Case No: HQ15X04419
Neutral Citation Number: [2016] EWHC 2599 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 30/11/2016

Before:

MRS JUSTICE MAY DBE

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Between:

	(1)	Paul Richards

(2)	Keith Purves

Claimants	
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	I P Solutions Group Ltd	Defendant	

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Mr Richard Leiper (instructed by Clyde & Co) for the Claimants
Mr Chris Quinn (instructed by DMH Stallard) for the Defendants

Hearing dates: 1 July, 4 – 7 July 2016
Hand down Judgment 22 July 2016

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Judgment
Mrs Justice May:
1.	Following a hearing on 5 September 2016 and written submissions thereafter, this further short judgment will deal with the remaining issues relating to damages and costs arising from my earlier decision dated 22 July 2016.  All abbreviations used in that judgment are continued in this further decision. 
2.	The remaining issues may be summarised as follows:
(1)	 Whether any further bonus would have been payable to the Claimants during the contractual notice period ending on 29 January 2016, in particular for the quarter ending in November 2015 (“Q4 Bonus”).
(2)	Whether valuation of the Claimant’s shares as “Good Leavers” under the Company Articles of Association should take into account the provisions of Article 13.3.
(3)	Interest, costs and payment on account of costs.

Q4 bonus
3.	The Company has produced a spreadsheet setting out the application of the Spur 57 model to the Company figures for the relevant period from which it appears that the only quarter in 2015 to have produced a test-pass was Q3.  The Claimants in response have submitted that the calculations contain a number of significant omissions, correction of any one of which would convert the Q4 test-fail to a test-pass.  The Claimants have produced re-worked spreadsheets attached to Mr Leiper’s written submissions demonstrating how they say the various changes would have impacted the Company’s calculations.
4.	In his written submissions in response, Mr Quinn sought to deal with each of the re-worked scenarios. As to the failure to take account of the Q3 bonus being paid, having followed the (written) submissions and painstakingly worked through the detailed spreadsheets, in my view this criticism is only applicable to the “bonus re-credit” scenario where, as the Q1 figures are set out on the basis that £74.5k is not taken in March (such that “non-trading costs” are entered as £10.2k rather than £84.7k) then it would be appropriate to calculate the Q4 position on the basis that £74.5k was taken out after Q3, the bonus test having been passed in that quarter.  Once that is done, Q4 becomes a test-fail.  However, whilst that is the case for the bonus re-credit re-working, in every other re-worked scenario it appeared to me that the calculations had been done on the basis that the bonuses had been taken in Q1, and that it was right therefore to treat the bonus in Q3 as having been unpaid (there being a notional off-set against the bonuses wrongly taken in Q1).
5.	Whilst therefore, I do not accept that the “universal errors” identified by Mr Quinn at paras B1 and B2 of his submissions apply to all the re-worked scenarios, I have concluded that the other re-workings proposed by the Claimants are either wrong in principle or are based on a false premise as the Defendant has submitted.  Thus:
(i)	As regards the rent deposit, the question as to whether or not this is, or should have been treated as, an “exceptional item” was not put to Mr Daly when he gave evidence at the first hearing.  I heard no evidence on the point beyond his evidence that he did not think it appropriate to add back the rent deposit for the purposes of calculating the bonus.  I regarded Mr Daly as a reliable witness and I see no reason to change that view.  Moreoever the position that he took, and which the Defendant’s current Finance Director apparently also takes, accords with commonsense:  a rent deposit is a cash sum paid which, whilst it may be repaid in whole or in part at some point in the future, is for present cash purposes unavailable.
(ii)	In my view it is appropriate to factor in to the 2015 calculations a correction for overpayments made by Vodafone in 2015 when considering whether a bonus would properly have been payable in that year.
(iii)	I accept that an audit adjustment to the balance sheet for the year to 2014 would not have impacted upon cash movements in 2015. In principle that seems to me to be sensible, as does the Defendant’s point made in the letter from DMH Stallard dated 5 October 2016 that the purpose of line 55 “Cash Movement check” in the spreadsheet is to check that the correct adjustments have been made, resulting in a zero value.  It follows that I prefer the calculations in the Defendant’s unadjusted scenario in this respect.
6.	For these reasons I am not persuaded that the Claimants are due any further bonus payments by way of damages.
Valuation of the Claimants’ shareholding
7.	The parties are agreed that as employees who were wrongfully dismissed, the Claimants are entitled to be treated as “Good Leavers” under the Company Articles of Association.  By Article 18.3 the Claimants, as “Good Leavers”, were entitled to be paid the “Market Value” of their shares.  “Market Value” is defined in the Articles as: 
“such value as the transferor and (with Investor Consent) the Company shall agree within ten days after the date of the relevant Transfer Notice (or such longer period as shall be agreed between the transferor and (with Investor Consent) the Company) or, failing such agreement, such value as the Independent Expert shall determine pursuant to Article 18.4.”

8.	The critical provision for these purposes is Article 18.4, under which the Independent Expert is required to determine the Market Value: 
“..on the basis which, in the Independent Expert’s opinion, represents the market value of the Leaver’s Shares at the Leaving Date as between a willing seller and a willing buyer as if the entire issued  share capital of the Company were being sold in accordance with these Articles and, in making such determination, the Independent Expert shall ignore the fact that such Leaver’s Shares may represent a minority interest and may be subject to the compulsory transfer requirements of Articles 17 (Transfers of Shares) and 20 (Tag Along and Come Along)”

Further, by Article 18.4.3:
 “the certificate of the Independent Expert shall, in the absence of manifest error, be final and binding”

9.	The parties were unable to agree the Market Value (as defined) of the Claimants’ shares, accordingly they jointly instructed Ernst & Young (“E&Y”) to act as Independent Expert in accordance with the Articles. Notwithstanding that appointment, there remain, it seems, two issues for me to determine: (i) the date to be taken for the valuation, being either 29 July 2015 when the Claimants’ employment was (wrongfully) terminated or 29 January 2016 when their contractual period of notice would have otherwise have expired; and (ii) whether the provisions of Article 13.3 are properly to be taken into account in determining Market Value.
(i)	 Valuation date
10.	Article 18.4 set out above refers to “Leaving Date” as the date for valuation.  “Leaving Date” is defined in the Articles as follows:
“... the date on which the relevant person becomes a Leaver, which in the case of any Shareholder who becomes a Leaver by virtue of any person ceasing to be an Employee shall be the Termination Date in relation to such Employee”
“Termination Date” is defined differently according to the circumstances under which an employee leaves the Company, the relevant provision in the Claimants’ case being:
“(c) where the Employee concerned is a director and an employee of any Group Company, the date on which the Employee’s contract of employment with any Group Company is terminated”

11.	The circumstances under which an employee becomes a “Good Leaver” are set out in the definition section of the Articles, the material part of which provides as follows:
““Good Leaver” means:
(a)  A person (other than a Bad Leaver) who ceases to be an Employee where such cessation occurs for one of the following reasons:
...
(iii) the termination of that person’s employment by the employing company:
(A)	In circumstances that are determined by an Employment Tribunal or Court to be or amount to wrongful dismissal...”

12.	Mr Leiper submitted that if they had not been wrongfully dismissed his clients would have been entitled to six months’ notice under their contracts of employment; accordingly that the date of termination for the purposes of valuation should be taken as 29 January 2016.  Mr Quinn argued that the date of termination was the date on which their employment actually ended (albeit, as I have found, wrongly), namely 29 July 2015; alternatively that I should conclude that the Company would have invoked the “PILON” clause in the Claimants’ employment contracts so as to bring about the immediate removal of the Claimants from the Company on 29 July 2015 in any event.
13.	I have concluded that I do not need to consider what the Company might have done had it not summarily dismissed the Claimants on 29 July 2015.  The point at issue here is what sum, if any, the Claimants as “Good Leavers” would have been entitled to be paid for their shares.  The Claimants fall within the definition of “Good Leavers” under the Articles by reason of the fact that their contracts were wrongfully terminated on 29 July 2015 – see section (a)(iii)(A) of the definition at paragraph 11 above.  It follows that that date, 29 July 2015, is the “Leaving Date” for the purposes of valuation under Article 18.4.
14.	I should add that there was no evidence before me as to whether taking the July or January date would in fact make any difference to market value. Moreover in view of the conclusion I have reached on the redemption premium provision, below, any difference that there is may in the end prove immaterial.
(ii) The impact on valuation of clause 13.3

15.	Clause 13.3 of the Articles (“the redemption premium provision”) provides as follows:
“13.3 Exit Provisions
“On a Share Sale the Proceeds of Sale shall be distributed in the order of priority set out in Article 13.2 unless the aggregate Proceeds of Sale distributed to the Living Bridge Investors is less than two times the Living Bridge Investment Amount in which case:
13.3.1  the holders of the A Ordinary Shares shall be paid the Issue Price of each such Share, together with a sum equal to any arrears or accruals of any dividends calculated down to and including the date of actual payment (“the A share proceeds”);
13.3.2  the holders of the B Ordinary Shares shall be paid the B share Prices of each such Share, together with a sum equal to any arrears or accruals of any dividends calculated down to and including the date of actual payment (the “B Share Proceeds”) plus an additional amount (the “Additional B Share Proceeds”) such that the A Share Proceeds, the B Share Proceeds and the Additional B Share Proceeds plus the Previous Distribution Amount in aggregate equal two times the Living Bridge Investment Amount; and
13.3.3 the balance of such assets shall be distributed amongst the holders of all the Equity Shares (other than the A Ordinary Shares) in proportion to their respective nominal values by reference to the total nominal value of those Equity Shares in aggregate, provided that the amount payable to the holders of the A Ordinary Shares and the B Ordinary Shares pursuant to the Article 13.3 shall not be subject to the 49.9 per cent limit set out  in  Article 13.2.2
For the purpose of Article 13.3.3 the Equity Shares shall be deemed to have the same nominal value being 0.1pence per share”
16.	Article 13.3 in effect directs that on sale of a controlling interest in the Company, the holders of other than Class A or B shares will not receive any distribution until the value of the equity is at least twice the amount invested by the holders of the A shares and B shares (i.e. the LB investment companies). The intention was clearly to provide a priority return for LB’s investment.  
17.	The dispute between the parties concerns whether the redemption premium provision is to be taken into account in determining the Market Value of the Claimants’ shares in accordance with Article 18.4.  
18.	Under Article 18.5 the decision of the independent expert as to Market Value is final and binding in the absence of “manifest error”.  E&Y have not (yet) been asked to arrive at an opinion of Market Value, their view has only been sought in relation to the question of whether the provisions of Article 13.3 would impact upon that value.  By letter dated 30 August 2016, E&Y advised that in their view it was appropriate to take the redemption premium provision into account in arriving at a value of the Claimants’ shares pursuant to Article 18.4.  Mr Leiper submitted that E&Y have misconstrued the effect of Article 18.4 and that this amounts to a “manifest error”.  He argued that the proper construction and application of Article 18.4 in relation to Market Value is a matter for the court to determine and not E&Y.
19.	It seems to me that there is a very fine line between the court’s role and that of the expert here:  where does construction of the parties’ agreement, which included the Company Articles of Association, end and the expert duty to assess market value begin? The impact, or otherwise, on Market Value (as defined) of a provision agreed between the parties designed to ensure a priority return to investors seems to me pre-eminently a matter for the expert and not one for the court.  Moreover if the expert has decided, as E&Y has, that the redemption premium provision is to be taken into account in assessing the value of the Claimants’ shares, can this properly be said to be a “manifest error”, even if the court might take a different view?  These are questions that I have found it very difficult to determine.  
20.	Happily, I have not in the end needed to as my view of Article 18.4 accords with that of E&Y.  I have concluded that the phrase “...market value of the Leaver’s Shares...as if the entire share capital of the Company were sold in accordance with these Articles” necessarily includes a recognition of the type of shares held by the Leaver.  The Claimants held Class C shares whose realisable value was subordinated to the holders of the Class A and Class B shares by the provisions of Article 13.3.  Any buyer purchasing the Claimants’ shares would purchase subject to the restrictions affecting realisable value imposed by Article 13.3.
21.	Mr Leiper submitted that the result of such a construction – rendering his clients’ shares of negligible value - made no commercial sense given that the Claimants had sold their shares in IPS for just under £2million each some 6 months previously, being left with a 30% shareholding in the Defendant.  In response to this Mr Quinn made the point that the shares which the Claimants sold were shares in IPS, that purchase being part of an investment deal which saw the incorporation of a new Company, namely the Defendant.  The Claimants’ shareholdings in the (new) Company were thus different shareholdings, held on entirely new terms agreed as part of the investment deal.  Mr Quinn pointed out that in these circumstances Mr Leiper was not comparing like with like; in any event, he argued, the Articles in general and Article 13.3 in particular formed part of the overall deal documentation which had been finalised followed extensive negotiations and in relation to which the Claimants had had the benefit of expert legal advice.  If the provisions which they had agreed operated disadvantageously, or proved uncommercial, to them then they may have a claim elsewhere, but it did not justify the court in “reading down” the clear wording of that agreement.
22.	Mr Leiper next directed me to Article 18.3, where the detailed provision for payment to an “Other Leaver” in respect of their shareholding indicated, he suggested, the parties’ contemplation of Market Value as ignoring any effect of Article 13.3, on the basis that the detailed provisions of Article 18.3 clearly contemplated Market Value as having significant value.  He cited examples of apparently anomalous results depending upon the circumstances under which a “Leaver” was to leave the company.  Mr Quinn, for his part, gave examples of apparently equally inconsistent results if a valuation under Article 18.4 were to omit consideration of the redemption premium provision.  
23.	In the end I return to the wording of Article 18.4 itself which seems to me to be clear:  the expert is called upon to determine market value of the “Leaver’s shares”.  There is no provision directing that the type or class of share is to be disregarded in that process, in circumstances where the Articles clearly contemplated that a “Leaver” might hold any one or more of many different classes of shares.  As Mr Quinn rightly submitted, Article 13.3 was a clause designed to protect LB’s investment by effectively subordinating the realisable value of classes of shares other than those held by the LB investors.  To leave that circumstance out of account in assessing the market value of those other shares would in my view be contrary to commonsense, given the purpose of the clause, and would require explicit provision.  It is significant, in this respect, that Article 18.4 does include explicit provision for ignoring the circumstance of a particular bundle of shares being a minority shareholding or subject to compulsory transfer requirements, but not for their being shares of a class impacted adversely (or potentially adversely) by the provisions of Article 13.3.
Interest, costs and payment on account

24.	I can take the remaining matters relatively shortly.
 Interest
25.	There is a distinction between pre-judgment interest on damages under s.35 of the Supreme Court Act 1981 (“SCA”), pre-judgment interest on costs under CPR Part 44.2(6)(g) and post-judgment interest on judgment debts (including the judgment debt created by an order for payment of costs) under s.17 Judgments Act 1838.  
26.	The court has a wide discretion under s.35A SCA in relation to pre-judgment interest, including in particular what rate is to apply.  In the Commercial Court the appropriate rate is generally taken as 2% above base (noted by Leggatt J in Involnert v. Aprilgrange [2015] EWHC 2838 (Comm) at para.9), although a court may nevertheless decide that it is just and appropriate in a given case to assess interest at a higher or lower rate.  In the present case I see no reason to depart from the ordinary commercial rate of 2% above base.
27.	CPR 44.2(6)(g) gives the court power to award interest on costs from a date before judgment.  In Aprilgrange (supra), Leggatt J noted (at para. 7) that this power “is now routinely exercised where an order for costs is made following a trial to award interest at a commercial rate from the dates when the costs were incurred until the date when interest becomes payable under the Judgments Act”.  The appropriate date to start interest running is the date when invoices are actually paid; interest at that rate continues until it is replaced by judgment interest under s.17 Judgments Act.  In the present case the rate of 2% above base will also apply to costs, to run from the date of payment.
28.	There is no discretion as to the rate of interest payable under the Judgments Act; the rate has remained unchanged at 8% since 1993.  However, where there has been a subsequent hearing for the purpose of quantifying damages, interest at the judgment rate will not start to run until the relevant judgment or order quantifying the amount:  see the White Book at para 40.8.9.  Although my earlier decision determined that the Claimants had been unlawfully dismissed, the award of any judgment sum has necessarily had to await this further judgment.  Accordingly, the date upon which interest at the judgment rate of 8% will start to run will be the date of my order made following this decision.
Costs
29.	Although no order for separate hearings was either sought or made prior to trial, the determination of these proceedings has in practice involved separate hearings.  Subject to allowing the parties a final opportunity to address me on the matter of costs as a result of this further judgment, my preliminary view is that the final order for costs ought to recognise the reality of the manner in which proceedings have been pursued and resolved, in particular that, whilst the Claimants obtained a judgment in their favour at the first hearing, the Defendant has succeeded on the issues which remained for my determination at the second.  
30.	I have heard from the parties already in relation to the costs of the trial leading to my judgment dated 22 July 2016.  Mr Quinn sought to persuade me that the usual order for costs should not apply given the behaviour of the Claimants, together with the fact that certain of the issues arising were either not pursued by the Claimants, or were resolved against them.  I have concluded, notwithstanding his eloquent submissions, that there is no justification for departing from the usual order that costs should follow the event.  The Claimants’ regrettable outbursts in public against Living Bridge individuals whom they blamed for the unfairness of their dismissal in July 2015 were no doubt unpleasant but did not impact upon the costs incurred in connection with these proceedings.  Further although certain of the issues raised on the pleadings were either not argued or were resolved against them, the Claimants received a judgment on liability in their favour overall.  Accordingly, the costs up to and including the trial in July must be paid by the Defendant to the Claimants.
31.	Pending final resolution of the question as to how the costs of this second part of proceedings are to be dealt with, I have not thought it right to reach any final view as to the proper amount of a payment on account.  In principle there should be such a payment; however it seems to me that the final amount may need to reflect the fact that the Defendant has succeeded at this second stage of proceedings.