Neutral Citation Number: [2004] EWHC 1927 (QB)

Case Number: HQ03X02219
 
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Thursday 5th August 2004

Before:

THE HONOURABLE MR JUSTICE STANLEY BURNTON
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Between:

	KENNETH CHRISTOPHER MURRAY
	Claimant	
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LEISUREPLAY PLC
(formerly Murray Financial Corporation Plc)	

Defendant	

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Andrew Stafford QC (instructed by Archon) for the Claimant
Michael Lazarus (instructed by Ingram Winter Green) for the Defendant

Hearing dates: 13, 14, 15 and 19 July 2004
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Judgment

Mr Justice Stanley Burnton: 
Introduction
1.	In these proceedings the Claimant claims as liquidated damages the sum of £758,691 alleged to be payable by the Defendant company under clause 17.1 of his service agreement dated 2 June 1998, by which he agreed to serve it as chief executive director, plus the sum of £4,401.30 alleged to be due as pay in lieu of holiday. The sum of £758,691 is calculated on the basis that at the date of termination of his service agreement the Claimant was entitled to 3 years’ notice. The Defendant contends that in the events that happened the Claimant was entitled to only one year’s notice, and that in any event clause 17.1 on its true construction provides for payment of a penalty rather than a true pre-estimate of damages and is accordingly unenforceable. It counterclaims the sum of £129,112 under section 322(3)(b) of the Companies Act 1985, on the basis of its claim that the company incurred loss in that sum as a result of the breach of the requirements of section 320 for which the Claimant was responsible. In addition, it claims £7,911 allegedly repayable as overpaid holiday pay.
2.	On the first day of the trial the Claimant sought permission to amend his Particulars of Claim in order to add a claim for damages, to be determined on a future inquiry, for the wrongful termination of his service agreement as an alternative to his claim for liquidated damages under clause 17.1. The Defendant opposed this application. I heard submissions on the application and stated that I would give my decision and reasons in my judgment on the substantive issues.
3.	I shall refer to the Claimant as Mr Murray and to the Defendant as MFC.
The uncontentious facts in summary
Mr Murray
4.	Mr Murray has a background in financial services. He has been an investment analyst, the managing director of a bank, the chairman and chief executive of a company engaged in wholesale mortgage broking, and the chairman and chief executive of a fund management company.
The incorporation and flotation of MFC
5.	MFC was the brainchild of Mr Murray. It was incorporated on 23 April 1998. He selected the first directors and its legal advisers, Lovell White Durrant (“Lovells”). The first directors were, in addition to Mr Murray, Philip Court, Donald Jones, Bryan Rankin, John Redwood and Russell Frith. Mr Rankin became first chairman. He and Mr Murray were the subscribers to the company’s memorandum and articles. The first secretary of the company was Michael Pretty. 
6.	The articles of the company in their original form conferred on Mr Murray, as founding director, power to remove any director: see Lovells’ letter of 9 April 1998. (The articles were amended on 2 June 1998 so as to require the agreement of Mr Murray and the chairman of the company to remove a director.) In his witness statement, Mr Murray put his purpose in establishing the company as follows: 
“My idea was to create a broadly diversified financial services group capable of producing a high return on equity. My preferred way of achieving this was to start by acquiring one or more building societies and ‘bolting on’ other complementary financial businesses in order to extend the range of products available to our customers and to boost profitability. This multi-product multi-channel business model was being followed by a large number of other financial businesses at that time.”
7.	The memorandum of association of MFC stated that its objects were:
“(a)	To carry on the business of acquiring or acquiring the   businesses of building societies, life assurance companies and other mutual organisations; to enter into transfer agreements pursuant to s 97 Building Societies Act 1986 (as amended from time to time) (“BSA”); to take over and assume the business and liabilities of any acquired building societies, life assurance companies and other mutual organisations upon vesting of the property, rights, liabilities and obligations thereof in the Company.
(b)	To carry on business as bankers, financiers and financial agents in all aspects (but without limitation) the transaction of all financial, monetary or other business usually or commonly carried on in any part of the world now or in the future by banks and financial institutions including but not limited to:
(i)	to carry on the business of banking and to transact financial business of every description;
(ii)	to provide all kinds of banking facilities …;
….
(m)	 	To purchase or otherwise acquire and undertake all or 	any part of the business, property, assets, liabilities and	transactions of any person, firm or company;
…”
8.	Mr Murray and the other directors of the company, whom he had appointed, proposed to raise the money required to effect the objects of the company on AIM. Peel Hunt were appointed stockbrokers to the company and advisers for the flotation. 
9.	During May 1998, Mr Murray and other directors of the company and Peel Hunt engaged in presentations to potential investors. The presentations were based on slides, copies of which are in the trial bundle. They gave the objective of MFC as being the acquisition of building societies, mutual life assurance companies and friendly societies. The MFC business plan referred to the acquisition of building societies, mutual life assurance companies and friendly societies. It also referred to a plan to “increase profitability by expanding the product range and improved targeting of products”. Appendix 1 showed the corporate structure of MFC as including, as subsidiaries, Murray Banking Corporation Ltd, Murray Financial Services Plc and Murray Life Ltd.
10.	At their meeting on 29 April 1998, the board of directors of MFC approved the terms of a service agreement (“the first service agreement”) between the company and Mr Murray. For present purposes, its terms may be regarded as identical with those of the agreement (to which I shall refer simply as “the service agreement”) which is the subject of these proceedings, apart from the provisions as to holiday pay, the length of notice of termination and liquidated damages. The first service agreement entitled Mr Murray to three years’ notice, and correspondingly to liquidated damages of three years’ salary and benefits in the event of wrongful termination by the Company. It was executed by Mr Murray and on behalf of the Company in Edinburgh before 2 June 1998, but was not then dated. 
11.	The presentations to potential investors produced a generally positive reaction. There was, however, objection to the proposed rewards for the Board, and in particular Mr Murray. One of the potential investors, Cargill Financial Markets Plc, sent a fax to Mr Bowman of Peel Hunt setting out its objections. It stated:
 “The service agreement of Mr Murray is inappropriate - £125,000 for three days is too high; 40 days holiday is too much and three year protection is excessive. The payment of £95,000 to Cairngorm is also not right. …We would encourage management to find the right deal and see them handsomely rewarded.”
12.	Cargill’s and others’ reactions to Mr Murray’s first service agreement led to its revision. The new terms were discussed and agreed at the meeting of the approvals committee of the board of MFC (Mr Murray, and Messrs. Court, Jones and Rankin) of 29 May 1998, at which they agreed the finalised flotation documentation. 
13.	On 1 June Adele Surtees of Lovells sent to Mr Murray and others draft minutes for the board meeting to be held on the following day to approve the flotation documentation in final form. Paragraph 11.2 of her fax accurately summarised the differences between Mr Murray’s first service agreement and the (second) service agreement.
14.	The (second) service agreement was drawn up for, and executed and dated at, the board meeting on 2 June 1998. It is common ground that it replaced the first service agreement. The board minutes are (at least in so far as they refer to Mr Murray’s service agreement) in the form drafted by Ms Surtees. During the course of that meeting Ms Surtees unwittingly dated the first service agreement as well as the second.
15.	The prospectus in the form agreed on 2 June 1998 was issued dated 3 June 1998. Under the heading “Key information”, the prospectus stated:
“		Murray Financial Corporation is a new company whose shares are to be quoted on AIM.
  	Its objectives are:
-	To acquire the businesses of selected Building Societies and other financial institutions, including life assurance companies and friendly societies;
-	To merge and rationalise the acquired businesses in order to improve their performance and profitability;
-	To grow the income and profit of the acquired businesses further by, inter alia, expanding the range of products and services available to their customer bases; and
-	To develop the Group into a substantial new financial institution capable of providing attractive returns to investors whilst providing its customers with competitive products.”
16.	The prospectus described the objectives of MFC as follows:
“The Directors intend to establish the Group’s business by the acquisition of a Building Society or other financial institution. Thereafter, they intend to expand the Group’s business by acquiring other Building Societies and financial institutions with the main focus being on the acquisition of Building Societies. More fully, the objectives of the Group are:…”
	   and it repeated the objectives set out in the previous paragraph.
17.	Under the heading “Industry Background”, the prospectus stated:
“The financial services industry is currently going through a period of considerable change and consolidation. This has been particularly apparent in the mutual sector, where a number of Building Societies and life assurance companies have been converted into limited companies whilst the managements of a further two Building Societies, believing that it is in the best interests of their members and the best long-term interests of their businesses, have declared their intention to do so.
…
The Group intends to profit from this trend towards consolidation by acquiring, merging and improving the profitability of a number of Building Societies and other financial institutions. The Directors believe that in the building societies, life assurance companies and friendly societies sectors, the economic arguments in favour of demutualization outweigh those in favour of retaining mutual status and believe that future demutualizations are inevitable. The Directors also believe that the opportunities to demutualise available to small to medium sized Building Societies, life assurance companies and friendly societies are limited. In particular, they consider that smaller organisations will be less attractive to large financial institutions seeking to make acquisitions and are unlikely to be large enough to justify conversion into limited companies in their own right. Accordingly, the Group intends to focus its activities on those Building Societies, life assurance companies and friendly societies where it believes its approaches will be attractive for the reasons given below in the paragraph entitled ‘Acquisition Strategy’.”
The service agreement
18.	Mr Murray’s service agreement was disclosed in summary to prospective investors in the Company’s accountants’ report in the following terms:
“K C Murray is engaged, conditional upon Admission, under a service agreement dated 2 June 1998. His employment with the Company is treated as having commenced on 1 December 1997. He is entitled to a salary of £125,000 per annum, a pension contribution equivalent to 30 per cent of his gross basic salary, medical insurance, permanent health insurance, critical illness cover, a motor car and 28 days’ paid holiday each year. He is required to work three days per week, and must devote such time as is reasonable and necessary for the proper performance of his duties. The agreement is terminable for cause or by one year’s notice or three years’ notice in writing by either party following signing of Heads of Agreement relating to an acquisition. K C Murray is subject to non-compete and non-solicitation provisions for a period of one year following termination of his employment with the Company. In the event of wrongful termination of his service agreement, K C Murray is entitled to a pre-determined settlement equal to one year’s salary and benefits or three years’ salary and benefits following signing of Heads of Agreement relating to an acquisition.”
19.	Mr Murray’s service agreement was conditional on the company’s admission to the AIM. That condition was duly satisfied. Clauses 2.1 and 3 of the service agreement were as follows:
“2.1	The Company shall employ the Executive as chief executive director and the Executive shall serve the Company as chief executive director.
…
3.1	The Executive’s employment shall be treated as having commenced on 1 December 1997 and he shall be employed until the expiry of not less than one year’s written notice given by either party to the other so as to expire at any time, save that following the execution of Heads of Agreement relating to the acquisition of a building society or other financial institution the Executives employment shall be terminable by not less than three years’ written notice given by either party so as to expire at any time. The Company reserves the right to terminate the Executive’s employment by payment in lieu of notice.
3.2	Notwithstanding the provisions of clause 3.1 the Executive’s employment shall terminate automatically when the Executive reaches the age of 70 years.”
20.	Clause 5.1 provided that Mr Murray’s remuneration should be a salary of £125,000 a year, reviewable by the Remuneration Committee of the Board. His pension contribution entitlement of 30 per cent of his gross basic salary, and his entitlements to medical insurance, permanent health insurance and critical illness cover, were the subject of clause 6, and his entitlement to a motorcar was contained in clause 8. Holiday pay was the subject of clause 9:
“9.1	In addition to the normal Bank and public holidays the Executive shall be entitled to twenty eight (28) working days’ paid holiday during each calendar year to be taken at such time or times as may be agreed with the Board. The Executive may carry forward any unused part of his holiday entitlement to a subsequent calendar year (such carried forward holiday entitlement to be reported by the Executive to the Company Secretary).
9.2	For the calendar year during which the Executive’s employment hereunder commences or terminates he shall be entitled to such proportion of his annual holiday entitlement as the period of his employment in each such year bears to one calendar year. Upon termination of his employment in accordance with the terms of this agreement for whatever reason he shall if appropriate either be entitled to salary in lieu of any outstanding holiday entitlement or be required to pay to the Company any salary received in respect of holiday taken in excess of his proportionate holiday entitlement.”
21.	Clause 12.1 was a restrictive covenant:
“12.1	The Executive shall not without prior written consent of the Board (such consent to be withheld only so far as may be reasonably necessary to protect the legitimate interests of the Company or any Associated Company):
(a)	For a period of 12 months after termination of his employment hereunder be engaged or interested (whether as a director, shareholder, principal, consultant, agent, partner or employee) in any business concern (of whatever kind) which shall in the United Kingdom be in competition with the Company or with any Associated Company and whose activities include the acquisition of building societies, and other financial institutions including life assurance companies and friendly societies being activities of a kind with which the Executive was concerned to a material extent during the period of one year prior to the termination of his employment with the company PROVIDED ALWAYS that nothing in this clause 12.1(a) shall restrain the Executive from engaging or being interested as aforesaid in any such business concern insofar as his duties or work relate principally to activities of a kind with which the Executive was not concerned during the period of one year prior to the termination of his employment hereunder;
(b)	For a period of 12 months after termination of his employment hereunder either on his own behalf or on behalf of any other person, firm or company directly or indirectly solicit or entice or endeavour to solicit or entice away from the Company or from any Associated Company any employee or executive of managerial status engaged in its or their business and with whom the Executive had dealings at any time during the last year of his employment hereunder.”
22.	The liquidated damages clause which Mr Murray seeks to enforce is clause 17:
“17.1	In the event of a Wrongful Termination by way of liquidated damages the Company shall forthwith pay to the Executive a sum equal to one year’s gross salary, pension contributions and other benefits in kind assuming that salary, pension contributions and benefits in kind had continued to be paid at the same rate as immediately prior to the date of Wrongful Termination, save following the execution of Heads of Agreement relating to the acquisition of a building society or other financial institution the Company shall forthwith pay to the Executive a sum equal to three years’ gross salary, pension contributions and other benefits in kind assuming that salary, pension contributions and benefits in kind had continued to be paid at the same rate as immediately prior to the date of Wrongful Termination. In the event of a dispute as to the value of any benefit in kind the amount payable shall be determined by the Company’s auditors.
17.2	Subject to any rights accrued at the date of termination of the Executive’s employment under the provisions of any pension scheme, option scheme or bonus or benefit plan of the Company, any payment of liquidated damages by the Company shall be made in full and final settlement of all and any claims arising out of the Executive’s employment, its termination, or ceasing to hold the office of director of the Company or any associated company.”
It is common ground that the termination by the company of Mr Murray’s service agreement was a Wrongful Termination within the meaning of the agreement.
23.	In addition to his service agreement, Mr Murray and another company of his, Blue Planet Investments Ltd (“BPI”), then called J P Cairngorm & Co Ltd, were granted warrants over a total of 16 per cent of MFC’s issued share capital. The warrants entitled Mr Murray/BPI to purchase 16 per cent of the ordinary share capital of MFC from time to time at the AIM floatation price of 10p per share. The warrants are described as “exploding warrants”, which means that Mr Murray remained entitled to subscribe for 16% of MFC at 10p per share notwithstanding that the share capital might have been enlarged since the granting of the warrants. Thus if MFC’s net asset value per share increased above the initial cash subscribed, Mr Murray could make an immediate profit by exercising his warrants at 10p per share and selling the shares in the open market. Three other directors received warrants in respect of a total of 2% of MFC’s shares between them.
24.	The AIM Flotation Agreement, also dated 2 June 1998, between MFC, Mr Murray and the other directors of the company, and the company’s brokers Peel Hunt & Co Ltd, included a definition of “UK Financial Institution”:
“UK Financial Institution means a United Kingdom bank, building society, life assurance company or other financial institution of a type and of a size described in the AIM Prospectus (but not otherwise) as being a suitable acquisition candidate for the Group; …”
Mr Jones’s service agreement 
25.	The expression “financial institution” was also used in Mr Jones’s service agreement. Clause 19(b) was as follows:
“The Executive shall initially be required to work two and a half (2-½) days per week which shall increase to not less than five (5) days per week in the event that the Company enters into its Heads of Agreement to acquire a building society or other financial institution. In the event that the transaction contemplated by the Heads of Agreement is aborted your hours shall revert to two and a half (2 ½) days per week and your salary will be adjusted to £40,000 per annum. The Executive’s hours of work shall be the normal hours of work of the Company which are from 9.00 a.m. to 5.30 p.m. together with such additional hours as may be necessary for the proper discharge of his duties hereunder to the satisfaction of the Board. The hours in respect of a half-day shall be from 9.00 a.m. to 1.00 p.m. or 1.30 p.m. to 5.30 p.m.”
26.	The prospectus described Mr Jones as follows:
“Mr Jones, a solicitor by profession, was with the Cheltenham & Gloucester Building Society from 1973 to 1996 during which time he helped negotiate mergers with 19 Building Societies. He was a senior member of the Cheltenham & Gloucester negotiating team in its discussions with Lloyds Bank Plc resulting in the formal offer from Lloyds in April 1994. Mr Jones also led the conversion process which resulted in the Cheltenham & Gloucester’s conversion. Following his retirement from Cheltenham & Gloucester, Mr Jones has acted as a consultant and advised the Bristol & West Building Society on its own conversion and acquisition by the Bank of Ireland. He was Chairman of the Catholic Building Society from May to October 1997 and is a director of the Cairngorm Demutualization Investment Trust.”
The result of the flotation
27.	The Company’s share issue was oversubscribed. It raised £10 million. 100 million shares of a nominal value of 10 pence each were allotted to investors on 25 June 1998.
The attempts to acquire a mutual
28.	Despite its efforts, following the flotation MFC failed to negotiate an agreed acquisition of any building society, mutual life insurance company or friendly society or of any of their businesses. In November 1999 it made a hostile take-over bid for the Leek Building Society. It was unsuccessful. 
29.	The company then changed its strategy. It proposed to acquire businesses that might be profitably carried on with those of building societies or other principal take-over targets, so as to make MFC more attractive to such targets.
Insurance Village plc
30.	In March 2000, MFC entered into Heads of Agreement for its acquisition of Insurance Village plc (“IV"). The purchase was completed on 22 May 2000 for £250,000.
31.	The business, or the proposed business, of IV was that of an insurance broker. It was to sell motor and property insurance on the Internet, through its own Internet site. It had acquired at least some of the software required to sell insurance on the Internet, and had registered a number of domain names. At the date of the Heads of Agreement and at the date of its acquisition it had not begun to trade or to sell insurance, and it did not do so until some months after its purchase by MFC: an information memorandum of December 2001 refers to its having traded for one year. According to the draft business plan of January 2000, it had a management team of 4 persons, although it is unclear to what extent any of them was then working on its business. Its called-up share capital was £125,000. Its unaudited balance sheet as at 14 January 2000 showed net assets of some £100,000, but most of this was comprised of the depreciated costs of computer hardware and software. Its balance sheet at 31 May 2000 shows tangible fixed assets of approximately £15,000 and intangible assets (software) of about £24,500.
Blue Planet Investment Management Ltd 
32.	The original name of Blue Planet Investment Management Ltd was Cairngorm Asset Management Ltd. Mr Murray owned all of the issued share capital of BPIM and managed its affairs. BPIM had promoted 10 identical investment trust companies during 1996, an eleventh investment trust company in 1997 and a twelfth in 1998.  The BPIM Information Memorandum of September 2001 described the investment trusts under its management as follows:
“Blue Planet Financials Growth & Income Investment Trust Nos. 1-10 plcs (‘BPFG&I’)
The objectives of these 10 identical Trusts are to provide investors with a high level of income combined with capital growth from the conversion of building societies and by exploiting the changes taking place in the European financial services sector.
Cairngorm UK Financials Investment Trust Plc (“CUKFIT”)
This Trust invests in equities and bonds issued by quoted financial companies and PIBs and bonds issued by building societies and life assurance companies with the objective of obtaining capital growth and dividend yield.
Blue Planet European Financials Investment Trusts Plc (‘BPEF’)
This Trust has been established to provide investors with an opportunity to benefit from the restructuring of the European financial services sector. It invests in shares of European financial sector companies which are traded or listed on recognised European investment exchanges.”
According to Mr Murray’s email to Semple Fraser of 18 October 2001, the net assets of the 10 identical trusts were £1.813 million each, those of Cairngorm UK Financials Investment Trust plc £14.242 million and those of Blue Planet European Financials Investment Trusts Plc £12.943 million. Mr Murray was a director of both Cairngorm UK Financials Investment Trust plc and Blue Planet European Financials Investment Trusts Plc. The draft long form report prepared by Baker Tilly in December 2001 accurately described BPIM’s customer base as “tied”: the company did not provide investment management services or any other services to any person or entity other than the 12 investment trusts referred to above.  In the year to 30 June 2000, BPIM’s accounts showed a turnover of just over £1 million and profit before taxation of £570,000. Its net assets at 30 June 2000 were approx £1 million. In the year to 30 June 2001 it made £157,000 profit on £1.02 million turnover. In the year to 32 June 2002, it made a pre-tax profit of £137,000 on turnover of £1.06 million. Shareholders’ funds were £1.2 million at 30 June 2001. The accounts to 30 June 2001 show as a major expense a fee for corporate services of £360,000 paid to Blue Planet Investments Ltd, another company owned and managed by Mr Murray. 
Events during 2001
33.	The possibility of Mr Murray selling BPIM to MFC first arose in late 2000 or early 2001. On 16 February 2001, Mr Murray wrote to Mr Rankin as follows:
“I have been reflecting on whether or not I wish to consider selling Blue Planet Investment Management Ltd to Murray Financial Corporation Plc and have come to the view that I would only want to do this if my shareholding in Murray Financial Corporation was larger than it is now.
For this reason, I do not wish to continue discussions regarding the possibility of Murray Financial Corporation acquiring Blue Planet Investment. It is however my intention to increase my shareholding in Murray Financial Corporation Plc once the current closed period is over. Obviously at this stage, I do not know if I will be able to acquire the shares I would like to, and if I cannot then it is unlikely that I would wish to reopen discussions on this matter. If I am able to acquire the shares I want, then I will contact you to see if the Board wants to reopen discussions on the matter.
In order to ensure compliance with the relevant regulations, I will obtain legal advice prior to acquiring any more shares in Murray Financial Corporation Plc and will copy you in on the advice.”
34.	Mr Murray wrote to Mr Rankin again 11 days later, on 27 February 2001:
“I have been reflecting on whether or not I want to sell Blue Planet Investments Management Ltd to Murray Financial Corporation Plc and have come to the conclusion that I do not. As such, there is no point to our continuing discussions regarding the possibility of Murray Financial Corporation acquiring Blue Planet Investments Management.”
35.	On the following day, 28 February 2001, Blue Planet Investments Ltd, a company owned by Mr Murray, acquired one million shares in MFC. Mr Pretty, the secretary of the company, was informed of the purchase, and he duly informed a Mr Davis of Peel Hunt, the Company’s brokers.
36.	By June 2001, the Board had serious concerns as to the future of MFC. The minutes of their meeting of 19 June 2001 show that the purchase of IV had proved a failure. Urgent consideration was to be given to its sale or closure. The possibility of MFC acquiring the shares of BPIM was discussed at the meeting of the Board of MFC on 19 June 2001. The acquisition of IV had proved a failure. The possibilities discussed included the liquidation of MFC, which would enable its unused funds to be returned to shareholders, and the reversal of BPIM into MFC, which would be effected by MFC buying the shares of BPIM, as a result of which Mr Murray would become the majority shareholder. The minutes note, “It was seen that a major difficulty could be that of valuation.” The Board minutes of 21 August 2001 state that Mr Murray had suggested that MFC should consider the reversal of BPIM into MFC. 
37.	By September 2001, a disagreement had surfaced between Mr Rankin and Mr Murray as to whether Mr Murray was entitled to one year’s or three year’s notice under his service agreement. Mr Murray was asserting that IV was a financial institution, so that the Heads of Agreement for its acquisition triggered the extension of the period of notice to which he was entitled. 
38.	It was decided to seek the opinion of Lovells. On 3 September 2001, Mr Pretty signed a letter, which Mr Murray had drafted, seeking Lovells’ advice. The letter stated that there were attached copies of the MFC prospectus, the service agreement, and the Heads of Agreement and subscription agreement relating to the acquisition of IV, and asked Lovells to “write to the Board confirming whether or not liquidated damages would be payable to Ken Murray in the event of the termination of his service agreement by the Company and the extent of those damages”. Unfortunately, the service agreement enclosed with the letter was the first service agreement. 
39.	There was a Board meeting on 4 September 2001. The directors discussed returning capital to shareholders. Mr Murray left the meeting for a discussion of his service agreement. The Board agreed to take independent advice on his notice entitlement. 
40.	Naomi Feinstein of Lovells replied to Mr Pretty’s letter of 3 September on 4 September 2001 advising that MFC would be obliged to pay to Mr Murray the sum specified by clause 17 of the first service agreement, i.e., 3 years’ salary and benefits. Presumably, this letter was received after the board meeting that day. The letter did not address the question whether clause 17 might be a penalty and as such unenforceable. 
41.	Mr Rankin must speedily have appreciated that Miss Feinstein had advised on the basis of the first service agreement and reverted to Lovells with a copy of the (second) service agreement, because on 5 September 2001 she sent him a draft letter of advice referring to the differences between the two service agreements. The draft advised that IV was not a “‘financial institution’ within the meaning intended by the wording of the … Service Agreement”, and that accordingly the relevant period under clause 17.1 was one year. It stated that Mr Nineham agreed with that view. On 6 September 2001, Mr Rankin telephoned Mr Davies of Peel Hunt, who expressed a similar view. 
42.	Mr Nineham of Lovells sent a draft letter of advice to Mr Rankin on 13 September 2001. It dealt at greater length with the meaning of “financial institution”, and again expressed the view that IV was not a financial institution. Again, the question of penalty was not mentioned.
43.	Mr Rankin discussed Mr Nineham’s letter with Mr Murray. On 17 September Mr Rankin sent an email to Mr Nineham stating:
“Ken has asked that the following points be made to you:
He believes that the original service agreement gave him three years notice and that he agreed to a late change (which may have been at the instigation of Peel Hunt but no one seems to remember exactly) to cover the situation where no activity took place. He believes it was the intention that any acquisition was covered in the trigger to make it a three year contract and that he believes the wording in the contract would have at his insistence then have reflected this if it had been realised that there would have been this problem.
However as there was no specific discussion of what the contract situation should be if we acquired a company such as Insurancevillage, it cannot be easy to state categorically that would have been the case.
It would be interesting if any of Adele’s notes indicated who had instigated the contract change, and why.”
44.	Mr Rankin went on holiday on 22 September 2001. He did not inform other members of the Board of Lovells’ draft advice. The day after his return from holiday, Mr Rankin collapsed and was rushed to hospital. He was not discharged until after the BPIM Heads of Agreement had been signed. The board minutes do not record that Mr Murray disclosed to the other directors the substance of Mr Nineham’s draft advice, and it is Mr Jones’s evidence (which I accept) that he did not do so. The result was that no one asked Mr Nineham to reconsider or to confirm his draft advice.
45.	The proposal to acquire the shares of BPIM from Mr Murray was carried forward. On 24 September 2001, Mr Murray instructed Kathleen Stewart of Semple Fraser, a firm of Scottish lawyers, to act on behalf of MFC. The terms of a proposed offer for the shares of BPIM were contained in an attachment to Mr Murray’s email. The email stated:
“…Bryan Rankin, Russell Frith and I are conflicted out due to our being directors of (BPIM). Directors of (MFC) who are not conflicted out are: John Redwood, Phillip Court and Chris Jones. They will have sole responsibility for the transaction from (MFC’s) side and your point of contact should be John Redwood …. I will be the representative of (BPIM) ….
It is our desire to agree the terms of this transaction and have an agreed sale & purchase agreement by Friday 5 October 2001 …”
46.	On 5 October 2001, Semple Fraser made a written submission to the takeover panel seeking a dispensation from the requirement that would otherwise arise that Mr Murray make an offer for all of the shares of MFC which he did not own or control. This was because the consequences of MFC allotting shares in return for shares in BPIM would be that Mr Murray would control more than fifty per cent of the voting rights. The takeover panel responded speedily. Mr Stockbridge of the panel informed Semple Fraser that dispensation would not be available if the acquisition of shares by BPIM in MFC in February 2001 had occurred after discussions on the transaction had begun. Semple Fraser advised Mr Redwood, by then the chairman of MFC:
“The main issues are therefore whether, at the time when Blue Planet Investments Ltd acquired shares in MFC in February of this year, discussion on an acquisition of BPIM for an issue of shares in MFC had begun, …”
47.	The takeover panel’s enquiry was discussed between Kathleen Stewart of Semple Fraser and Mr Redwood and Mr Murray on 9 October 2001. It is clear from her email to them that she was aware that there had been proposals for the acquisition of BPIM by MFC in December 2000 and January and February 2001, but they had not progressed very far. Her email refers to Mr Murray’s letter of 27 February 2001, but not to his earlier letter of 16 February 2001, and I do not know whether she had been provided with a copy. Her letter to the takeover panel of 12 October 2001 did not address this issue. 
48.	On 16 October 2001, Mr Fabrizi sent to Mr Murray at BPIM a document setting out a proposed role for Mr Fabrizi’s company Amnium Ltd and its remuneration for advising on the reverse of BPIM into MFC. It treated BPIM as Amnium’s client responsible for its fees, but as appears below this was changed to MFC.
49.	The next board meeting of MFC was held on 16 October 2001. They discussed the possible acquisition of BPIM. The minutes record the following:
“Messrs Murray and Frith declared their interests in BPIM.
It was agreed that Messrs Redwood, Court and Jones should be authorised by the Board to form a sub-committee to negotiate with BPIM on the understanding that they should have access to independent advice.
Mr Murray reported that he had seen the brokers, Charles Stanley, and qua BPIM, was satisfied with their ability. Mr Murray reported that he had negotiated Charles Stanley down to a fee capped at £75k, and Mr Fabrizi had agreed a fee of 2.5k per month, with a success fee totalling £25k less monthly payments to that date. It was agreed to appoint Charles Stanley and Mr Fabrizi.”
50.	On 16 October 2001, the committee of the directors charged with considering MFC’s interests in the proposed transaction met. The program of Due Diligence was discussed. On 16 October, Mr Fabrizi substituted an engagement letter addressed to MFC for the earlier letter addressed to BPIM.
51.	The Takeover Panel reverted to Semple Fraser on 17 October 2001. Mr Stockbridge, on behalf of the Panel, asked why Blue Planet Investments Ltd had purchased one million shares on 28 February 2001. He said that  “it was particularly important to know that Ken Murray was not in the ‘mind frame’ to enter into this transaction at the time when Blue Planet Investments Ltd purchased the million shares in February.” 
52.	In her letter to Mr Redwood of 17 October 2001, Kathleen Stewart of Semple Fraser advised:
“I have to say that though I believe it correct, in legal parlance, to say that discussions on this particular transaction commenced approximately one month ago, my recommendation to the Board of Murray is to make full disclosure of the fact there was vague talk of a transaction involving the acquisition of BPIM prior to 28 February this year which aborted when Ken Murray indicated, on 27 February, that BPIM was no longer for sale.
I readily appreciate that others may have a different view and, as indicated as above, although I confirm that in relation to this particular transaction it is correct to say that discussions commenced approximately one month ago, I see no merit to be obtained by not giving the Panel full information on the fact that a valuation was discussed early in February and the target company was subsequently withdrawn from a possible transaction.”
53.	Semple Fraser’s response to the Panel was discussed with Mr Murray and Mr Rankin before it was finalised. The statement made in Semple Fraser’s letter of response to the takeover panel of 29 October 2001 was as follows: 
“Mr Murray has confirmed that the possibility of the acquisition by Murray of BPIM was not in his mind or in his contemplation when the company owned by him known as the Blue Planet Investments Ltd, purchased one million shares in Murray on 28 February this year.”
54.	In the following paragraph of the letter, Semple Fraser gave Mr Murray’s reasons for his acquisition of the shares at the end of February 2001. The letter stated:
“We have enquired closely as to the reasons for the purchase and are advised that Blue Planet Investments Limited bought the shares on 28 February because they were trading at a discount to net asset value, and the purchase was made in the belief that a purchase at that point in time represented good value. In support of this the half year results announced by Murray on 22 February 2001 showed Murray had net assets of £7.5 million equivalent to 7.5p per share at 30 November 2000. The one million shares were purchased by Blue Planet Investments Limited at 4.5p per share representing a 40% discount to the November net assets. Blue Planet Investments Limited has previously purchased shares when they believed they were good value and when funds were available to it.”
There was no mention of the fact that there had been discussions concerning the acquisition of BPIM by MFC before 28 February 2001.
55.	At the meeting of the Board of MFC of 6 November 2001, it was reported that Mr Rankin would, by reason of his illness be unable to resume his duties as Chairman for at least another two months, and it was agreed that Mr Redwood should replace him.
56.	On 6 November 2001, the committee of directors of MFC concerned with the acquisition of BPIM approved the signing of the Heads of Agreement, having received advice from Kendal Wadley, the accountants to BPIM and Semple Fraser, acting as independent advisors, that the terms of the acquisition were fair as between the parties. The Heads of Agreement for the acquisition of Blue Planet Investment Management Ltd (“BPIM”) by MFC were signed on 6 November 2001. They were expressed to be subject to contract and not binding or enforceable. They specified the consideration for the shares in BPIM, which was to vary with the profits of that company. The acquisition was expressed to be subject to the completion of satisfactory Due Diligence and to both MFC and Mr Murray being satisfied with the terms of the proposed share purchase agreement, and the approval of the transaction by the independent vote, of a poll, at a meeting of the holders of the issued share capital of MFC, among other matters. “Due Diligence” was defined as 
“a report on the accounting, financial, contractual and legal affairs of (BPIM) to be prepared for (MFC) by accounting and legal representatives of (MFC)”.
57.	The minutes of the Board meeting of MFC of 20 November 2001 record the following:
“The Board had obtained Mrs Elaine Barker’s CV and agreed in principle that she had the relevant skills, independence, and experience to make a useful contribution to the assessment of any acquisition of BPIM. It was agreed that the Board should discuss an invitation for a short term non-executive appointment at a suitable future date. Should the invitation be extended to Mrs Barker it was agreed that she should be paid at an annual rate of £12,000 p.a. plus a premium of 50%, both to be pro rata to the duration of the appointment.”
Mrs Barker was duly appointed director, her appointment to “run until completion of the proposed acquisition of BPIM”.
58.	The annual report and accounts of MFC for the year ended 31 May 2001 were published at the end of November 2001. The directors report included the following statement:
“A service contract exists between the Company and Kenneth Murray, which is terminable for cause or by three years’ notice in writing by either party.”
59.	MFC had incurred some professional fees in relation to the proposed acquisition of BPIM before the Heads of Agreement were signed. It incurred further fees thereafter, namely those of Semple Fraser totalling £51,970.24, Baker Tilly, who among other work prepared the draft long form report referred to above, in the sum of £64,257.24, Elaine Barker received directors’ fees and expenses totalling  £7,009.06. Amnium’s (Mr Fabrizi’s) fees totalled  £5,875.
60.	The sale of BPIM to MFC was abandoned in March 2002 because Mr. Murray and the other directors of MFC could not agree terms. Mrs Barker ceased to be a director on 1 April 2002.
The termination of Mr Murray’s service agreement
61.	Mr Murray’s service agreement was terminated by MFC by letter dated 7 May 2003 with effect from 30 June 2003. Thus, he was given only 7½ weeks’ notice instead of the periods of 1 year or 3 years required by the agreement. MFC no longer seeks to justify the giving of less than 1 year’s notice. 
The issues
62.	Mr Murray contends that by reason of MFC’s entering into Heads of Agreement for the acquisition of IV and/or of BPIM, his notice period under clause 17.1 of his service agreement was extended from 1 year to 3, and that he is entitled to the sum payable under that provision as liquidated damages.
63.	MFC contends:
(a)	That clause 17.1 provides for payment of a penalty rather than liquidated damages, and is therefore unenforceable.
(b)	That neither IV nor BPIM was a “financial institution” within the meaning of the service agreement, so that at the date of its termination Mr Murray’s contractual entitlement remained 1 year’s notice.
(c)	That the Heads of Agreement for the acquisition of BPIM were an arrangement of the kind required by section 320 of the Companies Act 1985 to be approved by a resolution of the company in general meeting before it was entered into; that by causing the company to enter into the Heads of Agreement without such a resolution Mr Murray is liable to account to the company for any resulting gain and to indemnify it for any loss or damage resulting from the arrangement; that if the sum payable under clause 17.1 of Mr Murray’s service agreement was increased by the company’s entry into the Heads of Agreement, he made a gain which he is liable to disgorge, and the company cannot be liable to pay such a gain to him by reason of the defence of circuity of actions; and that the fees and costs paid and incurred by the company in relation to the abortive acquisition of BPIM are loss or damage resulting from the arrangement for which Mr Murray is liable under section 322 of the 1985 Act.
64.	There is a subsidiary issue concerning Mr Murray’s payment in lieu of holiday entitlement. Mr Murray contends he is entitled to £1,215.85 a day; MFC says it is £801.28. The only issue is whether Mr. Murray’s payment in lieu of unused holiday ought to have been calculated on the basis of £1,215.85 per day as Mr. Murray contends, or £801.28 per day as MFC contends.  The former figure is Mr. Murray’s total annual gross salary and benefits expressed as a daily rate.  The latter figure is his gross salary expressed as a daily rate. Mr Murray claims £4,401 unpaid salary in lieu of unused holiday; MFC denies any liability.
65.	The last substantive issue is whether Mr Murray should be excused, pursuant to section 727 of the Companies Act, from any liability under section 322. 
66.	I have also to decide whether to give Mr Murray permission to amend his Particulars of Claim to claim common law damages. This was perhaps the first issue to be determined. I deal with it last in this judgment, but that is a matter of convenience and not of priority.
The hearing and evidence
67.	There was no dispute between the parties as to the nature or size of the business of IV or that of BPIM at the respective dates of the Heads of Agreements relating to their proposed acquisition. Apart from the issues as to application and effect of section 320 of the 1985 Act, and the issue as to salary in lieu of holiday, all of the disputes between the parties related to the interpretation and effect of clause 17.1 of Mr Murray’s service agreement. No one suggested that the prospectus issued by the company did not fairly represent its and its directors’ intentions concerning its business and possible acquisitions at the date of the service agreement. In these circumstances, in my judgment the prospectus contains a full and fair statement of the matrix of facts against which the meaning of the words “Heads of Agreement relating to the acquisition of a building society of other financial institution” in clause 17.1 of the service agreement fall to be interpreted.
68.	In the absence of any suggestion of estoppel or a claim for rectification, it was throughout the trial and remains difficult, if not impossible, to see how oral (or indeed any) evidence of the subjective intentions of the directors of the Company or of Mr Murray or of the negotiations or oral agreements that led to the drafting of clause 17.1 could assist the Court in interpreting those words. Nonetheless, despite expressed judicial concern, most of the oral evidence, and most of the hearing, in this case have been devoted to an exploration of those matters. The result was substantially to increase the costs of the trial. (I am bound to mention, however, that the detailed closing written submissions of counsel shortened the duration of the trial.)
69.	It is equally irrelevant to the issue of construction what view was taken, or advice given, by Lovells, or what statement was made about the effect of the service agreement in the Company’s annual reports and accounts after the service agreement had been entered into. (However, the latter might be relevant to the question whether either IV or BPIM was in fact a financial institution within the meaning of the agreement.)
70.	Mr Murray testified. He called no other witness. The former officers of the company called by it were Donald Jones, who was a director of the company between April 1998 and November 2001, Bryan Rankin, a director until 7 October 2002 and chairman until 6 November 2001, and Michael Pretty, the company secretary between 23 April 1998 and 16 October 2002. In addition, it called Geoffrey Bowman and David Davies of Peel Hunt, and Hugh Nineham and Adele Surtees of Lovells, the company’s solicitors. 
71.	The credibility of some of the witnesses was put in issue, and in case this case goes further, and a different view is taken by the Court of Appeal of the relevance of their oral evidence, or (on one view) Mr Murray is permitted to proceed to a trial of his claim for common law damages, I have to make findings concerning the reliability of their evidence. In addition, Mr Murray’s conduct in relation to the proposed acquisition of BPIM is relevant for the purposes of his application under section 727 of the Companies Act 1985.
72.	Mr Murray is a highly intelligent man and clearly an able businessman. He was however an unreliable witness. He suggested that the expression “financial institution” in his service agreement, and indeed in the prospectus, had a special and specifically agreed meaning. In his witness statement, he said:
“… the term ‘financial institution’ was used to mean any and every kind of financial business that the company could conceivably wish to acquire. We wanted to have a free hand to acquire any financial entity that we felt added value to the business. This included a very broad range of types of business, operating in all areas of the financial services marketplace and of all sizes. For example, the types of entities we might seek to acquire included building societies, private limited and public limited companies, mutual life assurance companies, trustee savings banks incorporated under their own statutes, partnerships, sole traders and other unincorporated businesses. These might be commercial banks, building societies, insurance brokers, independent financial advisors, life assurance companies, savings banks, fund managers, stock brokers, health insurers, mortgage brokers, general insurance companies and estate agents to name but a few. It also included entities such as friendly societies and provident associations where, given their philanthropic origins, it was debatable whether or not they could even be correctly described as businesses.”
If this were correct, the prospectus would have been a misleading document: by way of example, a potential investor, reading the prospectus as a whole, would not envisage that an estate agency was a financial institution. Yet Mr Stafford, for Mr Murray, rejected any suggestion that the prospectus was misleading. There is thus an inconsistency in Mr Murray’s case.
73.	That Mr Murray contended that it had been agreed that the expression financial institution had an unusual and extended meaning was also made clear in his oral evidence. In answer to my question:
 “Are you suggesting that it was agreed that (these words) would have, in the context of the company documents and your agreement, some unusual meaning?”
 He said: 
“Yes, it had a different meaning.  We had to come up with a term that would encapsulate the wide range of businesses that we sought to acquire.  It is a term that I introduced into the documentation in order to cover those wide range of businesses …”
74.	Mr Murray asserted in his evidence that all of the directors of MFC knew of the special meaning of financial institution and understood the expression in that way. He said:
“I believe that everyone involved in the flotation should have understood the term in this way.  I believe that the term was explained to the directors that it meant any financial business of any size which the board might consider an appropriate acquisition.”
He made similar assertions in relation to Mr Davies and Mr Nineham:
“I think it should have been apparent to Mr Davies and it may well have been made apparent to Mr Davies.  The people who it was important understood this were the directors of the company.”

“I believe that Hugh Nineham would have known what was meant by this, particularly as his firm was involved in the drafting of the term ‘financial institution’ in the AIM flotation agreement.  Certainly Adele Surtees was extremely familiar with the term.”
Mr Murray was, however, unable to provide any evidential or factual basis for these assertions.
75.	In his witness statement, Mr Murray stated that he had agreed with Geoffrey Bowman of Peel Hunt that the trigger event for extending his period of notice under clauses 3 and 17 of his service agreement would be “the acquisition of a building society or any other financial sector business”. In evidence, he said that Adele Surtees, of Lovells, had been satisfied that the wording ultimately used “encapsulated what I had agreed with Geoff Bowman”. His account is intrinsically improbable: it is improbable that a solicitor of the evident ability of Ms Surtees would not appreciate the difference between the two formulae; Mr Murray’s evidence is weakened by the fact that in his witness statement he had attributed Ms Surtees’ alleged advice to Mr Nineham of Lovells; and Mr Murray’s account is denied by both Ms Surtees and Mr Bowman. The fact that varying versions of events were given in different versions of Mr Murray’s Reply and Defence to Counterclaim speaks for itself. I accept Ms Surtees’ evidence that the advice she gave to Mr Murray was that the expression financial institution was used in the final version of his service agreement in order to be consistent with the prospectus. 
76.	I similarly do not accept that Mr Davies or Mr Bowman, who too are of obvious intelligence, would not have been alive to the difference between the expression “financial institution” and the meaning suggested by Mr Murray. They would not have permitted that expression to be used in the prospectus and other documents without special definition if a special meaning had been agreed or intended.
77.	For these reasons, I reject Mr Murray’s evidence that any special extended meaning was agreed or that he was advised that the expression had any unusual or extended meaning. I conclude that he was well aware that there had been no such agreement or advice.
78.	In support of his submission that Mr Murray’s evidence was unreliable on this issue, Mr Lazarus referred to Semple Fraser’s letter to the Takeover Panel of 29 October 2001. He submitted that the statement that the possibility of the acquisition by Mr Murray of BPIM was “not in his mind or in his contemplation” when he bought 1 million shares in MFC on 28 February was untrue, to Mr Murray’s knowledge. I have reached my conclusion as to the unreliability of Mr Murray’s evidence without regard to this matter. In case this case goes further, however, I do say that it is difficult to accept that Mr Murray did not have in mind the possibility of MFC purchasing BPIM when he purchased the shares on 28 February, given the contents of his letter to Mr Rankin of 16 February 2001. He did that which had been contemplated less than a fortnight earlier, namely to increase his shareholding in MFC. At best, Semple Fraser’s letter discloses an economy with the truth. Mr Murray should have accepted Kathleen Fraser’s advice in her letter of 17 October 2001.
79.	There are two other matters to which Mr Stafford referred during the course of his closing speech that I must mention. The first is the suggestion that Mr Murray deliberately secured Ms Surtees’ dating of the first service agreement with a view to its possible use subsequently in place of the second service agreement. The second is that Mr Murray deliberately enclosed the first service agreement with the letter to Lovells dated 3 September 2001 with a view to their advising the Board that he was entitled to three years notice. A large number of documents had to be dated and signed on 2 June 1998, and the possibility of confusion cannot be excluded. The inclusion of the wrong version of the service agreement with the letter to Lovells was not sufficiently investigated in evidence. The evidence does not establish that either of these suggestions is well founded. 
80.	Mr Stafford’s closing submissions did not contain any general attack on the credibility of the witnesses called by MFC. I accept their evidence, and prefer their evidence to Mr Murray’s wherever they are in conflict.
The meaning of financial institution
81.	The expression financial institution is in common use. It is found in a large number of statutes and statutory instruments. The Building Societies Act 1997 and the Proceeds of Crime Act 2002, by way of example, contain definitions, which are different from each other. However, its meaning when specially defined may differ from its ordinary meaning; and in any event I am concerned with its meaning in the flotation documents and service agreement agreed on and about 2 June 1998.
82.	The word “financial” requires no elucidation. “Institution” denotes a substantial undertaking.
83.	Both parties contended for special meanings in these documents. Mr Murray’s case, as I have made clear, is that it extended to any business in the financial sector that MFC might acquire. MFC’s case is that it was limited to mutual organisations: building societies, friendly societies and mutual insurance companies. 
84.	It cannot be doubted, and indeed it is common ground, that the service agreement and the prospectus, both finally agreed on 2 June 1998 (although the prospectus was dated the following day), fall to be construed together, as do the other instruments executed that day or referred to in the documents executed that day, including the verification notes, the AIM flotation agreement and the memorandum and articles of the company. The same applies to Mr Jones’ service agreement. All of these documents were considered and agreed by all relevant parties, and in particular Mr Murray and the other directors of the company. The prospectus referred to the service agreement, and in clause 17 the service agreement referred to a possible acquisition in terms that were also used in the prospectus. 
85.	I reject Mr Murray’s case on construction because it does violence to the words used. Mr Stafford relied on the fact that the directors and investors might have envisaged that MFC might acquire businesses that were not within the natural meaning of financial institution. But that consideration, even if it were well founded, could not lead to an extended meaning of the expression. If anything, it strengthens the case for a confined meaning, on the basis that the words must have been used in order to exclude businesses and companies that were not financial institutions. Similarly, the fact that the company had a subsidiary called Murray Financial Services Ltd, on which Mr Stafford relied, cannot lead to the conclusion that any company providing any financial services is a financial institution. Similarly, it is not relevant that the prospectus envisaged expanding the business of an acquired building society by expanding the range of products it offered. That cannot lead to any business offering a product that could be sold by a building society being that of a financial institution. 
86.	Mr Lazarus relied on the context of the expression, particularly in the prospectus, and on the eiusdem generis rule of construction. He submitted that the expression was repeatedly used in conjunction with the three kinds of mutual entities, as in the description of the objectives of the company cited above:
“selected Building Societies and other financial institutions, including life assurance companies and friendly societies.”
Mr Lazarus’s submission finds support in the statement in the prospectus that “the Group intends to focus its (acquisition) activities on those Building Societies, life assurance companies and friendly societies”. It is noticeable that the only entities the acquisition of which is referred to in the prospectus are mutuals. Consistently with this, the memorandum of association of the company referred in paragraph 3(a) only to the acquisition of mutuals. It did not refer to acquisitions (as distinguished from the carrying on of businesses) elsewhere other than in the entirely general provisions of paragraph 3(m). MFC’s case is also supported by the terms of Mr Jones’s service agreement. His expertise and experience, as described in the prospectus, were limited to building societies. He had not worked outside the mutual sector. His agreement provided for the doubling of his working week “in the event of the Company entering into Heads of Agreement to acquire a building society or other financial institution”. It is difficult to see that this referred to a non-mutual, in respect of which Mr Jones had no relevant experience. It is therefore not surprising that in his letter to Mr Jones of 17 October 2001 Mr Murray referred to his being on an executive contract “to help with building society acquisitions”, though he added “and subsequently to manage Insurance Village”.
87.	The risk factors identified in the prospectus are also relevant. Two of these were the following:
“The Group’s strategy depends on the obtaining of appropriate regulatory consents and authorisations as and when required, in particular satisfying the criteria for authorisation under the Banking Act 1987 or subsequent legislation.
The Group’s strategy may also depend on no changes being made to existing legislation affecting the building societies, life assurance and friendly societies sectors.”
It is significant that there was no reference to changes in legislation affecting anything other than building societies, life assurance companies and friendly societies.
88.	There are pointers the other way. The phrase “Building Societies and other financial institutions, including life assurance companies and friendly societies” suggests that there are financial institutions other than those mentioned. Nonetheless, viewed as a whole, there is a powerful case for concluding that “financial institution” was used to refer to mutuals only. 
89.	However, the financial institutions mentioned in the prospectus have other features in common. They are regulated, and receive money and deal with the public. They would almost always have a relatively wide ownership. Even if “financial institution” includes non-mutuals, it’s meaning is coloured by the examples given and their common features.
Was IV a financial institution?
90.	It is quite impossible to conclude that IV was a financial institution within any sensible meaning of the expression at the date of the Heads of Agreement for its acquisition. It had not begun to trade with the public. It had no business in any meaningful sense. To call it an “institution” would be an abuse of language. I agree with Mr Rankin’s view that the suggestion that it was a financial institution for the purposes of clause 17 of Mr Murray’s service agreement was risible. 
91.	It follows that immediately before the date of the BPIM Heads of Agreement, Mr Murray was entitled to only one year’s notice of termination of his service agreement.
Was BPIM a financial institution?
92.	In my judgment, an investor reading the prospectus with reasonable care would not have considered that BPIM, with its narrow range of captive clients, owned by Mr Murray himself, not dealing with the public, and carrying on a class of business nowhere referred to or suggested in any of the flotation documents, and whose business was very different from the businesses the possible acquisition of which was referred to in those documents, fell within the expression “financial institution” as used in those documents.
93.	I do not think that the fact that the investment trusts managed by BPIM dealt with members of the public means that it should be regarded as dealing with the public. 
94.	It follows that the period of notice required by Mr Murray’s service agreement was not extended beyond its original year.
Other points on the BPIM Heads of Agreement
95.	There are two points to be mentioned. Heads of Agreement may be binding or non-binding; indeed, in the absence of express provision, it is sometimes difficult to ascertain whether they are or are not intended to have contractual effect. There is an argument that the parties to the service agreement could not have envisaged that Mr Murray would benefit so substantially from the signing of Heads of Agreement from which both parties were immediately free to resile. MFC abandoned this issue on its re-amendment of its Defence and Counterclaim.  
96.	Secondly, it is possible to construe clauses 3.1 and 17.1 of Mr Murray’s service agreement as being triggered only by the lawful execution of Heads of Agreement: c.f. Alghussein Establishment v Eton College [1988] 1 WLR 587, or that as a matter of law they cannot be triggered by Heads of Agreement executed as a result of a breach by Mr Murray of his duties to MFC. The unlawfulness and breach of duty to which I refer are the alleged breaches of section 320 of the Companies Act 1985. No such submissions were made on behalf of MFC.
Penalty or liquidated damages?
97.	The rule against penalties is an exception to the general rule that the Court will enforce the terms of a lawfully made contract: pacta sunt servanda. Where a contract has been made between equal parties negotiating at arm’s length, the Court may be reluctant to strike down a term freely entered into. However, this is not such a case. Mr Murray had chosen all of the directors of MFC and its advisors. The other directors owed their position to him. The company was his brainchild. He was able within broad limits to determine the terms of his service agreement and his entitlement to warrants. The terms of the first service agreement were unusually beneficial, giving as it did a 3-year rolling service agreement to Mr Murray. It was only negative investor reaction, and the risk of the flotation failing, that led to the substitution of the (second) service agreement for the first. The persons who would ultimately bear the cost of the payment of the sum required by clause 17.1 of the service agreement are the shareholders of MFC. The original shareholders (other than Mr Murray himself and the other directors) were not a party to its negotiation.
98.	Mr Lazarus referred me to the helpful judgment of Mance LJ (with which Peter Gibson and Thomas LJJ agreed) in Cine Bes Filmcilik Ve YapimClick v. United International Pictures [2003] EWCA Civ 1669, in which the classic authorities are collected and discussed. The applicable principles are as follows:  
(a)	In general, a contractual provision that requires one party in the event of his breach of the contract to pay the other party a sum of money is unlawful as being a penalty unless the provision can be justified as a payment of liquidated damages, being a genuine pre-estimate of the loss that the innocent party will incur by reason of the breach. 
(b)	A liquidated damages clause will be held to be penal if it provides for payment of a sum greater than can be justified as a genuine pre-estimate of loss.
(c)	Although the classic distinction is between payments stipulated in terrorem and genuine pre-estimates of damages (Dunlop Pneumatic Tyre Company v. New Garage [1915] AC 79), the phrase “in terrorem” adds nothing to the idea conveyed by the word “penalty” and may obscure the fact that penalties may be undertaken by parties who are not “terrorised” by the prospect of having to pay them.
(d)	Whether a provision is penal is a matter of construction to be resolved by considering whether at the time the contract was made, the predominant function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach.  The answer to this may be deduced by comparing the amount stipulated as payable on breach with the loss that might be sustained if a breach occurred.
(e)	Although it is not sufficient merely to identify some situations in which the application of the provision could result in a party recovering more than his actual loss, if it is obvious that in relation to some of the possible outcomes the liquidated damages are totally out of proportion to the losses that might be incurred, the failure to make special provision for these cases may result in the clause being held to be penal.
99.	Mr Stafford pointed to the advantages to MFC of the certainty of an agreed settlement of any claim by Mr Murray resulting from his wrongful dismissal. This point is of little weight: the point of penalty clauses is that they provide for an agreed payment on termination; it is the excessive amount of the termination payment that is the mischief at which the doctrine is aimed. It is also right to mention that Mr Murray could not and therefore did not contract out of his right to claim damages for his unfair dismissal under the Employment Rights Act 1996: section 203.
100.	The fact that the parties described the payment as liquidated damages is relevant, but not determinative, and cannot prevent a penal provision from being so treated.
101.	Mr Stafford’s written submissions exaggerated the effect of clause 17.2 in suggesting that Mr Murray’s rights to, for example, pension contributions that should have been paid by the company before the date of termination would be compromised by it. Clause 17.2 does not apply to “rights accrued at the date of termination”, and Mr Murray’s right to monthly pension contributions due to be paid before termination would not be affected by it.
102.	Mr Lazarus submitted that clause 17.1 failed as a genuine pre-estimate of damages for a number of reasons: 
(a)	It failed to take account of the fact that £30,000 of any liquidated damages payment would be tax free, whereas all of a salary is taxable.
(b)	It failed to take account of the fact that Mr Murray would not be liable to pay National Insurance contributions on his liquidated damages.
(c)	It provided for payment of the whole of one year’s or 3 years’ gross salary even if the wrongful termination resulted from the company giving insufficient notice of termination. If, for example, the company considered that Mr Murray was entitled to one year’s notice, and paid him one year’s salary in lieu of notice under clause 3.1, he would be entitled to a further 3 years’ salary under clause 17.1. Similarly, and underpayment of salary in lieu of notice would constitute a wrongful termination and have the same effect.
(d)	Wrongful termination shortly before Mr Murray reached 70 would result in an overpayment, because of clause 3.2.
(e)	Clause 17.1 takes no account of Mr Murray’s duty to mitigate his damages.
103.	In my judgment, the last of these points is sufficient. Reasonable contracting parties must have had in mind that there was a real possibility that if Mr Murray were not constrained to act as executive director of MFC, he could and would benefit from other work. It is not surprising to find that the information memorandum of BPIM of July 2000 stated that its turnover and profits had “stagnated in the last financial year as the Chief Executive (Mr Murray) was diverted to other businesses he manages and/or owns”. The BPIM Information Memorandum of September 2001 was explicit:
“Blue Planet Investment Management has grown both turnover and profits at a very high rate since its formation in 1994. Both of these, however, paused in the last two financial years as the Chief Executive was diverted to MFC business. This led to no new fund launches in those years. However, the Chief Executive is now keen to regain the impetus and return the Company to its rapid growth path and a number of initiatives to this end are now being pursued.”
The Chief Executive was Mr Murray. Any increased profitability of BPIM would of course benefit Mr Murray, as its sole shareholder. 
104.	An enforceable liquidated damages clause would have had to make a significant allowance for the income and profits that Mr Murray was likely to make if freed from his commitment to MFC. Clause 17.1 does not. Mr Stafford did not suggest that the covenant in restraint of trade in the service agreement affects this point. It follows that it provides for payment of a penalty and as such is unenforceable.
The application of section 320 of the Companies Act
105.	So far as is relevant, section 320 is as follows:
(1)	With the exceptions provided by the section next following, a company shall not enter into an arrangement - 	
(a)	whereby a director of the company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b)	whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected,
unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company.
The shares in BPIM that MFC would have acquired had the transaction envisaged by the BPIM Heads of Agreement been completed were of the requisite value, and they were to be acquired from Mr Murray, a director of MFC. If, therefore, the Heads of Agreement were an “arrangement” within section 320, it applied to them.
106.	Mr Stafford submitted that the non-binding BPIM Heads of Agreement were not an “arrangement” within the meaning of section 320 because they were not binding on the parties to them. “Arrangement” is a term commonly used in legislation to include a transaction that is not legally binding, as in the now repealed Restrictive Practices Act 1976. In any event, however, in In re Duckwari Plc [1999] Ch 253, the Court of Appeal held that the transactions to which section 320 applies are not limited to arrangements purporting to have contractual effect, and included understandings having no contractual effect.
107.	It is not suggested that s 321 applied to except the BPIM Heads of Agreement from the requirement of section 320. It follows that section 320 applied to the Heads of Agreement and that they should not have been entered into by the Company without prior approval by a resolution of the Company in general meeting. There was no such resolution. 
108.	The consequences of breach of section 320 are set out in section 322:
“Liabilities arising from contravention of s.320
(1)	An arrangement entered into by a company in contravention of section 320, and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) is voidable at the instance of the company unless one or more of the conditions specified in the next subsection is satisfied.
(2)	Those conditions are that –
(a)	restitution of any money or other asset which is the subject-matter of the arrangement or transaction is no longer possible or the company has been indemnified in pursuance of this section by any other person for the loss or damage suffered by it; or
(b)	any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance; or
(c)	the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting.
(3)	If an arrangement is entered into with a company by a director of the company or its holding company or a person connected with him in contravention of section 320, that director and the person so connected, and any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an arrangement, is liable
(a)	to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction, and
(b)	(jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.”
109.	Thus Mr Murray is liable to account to MFC “for any gain which he has made directly or indirectly by the arrangement or transaction”. Mr Lazarus contended that any increased sum payable by the Company as a result of the BPIM Heads of Agreement would be such a gain. Mr Stafford did not dispute this contention; instead, he sought relief under section 727.
110.	I accept Mr Lazarus’s submission. Section 322 does require the gain to which it applies to be made or received immediately on the making of the proscribed arrangement. The words “directly or indirectly” indicate that Parliament intended to cast its net wide. 
111.	If, therefore, I had held that Mr Murray was entitled to an increased sum under clause 17.1 as a result of the execution of the BPIM Heads of Agreement, I should have held that he was liable to account to MFC for that increase. The principle against circuity of actions would have required me to dismiss his claim for that increase.
MFC’s counterclaim
112.	Whether the fees paid (and costs reimbursed) by the company for professional services rendered after the Heads of Agreement in connection with the proposed acquisition of BPIM were “loss or damage resulting from the arrangement” within the meaning of section 322 is a more difficult question. Mr Lazarus’s submissions assumed that expenditure on professional fees are necessarily “loss or damage”. That assumption is not well founded. Take a case where the arrangement in breach of section 320 is completed by the company, and proves profitable. The company does not in such circumstances suffer loss or damage by paying incidental professional fees. To the contrary, it gains by them. Furthermore, it does not necessarily follow that if the company refuses to proceed with the transaction because professional Due Diligence reveals that the transaction is commercially unsuitable, the cost of that Due Diligence is loss or damage. In such circumstances, the company has benefited from the Due Diligence. Furthermore, as Mr Stafford submitted, the fact that fees are incurred after an arrangement is entered into, and would not have been incurred if it had not been entered into, is not necessarily a sufficient condition for recovery. The “but for” test is a necessary, but may not be a sufficient, condition of liability. Professional fees of the kind claimed in this case may be incurred without any arrangement being made, and it may be fortuitous that they are incurred after rather than before or without an arrangement being made.
113.	In In re Duckwari Plc (No. 2)  [1999] Ch 268, the Court of Appeal considered a claim by a company for the borrowing costs it had incurred in acquiring a property under an arrangement to which section 320 applied for which no prior shareholder approval had been obtained. The acquisition of the property had been unprofitable, and the company was held to be entitled to recover from the defendant directors the loss resulting form the acquisition. But the Court of Appeal held that the company was not entitled to recover the borrowing costs incurred in making the acquisition. Nourse LJ, in a judgment with which the other members of the Court agreed, said:
“The essence of the argument of Mr. Richards, for Duckwari, is that the transaction entered into in pursuance of the arrangement was not simply Duckwari’s acquisition of the property but included the means by which it was acquired, in particular the borrowing of £350,000 from the bank and the application of £155,923 from Duckwari’s own resources: see p. 258F-G. He says, correctly on the evidence, that the acquisition and the borrowing were part and parcel of one transaction, in the sense that the acquisition could not have been achieved without the borrowing and the borrowing would not have been incurred but for the acquisition. Identifying the transaction in that way, Mr. Richards claims that the ‘loss or damage resulting from’ it included, up to 8 May 1998, actual compound interest paid or owing to the bank amounting to £676,686 and notional compound interest lost on the £155,923 amounting (at base rate less 0.5 per cent.) to £183,632. On that footing, Duckwari’s total claim is put at £1,216,753. . ..
The essence of the argument of Mr. Hoser, for the respondents, is that, since the arrangement which contravened section 320(1) was that Duckwari should be at liberty to take over Offerventure’s rights and liabilities under the contract, the only transaction falling within section 322 was Duckwari’s acquisition of the property pursuant to the contract. That, and that alone, was the ‘substantial property transaction’ involving a director within the marginal note to section 320. Neither Duckwari’s borrowing from the bank nor the application of its own moneys in part payment of the purchase price was part of the arrangement between Offerventure and Duckwari and neither was in contravention of section 320(1). A fortiori, neither could be or be part of a transaction entered into in pursuance of an arrangement for the purposes of section 322. …
… Although it was at the heart of our earlier decision that the effect of section 322(3)(b) was to make the respondents liable as if they had been trustees, we also held that that basis of liability only arose because there had been a breach of section 320(1): see p. 920H. It necessarily follows that the loss or damage recoverable under section 322(3)(b) is limited to that resulting from the breach, in other words from the acquisition itself.”
114.	With respect to the Court of Appeal, it is not clear to me why the costs of borrowing to purchase a property are not to be taken into account when determining its loss resulting from its acquisition. Be that as it may, the Court of Appeal drew a distinction between the acquisition in question and the agreement between the company and the bank under which finance for the acquisition was provided. That agreement was not an arrangement to which section 320 applied, and the sums payable under it by the company were therefore not loss or damage resulting from such an arrangement.
115.	I am unable to distinguish the claims of MFC in this case from that of Duckwari rejected by the Court of Appeal. The fees and costs for which MFC seeks reimbursement were payable not under the Heads of Agreement, but under separate contracts to which section 320 did not apply. Applying the logic of the judgment of the Court of Appeal, those fees and costs did not result from the proscribed arrangement, but from those separate contracts. The fact that the BPIM Heads of Agreement envisaged Due Diligence does not seem to me to be a relevant distinction. The Heads of Agreement did not impose any obligation on MFC to carry out Due Diligence; the condition relating to satisfactory Due Diligence was one that could have been waived by it.
116.	It follows that Mr Murray is not liable to MFC under section 322(3)(b).
Mr Murray’s claim for relief under section 727(1) of the Companies Act 1985
117.	Section 727(1) is as follows:
“If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.”
118.	Mr Stafford submitted that the following matters justified an order under section 727 relieving Mr Murray from any liability under section 322:
(a)	He declared his interest at the board meeting of MFC on 16th October 2001.
(b)	MFC appointed a sub-committee to address the proposed acquisition of BPIM.
(c)	Mr. Murray had no involvement in the decision-making process concerning the proposed acquisition of BPIM and the actual entering of Heads of Agreement. The Heads of Agreement were entered by MFC because the Board considered them to be in MFC’s best interests.
(d)	MFC appointed a new director (Mrs Barker) to add to its independence.  Guidance was sought from the Takeover Panel in October 2001 as to the desirability of ensuring independence.
(e)	MFC appointed solicitors, stockbrokers, accountants for the purpose of advising them.
(f)	MFC and Mr. Murray intended to obtain shareholder approval.
(g)	MFC was advised to call an EGM to take place in 2002.
(h)	None of the directors who was involved in the failure to seek shareholder approval prior to entering the Heads of Agreement has been required to pay compensation to MFC.
119.	Mr Murray did not contend that he was not liable for any breach of section 320 by virtue of section 322(5) or (6). So far as the former is concerned, that was presumably because he was unable to show that he took any, let alone all reasonable, steps, to secure MFC’s compliance with section 320. 
120.	Mr Lazarus did not contend that the specific provision in section 322(5) and (6) excluded the application of section 727.
121.	In my judgment, important, but not decisive, considerations for the purposes of section 727 are whether the company or the person seeking relief should have obtained legal advice, and if it or he did so the terms in which that advice was sought and what advice was given. 
122.	In the present case, Mr Murray was doubly interested in MFC’s proposed acquisition of BPIM. In the first place, he was the proposed vendor, with whom any Heads of Agreement would be entered into. Secondly, if the effect of signing the BPIM Heads of Agreement was to trigger the extension of Mr Murray’s notice period, he would benefit from that extension and, if clause 17.1 was valid, from the increase in the sum payable under it. It should have been obvious that legal advice was necessary before the Heads of Agreement were signed.
123.	Mr Murray told me that his state of mind in the latter part of 2001 was that he was sure that his period of notice had already been extended by the acquisition of IV:
“Q.	It is right, it is not, that Mr Nineham's advice that Insurance Village had probably not triggered your 3-year entitlements had been received just about a month before the setting up of the subcommittee for the acquisition of BPIM?
A.  	Yes.
Q.  	13th September, 16th October.  So it must have been in your mind, on your case, that the signing of heads of terms for the acquisition of BPIM from you would trigger your 3 years entitlement even if the Insurance Village heads of terms had not?
A.		That was not the case.  I was absolutely quite certain, totally convinced that the acquisition of IV had already triggered it.”
124.	I reject this evidence. Even if I believed that Mr Murray had believed that IV was a financial institution within the meaning of his service agreement, which I do not, I could not accept that Mr Murray rejected Mr Nineham’s advice out of hand. Mr Nineham was a partner in an important commercial firm. Mr Murray had worked with him before, and it was Mr Murray who decided that Lovells should be instructed on the MFC flotation, presumably because of his confidence in Mr Nineham and Lovells. I have no doubt that Mr Murray was well aware that the signing of the BPIM Heads of Agreement might trigger the extension of his notice period.
125.	I have seen nothing to suggest that Mr Murray brought clauses 3 and 17 of his service agreement to the attention of Semple Fraser, or that he took any steps to do so. His service agreement was not referred to in his email to Kathleen Stewart of 24 September 2001 or any other communication with her. His email assumed that no action need be taken so far as the shareholders were concerned, and neither Mr Murray nor the other directors sought advice on this point.
126.	In my judgment in these circumstances, despite the points made by Mr Stafford, Mr Murray did not establish that he acted reasonably in relation to the BPIM Heads of Agreement. I should therefore have refused relief under that section.
127.	If I were satisfied that Mr Murray had acted reasonably, I should not have relieved him from his obligation to account to MFC for any gain resulting from the extension of his notice period. On the hypothesis that there would have been such a gain as a result of the signing of the BPIM Heads of Agreement, it would have been made even if the acquisition of BPIM from Mr Murray himself did not proceed as a result of his refusing to proceed with it or the directors of MFC refusing to do so because they thought that the terms sought by him were exorbitant. It is particularly important that the shareholders of a company have an opportunity to approve Heads of Agreement having such consequences before the company enters into them. 
128.	I leave open the question whether, if MFC were entitled to recover the fees and costs incurred in connection with its proposed acquisition of BPIM, and he had acted reasonably, it would be fair to excuse him from that liability.
Holiday pay
129.	The issue between the parties turns on the effect of clause 9 of the service agreement. It is as follows:
“9.1	In addition to the normal Bank and public holidays the Executive shall be entitled to twenty eight (28) working days’ paid holiday during each calendar year to be taken at such time or times as may be agreed with the Board. The Executive may carry forward any unused part of his holiday entitlement to a subsequent calendar year (such carried forward holiday entitlement to be reported by the Executive to the Company Secretary).
9.2	For the calendar year during which the Executive’s employment hereunder commences or terminates he shall be entitled to such proportion of his annual holiday entitlement as the period of his employment in each such year bears to one calendar year. Upon termination of his employment in accordance with the terms of this agreement for whatever reason he shall if appropriate either be entitled to salary in lieu of any outstanding holiday entitlement or be required to pay to the Company any salary received in respect of holiday taken in excess of his proportionate holiday entitlement.”
130.	Mr Murray was entitled to receive “salary in lieu of any outstanding actual holiday entitlement” under clause 9.2 He contends that “salary” in that phrase includes the benefits other than his salary strictly so called, i.e., the pension contributions to which he was entitled under clause 6.1, the medical and other insurance to which he was entitled under clause 6.2 and the value of his motor car provided under clause 8. Mr Stafford relies on the fact that Mr Murray would clearly be entitled to all those benefits during any actual holiday under clause 9.1, and submitted that it would be anomalous if he were entitled to anything less in lieu of holiday.
131.	Clause 9.2 is however clear. The service agreement distinguishes between salary and other benefits to which Mr Murray was entitled under it: see clause 17.1, which refers to “gross salary, pension contributions and benefits in kind”. Clause 5 fixed his salary:
“5.1	As remuneration for his services hereunder the Company shall pay to the Executive a salary at the rate of one hundred and twenty five thousand pounds (£125,000) per annum (which shall be deemed to accrue from day to day) payable in arrears by equal monthly instalments on the fifteenth (15) day of each month such salary being inclusive of any fees to which the Executive may be entitled as a director of the Company.
5.2	The said salary shall be reviewed by the Remuneration Committee of the Board from time to time (but not less frequently than annually) and the rate thereof may be increased with effect from any such review date.
5.3	For the purposes of the Employment Rights Act 1996 and otherwise the Executive hereby consents to the deduction of any sums properly owing by him to the Company at any time from his salary or any other payment due from the Company to the Executive and the Executive hereby also agrees to make any payment to the Company of any sums properly owed by him to the Company upon demand by the Company at any time.”
132.	See too the reference in clause 6.1, calculating the pension contribution as equivalent to “30 per cent of (the executive’s) gross salary”. 
133.	I accept Mr Lazarus’s submission. “Salary” in clause 9.2 refers to the sum payable under clause 5.
134.	Mr Stafford did not suggest that in the event that I was against him on the interpretation of clause 9.2, MFC is not entitled to repayment of the sum overpaid by it. The calculation of that sum, namely £7,911.43, was not in dispute. Accordingly, MFC is entitled to judgment on its counterclaim for that sum.
Permission to amend Mr Murray’s Particulars of Claim
135.	The only prayer in the present Particulars of Claim is for the sum payable under clause 17.1 of Mr Murray’s service agreement. On that basis, if that clause is on its true construction a penalty, his claim must be dismissed irrespective of the determination of the other issues between the parties, and notwithstanding that the company accepts that the termination of the agreement was wrongful. The application for permission to amend is therefore of considerable importance, and it is all the more surprising, therefore, that it was made so late. 
136.	The history is curious. Given the nature of Mr Murray’s claim, any question of mitigation of damages was irrelevant. The availability of an alternative claim for common law damages was however blindingly obvious. It was perhaps for this reason, but also possibly because the omission of the alternative claim was overlooked, that the original defence of MFC pleaded that Mr Murray was “obliged to take all reasonable steps to mitigate his alleged loss by seeking alternative employment”. I suspect that this plea was included because it is boilerplate for a defence in a wrongful dismissal claim: the plea was not adapted to the facts of this case, where Mr Murray might mitigate his loss by his activities on behalf of companies he owns and controls without seeking alternative employment. 
137.	Mr Murray pleaded to this allegation in his Reply and Defence to counterclaim. He denied being under a duty to mitigate his damages, and alleged that the content of any such duty was circumscribed by specified matters. 
138.	At that stage, therefore, it appeared that mitigation of damages (although legally irrelevant) was an issue between the parties. But there were still no pleaded claim for common law damages and no particulars of such damage.
139.	On 7 January 2004 MFC’s solicitors wrote to Mr Murray’s solicitors about disclosure:
“In relation to your client’s disclosure we trust that included within the categories of documents to be disclosed will be all requisite documentation in relation to your client’s duty to mitigate his loss. …”
Mr Murray’s solicitors replied on 9 January 2004:
“Further to your last letter we confirm that the List will not contain any documentation relating to our client’s attempts to mitigate his loss. It is of course our case that there is no requirement for our client to mitigate given that we say he is entitled to liquidated damages. Without prejudice to that position our client has taken steps to mitigate his loss. However, these steps are appropriate to the type of salaried work which is consistent with our client’s reputation and experience. Accordingly, while our client has made oral enquires of suitable parties, he has not made any written applications.
140.	Mr Lazarus informed me that this letter led the Defendant’s solicitors to conclude that Mr Murray was not making any claim for common law damages. I do not think that the letter is sufficiently unequivocal for this conclusion to be safely drawn.
141.	Mitigation of loss is, of course, only part of the story. Before one comes to mitigation, one must consider the actual loss suffered by the claimant. Mr Stafford accepts that when disclosure was made, no disclosure was made by Mr Murray of documents relating to his post-termination business activities or income or loss. He subsequently qualified this by concession by pointing out that BPIM’s audited accounts to 30 June 2004 could not have been available for disclosure. Its management accounts could have been, however. It is clear that there are management accounts: they are referred to in Baker Tilley’s draft long form report on BPIM of 12 December 2001. In any event, Mr Murray’s activities were not confined to BPIM. 
142.	Mr Murray’s witness statement served on 9 June 2004 does not deal with his post-termination loss. It was from that date abundantly clear that no issues concerning such loss were to be raised by him at trial. If MFC’s legal team had concluded from the exchange of correspondence in January 2004 that he was not claiming damages, it seems that they were right to do so.
143.	On 18 June 2004, MFC’s solicitors sent to Mr Murray’s solicitors a document entitled “Calculation of damages that would be awarded to the Claimant at common law for wrongful dismissal before allowing for mitigation”. Its object was to demonstrate that clause 17.1 is a penalty by showing that common law damages would necessarily be less than that provided for by that provision. It is unlikely that that document would have been served if MFC’s solicitors or counsel had thought that there was a live claim for common law damages. 
144.	Mr Stafford’s skeleton opening, dated 7 July 2004, referred to Mr Murray’s entitlement to damages if clause 17.1 was a penalty. However, I do not read his summary of the issues as including an assessment of damages, and damages were not otherwise referred to in his skeleton. It is, I think, clear (and I do not think it was controverted by Mr Stafford), that apart from the proposed amendment, both parties understood that the trial before me was a trial of all of the issues between them and subject to any appeal would dispose of the proceedings.
145.	In form, Mr Murray’s application is to amend a pleading. I do not think it right so to consider the substance of the application. MFC was entitled to assume, until Mr Lazarus was given notice of the application on the day before the beginning of the trial, that the hearing before me would determine all of the issues in the proceedings. To a significant extent, the application to amend is a late application for an adjournment or for a split trial.
146.	That consideration is stronger if this is a case in which all issues should have been determined in one trial. It is attenuated to the extent that there would in any event have been a split trial of liability and, if required, the quantum of damages to which Mr Murray is entitled. Mr Stafford accepted that I have no material before me on the basis of which I could assess whether or not a split trial would have been appropriate; Mr Lazarus submitted that this is a case in which no split trial would have been ordered.
147.	If there had been a pleaded claim for substantial and particularised damages, I do not think that this is a case in which a split trial should have been ordered. It is likely that the assessment of Mr Murray’s loss would be less than straightforward. MFC and the Court would have to consider:
(a)	 what income Mr Murray received and/or would receive during the relevant period by way of salary and dividends, 
(b)	and whether he had or would benefit from increases in the value of his shareholdings, 
as a result of his increased availability following the termination of his service agreement and which but for its termination he would not have received or benefited from. There may well have been investigation of what dividends could have been paid, and who had decided on their amount and for what reasons. Given the differences between the parties’ respective contentions before me, it is likely that there would have been issues as to mitigation. In this respect, it is relevant to refer to the documents cited at paragraph 103 above. Again, it is difficult to believe that Mr Murray’s credibility would not have been in issue. If it were, a split trial would not be appropriate. MFC would have wanted to use any findings concerning his credibility arising from the issues of liability to attack Mr Murray’s assertions of loss. Conversely, if those findings were favourable to Mr Murray, he would want to use them as bearing upon the reliability of his evidence of loss.
148.	There is a degree of speculation about this, because even when the application to amend was made Mr Murray put forward no quantified or particularised claim. I therefore do not know whether when pleaded his claim would be large or small or even nominal, what credit if any would be given for actual mitigation or mitigation he accepts he could have effected. In my judgment, a claimant who, particularly at a late stage (and this application could scarcely have been made later) seeks to amend to claim damages must particularise his alleged loss. The defendant and the court are entitled to know what the claim is. Moreover, the defendant and the court should be informed of the nature and size of the claim and so as to be able to form a view as to the likely issues and as to the scope, the evidence required for and the costs of the proposed inquiry as to damages. In the present case the court is asked to make the amendment blind. But on the assumption that there would have been a claim for substantial damages, the likelihood is that the trial would have been of all issues, liability and quantum.
149.	Mr Stafford suggested that the fact that the audited accounts of BPIM for the year to 30 June 2004 could not have been available for this hearing, and so a split trial would have been necessary. I do not think that this is right. If it were sufficiently important for the audited accounts to be available at trial, a later date could have been fixed. In any event, the management accounts of that company would have been available for the present hearing. 
150.	Mr Lazarus submitted that I should find that Mr Murray deliberately did not plead a claim for common law damages. He suggested that the particulars of special damage would have quantified Mr Murray’s loss at a figure significantly below the figure payable under clause 17.1, and that in any event Mr Murray would have risked a finding that his actual loss was considerably less than that sum. His particulars of his special damage, or such a finding would have been relevant to the issue whether clause 17.1 is a penalty clause. In this connection, he relied on the advice of the Privy Council in Philips Hong Kong v the Attorney General of Hong Kong (1993) 61 BLR 41, 59:
“The fact that the issue has to be determined objectively, judged at the date the contract was made, does not mean what actually happens subsequently is irrelevant. On the contrary it can provide valuable evidence as to what could reasonably be expected to be the loss at the time the contract was made. Likewise, the fact that two parties who should be well capable of protecting their respective commercial interests agreed the allegedly penal provision suggests that the formula for calculating liquidated damages is unlikely to be oppressive.
On this basis, Mr Lazarus submitted that MFC had been deprived of a legitimate forensic advantage as a result of Mr Murray’s late application to amend to claim damages.
151.	I do not place great weight on this point. Clause 17.1 is in my judgment an obvious penalty provision. It is obvious that the parties should have had in mind the possibility or probability that Mr Murray would be able to mitigate his loss to a significant extent. Furthermore, care is required in applying the Philips principle. Whether a clause is a penalty or not must be determined as at the date of the contract in question, and hindsight must not be allowed to lead to the distortion of what the parties would reasonably have had in contemplation at that date.
152.	One of the considerations I must bear in mind is the possibility that if permission to amend is refused, Mr Murray will be unable to bring any further claim for damages on the basis that any such claim would be an abuse of the process of the court. Mr Stafford submitted that I should not decide whether or not any new proceedings would be an abuse of the process, but assume that there would be a real issue as to whether they were. I am content to approach the matter on this basis, but I consider the likelihood to be that Mr Murray will not be permitted to bring a subsequent claim for damages, and I take that probability into account.
153.	One of the matters that concerned me when this application was argued is the fact that failure of Mr Murray to plead his claim for damages timeously has deprived MFC of the opportunity to make a Part 36 offer or payment into court on account of that claim. On reflection, there is little if anything in this point. MFC was able to make a Part 36 payment or offer in respect of the liquidated damages claim (whether or not it chose to do so in fact). If leave to amend is given, the costs of the inquiry as to damages will fall to be dealt with separately, and MFC can make any Part 36 offer or payment it wishes to hereafter.
154.	However, Mr Lazarus was entitled to ask the Court to bear in mind the additional costs that would be incurred by it if permission to amend were granted. Further disclosure, additional witness statements would be required, quite apart from the costs of a further hearing. There is a real risk that some of these costs would be irrecoverable.
155.	I am prepared to accept that Mr Murray’s failure to claim common law damages at an earlier stage in these proceedings was due to oversight, at least so far as Mr Stafford is concerned. Nonetheless, I do not think that I should give permission to amend. The application is late and the damages claimed are unspecified. As I have stated above, if the damages claim is substantial, Mr Murray’s credibility is likely again to be in issue. If I were to hear the inquiry as to damages, Mr Murray would have grounds (whether justified or not) for believing that his credibility on the new issues would be pre-judged. If another judge were to hear the inquiry, MFC would be concerned whether he or she could rely on the view formed of Mr Murray’s credibility during the present trial. The disclosure of documents involved and the difficulty of the issues that are liable to arise indicate that the costs involved may be considerable. If the damages claim had been made at the proper time, the likelihood is that it would have been heard together with the issues before me. Leave to amend will be refused.