A2/2005/0063 
Neutral Citation Number: [2005] EWCA Civ 993
IN THE SUPREME COURT OF JUDICATURE 
IN THE COURT OF APPEAL (CIVIL DIVISION) 
ON APPEAL FROM LEEDS DISTRICT REGISTRY 
Royal Courts of Justice 
Strand 
London, WC2 

Monday, 20th June 2005
 
B E F O R E:

LADY JUSTICE ARDEN 

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CLAUGHTON (LIQUIDATOR FOR GEORGE ANDERTONS (SALES) LTD)
Claimant/Applicant
-v-
 
MITCHELL & ANR 
Defendant/Respondent 
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(Computer-Aided Transcript of the Stenograph Notes of
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No:  020 7404 1400  Fax No: 020 7831 8838
(Official Shorthand Writers to the Court)
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THE CLAIMANT APPEARED IN PERSON  
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J U D G M E N T 
1.	LADY JUSTICE ARDEN:  This is an application for permission to appeal from the order of Mr Anthony Elleray QC, dated 31st December 2004. This order was made at the trial of the proceedings against Mr Michael, the appellant, and it provides in material part: 
"1. The second Respondent to pay the Applicant forthwith the sum of £37,553.04 under section 212 of the Insolvency Act 1996 
2. The second Respondent to pay forthwith interest on the paid sum of £37,553.04 at the rate of 8% per annum for the period 21 February 1997 to 12 November 2004, being the sum of £18,024." 
Then there were orders as to costs which I am not concerned.
2.	The applicant in the proceedings was the liquidator of a company, George Anderton (Sales) Limited.  He had issued an application originally against both a Mr Mitchell and Mr Michael, for various orders including a declaration that Mr Mitchell was guilty of misfeasance or breach of fiduciary duty and/or breach of the trust within the meaning of section 212 of The Insolvency Act 1986 in relation to the company as a shadow Director or as a de facto Director thereof in applying or otherwise applying to his own use or the use of the first respondent in or about February 1997, the sum of £87,553.01, such monies being the property of the company.
3.	Section 212 of the Insolvency Act 1986 provides in material part: 
"(1) This section applies if in the course of the winding up of a company it appears that a person who- 
 (a) is or has been an officer of the company.  
 (b)... 
 (c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company. 
has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company."
4.	The company, George Anderton (Sales) Limited, went into creditors' voluntary liquidation on 18th April 1997.  Section 212(1)(a) uses the word "officer" which is defined in the Companies Act as including a Director and a Director includes a de facto Director under section 74(1) of the Companies Act 1985.  But even if a person is not an officer of the company, he can still be made subject to a remedy under section 212, if he has been concerned or taken part in the management of a company (see section 212(1)(c)).
5.	The background can be very shortly stated.  The appellant is a financial consultant and through a company called Crown Financial Consultants Limited, ("Crown") now dissolved, he provided services to George Anderton (Sales) Limited. That company had a substantial claim against Asda, which was settled in early 1997 for £87,553.04 net.  This sum however was paid at the direction of the appellant, on the judge's findings to or for the benefit of Mr Mitchell and Mr Michael in shares such that Mr Mitchell received £52,500 through his company and the appellant, or rather Crown received the balance in settlement of their fees.  In point of fact Mr Mitchell settled the claim against him shortly before the trial for £50,000.
6.	I need to say a little more about the background, which I have just very shortly summarised but it is a long judgment and I will only deal with the absolutely necessary points.  The de jure Directors of George Anderton (Sales) Limited were a Mr Morgan and Mr Claughton. They guaranteed amounts owing to the bank and namely the Royal Bank of Scotland. They have now paid off those sums and are subrogated to the bank's claim. They have entered into funding agreements, whereby they have agreed to fund proceedings against Mr Mitchell and Mr Michael, but under the terms of that agreement, they had no right to influence the proceedings.
7.	GASL, that is George Anderton (Sales) Limited business was the sale of knitwear at Asda's stores pursuant to concessions given by Asda.  The largest supplier to George Anderton (Sales) Limited was said to be a company called Dominique Limited which was controlled by Mr Mitchell. Mr Mitchell became concerned that George Anderton (Sales) Limited was in arrears with payments due to Dominique Limited and that it had not paid amounts due to Dominique.
8.	Mr Mitchell became interested in George Anderton (Sales) Limited and he introduced Mr Michael, who is an accountant and who providing accounting and financial management services to George Anderton, through Crown, as I have said.
9.	In about May 1997 Mr Michael and Mr Mitchell acquired a company called Claymore, which was the holding company of George Anderton (Sales) Limited. They made this acquisition through a company called Bevington Development Limited and they together owned the majority of its shares.
10.	Mr Michael and Mr Mitchell then took a leading role in conducting litigation against Asda and, on the judge's findings, Mr Michael was also involved in dealings on behalf of George Anderton Sales with the bankers.  Mr Morgan and Mr Claughton were given options to buy back those shares and they retained day to day control of the business of George Anderton Sales.
11.	The position is that the Asda sale was originally believed be worth some £500,000 but in the fullness of time the best that Mr Michael and Mr Mitchell could arrange was for a settlement of the claim for £100,000, which went, first, to reduce the fees due to George Anderton's (Sales) Limited lawyers, Mischon De Reya.  The proceeds of £87,553.04, net of legal fees were paid into an account for Bevington, and that sum, £52,500 was paid to Mr Mitchell. The balance was paid to Crown in settlement of the fees due to it.
12.	At the hearing before the judge, Mr Michael's case was that George Anderton (Sales) Limited had agreed to pay him, £3,000 plus VAT per calender month out of net proceeds of sale of the Asda claim.
13.	Now, the crucial findings of the judge were at paragraphs 88 to 96 of his judgment.  He held, first, that Mr Michael and Mr Mitchell were responsible for running the company's Asda claim, through Mischon De Reya.  The judge found that Mr Michael was responsible for dealing on the company's behalf with its bank and his functions included putting a professional front on those dealings as an accountant.  In such dealings, according to the judge, judge's findings he was effectively negotiating and ensuring the company's continuing facilities.  The judge further found that Mr Michael directed Bevington and Crown in the distribution of the £87,553.04 in February 1997.
14.	The judge then dealt with the instructions for putting the company and Claymore into liquidation. I need not deal with that matter. The judge's conclusion, at paragraph 91 was that the reality, in his judgment, was that from March 1996 the Board of George Anderton (Sales) Limited, that is Mr Morgan and Mr Claughton felt in practice that they had to comply with directions by the owner, Bevington, whose Director was Mr Michael.  The judge therefore concluded that Mr Michael was concerned in the management of the company for the purposes of section 212(1) of the 1986 Act.
15.	The judge then went on to find that Mr Michael was also a shadow Director, and he expressed the view that, although he did not have to make a finding that Mr Mitchell would also have been a shadow Director, he found that he (Mr Mitchell) did not act as de facto Director.  Then he went on to consider whether Mr Michael had any entitlement to the fees that were paid to him out of the proceeds.  He said this, at paragraph 95: 
"I accept that Bevington had by letter agreed that Mr Mitchell should have 30% of the net proceeds of the Asda claim following settlement and that the letter defined proceeds to include the value of waived rents. I have equally no doubt that Mr Michael was expected by the Company and Mr Morgan and Mr Claughton, to be paid for his services contingently upon success in the Asda claim. Further the reality that Bevington controlled the Company through Claymore, meant that decisions on such fees would ultimately be reached by Bevington of which Mr Michael was the director, responsible through that Company to controlling shareholders. I have no doubt that Mr Mitchell's approval of any fees would have been sought.  In context, he doubtless agreed the split of the £87,533.04. Further I accept that Mr Michael contemporaneously prepared the May 1996 letter setting out fees and the invoices for the sums to which I refer at paragraph 29 [that is a letter which I will describe in a moment].  If he had sent the letter to Bevington, Claymore and its subsidiary including the Company, that might have been sufficient shadow director disclosure for the purpose of section 317 of the Companies Act 1985.  However I have come to the conclusion that the letter and invoices though prepared were not sent out contemporaneously.  I suspect that they were retained on file by Mr Michael, against the event of successful outcome of the Asda litigation and the resolution with Mr Mitchell as to how its proceeds were to be divided. I doubt that he would earlier have wished his fee entitlement to be known by Mr Morgan or Mr Claughton. Further, if he so wished, and wanted to ensure disclosure at that time, he would have chased up an acknowledgment.  I am mindful that it is a rare case in which to find letters relied upon by both sides, unsent.  But whilst I am not satisfied Mr Morgan sent his letters of inquiry on 12th March 1997, I have been satisfied the May 1996 letter and invoices related to it, were not sent out.  In context, I accept the evidence of Mr Morgan that the Company and thus the Liquidator did not have copies of the letter or invoices and that their disclosure first arose in 2000 as a result of public examination sought of Mr Michael and Mr Mitchell. In consequence, Crown was not entitled to fees or the £34,053.04." 
The judge went on to say that £87,553 had been distributed in the knowledge that the company and claimant would not survive.
16.	The judge had accepted that Mr Morgan was not told of the receipt of the £100,000 and its use.  He had thought that all the monies were used to pay fees of the lawyers, Mishcon De Reya.
17.	In those circumstance the judge found that there was a misfeasance by Mr Michael.  However, he did not find that there was a preference of Mr Michael, as much as Crown. The Crown was not a party to the proceedings and therefore no order could be made against Crown.  Indeed, Crown had been dissolved.
18.	The judge's reasoning in paragraph 95 is quite complex.  He had accepted that Bevington had got an agreement with Mr Mitchell that Mr Mitchell should have 30% of the net proceeds of the Asda claim. He further found that Mr Michael would obviously be paid for his services and that renumeration was contingent in success in the Asda claim and he had no doubt that Mr Mitchell agreed and approved the fees to be paid to Mr Michael, though it would appear from his finding that approval might in his judgment be given after the Asda claim was settled.  He was further happy to accept that Mr Michael had written the letter of May 1996 and the invoices which followed it at the dates referred to on those documents.  The judge dealt with a point under section 317, which I need not be concerned, because it was not a point which he held adverse to Mr Michael.  However, the judge came to the conclusion that the letters and the invoices were not sent out contemporaneously and they were therefore not received by George Anderton (Sales) Limited.  Specifically, the judge accepted the evidence of Mr Morgan that the company did not have copy of the letter or invoices and their disclosure first arose in 2000.
19.	The judge, therefore, found that this part of the case turned on a very narrow point, namely that Mr Michael had written a letter in May 1996 dealing with his fees, but had not sent it out and had prepared invoices regularly months thereafter, but they too had not been sent out.
20.	It is important that I should now refer to the letter in question.  It is dated 7th May 1996. It is on Crown's note paper and it is addressed to Messrs Morgan and Mr Parry.  Mr Parry, I am told, is the company secretary of companies within the Bevington group.  It is then addressed to them, at Claymore Management Services Ltd and Bevington Development Ltd and subsidiary undertakings at their address. The letter starts "Dear David".  It begins by saying that Mr Michael encloses the company's fee note in respect of time expended during the month of April 1996. He notes that the company is in arrears with settling the fee notes but refers to the company's financial predicament.
21.	The crucial paragraph is the final paragraph, just before Mr Michael agrees to restrict his fees to £3,000 per month, although his estimate of time to be spent on the company's affairs exceeds that sum.
22.	Then in the final paragraph he deals with payment.  It reads as follows: 
"Turning to the settlement of my company's fee notes, I would in accordance with our agreement expect these to be settled out of the proceeds of the Asda litigation, in priority to any other liabilities of the group, save for the solicitors and counsel's fees which may be outstanding at the time of the money passing.  In the unlikely event of the Asda litigation being lost, then clearly we will encounter a problem which I suggest we review at the appropriate time." 
So this is a letter addressed to Mr Morgan, which on the judge's findings was not sent to Mr Morgan.
23.	Now, the letter, I should observe, is not particularly explicit. It simply says: "I would in accordance with our agreement expect these to be settled out of the proceeds of the Asda litigation, in priority to any liabilities of the group." It does not in fact say that "we have agreed that they will be settled out of the proceeds of the Asda litigation", though that may have been what was intended.  When I say that may have been intended, I mean that may have been intended by the writer in using those words.  I fully accept the argument that it is most unlikely that somebody would willingly work for an insolvent company without having some security about payment of their fees.  I would also add that I can understand that Mr Michael has an argument that the fees which he provided were provided in a professional capacity and not in capacity of a shadow director.  In other words, I am proceeding on the basis that there would be a reasonable ground of argument on an appeal that Mr Michael was not a shadow Director.
24.	Mr Michael, points me to the evidence in support of that letter, to be found at page 678, of bundle 2. This is part of a witness statement, which Mr Michael put in at trial.  He says: 
"I, through Crown, provided professional services to Anderton and Morgan does not deny this fact.  There was an agreement as set out in Crown's letter dated 7th May 1996 which was sent to Anderton its associated companies, as were all the fee notes. The reason why an agreement was made for Crown's fees to be paid out of the settlement moneys achieved with Asda was that Anderton's financial position was such that it could not fund Crown's fees as and when the fee notes were rendered. Morgan states that I have not even produced any further letters which he says were sent with the other fee notes. If Mr Morgan was to carefully read my statement he will note that I have not stated that there were any other letters sent with the fee notes." 
I should add that, in order for Mr Michael to succeed at the end of the day on this point, he would have to say that there was an outright assignment of a proportion of the proceeds and that was not simply an assignment by way of charge. I am proceeding on the basis that if the agreement was as described here, he would be able to show that sort of assignment, with the result that he would be able to gain priority over the other creditors. At the end of this day, this was a question of whether Mr Michael was entitled to payment in priority to the other creditors.
25.	Mr Michael there refers to an agreement set out in the letter, but the letter itself was not an agreement, it was simply a letter by Crown. There were two possibilities. First, the letter was received by Mr Morgan and he accepted it. Alternatively, there was some pre-existing agreement.  The first possibility is closed out by the judge's findings though I will consider, in a moment, whether the judge's finding can be attacked.
26.	So far as the other way of putting it, namely that there was a prior agreement, it is to be noted that neither the letter nor in Mr Michael's statement was there any particulars of when and where and how that agreement had been made.  There was nothing to add to the detail in the letter.
27.	Now, Mr Morgan had put in the witness statements. He had said, at one witness statement, he had said at page 161 of the first appeal bundle:
"The fact that there was no agreement for renumeration of the Second Respondent out of the company.  This is confirmed in examination held in 14 January 2000. On page 15/Question G, the Second Respondent stated that '(i)there was no written agreement regarding Crown Financial's renumeration'. The benefit which he believed he would obtain was merely that of the increase in value of the shares as a consequence of the Asda action, which shares were owned by his Company, Bevington. In his examination in January 2000 (page 10/Question F), the Second Respondent admitted that Bevington had not been entitled to the settlement monies." 
On page 166 he says: 
"At paragraph 7 he [Mr Michael] again contends that the £35,000 which he took was "paid in accordance with agreement entered into' but is still unable to produce any evidence of the alleged agreement. The fact that he took the money secretively evidences the fact he did not have any open and legally binding agreement for payment of fees either to him or to Crown." 
In the event the judge clearly preferred Mr Morgan's evidence to that of Mr Michael.  Mr Michael was expecting that Mr Mitchell would give evidence at the trial and he tells me he would have examined Mr Mitchell, whom he says was present when the agreement was made.  But there was no witness statement from Mr Mitchell dealing with this.  The position, as I have explained, that Mr Mitchell settled this case at a very late date. By a Tomlin Order dated 13th October 2004.  But there was clearly time in which Mr Michael could have got a witness statement from him.  Alternatively, Mr Michael says that Mr Parry was aware of the agreement and Mr Michael could have obtained a witness statement from him.
28.	Mr Michael wants a rehearing on fresh evidence of the claim against him.  But the evidence which he seeks to adduce is evidence which he could have obtained for the trial.  Thus it would be too late to seek, on appeal, to claim to put in new evidence. Furthermore, Mr Michael, who unfortunately was representing himself, did not ask the judge for an adjournment. He says he was unduly prejudiced by the fact that Mr Mitchell settled this matter at a very late point.  But the position is that Mr Michael did have some notice that Mr Mitchell would not be available at the trial and could have sought to get evidence from Mr Mitchell. Therefore, I do not think there is any prospect of success in persuading the Court of Appeal to set aside the judgment that has been on the basis there might be fresh evidence to be adduced.  Certainly no such evidence is available in any draft witness statement before me.
29.	The next question that I need to consider is whether or not the judge's finding can be said to be against the weight of the evidence so the Court of Appeal could set it aside on that basis. However, the position is that Mr Morgan had put more detail into his witness statement. There was clearly a transcript of a private examination of Mr Michael, which I have not seen.  There are also factors connected with the letter, such as the fact that it was not addressed to George Anderton (Sales) Limited.  There was no covering letter with the later invoices. There was no acknowledgment of the letter and the letter itself does not read as if it was confirming something that had actual been agreed, although that to my mind is not a conclusive point.  I can understand that someone in Mr Michael's position, working very hard as he did, not being a lawyer, could overlook the legalities.  But the judge had to be satisfied that Mr Michael was right in saying that he was entitled to priority over the other unsecured creditors because he had obtained an assignment of the proceeds.  In other words, the onus of proof was on Mr Michael. If there was any doubt about it, the liquidator had have to succeed. As I see it there is no basis for arguing in the Court of Appeal that the judge's finding on this point was perverse, even though circumstances, as I have explained, were somewhat unusual.
30.	The next point is this.  I have worked on the basis that there would be a prospect of success in arguing Mr Michael was not a shadow director but rather provided services in a professional capacity.  I have not read out the definition of shadow director but it excludes a person in accordance with whose directions directors of a company are accustomed to act if that person was acting in a professional capacity.
31.	Now, the claim, as I read out, refers to Mr Michael being a de facto, or shadow Director. The judge clearly found that Mr Michael was not a de facto Director.  The judge actually found liability under section 212(1)(c), namely that he was concerned in the management of the company. The argument before the judge clearly proceeded on the alternative basis, and therefore, in my judgment, there is no reasonable ground of success in arguing the claim was not precisely the same claim as was pleaded in the claim.
32.	In those circumstances, in my judgment, on this very crucial issue of whether or not there was an agreement which gave priority for Mr Michael's fees, the judge has made a finding of fact against Mr Michael. This Court rarely interferes with findings of fact and I do not consider that there is any basis for giving permission to appeal against that finding of fact.
33.	That was the really important point in this case. As I have explained, the fact that Mr Michael was arguably not a shadow director would not matter because the claim was brought under section 212(1).
34.	The next principal ground of appeal was that there was a funding agreement that this litigation was basically being run for the benefit of Mr Claughton and Mr Morgan. There is a funding agreement, but it provides for Mr Claughton and Morgan to have no influence on the liquidators exercise of his judgment in relation to the proceeding. Therefore, I do not see any basis on which it could be said the agreement was champertous. There is authority on this point, namely Re Oasis Merchandising Services Limited [1998] Ch 170, where this Court said that the fact that a liquidator was an officer of the company, assuming a claim under section 213 of the Insolvency Act 1986 conducting litigation with a public or penal element is relevant to the propriety of his act in entering into an agreement and the correctness of the court in authorising that Act.  That there was much to be said for allowing the liquidator to sell the fruits of an action provided the terms of sale did not allow the purchaser to influence, the course of it or to interfere with liquidator's conduct of the proceedings.  The next point which Mr Michael makes is that there were other claims which could have been taken against Mr Claughton and Mr Morgan which were not in fact pursued.
35.	Mr Michael refers me to potential breaches of the prohibition on financial assistance. But the question whether or not those claims could be brought were really separate from these proceedings and, as I understand it, Mr Michael accepted that point.  If there was to be proceedings taken against Mr Claughton and Mr Morgan, they would have to be in separate proceedings and if the liquidator was to be challenged for not having taken those proceedings that would likewise have to be a separate proceeding.
36.	That then deals with the grounds of appeal.  I think I should like to add this.  This was a hard case to be brought against Mr Michael.  He had no legal representation before the judge.  I do not, of course, criticise the way in which the judge conducted the trial and Mr Michael has not sought to do so.
37.	The position is that this was a difficult claim and complex matter to be conducted. The claim was originally made against him as a shadow Director and it is to that issue, no doubt, that much of Mr Michael's energies were turned.
38.	Mr Michael appeared before me and has made helpful submissions today. He has also explained his own personal circumstances, which is that he faces bankruptcy as a result of these proceedings; that he has a most serious illness and four children and that he needs medical treatment.
39.	I am in the position where I must refuse permission to appeal but I very much hope that those matters will be taken into account by the liquidator and by the court which has to deal with the matter hereafter.
40.	LADY JUSTICE ARDEN:  I am sorry I cannot help you.  But I hope those concluding comments will be of some assistance when you get to Leeds Court tomorrow.