account or failed to take into account matters that he should have taken into account or was plainly wrong. In my view that cannot be said of this decision and therefore this ground raises no real prospect of this court ordering a retrial upon that ground.
28. Fourth, it is said that the defendants never gave evidence and this amounted to a breach of natural justice to Mr and Mrs Brown because they did not have the opportunity to cross-examine them. Such a contention is unarguable. Mr and Mrs Brown were given ample opportunity to present their case. They could, if necessary, have administered or sought to administer interrogatories. They did at the relevant time have the advantage of legal representation and no such interrogatories were sought to be administered. If they did not establish the pleaded allegations at the time that their evidence was complete, it was right that the judge should stop it at that stage rather than incur extra costs.
29. Fifth, Mr and Mrs Brown contend that the judge was wrong to refuse to allow certain amendments to the pleadings. This relates to an allegation sought to be raised at the trial that the directors of Pinecord had wrongly failed to raise £500,000 by way of a rights issue. The judge pointed out in his judgment that the allegation was statute-barred. Thus it could only be allowed by amendment under section 35 of the statute of limitations. He went on to conclude that the allegation did not arise out of the same facts or substantially the same facts as those already pleaded, and concluded that it was not right to allow the pleadings to be amended to raise that allegation. I can find no fault with that conclusion and Mr and Mrs Brown have not demonstrated any grounds for challenging that decision of the judge.
30. However, Mr and Mrs Brown seek to get round that decision by referring to voluntary particulars. Mr Brown drew to my attention certain voluntary particulars that had been served. He says that they and a form of the statement of claim which I have not seen and which was not before the judge, made ample reference to the rights issue. However, those voluntary particulars do not meet the point made by the judge. The pleading did not allege the rights issue point and the service of voluntary particulars is cannot be a substitute for an amendment of the pleading. The issue, by the time that of the trial, was statute-barred by the statute of limitations and no service by any document headed "voluntary particulars" could get round the requirement to obtain leave to amend. If that could be done, then many cases where amendment was sought and judges have held that the statute of limitations precluded such amendment would have been decided differently if there had been service of a document called "voluntary particulars". In my view this ground of appeal could not succeed.
31. In any case, the judge went on to conclude that even if the matter had been pleaded it would have failed. He said:

"If I had been prepared or were able to permit this amendment to be made, I do not consider that the Browns could have made out even a prima facie case for contending that the director defendants were in breach of their duty in not having called a rights issue between July 1990 and January 1991."

32. The judge went on to set out the reasons for coming to that conclusion. They appear to be sound and for those reasons also this matter does not provide a real prospect of success.
33. Sixth, the Browns contend that the judge was wrong to come to the conclusions that he did on their credibility. In their skeleton argument they revisit the matters referred to by the judge. In particular Mr Brown drew to my attention his evidence that he had given that Mr Kane had lied, and another example relating to Mr Freedman and a meeting at the Midland Bank. Those submissions have not persuaded me that they stand a real prospect of being able to persuade this court that the judge wrongly came to the conclusion that he did. The position was that the pleaded allegations were not made out when compared to the documentary evidence. The judge in particular had the advantage of seeing Mr and Mrs Brown give their evidence and to compare their evidence with the contemporaneous documents. That is an advantage that this court will not and does not have. It is for those reasons that this court does not, except in very exceptional circumstances, conclude that a judge came to the wrong conclusion as to credibility.
34. Seventh, Mr and Mrs Brown complain that the judge had attended school with the chairman of one of the APA companies and had recently met him socially. The implied suggestion is that there was apparent bias. However, the judge had informed the parties of this matter at an earlier hearing and had offered to withdraw, but counsel acting for Mr and Mrs Brown had waived any concerns about the issue. In those circumstances there is no realistic prospect of an appeal succeeding on that ground either. The judgment contains no appearance of bias to the reasonable and well-informed observer, particularly as the judge had declared the particular events about which complaint is made.
35. Eighth, it is alleged that Mr and Mrs Brown were relying on being able to cross-examine the defence witnesses. Perhaps they were. But it was a duty upon the Browns to establish their case. This allegation is one which in my view could not enable a successful appeal. A claimant must make out his case and the judge was at pains to take the claimants' case at its highest. Thus this point stands no real prospect of success either.
36. Ninth, the Browns seek to argue in this court that the judgment was perverse and was against the public interest. Mr Brown ended his submissions with an impassioned plea to that effect, drawing attention to the fact thatboth he and a number of creditors had lost a substantial amount of money.
37. However, reading his skeleton argument it is clear that he seeks to reargue the case that was decided by the judge. The jurisdiction of this court is to review the decision, and I do not believe that the conclusions of fact made by the judge could be reversed in this court. Further, in the light of the judge's conclusion on credit in my view there is no real prospect that those allegations could succeed.
38. Mr and Mrs Brown take two basic points on the merits of the case. First, they say that the judge was wrong to take £500,000 as being the sum required to avoid the breaches of the banking covenants. The correct sum was £350,000. But even if they are right that that was the correct sum, the reasoning of the judge applied. Second, the Browns attack the judge's finding on the possible source of equity funding. Mr and Mrs Brown say that it was wrong to assume that the only available source for funding was from the shareholders. Thus it was the responsibility of the directors to call a rights issue given the accepted business plan. In particular, the judge ignored the creditors as a source of funding.
39. In my view there is no real prospect of success of an attack on the judge's approach to the applicants' case and that his conclusion on this matter on the evidence. It is true he did ignore the possible source of funding from creditors, but the judge dealt in detail with the potential sources of equity. In particular the three groups of people that were most likely to have contributed to the rights issue, namely the Bennetts, the Browns and APA. He concluded that none of them was a potential source of funding. There was no evidence that anybody else would have put up money and in those circumstances there is no real prospect of Mr and Mrs Brown succeeding in showing that the judge came to the wrong conclusion as to the merits of their case. If they had believed and really believed that the creditors would have put up the money, then they should have led evidence to that effect and in particular evidence that would be believed. That conclusion is particularly relevant when it is realised that the judge found that the claim against the directors was bound to fail in any event because of the absence of a causal link between the failure to cause an Extraordinary General Meeting and the loss. Also that Ms Callaghan herself was only looking to the Bennetts and APA sources, and that the questions of the rights issue was statute-barred.
40. The Browns also pray in aid the Human Rights Act, but I cannot see its relevance. Their complaint that they were refused legal aid must be addressed to the appropriate authority. If I thought that Mr and Mrs Brown had not been able to put their case before the court in an appropriate manner and therefore had not had a fair trial, then I would have given permission to appeal. But having read the papers and the careful judgment of the judge, I have come to the conclusion that the Browns' views are unreliable, as was their evidence.
41. In my view this is a case where an appeal would stand no real prospect of success and in those circumstances I refuse permission.
ORDER: Application for permission to appeal refused; a copy of this judgment to be provided to the applicants. (Order not form of approved judgment)