Mr Justice Park:
abbreviations, dramatis personae, etc
- These are set out in the Table annexed at the end of this judgment. A reader who is unfamiliar with the case might find it convenient to detach the Table or make a copy of it so as to be able easily to refer to it as the judgment progresses.
Overview
- In December 1997 'the investors' (two venture capital companies, as described in the Abbreviations and Dramatis Personae) subscribed £9m for shares in HWG, the holding company for the trading subsidiary HWM. HWM was in the business of waste management. Mr Hoare, the first defendant in this case, was the other major shareholder in HWG. He was the Chairman and a director of that company. Through his own holding company, HHHL, he also owned several other companies, of which the principal ones were HTH and KPH. There had in the past been much inter-company trading between HWM, HTH and KPH, and so it continued after the investment. As this judgment progresses I shall have to say quite a lot about the events of the 18 months which came after the making of the investment, but at this stage I move forward some 20 months. In July 1999 the investors had, under provisions of the agreements which regulated the venture capital investment, dismissed Mr Hoare and had taken complete control of HWG and HWM. On 10 August 1999 HWM, being by then in desperate cash flow difficulties despite having apparently been profitable throughout, sold its business and assets to an unconnected waste management company, A&J Bull Ltd. The price was substantial, and enabled HWM's bank debts to be paid. It was also sufficient to recoup to the investors part of their original outlay of £9m, but not the whole of it.
- At some time between 1999 and 2004 the names of HWG and HWM were changed to NBH Group Ltd and NBH Ltd, the names of the two claimants in this case. However, in this judgment I shall refer to them throughout as HWG and HWM. They were referred to in that way (or by a non-abbreviated form of words, typically 'Hughes Waste Management') throughout the trial, and were naturally thought of and spoken of in those ways by all of the witnesses who had been involved with the companies during the period which gave rise to the present case.
- In December 2003 HWG and HWM commenced this case, a civil claim for damages against Mr Hoare and two other defendants, Mrs Hardman and Mr Hazell. Mrs Hardman is now retired. She had been the principal bookkeeper to the companies (including HTH and KPH as well as HWM), and she had handled the companies' banking transactions on a day to day basis. Mr Hazell owns an accountancy practice, Hazell Minshall. He had been the accountant and financial adviser to Mr Hoare and Mr Hoare's companies for some 20 years. The claimants say that he was the de facto finance director of all of the companies, an issue which I will consider later. The claim is brought by HWG and HWM, but I take it that in substance the investors stand behind HWG and HWM. I was not specifically told, but it seems obvious that what the investors want is to recover the remainder of their original investment plus, depending on the amount of any damages which may be awarded, an element of the profit which they had originally hoped to make.
- The claimants divide their claim into three parts, which they label claim 1, claim 2 and claim 3. Claim 1 is brought against Mr Hoare only. It fastens on an element in the complex of transactions all of which took place at the time of the investment. HWM purchased 'the J and W assets', a package of landfill sites and landfill rights in Hampshire, from an offshore company now known to have been connected with Mr Hoare. The price was £4.4m. The offshore company (or possibly a predecessor in the offshore structure) had acquired the assets a few years before for a price in the region of £400,000. The purchase of the J and W assets by HWM was not approved by formal resolution of HWM or HWG in general meeting. The claimants say that it ought to have been so approved, by reason of s.320 of the Companies Act 1985, and they claim that in consequence Mr Hoare is liable under s.322 to pay to HWM the whole of the profit (in the region of £3m) which the offshore company made on the assets.
- In my judgment claim 1 fails for reasons which I will enlarge on later. Two significant points which I can usefully mention now are as follows. First, the transaction was clearly approved by Mr Hoare, who was the sole shareholder, direct or indirect, in HWM immediately before the investment took place. In my view, despite the absence of a formal resolution of HWM or HWG in general meeting, that suffices for purposes of s.320. This is an application of the well-known Duomatic principle: re Duomatic Ltd [1969] Ch 365. Second, at the time when the J and W assets were sold to HWM they were valued at more than £5m, so that the price which HWM paid, so far from exhibiting an improper extraction of the company's funds by Mr Hoare or by offshore interests connected with him, was financially advantageous to the company. Further, when HWM's assets were sold to A&J Bull Ltd the part of the total price attributable to the J and W assets was considerably greater than the £4.4m which HWM paid to acquire them. I do not believe that a case of such a nature should be covered by s.320 or by the associated provisions in s.322, nor do I believe that it is in fact so covered.
- Claims 2 and 3 are advanced against all three defendants. The two claims tended to come together as the hearing progressed. The essence of what they alleged was that, over the period of 20 months from the investment until Mr Hoare and his colleagues were removed from management in July 1999, the funds of HWM were milked away from it to the advantage of the HHHL companies, especially HTH and KPH. The HHHL companies were (indirectly) owned as to 100% by Mr Hoare, whereas he had a smaller interest in HWG and HWM. It is contended that this process was achieved in two ways: (1) by HWM making inter-company payments to HTH or KPH for which in the event it (HWM) received no consideration, and which HTH and KPH were unable to repay; (2) by HWM continuing to provide goods and services to the HHHL companies on credit long after it ought to have withdrawn credit, so allowing further indebtedness to accrue which HWM was never going to recover and in the event never did recover. Although the particulars of claim allege negligence and breach of fiduciary duty by the defendants, Mr Lazarus made it clear in his submissions that he based claims 2 and 3 on the assertion that the milking away of HWM's funds was achieved through a fraudulent conspiracy between the three defendants. If I do not accept the case formulated in that way I do not understand Mr Lazarus to invite me to consider an alternative and less dramatic formulation revolving around some form of negligence or other non-dishonest breach of duty.
- The issues presented by claims 2 and 3 are not easy, but I have concluded after reflection and study of the transcripts and of the submissions of counsel that the claims must fail. I cannot say with certainty that there is nothing in any of the allegations on which they are based. It is common ground that some plainly improper entries were made in some of the books of HWM, and there are undoubtedly suspicions about why they were made. However, I am unable to form any conclusion about who was responsible for the improper entries, and it is not in any event clear that in themselves they caused any loss to the company. The allegations of conspiracy and fraud against Mr Hoare, Mrs Hardman and Mr Hazell suffer from an inclination to see sinister features everywhere in circumstances where, to an uncommitted observer, it has simply been a matter of business transactions and decisions going wrong. There is no evidence of any specific occasion when the three defendants entered into the alleged conspiracy, and to a large extent the case in support of claims 2 and 3 rests on conjecture. Also, having observed each of the defendants being cross-examined rigorously at some length I do not see them as persons likely to have engaged in the kinds of nefarious conduct which would be required for the claimants to succeed. In various other respects, which I cannot realistically summarise at this early point in my judgment, I consider that specific allegations made by the claimants have not been made out. All of these matters I will enlarge upon in subsequent sections of this judgment.
An outline of the background facts
- In this section of the judgment I will attempt to give a relatively brief description of the facts against the background of which the contested allegations are made. For the most part at this stage I will steer clear of the controversial issues, but I hope that what I will say will place those issues and my subsequent discussions of them in context. There are many detailed facts, often disputed, which I will not describe in this section, but to which I will refer as appropriate when I come to discuss the various issues which I need to consider and decide.
- At the time of the critical events Mr Hoare, the first defendant, was in his late forties or early fifties. I suspect that he would not dissent from the description of him as an entrepreneur, but with the emphasis very much on the operations side of running a business rather than on the financial side. I do not know much about his earlier business ventures, but by 1997 he owned a group of companies which carried on business on a substantial scale in and around Hampshire. The three main operating companies were HTH, HWM and KPH. Mr Hoare had not, I believe, been the original founder of HTH, but had bought if from its previous owners a few years earlier. The first H in my abbreviation HTH stands for Hughes, not Hoare, which tends to confirm my belief. HTH was a transport company. It had a large fleet of lorries and trucks, especially tipper trucks suitable for transporting waste materials and depositing them at appropriate destinations. In 1995 Mr Terry Vincent joined HTH with the designation of managing director.
- HTH was involved in the waste business, but originally was so involved only to the limited extent that its lorries and trucks carried waste. It was not involved in management of waste. The principal activities involved in the management of waste are, as I understand it, (1) sorting waste into materials which can be recycled and materials which cannot (an operation normally carried out at 'transfer stations'), and (2) providing and running landfill facilities for the depositing and the secure long term storage of waste which cannot be recycled. For obvious reasons it is a highly regulated activity, and the strong impression which I formed in the hearing is that it is highly capital-intensive.
- At some time around 1995 Mr Hoare decided that HTH should expand its activities into waste management as well as waste transportation. However, quite soon he also decided to set up a separate waste management company. That company was HWM, the company which is at the heart of this case. Mr Vincent was designated the managing director of that company as well as of HTH. Many of HTH's tipper trucks were used in connection with HWM's business: often a client's waste would be transported to HWM's transfer stations and landfill sites in HTH's trucks, rather than in HWM's own vehicles, and, to the extent that it was not to be recycled, deposited in the landfills. HWM had a fleet of vehicles of its own. If I have understood correctly, the broad division of ownership of vehicles was that in the main HTH owned tipper trucks and HWM owned skip-transporting vehicles. By 1997 HWM had five landfill sites and had plans to acquire more. Mr Hoare states that by then HWM had the largest turnover of all of his companies. Not all of its sites were yet in operation: there is predictably quite a lengthy and frequently expensive process in obtaining all the consents and licences that are required for a site to be able to be used for landfill purposes.
- Mr Hoare's other principal company was KPH, which was a contracting company. I do not know its earlier history. Since the H in my abbreviation of its corporate name stands for Hoare I conjecture (but the point does not matter anyway) that Mr Hoare had founded it himself rather than (as happened with HTH) acquiring it from a previous owner. KPH had numerous customers outside Mr Hoare's group, but it carried out all, or almost all, of the construction and engineering work which was required for the creation and improvement of HWM's transfer stations and landfill sites. As the case progressed before me this became an important aspect of it.
- At a date which may appear in the documents somewhere, but which I have not picked up precisely, a holding company, HHHL, had been established, and the shares in HWM, HTH, and KPH were owned by it rather than by Mr Hoare directly. However, he was the sole owner of the shares in HHHL. There were, I believe, three other subsidiaries of which one, called Nivek, plays a minor part in the issues in the case.
- Before I move on I should say something about the J and W assets. These were a number of landfill sites (actual and potential) and landfill rights in Hampshire. In 1992 Mr Hoare had had the opportunity to buy them (or possibly companies which owned them) from an arm's length vendor. He had taken advantage of the opportunity, but instead of them being bought by him personally they were purchased for about £400,000 by a nominee. Mr Hoare secretly provided the £400,000. The assets eventually found their way into an offshore company owned (probably, although the details are obscure) by one or more overseas trusts of which Mr Hoare was an actual or potential beneficiary. He had taken tax advice from an adviser in Jersey introduced to him by Mr Hazell. It does not matter to the present case, but it seems that the Revenue authorities disagree with the advice and are pressing tax claims against Mr Hoare personally. At one stage in the pleadings for this case Mr Hoare denied that he had any connection with the offshore structure which owned the assets. Mr Hoare now admits that that was untrue. It is an aspect of the case which does him no credit, and I must plainly be cautious about how far I should accept things which he says in his evidence, not just about the J and W assets but also about the other issues in the case.
- By 1997 HHHL's group of companies was experiencing major cash flow problems. Further, Mr Hoare had plans to expand HWM's waste-management business. For both reasons a substantial injection of capital was required. Mr Hoare was advised to approach businesses which provided venture capital, and in the event the investment of 18 December 1997 took place. The investors were Nash Sells and BancBoston. It was a substantial transaction, and a formidable bible of documents was created. The following were the major elements of the transaction.
i) The corporate ownership of Mr Hoare's various companies was changed. HHHL continued to be owned solely by him and to be the owner of the various operating companies other than HWM. Thus HTH and KPH remained as wholly owned subsidiaries of HHHL, and therefore remained in the indirect 100% ownership of Mr Hoare. But HWM was demerged out of HHHL and became a wholly owned subsidiary of HWG. HWG was owned as to part by Mr Hoare and as to part by the investors.
ii) There was a complicated share structure for HWG, and it was potentially subject to change by virtue of one or more shareholders' agreements. It was not necessary to go into the finer details in the trial, but I think it is broadly right to say that, in the first instance at least, Mr Hoare had a 75% equity interest, with the investors having a 25% equity interest between them. But voting control was a different matter. Mr Hoare no longer had voting control: it was shared between him and the investors. There were also provisions whereby in various events (some of which happened as time progressed) the investors could take complete control.
iii) A carefully constructed board of directors was created, including Mr Hoare, Mr Vincent, and Mr Coe (the development director), but also including representatives of the investors (the main one being Mr Grassby) and a non-executive director experienced in the waste business. This was Mr Merrick. There was no finance director. The board was to meet once a month. Previously all of Mr Hoare's companies had had boards of directors, but they had never met. I interpose here that after the investment HWM, the trading company, had directors of its own, some of whom were not directors of HWG, but in practice they never had board meetings. The board of directors which mattered so far as HWM's business was concerned was not its own board but the board of HWG.
iv) HWM was to purchase, and did purchase, the J and W assets from the offshore company which owned them for £4.4m.
v) There was an inter-group services agreement which was intended to regulate the manner in which trading transactions would be carried on after the investment between HWM on the one hand and HTH and KPH on the other. The basic principle was that the terms of individual inter-company transactions should be the same as those which would be adopted if the other party was a complete outsider. The companies were to pay each other for goods and services provided in the course of inter-company trading, rather than to leave their charges to each other outstanding on inter-company accounts. The normal period of credit would be 28 days, but there was an important exception for supplies made to HWM by HTH. (In practice these would mainly consist of the numerous and frequent occasions when HTH's tipper trucks would be used to transport waste to HWM's transfer stations and landfill sites and where the outside customer would be a customer of HWM rather than of HTH.) HTH would charge HWM for the use of its vehicles and for any other relevant inter-company trading, and the inter-group services agreement provided that HTH's invoices were to be paid immediately. The reason was that HTH had a business practice of discounting business invoices with a third party so as to raise immediate funds rather than waiting to receive payment from its customer, but if the invoice-discounter made an exception for invoices to a customer which was an associated party (including HWM). The invoice-discounter would not discount those invoices. So if HTH was going to continue to receive cash immediately upon invoicing HWM it could not do that by invoice-discounting, and would have to receive payment from HWM immediately.
vi) Against the background that HWM did not have a finance director but that the investors considered that one should be recruited, there was for the time being an agreement between HWG and HWM of the one part and Mr Hazell of the other part for him to provide various financial services to the companies. It was described as a consultancy agreement, but in my view it was rather an agreement for Mr Hazell to provide various services of a financial nature to HWM, rather than an agreement for him to be available to be consulted from time to time.
vii) The investors subscribed £9m for their shareholdings in HWG.
viii) A bank loan of £9m was provided to HWM by Bank of Scotland. In addition Bank of Scotland made available an overdraft facility of £1.5m. I should mention here that previously all of Mr Hoare's companies had banked with Lloyds TSB, but that bank had not been willing to provide significant capital funds for expansion. However, the HHHL companies continued to bank with Lloyds TSB. Further, HWM kept its account with Lloyds TSB open for several months after the investment. One of the issues in the case concerns the continued existence and use of that account.
- The investment transaction was completed on 17 December 1997. On paper there was thereafter a clear difference between HWM on the one hand and Mr Hoare's other operating companies on the other (especially HTH and KPH). HWM was owned by HWG, which was a joint holding vehicle of Mr Hoare and the investors. The investors, through their representatives on the board of HWG, had a clear and powerful voice in connection with the business operations of HWM. HTH and KPH were, in contrast, still owned by HHHL, which was wholly owned by Mr Hoare, and the investors had no status in relation to those companies.
- On the ground, however, little if anything changed in the manner in which the various companies operated. The central base of operations of HWM and HTH (and I think KPH also, although I am not so sure of that) had been at Wallington, adjoining Fareham. It continued to be there. If I understand correctly the Wallington property was in the nature of a large yard which served as a depot and which also contained a number of buildings. One building was mainly used by HTH and KPH. Mr Hoare's and Mrs Hardman's offices were in that building. Another was mainly used by HWM. Mr Vincent's office was in that other building. The Wallington property was owned by HWM.
- In so far as the trading operations of the three companies had been interconnected in the past they continued to be interconnected after the investment. One example was that HTH's tipper trucks still transported waste, sometimes for its own customers, sometimes for HWM's customers, to HWM's transfer stations and landfill sites. Another example was that KPH's staff and equipment were still used for engineering operations at HWM's sites (including at the Wallington site). As regards vehicles the evidence was that HTH and HWM had a single 'desk' to manage the use of the vehicles of both companies.
- In summarising some of the legal arrangements made at the time of the investment I said that HWM did not have a finance director (see paragraph 16(vi) above). It was the policy of the investors that a finance director should be recruited, but effectively that never happened. It is true that in about October of 1998 a Mr Woodsend was engaged to be the finance director, but he left in January 1999 without ever having become a member of the board of HWG, and without his having made any significant contribution to the financial management and control of the group. All the witnesses agreed about that, and in the trial he was hardly referred to at all.
- It emerged from time to time in the evidence that some relationships within the management of the various companies were less than satisfactory. Mr Hoare seems to have had a policy – or, if not, seems in practice to have run his companies as if he had – of employing people to do particular jobs, even in senior positions, but not letting them know what the wider picture was. Many witnesses said that in their perception nothing changed in practice after the investment. Mr Middleton, who was the managing director of KPH, said that he did not know that, from December 1997 onwards, HWM was no longer in the sole indirect ownership of Mr Hoare: 'I was unaware at the time that HWM was not 100% owned by Mr Hoare. Mr Hoare keeps a lot of things to himself. He has a policy: we are employed to do certain things.' Mr Rose, who was one of the directors of HWM but not of HWG (having the designation 'Operations Director', but being a member of a board which never met) said in oral evidence that the directors (by which I think he meant primarily the directors of HWG, especially Mr Hoare and Mr Vincent) 'operated in an atmosphere of hostility and secrecy'. It certainly seems to have been the case that, at least after the investment, Mr Hoare and Mr Vincent disliked each other. Mr Rose said that Mr Hoare sometimes spoke in a defamatory fashion about Mr Vincent. Mr Hoare certainly made a number of disparaging remarks about Mr Vincent in oral evidence. Conversely in Mr Vincent's oral evidence he said: 'I do not like Kevin Hoare. I think that he has grown businesses that are too big for him, and he is a fool.'
- An important consequence of the feature that nothing changed on the ground after the investment was that inter-company trading continued after the investment as before. The issues raised by claims 2 and 3 to a substantial degree arise from the inter-company trading. The accounting records are not complete, but they have nevertheless been sufficient to enable the parties' experts substantially to reconstruct a lot of the inter-company transactions. For a number of months (down to the accounting date on 31 March 1998, and for two or three months thereafter) money payments from HWM to the HHHL companies substantially exceeded payments in the opposite direction. The claimants say that during this phase a lot of HWM's money (derived from the investors' subscribed funds and loan moneys provided by Bank of Scotland) was simply being diverted to the HHHL companies to keep those companies afloat and to keep them within their bank overdraft limits: there was no consideration to HWM in return except for a dubious and ultimately unfulfilled obligation to repay. The defendants say that that was not the case, principally because KPH was doing a lot of work for HWM but not issuing invoices for it at that stage, so that many payments by HWM were for goods and services received; they were not made in payment of invoices, but rather were on account of invoices to be delivered later. Whether that was so or not is a big issue in the case, and I will have to return to it at some length later.
- From about May or June of 1998 the pattern changed, though gradually rather than abruptly. There was no longer a regular flow of apparently uninvoiced money from HWM to the HHHL companies. So far as invoices show, the balance of inter-company trade was approximately even, in the sense that HWM invoiced the HHHL companies for supplies to them in amounts roughly equivalent to the invoices from the HHHL companies to HWM for supplies in the opposite direction. However, HWM in general paid its invoices, whereas the HHHL companies, which were in serious cash flow difficulties, did not. In essence HWM was allowing extended trade credit to the HHHL companies, and was not receiving corresponding credit from them.
- I have said in the previous paragraph that the HHHL companies were having cash flow difficulties. So was HWM, once the cash injections from the investors and Bank of Scotland had been utilised. There was, I think, not much difference between the witnesses for the opposing parties about the explanation for this. Mr Hoare says in his witness statement that there were delays in getting sites on stream; there had been expensive planning applications and public enquiries; and a major customer, Onyx, had withdrawn its business. Mr Vincent, the claimants' main witness against Mr Hoare and the other two defendants, said in oral evidence that HWM's cash flow problems came from three directions: (1) the company did not have as many new resources as they had expected (much the same as Mr Hoare's reference to delays in getting sites on stream); (2) the level of costs on planning permissions, obtaining licences, and the like; (3) problems of getting money paid by HTH.
- The monthly management accounts showed HWM to have been profitable. Its business had expanded. As I have mentioned earlier, in 1997 it had five landfill sites. Mr Hoare's witness statement states that after the investment it had eleven transfer stations and nine landfill sites. It also had about 60 lorries of its own, as well as access to HTH's fleet of tipper trucks. Nevertheless, against the background of worsening cash flow problems Mr Hoare formed the view that the business should be sold. There was quite a long period in the later part of 1998 when there were active negotiations with a major operator in the waste business, Onyx. However in early 1999 these came to an end without agreement. It may be recalled that Mr Hoare had said that one of the causes of the cash flow problems was the loss of Onyx as a major customer. I imagine (although the point was not directly covered in the evidence) that the failure of the negotiations had some connection with the loss of Onyx as a customer.
- Onyx having ceased to be a possible purchaser for HWM's business, negotiations commenced with A&J Bull Ltd, a subsidiary of a nationally based group, United Waste. These were ultimately successful, as I will explain below. But there were also other relevant events which took place in the first part of 1999. The investors were extremely concerned about how matters were turning out. At one time Mr Grassby insisted on a procedure whereby all cheques written by HWM had to be approved by him before they could be sent out. In May 1999 an amendment to the inter-group services agreement was adopted at the instigation of Mr Vincent whereby inter-company charges by the HHHL companies (especially HTH) to HWM were to be netted off against inter-company charges in the opposite direction. This removed the feature whereby HTH's invoices to HWM had to be paid in cash immediately (see paragraph 16(v) above). However, these changes seem to have come too late to do much good.
- The investors had lost confidence in Mr Hoare. They commissioned a specialist consultancy called Postern to investigate HWM. Postern produced its report (called 'Interim Report', but in fact the only report) on 23 July 1999. The report was critical of HWM and its operating systems in several ways. Two days earlier, on 21 July 1999 the investors, acting under powers in the shareholders' agreements, caused Mr Hoare to be dismissed from office in HWM. They also terminated the arrangement whereby Mrs Hardman (who was technically employed by KPH but undertook various functions for HWM) was responsible for banking and bookkeeping for HWM. They also terminated Mr Hazell's consultancy agreement.
- Meanwhile the negotiations with A&J Bull Ltd were continuing. They were largely being conducted on behalf of HWM (the prospective vendor of its business and assets) by Mr Elliott, who has remained with HWM and has had the general supervision of the present case. He had had previous experience of the waste management industry, and had joined HWM in August 1998. The negotiations with A&J Bull Ltd were successful, and a sale agreement was concluded on 10 August 1999. That was the last date of trading by HWM.
- HWM's business and assets (which included the transfer stations and landfill sites, and also the offices and depot at Wallington) were sold for a substantial price of over £30m, together with a possible deferred consideration of a maximum of £14m. As I have previously said, there was sufficient to pay off HWM's creditors, including Bank of Scotland, the Inland Revenue and Customs & Excise. (Customs & Excise were creditors for VAT, as they tend to be in the case of any company which runs into financial problems. In the particular case of HWM they were also a substantial creditor for landfill tax.) HWM had a balance left after payment of creditors. Thus the company was and is still solvent, but there is not enough remaining for the investors to recover their full investments, still less to make the sort of profits which they had been hoping for when they entered into the transactions of December 1997.
- After the sale A&J Bull Ltd brought proceedings against HWM, HWG and Mr Hoare. The proceedings were resolved after mediation (if I recall correctly) on terms which were quite favourable to HWM and Mr Hoare. He paid nothing to A&J Bull Ltd on its claim, and HWM recovered a further £3.5m by way of deferred consideration for the sale of its business.
- Two further events which happened after the sale were that both HTH and KPH became insolvent and went into liquidation. Each of them owed money to HWM, and neither was able to pay any of it. Thus HWM was a loser in the liquidations of its former associated companies. Those losses, or some not very clearly defined parts of them are the major component in what HWM seeks to recover from the three individual defendants by this action.
- There is nothing more that I wish to say by way of factual background at this point. There are many detailed matters of fact, sometimes disputed, sometimes not, which arise in connection with the issues which I have to decide. I will describe them from time to time as this judgment progresses.
Claim 1: ss.320 to 322 of the Companies Act 1985
- Claim 1 is brought solely against Mr Hoare. Mrs Hardman and Mr Hazell are not defendants to it. It concerns the J and W assets. Originally there were disputed factual issues, but by the time of the trial all the relevant facts were substantially admitted. Mainly this happened because Mr Hoare eventually accepted that he had been the person behind the acquisition of the assets for about £400,000 from an unconnected vendor back in 1993. He also conceded by the start of the trial that he was connected with the Jersey company (which was called Celet) which sold them to HWM for £4.4m as part of the investment transactions which took place on 18 December 1997. The concession was that he was 'connected with' Celet both in a general sense and within the specific statutory definition in the Companies Act 1995 s.346.
- In the circumstances the issues which I have to decide are essentially issues of law. I can briefly state the facts as follows.
i) Celet sold the J and W assets to HWM on 18 December 1997 for £4.4m.
ii) The cost of the assets to Celet was considerably lower. If Celet is taken to have acquired them for the price at which they had been purchased from an unconnected vendor in 1993, Celet's cost was about £400,000. (I interpose here that, if I considered that Mr Hoare was liable in principle under claim 1 – which I do not – I would wish to investigate more fully whether the £400,000 paid in 1993 was indeed the cost of the assets to Celet. The details of Celet's acquisition are obscure. However, the hearing proceeded on the assumption that, whatever Celet's cost for the assets was, it was considerably less than £4.4m.)
iii) A valuation of HWM's landfill assets ascribed to the J and W assets values aggregating to £5,580,000 in 1997. The skeleton argument of Mr Chivers and Mr Davies says that this was an independent valuation obtained at the insistence of the investors. I do not recall being shown any evidence to confirm what Mr Chivers and Mr Davies say, but the arguments proceeded on the basis that the assets were worth more than the £4.4m which HWM paid for them, and Mr Lazarus did not at any stage question that assumption.
iv) Mr Hoare was at all material times a director of HWM.
v) Before the transactions of 18 December 1997 Mr Hoare was the sole owner of HHHL, which was the sole owner of HWM. By reason of the transactions of 18 December 1997 he was one of three major shareholders in HWG (the other two being the investors), and HWG was the sole owner of HWM.
vi) There was never a formal members' resolution of HWM or of HHHL or of HWG approving the purchase by HWM of the J and W assets.
vii) The J and W assets were included in the assets sold to A&J Bull Ltd on 10 August 1999. The skeleton argument of Mr Chivers and Mr Davies says that the part of the entire sale price attributable to them appears to have been £5.02m. Mr Lazarus made no comment on that point, and I take it that he accepts the figure.
- In the original particulars of claim the claimants pleaded that Celet's profit on the sale of the assets was a 'secret profit' which had been made as a result of a breach by Mr Hoare of his fiduciary duties to HWM, and that Mr Hoare was liable under general equitable principles to pay an amount equal to Celet's profit to HWM. In June 2005 HWM abandoned that contention, and replaced it with an argument that Mr Hoare was liable to pay the same amount to HWM under CA ss.320 and 322.
- I will now set out the relevant provisions of the Act. The sections were originally parts of a fasciculus of provisions first enacted in the Companies Act 1980 and 1981 and intended to sharpen up the protections of companies against being improperly exploited by directors to their (the companies') detriment.
"320 Substantial property transactions involving directors, etc
(1) With the exceptions provided by the section next following, a company shall not enter into any 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.
(2) [Defines non-cash assets of the requisite value. The definition covered the J and W assets.]
321 Exceptions from s 320
(1) No approval is required to be given under section 320 by any body corporate unless it is a company within the meaning of this Act … or if it is a wholly-owned subsidiary of any body corporate, wherever incorporated.
(2) to (4) [Irrelevant and unnecessary to reproduce]
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) [Irrelevant]
(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 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.
(4) Subsection (3) is without prejudice to any liability imposed otherwise than by that subsection … ; and the liability under subsection (3) arises whether or not the arrangement or transaction entered into has been avoided in pursuance of subsection (1).
(5) and (6) [Irrelevant]"
'Connected person' is defined in s.346. I need not reproduce the definition, since it is now conceded by Mr Chivers (though it was not always conceded) that Mr Hoare and Celet were connected persons.
- The claimants say that the manner in which, and the reasons why, the sections apply is as follows. As I set the propositions out I shall indicate whether they are agreed or disputed.
i) With reference to the opening words of s.320(1) HWM did enter into an arrangement. (Agreed)
ii) With reference to s.320(1)(b) –
a) Mr Hoare was 'such a director', that is a director of HWM or of its holding company, and in fact was a director of both. (Agreed)
b) Celet was a person connected with Mr Hoare. (Agreed)
c) The J and W assets were assets of the requisite value. (Agreed)
d) By the arrangement HWM acquired the J and W assets from Celet (that is, from a person connected with 'such a director'). (Agreed)
iii) With reference to the last part of s.320(1), the arrangement was not first approved by a resolution either of HWM in general meeting or of either of HWM's holding companies (whether that holding company was HHHL or its successor, HWG) in general meeting. (Agreed up to a point, but the defendants say that the arrangement was approved by Mr Hoare, who was the sole shareholder in HHHL at the relevant time, and that that was sufficient to satisfy the requirement of approval. This contention on the part of Mr Hoare is disputed by the claimants.)
iv) The exceptions in s.321 are largely irrelevant. The part of s.321(1) that I have quoted means that approval of HWM was not required, because at any conceivably relevant time HWM was a wholly owned subsidiary (originally of HHHL and later of HWG). However, that did not remove the requirement in the final part of s.320(1) for the approval of the holding company.
v) With reference to s.322(1) the arrangement (the purchase by HWM of the J and W assets) was entered into in contravention of s.320. (Not agreed, for the reason indicated in (iii) above.)
vi) Therefore the arrangement was voidable at the instance of HWM unless one of the conditions in s.322 was satisfied. HWM does not wish to avoid the transaction in any case, so the conditions in s.322 do not matter. (The defendants have no particular comment on this. If the arrangement was entered into in contravention of s.320 they would not disagree with this proposition (vi)).
vii) With reference to the opening part of s.322(3), the arrangement was entered into with HWM by a person connected with Mr Hoare, namely Celet. Mr Hoare was a director of HWM and of its holding company. (Agreed)
viii) The arrangement was entered into in contravention of s.320. (Not agreed, for the reason indicated in (iii) above – the arrangement was approved by Mr Hoare, which approval Mr Hoare contends to have been sufficient to comply with the last part of s.320(1).)
ix) With reference to s.322(3)(a), Celet made a gain of about £4m by the arrangement or transaction. (Disputed; Mr Hoare says that, since Celet sold the assets for less than their market value it did not make a gain by the arrangement or transaction, but if anything made a loss.)
x) With reference to s.322(3)(a), by the combination of that paragraph and s.320(1)(b) Mr Hoare is liable to account to HWM for the gain of about £4m. (Disputed, even if there was a gain of about £4m; Mr Hoare says that s.322(3)(a) operates in combination with s.320(1)(a), and not in combination with s.320(1)(b).)
xi) By virtue of s.322(4), the fact that the arrangement or transaction has not been avoided by HWM under s.322(1) does not exclude Mr Hoare's liability to account to HWM under s.322(3)(a). (Agreed, but Mr Hoare contends for various reasons indicated earlier that he is not in any event liable to account to HWM under s.322(3)(a).)
- I agree with all of the reasons, indicated in the foregoing sub-paragraphs, for Mr Hoare's submission that he is not liable to HWM under claim 1. It is worth noting the general point that, whether or not the claim can be said to be technically supportable, it is opportunist and has no merits in the broad sense of the term. S.320 and other sections originally enacted at the same time are intended to protect companies against exploitation by directors to the financial benefit of the directors and the financial detriment of the companies. The purchase of the J and W assets by HWM was not detrimental to HWM, but rather the reverse. It was a purchase at an undervalue, something which is inherently beneficial to the purchaser, and in the event HWM profited from the purchase. HWM wants to keep the profit which it made, and to require Mr Hoare to pay over to it the profit, computed by reference to historic cost, which Celet made from the transaction.
- Mr Lazarus effectively acknowledges the unreasonableness of the result for which he contends. He says in his skeleton that it may result in a 'windfall' in some cases. Nevertheless he says, and I accept, that if that is the plain result of the statutory provisions, HWM is entitled to take advantage of the windfall. Accordingly I move on to consider the various technical objections to Mr Lazarus's argument. I have anticipated those objections in some of my comments in the sub-paragraphs of paragraph 37 above.
- The first question is whether the transaction was approved in a manner which satisfied the words at the end of s.320(1) ('unless the arrangement is first approved … by a resolution in general meeting of the holding company'). Mr Chivers submits that it was, because, although it was not approved in a formal general meeting of HHHL, it was approved without formality by Mr Hoare, and that sufficed. Two issues may arise here.
- First, there is a point of timing. One of Mr Lazarus's points is that the purchase of the J and W assets happened at the same time as the acquisition of the shares in HWM by HWG, so it is submitted that what was required was the approval of HWM's holding company at the time of the purchase. The holding company at that time was HWG. Its approval was not obtained, and since Mr Hoare was not the sole shareholder of HWG there is no scope for him to rely on the Duomatic principle (as to which see paragraph 43 below). Indeed, there was evidence from Mr Nash of Nash Sells (one of the investors) that, if the investors had known that Mr Hoare had an interest of some sort in the vendor, Celet, they might well have wished to renegotiate the terms of the entire transaction. However, in my opinion the approval of which s.320(1) speaks is, or at least is satisfied by, approval of the transaction before it takes place. That seems to me to be inherent in the concept of a transaction having to be approved, and in any event it is in my view made clear by the word 'first' in s.320(1) : 'unless it is first approved …' A similar assumption can, perhaps, be seen in the way that s.322(1) refers to 'any transaction entered into in pursuance of the arrangement'. The 'transaction' in this context was the purchase of the J and W assets. It was one of a great many separate transactions which (according to the evidence of Mr Greaves, the solicitor who acted for Nash Sells and who in practice took the lead role in organising the completion meeting) all took effect simultaneously. If it was entered into 'in pursuance of' an arrangement, the arrangement must have preceded the transaction. Before the entering into of all of the transactions which took effect simultaneously at the completion meeting HWM's holding company was HHHL, and Mr Hoare was the sole owner of HHHL. On any view he approved before the completion meeting the transactions which were intended to take place at it.
- Second, it is true that there was no formal resolution of HHHL in general meeting approving the proposed purchase by HWM of the J and W assets, but Mr Chivers submits that the Duomatic principle applies, and that the informal approval by Mr Hoare sufficed. It is worth adding that Mr Hoare's express evidence that at every stage he approved the acquisition by HWM of the J and W assets was not challenged. The well known words of Buckley J in Re Duomatic Ltd [1969] 2 Ch 365 at 373 are:
"where it can be shown that all the shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be."
Mr Lazarus submits that the Duomatic principle does not apply to s.320, and only a fully fledged resolution in general meeting would do. It is suggested that my own words in Demite Ltd v Protec Ltd [1998] BCC 638 at 648 support this:
"I am not convinced that this particular statutory requirement of a resolution in general meeting can be complied with by a Duomatic-type assent of the shareholders outside a general meeting. However, I will proceed on the basis that it might be."
Reading what I said then, I seem to be leaving the matter open. Or at least any view that can be extracted from my words that Duomatic would not apply to s.320 could hardly have been expressed more tentatively.
- However that may be, having had the benefit of full argument on the point, and of the judgments of the Court of Appeal in an intervening case, I am now clearly of the opinion that there is no reason why the Duomatic principle should not apply to s.320. I agree with the editors of Buckley on the Companies Acts, paragraph 320.10, that it is difficult to see why it should not apply. Further, in Wright v Atlas Wright (Europe) Ltd [1999] 2 BCLC 301, the Court of Appeal held that the principle applied to s.319, which was originally enacted at the same time as s.320 and formed another part of the package of sections intended to protect shareholders against depredations by directors. The principle applies to s.319, and it would be remarkable if it did not also apply to s.320. I decide that, whatever may be said about two sentences in my judgment in Demite v Protec, the principle does apply to s.320.
- Assuming that that was so, Mr Hoare's prior approval (prior being equivalent to 'first' in the section) sufficed to meet the requirement of s.320(1). That is enough to mean that claim 1 fails, but in case I am wrong so far I will continue to consider the other disputed matters.
- The next question is whether the £4m for which the claimants contend that Mr Hoare is liable to account to HWM is indeed a 'gain' of the type to which the section applies. In my judgment it is not. Arithmetically it is of course true that, if Celet or a predecessor acquired the J and W assets for £400,000 in 1992 and sold them for £4.4m in 1997, there was a gain of £4m in one sense of the word. But in my judgment it is not a sense which should apply in this context. The question is whether Celet made a gain 'by' the transaction, and the transaction was only the sale. The question is not, for example, whether a gain of any amount accrued to Celet on an acquisition and disposal where the disposal was the sale to HWM. I agree with Mr Chivers that, on a realistic analysis, Celet suffered a loss 'by' the transaction. Previously it had assets worth over £5.5m. By the transaction it ceased to have those assets and had £4.4m instead. It would be unreal, and would be wholly out of line with the statutory purpose, to say that Celet made a gain of £4m by the transaction.
- It is true that in re Duckwari plc [1999] Ch 253, a case where a director had sold an asset to a company at a fair value but the asset fell in value and the company sold it at a loss compared to the purchase price which it had paid, the director was held to be liable to indemnify the company under s.322(3)(b). The Court of Appeal did not agree with the judge's analysis that, because the asset had been worth what the company paid for it at the time of the purchase, there was no 'loss' within the meaning of paragraph (b). Thus the court took account of movements of value after the purchase. In my view, however, it does not follow that, in a case where the company does not make a loss after the purchase, the court should take account of changes in the value of the asset in the period when it was owned by the vendor before the sale to the company. In any case it is worth noting that, whereas s.320(1)(b) applies to a gain 'by' the arrangement or transaction (by the sale to the company), s.322(3)(b) applies to a loss 'resulting from' the arrangement or transaction (resulting from the purchase by the company). The two provisions do not use matching wording, and in my judgment do not apply in the same way as each other.
- If what I have said is not right the implications would be alarming. Consider the following simple and common example. A man owns a freehold farm and has owned it for many years. In pure monetary terms it is worth vastly more than he paid for it years ago. Perhaps he even inherited it and did not pay anything for it. He is advised that he should transfer his farming business to a company, in which, let it be supposed, he was not the sole shareholder (thus excluding any possible application of the Duomatic principle). He acquires a company and transfers his farm to it in exchange for shares. The shares have a market value much the same as the farm had, so that in one sense he makes a large gain on the farm: he had acquired it years ago for what may have been a full value at the time but now (by reason of years of inflation) seems to be an insignificant figure, and he has exchanged it for valuable shares. Not surprisingly it does not occur to him or to his professional advisers that he ought first to have caused the company to resolve to approve the transaction in order to prevent s.320 applying. Later the company comes into different control – perhaps a receiver or a purchaser. Can the company bring proceedings against the farmer and require him to pay to it the difference between the historic cost of the farm and the value of the shares which the company issued to him in exchange for it? Surely not, but if 'gain' in s.322(3)(a) has the meaning which Mr Lazarus ascribes to it, it is hard to see why not.
- Finally I move to the proposition that s.320(1)(a) combines with s.322(3)(a), and s.320(1)(b) combines with s.322(3)(b), but s.320(1)(b) cannot be combined with s.322(3)(a). Mr Lazarus's argument involves the proposition that it can. I accept that a combination of s.320(1)(b) with s.322(3)(a) is not expressly ruled out by specific words in the section, but in my view it would be contrary to the whole scheme and purpose of the section for it to be made. Surely s.320(1)(a) is about cases where a director or a person connected with him purchases assets from a company at an undervalue, so that the director or connected paragraph is in a position to make a gain at the expense of the company; that is the situation in which the director is liable to account to the company under s.322(3)(a). And conversely s.320(1)(b) is about cases where a director or a person connected with him sells assets to a company at an overvalue, so that the company is exposed to a loss which ought to have fallen on the director or the connected person; that is the situation in which the director is liable to indemnify the company under s.322(3)(b).
- Further, I believe that what I have said in the foregoing paragraph has effectively been said already by Nourse LJ in the Court of Appeal in re Duckwari plc (supra, at page 261):
"Thus section 322(3)(a), corresponding to section s.320(1)(a), applies to a case where a gain is made on an asset acquired from the company. Section 322(3)(b), corresponding to section 320(1)(b), applies to a case where a loss is made on an asset acquired from the company."
I believe that my analysis of the structure of the sections is in accordance with what the learned Lord Justice said, and that Mr Lazarus's submission is inconsistent with it. For that reason also I am unable to accept the submission.
- For the reasons which I have explained I conclude that claim 1 fails.
Claims 2 and 3: losses alleged to have been brought about by a dishonest conspiracy between the three defendants
- Although claims 2 and 3 were pleaded separately, they tended to come together in the course of the trial. They involve analyses of elements in the inter-company trading and inter-company payments between HWM on the one hand and the HHHL companies, principally HTH and KPH, on the other. Claim 2 was pleaded in relation to HWM's accounting period from 18 December 1997 (the date of the investment transaction) to 31 March 1998. Claim 2 was pleaded in relation to the accounting year from 1 April 1998 to 31 March 1999. Claim 2 focused on payments by HWM to the HHHL companies, mainly KPH, which are argued to have been improper. Claim 3 focused on HWM continuing – improperly continuing, so it is alleged – to engage in inter-company trade with the HHHL companies for a protracted period when it was paying a substantial proportion of their invoices to it but they (mainly HTH) were paying a far lower proportion of its invoices to them.
- However, the timing division between the period when HWM was making the payments to the HHHL companies which the claimants say were improper and the period when HWM (according to the claimants' case) improperly continued to trade with the HHHL companies did not fall neatly on 31 March 1998. Further, the claimants sought to quantify their claim by reference to all the inter-company payments by HWM, not just those made before 1 April 1998, and by reference to the outcome of all the inter-company trade, not just that with HTH after 31 March 1998. The claimants' own expert witness, Mr Matthew-Jones, said that in his view all aspects of inter-company transactions – payments as well as invoices for trading between the companies – had to be taken together in analysing what sort of loss HWM might have made. In those circumstances the formal difference drawn in the pleading between claims 2 and 3 had effectively disappeared by the time that Mr Lazarus was presenting his final submissions on behalf of the claimants.
- There were other important respects in which claims 2 and 3 changed as the case proceeded, of which I will mention five.
i) The particulars of claim for claim 2 seek to make a lot out of the continued use by HWM of its bank account with Lloyds TSB for a time after the investment. I say more about this in paragraphs 54 et seq below. It was originally contended that every single payment made out of that account was wrongful and that the defendants were liable to HWM for the aggregate of all the payments. That meant that claim 2 was originally for some £2.2m, and (unreasonably and indefensibly in my view) did not give any credit for those of the payments which operated to discharge HWM's liabilities to the HHHL companies for invoiced inter-company trading. By the time of the trial the claimants had recognised this point: claim 2 had been reduced to £552,000.
ii) At one stage HWM was alleging that all payments by HWM to the HHHL companies, in so far as they exceeded invoices rendered by the HHHL companies, were gratuitous transfers of HWM's cash to Mr Hoare's companies: that is they were gifts. Mr Lazarus did not put it that way in the trial. His position in essence had become, and remained, that payments by HWM to the HHHL companies in excess of invoices received were in the nature of loans on inter-company account, but, notwithstanding that as a matter of law they were repayable, they were still improperly made and arose from a dishonest conspiracy between Mr Hoare, Mrs Hardman and Mr Hazell. When it turned out that HWM could not recover them because the HHHL companies had collapsed into insolvent liquidation, the three alleged conspirators were said to be liable to pay corresponding amounts to HWM.
iii) In a somewhat similar manner, as regards claim 3 it was argued for HWM at the beginning of the trial that any difference in the inter-company net trading balances between HWM on the one hand and the HHHL companies on the other was a sum which the defendants were liable to pay to HWM. As Mr Chivers, not unfairly in my view, categorised the claim in his initial oral observations to me: 'For every pound's worth of work which HWM does for HTH, if in the event HTH does not pay, the defendants must pay.' Mr Chivers described that claim as 'extravagant'. By the end of the trial Mr Lazarus no longer put it in so stark a way. In his closing written submissions and oral address he still complained over the manner in which HWM continued to trade with HTH when HTH was unable to pay HWM's invoices, but he accepted that he could not successfully contend that the defendants were liable for the whole of the balance owed to HWM which in the event was not paid. Apparently the defendants should be allowed some credit for what would or might have still been irrecoverably owed by the HHHL companies (mainly HTH as respects this part of the case) even if the inter-company trade had not been influenced by what the claimants allege to have been the fraudulent conspiracy between the three defendants. It is unclear to me how that amount would be ascertained. Mr Lazarus did suggest two possible calculations, but both of them seemed to me to be arbitrary and to have no logical basis. I believe that, if the defendants were liable in principle, there would have to be another trial to address this intractable problem of dissecting the irrecoverable net balances of the inter-company accounts into the parts for which the defendants were liable and the parts for which they were not.
iv) The particulars of claim included averments that the defendants had been negligent and had committed breaches (not necessarily dishonest breaches) of fiduciary duty. However, as the trial progressed Mr Lazarus sharpened up the claim and narrowed the issues. He made it clear in his closing submissions that he based the claim solely on the contention that there had been a fraudulent and dishonest conspiracy between the three defendants to damage HWM and to confer corresponding advantages on the HHHL companies. I believe that he still asserts that the defendants owed fiduciary duties to HWM and were in breach of them, but he relies only on conscious and deliberate, as opposed to negligent, breaches of those duties. As he said in his final address: 'Because we put the case on the basis of dishonesty, the question of fiduciary duties does not really arise.' His point, with which I agree, is that, if I accept HWM's case that the defendants fraudulently and dishonestly conspired to injure HWM, they would be liable whether they owed fiduciary duties to HWM or not. (How much they would be liable for is of course another matter.)
v) The particulars of claim contain allegations that the company's records were not properly maintained or may have been improperly disposed of, and that the defendants were in some way responsible for those deficiencies. These matters are denied by the defendants. There is quite a lot in the witness statements about what records were kept by whom, and what happened to them. However, this part of the pleaded case effectively disappeared as an issue. Although not all of the books and records of HWM (and of the HHHL companies) appear to have survived, and even if there may have been inadequacies in the records which were maintained in the period from the investment until the sale to A&J Bull Ltd, the accountancy expert witnesses were able from the books and records which they did have to reach agreement on what inter-company payments had been made and what inter-company invoices there had been. Mr Lazarus confirmed in his closing address that he was not seeking any relief against any of the defendants in respect of the allegations about books and records.
- At this point I should say something about the banking arrangements. Before the investment all of Mr Hoare's companies, including HWM, had banked with Lloyds TSB. The accounts were, I believe, based at the bank's principal branch in Southampton. At that time inter-company payments were made by transfers between accounts at that branch of the various companies. New banking arrangements for HWM, but not for the other HHHL companies, were made at the time of the investment. Bank of Scotland made a substantial bank loan, and also provided an overdraft facility. The intention was that HWM should cease to bank with Lloyds TSB and bank instead with Bank of Scotland. However, that change could not be made immediately. For practical reasons the Lloyds TSB account needed to be kept open for a transitional period. In the event it was kept open until the middle of 1998, probably rather longer than Bank of Scotland or the investors had expected.
- During this period inter-company payments from HWM to the HHHL companies originated with HWM's balances in its account at Bank of Scotland, but were routed through HWM's Lloyds TSB account. A typical occasion would be one where it was intended that HWM should make an inter-company payment to HTH and another to KPH. There might also be one or more smaller payments to other companies in the HHHL group. The aggregate sum required having been determined, Bank of Scotland was instructed to make a transfer from HWM's account with it to HWM's account with Lloyds TSB. Lloyds TSB then effected the inter-company transfers from HWM's account with it to the accounts with it of HTH, KPH and, if appropriate, of other HHHL companies. These transfers were usually made pursuant to instructions given on the telephone in the first instance by Mrs Hardman to one of the managers at the relevant branch of Lloyds TSB.
- The claimants submit to me that all of that is deeply sinister and indicative of the conspiracy which they assert to have been in existence all the time. The suggestion is that it was needlessly complicated by comparison with the alternative of simply instructing Bank of Scotland to make two or more transfers direct to the Lloyds TSB accounts of HTH, KPH and other HHHL companies. I am asked to infer that the motive was to prevent Bank of Scotland realising that money which it had loaned to HWM was being used to make payments to other companies associated with Mr Hoare. I am not prepared to make any inference of the sort. The procedure which the group followed was in essence continuing what had been done before the investment, but adapted to the new situation where HWM's money was (mostly) held in its account at Bank of Scotland. Previously HWM's money had been held in its account at Lloyds TSB, and the managers at the relevant branch of that bank were accustomed to being contacted by Mrs Hardman and instructed to make inter-company transfers to the accounts at their branch of other companies in Mr Hoare's group. I have no difficulty in accepting Mrs Hardman's evidence that it was convenient to continue following that procedure for as long as HWM's account at Lloyds TSB still existed. Once that account was closed, which was at a time in the middle of 1998, Bank of Scotland was instructed to make transfers from HWM's account direct to the accounts at Lloyds TSB of HTH, KPH and other HHHL companies. There was no question of concealing the identity of the transferees from Bank of Scotland. That in itself refutes the claimants' obsessive suspicion that the way in which the banking transfers had previously been made was indicative of a supposed conspiracy by Mr Hoare, Mrs Hardman and Mr Hazell to misuse the loan and overdraft facility which Bank of Scotland had provided to HWM. In hindsight Mrs Hardman might have instituted a system at the outset for direct transfers from Bank of Scotland to the Lloyds TSB accounts of HHHL companies, but I decline to view the fact that she did not as sinister.
- In the foregoing paragraph I have referred on several occasions to Mrs Hardman in connection with the banking machinery through which inter-company payments were effected. She was sometimes described as the cashier of the various companies. One of her responsibilities was to arrange for receipts collected from customers of HWM or of HHHL companies (principally HTH and KPH) to be recorded and banked. Another responsibility was to monitor the balances in the various accounts and to decide when inter-company money transfers should be made. She accepted without hesitation that, when the banks were instructed to make inter-company payments, the timing for the payments and the amounts of them were likely to have been decided by her, and that what she was seeking to achieve was that the companies at all times stayed within their overdraft limits. Mr Lazarus submits that that supports the claimants' case that inter-company payments, especially those made by HWM to KPH from the time of the investment in December 1997 to mid 1998, were simply instances of Mrs Hardman causing HWM's money to be passed over to HHHL companies so that it could be used to meet the business costs of those other companies.
- There was, however, a further element in Mrs Hardman's evidence about this. It is controversial, but if I accept it it is of critical importance. She said that, on all occasions when she caused bank transfers to be made from HWM to KPH or other HHHL companies, KPH or the other transferees had provided goods or services to HWM in values which were greater than the amounts of the transfers. Mr Lazarus fairly accepted that, if that was indeed true, it was an answer to a major part of claims 2 and 3. In his final submissions he said with reference to payments from Bank of Scotland to keep HHHL companies within their banking facilities: 'We accept … that there can be no complaint about any of that to the extent that those payments either were or were honestly believed to be in respect of debts owing by HWM, invoiced or not.' This is the matter which lies behind one of the most hotly controversial issues in the case, an issue which I will consider at some length at a later point: did KPH carry out substantial uninvoiced infrastructure works for HWM?
Claims 2 and 3: the recorded figures for inter-company payments and inter-company invoices
- The experts have helpfully provided a joint statement containing agreed figures for what the records of HWM show for inter-company payments and invoices. It should be stressed at the outset that, in so far as the statement records figures for inter-company supplies of goods and services received by HWM from HHHL companies, they are figures for the amounts invoiced. At the end of the previous paragraph I referred to the assertion on behalf of the defendants that KPH carried out work for HWM for which no invoices were rendered to HWM – the alleged KPH uninvoiced infrastructure works. That assertion, and any possible figures which may underlie it, are not reflected in the experts' agreed figures.
- Mr Lazarus most helpfully revised, so as to reflect the experts' agreed figures, a summary of inter-company trade and cash flows which he had provided to me in the course of his opening. I attach a copy of his revised summary at the end of this judgment, and reference should be made to it in connection with the next few paragraphs of my judgment, and at several other points as the judgment progresses. I refer to it in the remainder of the judgment as the Revised Summary. It includes letters for the rows and numbers for the columns so as to facilitate references to entries in it. The rows which matter are those which give figures for HWM's trading with, and payments to and from, HTH and KPH. The rows which relate to KPHPH, Nivek and Harfield are of lesser significance, but the comparatively small payments and receipts which they record are taken into account in the 'Checksums' at the foot of the Revised Summary.
- I will not attempt to give a commentary here on everything which the Revised Summary shows, but there are a few points which it is useful to mention.
i) The columns give figures for three separate periods and then a total of all three. The first period (columns 1 and 2) is the claim 2 period from 19 December 1997 (the date of the investment) to the accounting date of 31 March 1998. The second period (two columns both numbered 3) is the claim 3 period for the accounting year to 31 March 1999. The third period (column 5) is the period (not included in either claim 2 or claim 3) from 1 April 1999 until the sale by HWM of its business and assets to A&J Bull Ltd on 10 August 1999. The three periods together are reflected in column 7, which gives the combined total of columns 1,3 and 5.
ii) The Checksums take in the totals of all invoiced sales and purchases by HWM to or from HTH and KPH, and also all payments made by HWM to or received by HWM from HTH, KPH, KPHPH, Nivek and Harfield. The net of all the four totals in the Checksums is £2,800,848. That is the net sum agreed by the experts to have been owed to HWM by the HHHL companies as a result of inter-company trading and payments between 19 December 1997 and 10 August 1999. Because of the insolvent liquidations of HTH and KPH, HWM failed to recover that sum, save to the extent that, if at all, anything was recovered from KPHPH, Nivek, or Harfield.
iii) Row H, which shows HWM's payments to KPH, should be noted, since it is relevant to one of the claimants' main complaints: the complaint about payments by HWM to HHHL companies (principally KPH) heavily in excess of invoices received for any goods or services supplied to HWM in return. The entries at G1 and H1 show that in the period to 31 March 1998 (the claim 2 period) KPH invoiced HWM for only £23, 865, but HWM paid to KPH £591,290. For the next period (the claim 3 period) the entries at G3 show another deficiency, though not so dramatic, of invoices received below payments made. In the next period there was (as I will explain later – see paragraph 100(ix) below) a 'catching-up' on invoices, so that invoices received in that period substantially exceeded payments made. Over all three periods KPH invoiced HWM for £419,205 and received £924,501 (see G7 and H7).
iv) Rows A and B should also be noted. They show figures relevant to the other of the claimant's main complaints: the complaint that HWM continued to make supplies of goods and services to HTH when HTH was consistently failing to pay HWM's invoices. Over all three periods HWM invoiced HTH for supplies in the amount of £5,238,307 (A7), but was paid only £945,587 (B7). In the final period from 1 April 1999 to 10 August 1999 HTH made no payments at all. I believe that that was in part because HTH was in desperate cash flow straits at the time. I will comment later on the considerations bearing on whether, against the background of the above figures, HWM should have stopped making supplies to HTH. The issue is by no means as clear cut as it might appear at first sight. The final period from 1 April 1998 to 10 August 1999 is not included in either claim 2 or claim 3, so it might be appropriate to evaluate the figures in Rows A and B without regard to the final period. Even if that is done there is still a very large deficiency of payments received by HWM from HTH below invoices rendered to HTH: £945,587 (B1 plus B3) as compared with £4,459,835 (A1 plus A3). This shortfall of £3,514,248 makes by far the largest contribution to the net sum owing of £2,800,848, to which I referred in sub-paragraph (ii) above.
v) It can also be seen from the Revised Summary that the particular complaint which the claimants make about HWM's dealings with KPH cannot be made about its dealings with HTH. The complaint is that HWM paid to KPH considerably more than the aggregate amount of KPH's invoices to it. If the same comparison is made substituting HTH for KPH it can be seen that in all three periods (D7 and C7), and also in the claim 2 and claim 3 periods (D1 and 3, and C1 and 3) taken together but without the final period, HWM paid significantly less than the amounts invoiced to it.
The claimants' case in support of claims 2 and 3
- Claims 2 and 3 are advanced by the claimants against the background of the facts and figures which I have summarised in previous paragraphs and sub-paragraphs of this judgment. There is no doubt that, if all inter-company transactions were fully invoiced, HWM, when its trading came to an end with the sale of its business to A&J Bull Ltd, was owed something like £2.8m by the HHHL companies, principally HTH and KPH. There is also no doubt that little or nothing of that sum was in the event recovered from the companies which owed it.
- Mr Lazarus's case on behalf of the claimants is that that result was brought about by a dishonest conspiracy between Mr Hoare, Mrs Hardman and Mr Hazell to divert HWM's funds to companies owned as to 100% (indirectly) by Mr Hoare. The result was achieved in two ways: by HWM making payments to KPH for which it got no goods or services in return; and by HWM persisting in providing goods and services to Mr Hoare's companies, mainly HTH, without ever obtaining more than very partial payment for them. Mr Lazarus says that the figures, as summarised in the Revised Summary, speak for themselves. He also relies on something which I have not mentioned yet, and which I will describe and consider at a later stage in this judgment. This relates to certain entries in some of the books and records of HWM which seem clearly to have been made falsely and (presumably) dishonestly. I shall refer to this issue as 'the falsified accounting records issue'.
- A third factor which Mr Lazarus puts forward in support of his case is an allegation that Mr Hazell was the de facto finance director of HWM. For myself I have difficulty in seeing why this should be such a critical issue. However, in Mr Lazarus's opening skeleton he wrote that two factual issues stood out as effectively determinative. One was whether the financial management of HWM was controlled by Mr Hazell, as the claimants contend. (The other was whether KPH did or did not carry out a lot of uninvoiced infrastructure work for HWM.) Possibly Mr Lazarus no longer ascribes so much importance to whether Mr Hazell was the de facto finance director of HWM, given that no claim for culpable but non-dishonest breach of fiduciary duty is now pursued. Nevertheless a great deal of attention was devoted during the case to the role of Mr Hazell, and I ought to examine it with some care. I shall do so in the next section of my judgment. I will then proceed to explain all the reasons why I am not able to accept Mr Lazarus's submissions that the defendants are liable to the claimants under claims 2 and 3.
The role of Mr Hazell
- Mr Hazell is not, as I understand it, formally qualified as an accountant, but he owns the accountancy practice carried on as Hazell Minshall. He has known Mr Hoare for something like 20 years. During that time he has been the financial adviser and accountant to Mr Hoare personally and to Mr Hoare's companies. His offices, and I believe his home, are at Over Wallop, which is something like 30 miles away from Wallington. He used to go to Wallington from time to time, usually on a Friday afternoon in most weeks. He did not have his own office there. When there he was usually in Mrs Hardman's office, working on matters with her. He was much involved as an adviser to Mr Hoare in the negotiations leading up to the investment. Mr Grassby asked him at one stage whether he would be willing to become the finance director of HWM or HWG after the investment. He said that he would not. He explained that he had his own practice, and did not wish to give it up. The practice had several hundred clients. Mr Bryant (of whom more below) said about 300 clients.
- When Mr Hazell declined to be the finance director of HWM the investors formed the view that a full time finance director should be appointed. As I have said earlier that never effectively happened, despite the short period when Mr Woodsend was employed but did very little: see paragraph 20 above. Mr Hazell entered into the so-called consultancy agreement to provide various services of a financial nature to HWG and HWM. Mr Grassby's evidence was that the list of functions set out in the agreement was intended substantially to embrace the range of services which would be expected of a finance director. In my view it covered a significant number of important matters, but it is an overstatement to equate it to the responsibility of a full finance director. Mr Hazell's role was avowedly a part time role, and the level of fees payable does not strike me as commensurate with what a finance director would expect. The agreement did not, as it seems to me, appoint Mr Hazell to be the overall financial controller of HWG and HWM, with general responsibility for the financial affairs of the two companies.
- There is a minor issue on the evidence of whether Mr Hazell did or did not say to Mr Grassby that some of the functions listed in the consultancy agreement went beyond what he had done for HWM in the past, and he did not want to take them on. Mr Hazell's recollection is that he did say something along those lines, that Mr Grassby said that the position was understood, but that he (Mr Grassby) asked Mr Hazell to sign the agreement nevertheless. Mr Grassby has no recollection of that. I do not think that much, if anything, turns on this. Mr Hazell did many of the things listed in the agreement for him to do, but not, I think, quite all of them. (For example the agreement said that he was to prepare HWM's VAT returns, which he did not do. Mrs Hardman prepared them.) In any case, when over the next 18 months or so Mr Hazell was asked about some financial matter affecting HWM, either by someone within the HWG/HWM structure or by an outsider like an officer of Bank of Scotland, my impression is that Mr Hazell did his best to answer and be helpful. I do not suppose for a moment that either he or others (such as Mr Grassby) looked at the small print of the consultancy agreement to see whether whatever he was being asked about or asked to do on any particular occasion did or did not come within the small print of any of his specified functions.
- As I have said, Mr Hazell was not a director of HWG or HWM. However, the consultancy agreement provided that one of his duties was to attend at board meetings of HWG. He was therefore present at the meetings. He said that he was there to explain matters which arose in connection with the monthly management accounts, and to answer questions about them. On his evidence he did not in general participate in other aspects of the discussions at the meetings. This derived some support from the evidence of Mr Merrick, a non-executive director. His witness statement stated that Mr Hazell remained quiet at board meetings except to answer questions relating to financial matters. It may be worth noting that Mr Merrick was a witness for the claimants, not for Mr Hazell and his co-defendants.
- I have just referred to the monthly management accounts. These were presented to the HWG board at its meetings. The accounts were prepared by the staff of Mr Hazell's firm, Hazell Minshall. The source materials for the preparation of them (bank statements, ledgers maintained by the clerks at Wallington, and other records which were needed) were sent from Wallington to Hazell Minshall's offices. Sometimes they were taken there by Mr Vincent, who went there quite often to work in the comparative peace and privacy of a conference room in the offices. The management accounts were one of the constituents of board packs which were prepared for the members of the board.
- Mr Hazell also had functions in connection with the preparation of the board packs. There was a minor difference between his evidence and Mr Vincent's about this. Mr Hazell said that basically Mr Vincent was responsible for compiling the board packs, doing so at Hazell Minshall's offices and including in them the management accounts which Mr Hazell had prepared and discussed with him before they went into the board packs. Mr Hazell's firm then attended to the reproduction and distribution of the board packs. Mr Vincent's version was rather to the effect that he provided some information to Mr Hazell's firm and that others at the company provided other information, but that it was effectively Mr Hazell, not he himself, who took on the responsibility of deciding what should be in the board packs. Realistically there is precious little difference between the two versions. Mr Hazell and Mr Vincent were both involved in the compilation of the board packs, and they both knew what was in them before they were distributed.
- The relevance of the last few paragraphs is that Mr Hazell, through his (or his firm's) functions in connection with receiving the source materials for the management accounts every month, preparing those accounts, and also compiling the board packs in conjunction with Mr Vincent, was in regular receipt of financial information of various sorts concerning HWM.
- It is also clear, as he accepted in evidence, that he had did quite a lot in connection with the company's relationship with Bank of Scotland. Mr Hazell had been much involved in the discussions with the bank in the run-up to the investment, and he said that Mr Grassby specifically asked him to stay involved in that aspect of the business. Indeed, one of his specified functions under his Consultancy Agreement was 'managing the companies' relationship with their finance providers'. Some of the documents show that there were several occasions when a banking matter needed to be discussed with the company, and the bank manager in practice telephoned Mr Hazell about it. However, that was not an invariable practice. The most regular contact of both banks (Lloyds TSB and Bank of Scotland) was probably Mrs Hardman. Officers of the banks (particularly Bank of Scotland) also used sometimes to contact Mr Vincent. By 1999, when things were going badly and Bank of Scotland was becoming concerned about the state of HWM's account, there were several meetings with it. These were usually attended on behalf of the company by Mr Vincent and Mr Hazell. Mr Hoare used to stay away from them. I am not sure whether Mrs Hardman used to go or not.
- On the specific question of whether Mr Hazell was the de facto finance director of HWG and HWM, several witnesses said that they thought he was. Mr Hazell accepted that a number of people perceived him to be the de facto finance director, but he firmly said that the perception was wrong. He was not in control of the financial management of HWM on a day to day and strategic basis. Some other witnesses did not agree with the view that Mr Hazell was a de facto finance director. Mr Coe was the development director and a member of the HWG board. He said that it was not correct that Mr Hazell had significant involvement in the financial affairs of HWM. In his view Mr Vincent (who was the managing director of the company) had a lot of responsibility for financial affairs. Another interesting witness in this connection who did not share the view that Mr Hazell was effectively the finance director was Mr Bryant, whose name I mentioned a few paragraphs earlier. Mr Bryant is a chartered accountant who has for some time acted as the auditor of company accounts prepared by Hazell Minshall. (Mr Hazell, not being formally qualified as a member of an accounting body, could not be the auditor himself.) Mr Bryant worked frequently at Hazell Minshall's offices, sometimes in conjunction with Mr Hazell, and considered that he had an informed opinion on the basis of his observation of Mr Hazell over time. He did not think that Mr Hazell performed a role equivalent to that of a finance director.
- So what am I to make of all this (if it matters, which in my view it may not)? Everyone agrees that Mr Hazell was not a de jure director of HWM or HWG. Nor was he held out by the companies or by Mr Hoare as being a director. I have no evidence from which I could find that he represented himself to anyone as being a director. But did he in fact fulfil essentially the role he would have fulfilled if he had the finance director? I would say not, but I would accept that he came closer to being a de facto finance director of HWM and HWG than anyone else. He obviously knew a lot about the business from his general background of having been the accountant and adviser of Mr Hoare and his companies for some 20 years. His close connection with Mr Hoare, the chairman of the company and the largest shareholder, must have meant that many people regarded him as having some sort of special status and authority, even if he would not have regarded himself in that way. And, as I have explained, his roles in connection with the preparation of the monthly management accounts and the board packs, and in dealing with banking matters affecting the companies, meant that his financial knowledge of their affairs, or at least his access to such financial knowledge, was reasonably extensive, and remained up to date.
- In my view HWM did not have a de facto finance director. Responsibility for the company's financial affairs was divided between several people: Mr Vincent in some respects, but certainly not enough for him to be in effect the finance director as well as the managing director; Mr Hazell in some other respects; and also Mrs Hardman to a degree, although her involvement was more in day to day administration than in any sort of strategic or controlling role. I do not think that Mr Hoare played any real part in financial control. As I will say later, that was simply not the aspect of the business which was his (Mr Hoare's) field. I think that it is a pity that there was no one finance director with real authority to act decisively in that role. If there had been the sort of things which went wrong might have been forestalled, and the present case might never have arisen. In relation to Mr Hazell I sum it up by saying that he was not the actual or the de facto finance director of HWM, but he was important, influential and knowledgeable in connection with the financial affairs of the company. It does not surprise me that, although some witnesses did not think that he was the de facto finance director, some others did.
The alleged conspiracy: no direct evidence of its formation or existence
- I now move on to evaluate in a more specific way the allegations of conspiracy on which claims 2 and 3 are based. As I have noted earlier, even though the original particulars of claim contained allegations of negligent, rather than dishonest, breach of duty, Mr Lazarus explicitly confirmed in his closing submissions that he put his case on the sole basis that there had been a fraudulent and dishonest conspiracy between the three defendants. In all normal cases when fraud is alleged against a defendant one expects there to be some evidence adduced by the claimant to demonstrate its existence. This is one of those propositions which one tends to take for granted, but for which it is sometimes hard to find specific authority. However, Mr Chivers has referred me to observations of Thesiger LJ in the 19th Century case of Davy v Garrett (1878) 7 Ch D 473 at 489:
"There is another still stronger objection to this statement of claim. The Plaintiffs say that fraud is intended to be alleged, yet it contains no charge of fraud. In the common law courts no rule was more clearly settled than that fraud must be distinctly alleged and as distinctly proved, and that it was not allowable to leave fraud to be inferred from the facts."
His Lordship continued by saying that the same rule applied in courts of equity.
- As regards the present case I ask myself: is there any specific evidence of the three defendants having formed the alleged conspiracy? The answer is that there is none. The suggestion that they were engaged in a dishonest plot to divert HWM's funds to the HHHL companies was fairly put to them in cross-examination, and each of them firmly denied it. A suggestion which is put to a witness but denied is evidence of nothing. Sometimes conspiracies are proved because an original conspirator has broken ranks and gives evidence of how the conspiracy was formed and carried out. There is nothing of that sort here. Sometimes documents may emerge which show the formation of a conspiracy. There is nothing of that sort here either.
- Sometimes, although there may be no evidence of the specific occasion when a fraudulent conspiracy was formed, there may be evidence of the conduct of the conspirators which plainly shows that they were engaged in fraudulent conduct. For example a third party may have been present on some occasion, or may have overheard things, which unequivocally demonstrate that the conspirators were jointly engaged in a fraudulent scheme. The third party then gives evidence of what he saw and heard. There is nothing of that sort here. Or documents may be found which show that there was a fraud in progress. There are no such documents here.
- There is evidence that on most Friday afternoons Mr Hazell came to Wallington and spent some time with Mrs Hardman in her office. Quite often they were joined later in the day by Mr Hoare after he had returned from HWM's various sites. Sometimes Mrs Hardman went home at the end of normal office hours, but Mr Hoare and Mr Hazell stayed for a time discussing matters. It is, I suppose, possible that on those Friday afternoons the defendants were engaged in plotting the next stages of a dishonest campaign to take HWM's funds away from it and make them available to the HHHL companies. But there is absolutely no evidence that they were in fact doing that. The suggestion that they were was emphatically denied by them all. Mrs Hardman and Mr Hazell both said that the weekly discussions between the two of them were largely concerned with KPH, HTH and the other HHHL companies, not with HWM. If one is already convinced that Mr Hoare, Mrs Hardman and Mr Hazell were engaged in a fraudulent conspiracy, as the claimants appear to be, the Friday meetings can be perceived as parts of it, but if the question is whether there ever was a fraudulent conspiracy in the first place, the fact that the Friday meetings happened makes at best only a marginal contribution to answering it.
- The same point can be made about occasions, which Mr Lazarus demonstrated to me, when Mrs Hardman prepared draft letters of instruction for Mr Hoare to send to Bank of Scotland instructing it to make transfers from HWM's account with it to HWM's account at Lloyds TSB. In one such letter there is a PS, presumably drafted by Mrs Hardman: 'I am sending you this request, as Karin Hardman is on holiday this week – if you need to confirm the amount please contact Richard Hazell on 01264 781863.' Bank statements show the transfer requested by the letter being made, and the money then being transferred onwards within accounts at Lloyds TSB to several of the HHHL companies. Mr Lazarus says that there I have a clear example of all three defendants participating in one of the payments about which HWM is objecting in claim 2. My comment is: true, but so what? If I was persuaded that the alleged conspiracy existed, the letter might be seen as a particular instance of the three conspirators machinating away in the course of it. But it does nothing to show to me that there was a conspiracy in the first place, nor does in raise suspicions in my mind. If something which Mrs Hardman would normally have done was going to come up when she was on holiday it seems sensible, and in no way suspicious, that she should have made arrangements for it to be dealt with by someone else (in this instance the other authorised cheque signatory) and for any questions to be directed to the person who would be best able to answer them.
- I could accept the possibility of an argument in some cases that, even in the absence of specific evidence of defendants forming a conspiracy or conducting themselves in a way which demonstrated that there was one in existence between them, the events which happened were such that there just must have been a fraudulent scheme somewhere. It seems likely that Mr Lazarus's argument in this case is along those lines. Thus in paragraph 63 above I attributed to him the submission that the figures in the Revised Summary speak for themselves. For reasons which I will explain in subsequent parts of this judgment I do not accept the argument.
- To what I have said in the foregoing paragraphs I should add one qualification. The proposition that there is no evidence of fraudulent or dishonest conduct needs to be re-examined in the light of the falsified accounting record issue, which I mentioned in paragraph 63 above. I will re-examine the proposition when I explain and discuss that issue.
The alleged conspiracy: probable or improbable?
- One question upon which I have reflected is whether it is probable or improbable that the conspiracy which the claimants contend for did indeed exist between Mr Hoare, Mrs Hardman and Mr Hazell. My view is that it was more improbable than probable. I do not say that it was impossible. I am unable to assert definitively that it did not exist. But I do say that it would be surprising if it had existed. That is another factor that leads me not to accept the case which Mr Lazarus has advanced to me. There are two general points to make in this connection, and then I have some observations to make about the defendants as I see them.
- The first general observation is this. Claim 2 is formulated on the basis that the conspiracy was in full swing in the first three months after the investment. The claimants say that in the claim 2 period from 19 December 1997 to 31 March 1998 HWM made payments to HTH and KPH of £1,046,650 and £591,290 against invoices of only £972,683 and £23,865, and that that was part of the carrying out of the conspiracy. (For the figures see D1, H1, C1 and G1in the Revised Summary.) The correctness or otherwise of this analysis on the part of the claimants depends heavily on the disputed issue of whether there were large uninvoiced infrastructure costs laid out by KPH, and I address it later. It is, however, implicit in the way that the claimants formulate their case that, if they are right, at a time when the negotiations with the investors were in progress the defendants must already have been plotting fraudulently to divert large sums of money which originated from the investors and Bank of Scotland away from HWM and to the HHHL companies. I ask myself: how likely was that? I answer that, although it was not impossible, it seems to me not to have been likely at all. The idea that, at a time when Mr Hoare (supported by outside consultants and a team of impeccably respectable professional advisers) was busily negotiating with Nash Sells, BancBoston and Bank of Scotland to raise large sums for HWM, he and two others (Mrs Hardman and Mr Hazell) were plotting to secure that a large part of the money would in practice be funnelled on to the HHHL companies and used by them rather than by HWM is not an idea that I can readily accept.
- I move on to my second general observation. Part of the theory behind the claimants' allegations against the defendants is that, because Mr Hoare was the 100% owner of the HHHL group but had only a 75% equity interest in HWM, it was inherently in his interests to favour the HHHL group to the detriment of HWM. At first sight the proposition seems plausible, but on further examination I am by no means so sure. Mr Hoare's evidence (paragraph 48 of his witness statement, not challenged in cross-examination) was that HWM had far more future potential than HTH or KPH. Consistently with that he estimated that he devoted about three-quarters of his working time to HWM rather than to his other companies. The proposition that the real growth potential was perceived to lie with HWM is also consistent with the attitude of the investors. HWM was originally a wholly owned subsidiary of a group which also included HTH and KPH. The investors appear to have been interested in investing only in HWM, and for that reason it had to be demerged out of the HHHL group before the investors would come in. In those circumstances it seems quite likely to me that Mr Hoare's 75% equity interest in HWM had more commercial promise for him than his 100% equity interest in HTH and KPH. At the very least the opposite is by no means self-evident, so that what has been suggested to have been an obvious motive to underlie the alleged conspiracy is not obvious at all. Since the alleged conspiracy could only be found on the basis of inference, the lack of a clearly convincing motive for it substantially undermines the claimants' case.
- I now wish to say something about the defendants. I saw them in cross-examination for quite long periods. In some cases I have heard evidence of what other persons who knew them thought about them. Do they seem to me to have been the sorts of persons who would enter into a fraudulent conspiracy of the kind which is alleged against them? My overall answer to that question is: no. Or at least they do not strike me as obviously being the sorts of persons who would behave in the dishonest way which is alleged against them, and then come along to court and lie about it.
- I begin with Mr Hoare. I must be cautious here, because, as I have already observed in paragraph 16 above, Mr Hoare originally pleaded that he had no connection with the overseas structure which owned the J and W assets, whereas he now accepts that that was not true. I cannot take the view that dishonesty is so alien to his nature that I should accept implicitly anything that he says. But there is a different attribute of him which is relevant in this connection. It is that the conspiracy alleged here entails a degree of corporate and financial sophistication which would be wholly out of character for him. I have already quoted him as saying in his witness statement that he was 'an operations man'. He added:
"My strengths are dealing with technical and engineering issues, man-management, and anything relating to the practical side of my businesses. I have always had less aptitude for paper work and figures … . My forte is working out of the office, working 'on site'."
In oral evidence he said on one occasion:
"I was flat out in lots of different directions and in truth I was the only real operations man on the firm. I came into the office, I signed things. As I passed through I said is everything OK. Yes, and away we went."
- Mr Hoare's evaluation of himself in those respects was very much in line with the descriptions of him by other witnesses, whether witnesses for him or against him. For example Mr Merrick, a director of HWG and a witness against Mr Hoare and his co-defendants, said that Mr Hoare was 'hands on, running the sites'. Mr Coe, another director but a witness for the defendants, said that Mr Hoare 'was less involved on the financial side; he was out dealing with operations'. Particularly interesting are comments by Mr Vincent, who was the claimants' principal witness against Mr Hoare and the other defendants. Hostility to Mr Hoare comes through clearly, but the portrait which Mr Vincent paints is not one of a calculating financial plotter. In his witness statement he wrote:
"From my knowledge of Hoare he was incapable of distinguishing between the different companies he had established as in his mind they all belonged to him. From an accounting and financial perspective he did not actually run them as separate entities during the time that I worked for him. To him this was irrelevant or the job of others. He was just intent on expansion at any cost. Such considerations simply frustrated him and only served to slow him down so they were best ignored. He would get very angry and aggressive with anyone who tried to get him to separate one company from another operationally."
Mr Vincent was even more forthright in oral evidence:
"With costs all going in the wrong place, he did not want to know about it. It was an inconvenience and aggravation and he just wanted to get the job done. To some extent, you know, you could see where he is coming from. The man is about getting a job done and everything else is an obstacle to it. If you owned all the business that is fine. When we had the new investment business come on, it was not fine any more and Kevin Hoare needed to be able to separate in his mind that difference – but he did not. He chose to continue to run all the businesses as he had for years before, and, for all I know, very successfully; but when we came to have the merchant banks on board, you needed to make a difference between which people and vehicles and equipment were the responsibility of which part of the business. Kevin Hoare either could not get his mind round it or found it just an obstacle, a blooming nuisance. So just get the job done. …
Q. Was Mr Hoare scrupulous in ensuring that each of the different companies dealt with each other operationally at arm's length?
A. He would not even know where to start or even know how."
- Mr Hoare might not have been overly troubled by the ethical issues which would have arisen if he had been conspiring to manipulate the companies and to carry out inter-company transactions so as to damage HWM (and through it the investors and Bank of Scotland), but it was just not the sort of activity which he would have readily understood or in which he would have been likely to become involved.
- I move on to Mrs Hardman. At the time of the events she was employed by KPH, but in practice she operated as the bookkeeper and cashier of HWM and the HHHL companies (of which KPH was one). She was responsible for banking the companies' receipts and generally for managing the bank accounts. She had no equity interest of any sort in any of the businesses. She had worked for Mr Hoare and his companies for some 20 years, but she is now a retired lady in her 60s. She no longer lives in this country ,and as far as I know she has no continuing connection with Mr Hoare or Mr Hazell of a business or employment nature. She struck me as an entirely honest and straightforward witness, and there was nothing about her demeanour or her detailed answers which would lead me to suppose that she was giving false evidence.
- That does not mean that she could not be mistaken about some matters. It is clear that in some respects her original recollections as reflected in her witness statement must have been incorrect. One example concerned the comparatively small sums which were paid by HWM to Nivek. I deal with that in paragraph 112(iv) below. It emerged from documents that what she had originally believed to be the explanation of the Nivek payments could not have been right. She acknowledged as much and suggested what she said seems now to have been likely to have been the correct explanation. Mr Lazarus criticised her for this, but I do not accept the criticism. The events had happened five or more years before. Mrs Hardman presumably did not have access to much in the way of documents when preparing her witness statement, and it does not surprise me in the least that not everything in her witness statement was entirely correct. That is no indication that she is a dishonest witness.
- I acknowledge that I could be wrong, but I do not think that Mrs Hardman was a dishonest witness. I believe that she told me the truth as she recalled it. The claimants' suggestion is that she was an active member of a fraudulent conspiracy, in which her main role was to make payments which she well knew it was improper for her to make. Why should she have done that? The only answer which is put forward is that she did it out of loyalty to Mr Hoare. I cannot rule out that possibility, but I have to say that I consider it unlikely. Many a person in a subordinate position may feel loyalty to a superior, but will draw the line before participating in a fraud in the interests of the superior. Others may not draw the line at that point, but I am not willing to find that Mrs Hardman was one of them. As I assess Mrs Hardman I do not see her as a convincing candidate for being a participant in the fraudulent conspiracy which is alleged against her.
- Finally I come to Mr Hazell. I think that Mr Lazarus would portray him as the true architect of the conspiracy. It is perhaps with that in view that he continued to stress the contention that Mr Hazell was the de facto finance director of HWM and HWG. It is, I suppose, more realistic to suppose of Mr Hazell than it is to suppose of either Mr Hoare or Mrs Hardman that he could have planned and superintended the carrying through of a fraudulent scheme such as is alleged by the claimants to have existed here. But do I glean any impression from his evidence and the evidence of others about whether he would be likely to have done that? Leaving aside the falsified accounting records issue, which I consider later and as respects which there is a stark conflict of evidence between Mr Hazell and Mr Vincent, I do not think that I do. Mr Hazell was a perfectly satisfactory witness. He gave clear and direct answers to the questions put to him. Of course he did not always say what Mr Lazarus hoped he would say, but he was in no way evasive, and I did not detect any significant inconsistencies in his evidence or contradictions between it and the documents.
- There were differences between Mr Hazell and some of the other witnesses (but not by any means all of them) on the issue which I have already considered of whether he was the de facto finance director of HWM. Those differences were, however, largely ones of perception and not the sorts of things on which one set of witnesses was consciously lying and the other telling the truth. There was the minor difference between Mr Hazell and Mr Grassby over whether he did or did not say to Mr Grassby that his consultancy agreement provided him to perform some functions which he had not performed in the past and did not wish to perform in the future. That seems to me to have been a difference of recollection, and it does not cause me to regard Mr Hazell as having been an unreliable and possibly dishonest witness.
- Several of the other witnesses commented on Mr Hazell in one way or another. I do not recall anyone except Mr Vincent saying that he was generally unreliable and of questionable honesty.
- In relation to Mr Hazell the same question arises as in relation to Mrs Hardman: what motive did he have to participate in – indeed in his case to invent – a fraudulent scheme the beneficiary of which was Mr Hoare? Perhaps the same loyalty suggestion could be made as was made in the case of Mrs Hardman, but I repeat my comment to the effect that it is a big step to assume that someone would participate in deliberate dishonesty out of loyalty to someone else. Mr Lazarus said that Mr Hazell might have been hoping for a generous financial reward from Mr Hoare if the conspiracy had succeeded and Mr Hoare had profited as a result of it. It does seem to have been the case that a substantial sum of money found its way to a company connected with Mr Hazell out of the funds received by Mr Hoare's Jersey structure from the sale by them of the J and W assets to HWM. (Mr Hazell told me that he had personally declared this receipt to the Inland Revenue and paid income tax on it.)
- I cannot rule out the possibility that Mr Hazell did indeed dream up a conspiracy to divert to Mr Hoare's 100% owned companies funds derived from the investors and Bank of Scotland and meant for HWM, and that Mr Hazell did it because he thought that in the long run Mr Hoare would be financially generous to him. But it is no more than a possibility, and, in my view, not a particularly likely one. In the case of Mr Hazell I am scarcely, if at all, more inclined than I am in the cases of Mr Hoare and Mrs Hardman to approach the claimants' allegations of dishonesty with an opinion that they are quite likely to be true. On the contrary, my approach would be not to accept the allegations of dishonesty unless they are positively shown to have been true.
The claimants' allegations of improper payments made by HWM. Did KPH carry out uninvoiced infrastructure works for HWM?
- I refer to the analysis in paragraphs 60 et seq above of the figures shown in the Revised Summary. The figures which matter are those for payments to KPH, as compared with the invoiced purchases from KPH. The relevant rows in the Revised Summary are rows H (payments by HWM to KPH) and G (invoiced purchases by HWM from KPH). The figures in those rows under columns 1 and 3 show payments made which were greatly in excess of invoices received. The defendants' answer to this part of the claimants' case is that KPH did a great deal more work – infrastructure works – for HWM at HWM's transfer stations and landfill sites, and also at HWM's Wallington depot, than the work for which it had issued invoices by the time that everything collapsed. On that basis it was true that KPH made payments in excess of invoices received, but the payments were not simple inter-company loans and nothing else: they were made on account of HWM's liability for works done or in the progress of being done, and the expectation was that they would be rationalised against invoices at some later time when KPH got round to issuing the invoices. On behalf of the claimants Mr Lazarus submitted that the defendants case on this was 'fabricated': it was just not true that KPH had done any more work for HWM than the work for which it issued invoices.
- This was a highly controversial issue in the trial, and was very important. How important is shown by the following observation which Mr Lazarus, with his scrupulous frankness and fairness, made in his closing submissions. With reference to 'the topic of uninvoiced KPH infrastructure costs' he said: 'If it is right it removes a great deal of the claim. It may be that there is practically nothing left of the claim.' I say now that I accept the defendants' case about the uninvoiced works. In fairness to the claimants, however, I need to go into some degree of detail about the issue in order to explain my reasons.
- In the following sub-paragraphs I will describe the factual background and the nature of the arguments. In the course of doing so I will attempt to bring out the matters which are controversial and those which are not. In that way I will seek to lay the ground for my own analysis of the issue and my conclusions upon it.
i) HWM's transfer stations, landfill sites and depot at Wallington all required civil engineering and construction works to be done – the infrastructure works. Several examples were mentioned in the evidence. They included building roads of a quality to cope with heavy tipper trucks and skip-transporting vehicles; installing weighbridges; creating 'cells' and 'pushwalls' at landfill sites; laying down hard-standing areas at Wallington. There were other examples mentioned where the technical terms took me beyond the edges of my knowledge.
ii) The works were closely regulated by requirements of the Environment Agency.
iii) Except for aspects on which specialised skills required the engagement of outside contractors, all the infrastructure works were done either by HWM's own staff using HWM's equipment or by KPH's staff using KPH's equipment. There was a conflict of evidence about this, but as I will explain later the overwhelming balance of the evidence was that virtually all of the works were done by KPH, not by HWM itself.
iv) Infrastructure works had been going on before the investment, and continued after the investment. It will be recalled that as part of the transactions implemented on 19 December 1997 HWM purchased the J and W assets. There were seven such assets, and they were landfill sites and or landfill rights. Much infrastructure work was required for them to be made ready for bringing into use.
v) Several of the documents which were created at the time of the investment stated that the works which KPH did for HWM were comparatively small in scale. KPH's key witnesses on this issue at the trial (Mr Hoare, Mr Middleton, and Mr Coe) all said that the documents were simply wrong in that respect. The witnesses said that they did not know who had been responsible for the incorrect statements (as they described them).
vi) Mrs Hardman gave evidence that she was aware in a general way that infrastructure works had been carried out by KPH before he investment and continued to be carried out after it. From time to time she was informed about them by employees of KPH (by which company she was also employed herself). Her evidence was vague about precisely how she was told about the works. She said that she 'would think' that she was given figures about weekly by KPH's representatives for the amount of work which required to be paid for by HWM. She thought that the information came to her as printed figures, and she had a recollection of being given such a document. It was apparently right that there was not an invoice. She did not know what paper work there was within HWM to keep track of these requests. The documents which she was given she would probably have kept in a KPH file. All of that is vague, but it is fair to note that it was over five years ago now. All of KPH's documents are stored by the Official Receiver in something like 1,400 unindexed boxes, so Mrs Hardman had no opportunity to refresh her memory by reference to contemporary documents.
vii) Staying with Mrs Hardman's evidence I have already recorded (see paragraph 57 above) that what prompted her to make an inter-company transfer of funds from HWM to KPH was not an invoice from KPH or a request for payment for any specific item of work. What prompted the making of a payment was the state of the bank balances of the various companies. In relation to KPH, if it might otherwise go over its overdraft limit, she would cause the bank to make a payment of a round sum which was intended to prevent the limit being exceeded. (I explained in paragraphs 54 to 56 above that originally this process involved a transfer from Bank of Scotland to HWM's account at Lloyds TSB and an onward transfer from HWM's account at the latter bank to KPH's account there; after HWM's account at Lloyds TSB was closed there was a direct transfer from Bank of Scotland to KPH's account at Lloyds TSB.)
viii) But so far as the present issue is concerned the critical point in Mrs Hardman's evidence, if I accept it, is that she caused the bank transfers to be made in the knowledge, or at least the genuine belief, that KPH had been and still was doing infrastructure works for HWM for which it was in principle entitled to be paid. She probably did not know whether KPH had issued invoices or not: the issue of invoices for KPH was not one of her functions. If invoices had not been issued yet, the payments made to KPH were on account of invoices which would presumably be issued later. Mr Lazarus submits that I should reject Mrs Hardman's evidence summarised in this sub-paragraph. His case is that KPH had not done the large quantity of uninvoiced infrastructure works for HWM which the defendants' witnesses say that KPH had done, and that Mrs Hardman knew it. He put it to her, and she did not accept, that her evidence on this was 'made up'.
ix) The proposition that KPH did do some works for HWM and did not issue invoices for them at the time is confirmed by a number of invoices, sometimes described in the trial as 'catch-up invoices', which KPH issued in the period between 31 March 1999 and the sale by HWM of its business to A&J Bull Ltd on 10 August 1999. In the Revised Summary the entries at points G5 and G6 show that in those four months KPH issued invoices for a total of £276,594, and was paid only £382. I think that both sides in the case agree that the catch-up invoices were for works which had been done previously but not invoiced at the time. The difference between them is that the defendants say that there were many more works which had also been done but for which catch-up invoices were not issued before everything collapsed, whereas the claimants say that the realistic assumption must be that the catch-up invoices covered everything for which there was any catching up to be done.
x) Mr Middleton was the managing director of KPH at the relevant times. He is a Chartered Quantity Surveyor and an FRICS. He is currently the general manager of Mr Hoare's company Harfield Bros. (Contracting) Ltd. He gave evidence for the defendants. He did not have access to KPH's documents from the 1997 to 1999 period (they are stored by the Official Receiver), but he had recently done his best to reconstruct from his memory a schedule listing all the locations where KPH had done work for HWM, describing the work done, and giving his estimate of the value of each item. The schedule and Mr Middleton's evidence in support of it are very important in this case. Mr Middleton lists 30 different items of work at virtually as many sites (two different jobs at Wallington are separately itemised). He also gives his current estimates of what the VAT-exclusive values of the various items were at the time. The largest estimate is £350,000 for works at HWM's landfill site at Funtley. The smallest estimate is £5,000 for some works at a location called Pratts Farm, Romsey. The aggregate of the values is £1.7m. I quote two paragraphs from his witness statement:
"Considering the number of locations worked on by KPH for HWM during the period and the fact that there was always work being carried out by KPH for HWM, I would estimate that the value of the work done for HWM between December 1997 and about June 1999 would amount to at least £1.7m and possibly much more.
At [his exhibit] is a schedule which I have prepared listing the locations, scope and value of all works undertaken by KPH for HWM between December 1997 and about June 1999. It has been reconstructed from my recollection of the work which needed to be done at each of the sites listed, the number of KPH workmen who would have been required to do the work, and the plant and materials that would have been used. I believe it to be a fair estimate. …"
xi) In cross-examination Mr Lazarus put to Mr Middleton that his evidence was 'simply wrong'. Out of politeness Mr Lazarus did not say that it was false and perjured, but that is what he meant. He was not suggesting that Mr Middleton believed his schedule to be correct but was mistaken. Mr Middleton's answer to the suggestion that his evidence was simply wrong was 'Certainly not'. He had also said in his evidence that 'we' (meaning KPH) were invoicing for some activities but not all of them. He referred to a 'reconciliation that I expected to get done somewhere, which never took place. One would qualify the work, put prices at the end against a total, take away what we already had and receive the balance and raise invoices, but that never took place.'
xii) Mr Vincent had already given his evidence on behalf of the claimants before Mr Middleton gave his evidence, but Mr Vincent had seen Mr Middleton's schedule and was asked about it. He agreed that most of the items of work listed by Mr Middleton had been done (and did not specify any which had not been done), but he suggested that some of them had been done by HWM's own employees, not by KPH. He also made the point that, if KPH had done items of work for HWM, it ought to have issued invoices to HWM.
xiii) Parts of Mr Hoare's evidence related to the KPH uninvoiced infrastructure works issue. In his witness statement he said that KPH did substantial and essential infrastructure works for HWM continuously. The value of them far exceeded what the claimants admitted. In cross-examination he said that all construction work 'except specialised' on HWM's sites was carried out by KPH. He was the person who visited the sites, not Mr Vincent. The thrust of a long answer was that Mr Vincent did not know what he was talking about when he had said that HWM's staff could do the work involved. They were 'machine operators and rubbish pickers', and did not have the skills required for the infrastructure works. HWM had a lot of sites; there was a lot of work going on. The rules of the Environment Agency were very strict. Mr Hoare reacted with incredulity (which in my view was clearly genuine and not feigned) when some of the low values for KPH's works for HWM as estimated in documents from the time of the investment were put to him.
xiv) Mr Coe's evidence was also important. He was the development director of HWM, and was also a member of the board of HWG. If I have understood correctly, he was primarily responsible for relations with the Environment Agency. He said that, because of the requirements of the Agency, HWM's own staff could not have done the works themselves, and in any event would not have had the capacity to do them. An engineering company was needed. He saw the staff doing infrastructure works on the sites, and could say from his own knowledge that they were not the staff of HWM.
- The foregoing sub-paragraphs describe the background of evidence and surrounding circumstances against which I have to decide whether or not substantial uninvoiced infrastructure works were being carried on by KPH at all times. The defendants' case is that they were. The claimants case is that they were carried out to the extent of the invoices which KPH issued (including the catch-up invoices), but not beyond that. My conclusion is that the defendants are right and that the works were indeed carried on. In reaching that conclusion I have sought to take account of all of the evidence and arguments, but one item of evidence stands out in my evaluation as decisive. That is the evidence of Mr Middleton.
- Mr Lazarus clearly appreciated from the outset that the evidence of Mr Middleton was critical to the issue. In his opening skeleton, referring both to this issue and to the issue of whether Mr Hazell was or was not the de facto finance director of HWM, he wrote that the conflicts of evidence were stark and that there was no room for honest misrecollection; the claimants did not shrink from saying that the defendants and at least three of their witnesses had provided materially dishonest witness statements. (In relation to this uninvoiced infrastructure costs issue I think that he had in mind only one witness in addition to the defendants themselves, namely Mr Middleton.) In a later paragraph he wrote:
'… if the claimants are right and KPH did not carry out substantial infrastructure works for which it did not render invoices then the defendants have each fabricated an important part of their evidence and they have persuaded Mr Middleton to join in a conspiracy to mislead the court.'
He confirmed that that was still his position in answer to a question from me at the end of his final address in reply. He agreed that, if I accepted his submissions, that implied that Mr Middleton gave false evidence, and that there was no room for saying that Mr Middleton genuinely believed what he said but was mistaken.
- Knowing what the claimants alleged about Mr Middleton's evidence, I paid particularly close attention to it. In my opinion he was a transparently honest witness. I am as confident as a judge can ever be in similar circumstances that he was not fabricating his evidence and deliberately lying to the court. His schedule had been prepared carefully and conscientiously from his memory of the works which were done. It does not read remotely like an exercise in deceitful fiction. In the absence of access to contemporary documents Mr Middleton cannot vouch that the schedule is accurate in all respects, but I am convinced that he did the best that he could, and that no-one else was in a better position than he was to give evidence on the matter. His evidence derived considerable support from the answers which Mr Hoare and Mr Coe gave in their testimony. As I have said, I appreciate that I must be cautious about accepting everything which Mr Hoare said, but his evidence on this matter was very much in an area of which he had an intimate knowledge. I am convinced that he was being totally genuine and forthcoming in his answers to questions about the KPH works and the scale of them.
- To the contrary effect (that is to the effect that KPH did not carry out infrastructure works to a total value of around £1.7m, as Mr Middleton estimated) there was very little evidence as such, as opposed to arguments. The only real evidence came from Mr Vincent. But, rereading the transcript, he did not say that the works which Mr Middleton put in his schedule had not been done. He made two points: first that he would have expected KPH to have issued invoices for all the items of work which it had done; second that some of the works were, or might have been, done by HWM's own employees, not by KPH.
- The first point is a perfectly fair comment, but it is in essence a comment rather than a point of evidence. It does not cause me to depart from my conviction that Mr Middleton was an honest witness, and that his schedule represented the truth to the best of his recollection. I have already quoted his answer to the effect that they had expected in time to catch up on all the invoicing, but it did not happen. There are also some indications in his evidence that, in the earlier period when both HWM and KPH were wholly owned by Mr Hoare (through HHHL, though I am not sure that Mr Middleton knew that there was a holding company), they were lax about invoicing. That needs to be considered in conjunction with something else which Mr Middleton said: that he did not realise that Mr Hoare had ceased to be the 100% owner of HWM. (I have already referred to this in another connection: see paragraph 21 above.) A general thread in the evidence of several witnesses was that, in the practical operation of the companies, nothing really changed after the investment was made. This is not to defend KPH's invoicing procedures for inter-company trading with HWM. They were clearly inadequate. It is only to recognise the reality of what happened (or, perhaps more accurately, did not happen), even though it ought to have been otherwise.
- Mr Vincent's second point (that some of the works were done by HWM's own staff) is in my view definitely wrong. It was conclusively refuted by the evidence of Mr Coe. That was to the effect that, because of the strict requirements of the Environment Agency, the works had to be done by an engineering and contracting company, which HWM was not. It was also refuted by the evidence of Mr Hoare (which I accept) that HWM's employees did not have the skills to carry out the infrastructure works. It is perhaps appropriate for me to record that there was near unanimity of all the witnesses that Mr Vincent hardly ever went out to the transfer stations and landfill sites. His own evidence was that he had expected to spend more time visiting the sites, but in the event hardly ever had time to do so. Mr Hoare said that Mr Vincent was more comfortable in the office than on the sites. (Mr Vincent disagreed, but did not dispute that his duties as managing director kept him in his office most of the time.) Mr Rose, who was an operations director of HWM but not a member of the board of HWG, said of Mr Vincent: 'In real essence he was on a day to day basis locked up in his office. I have no idea what he did if I am totally honest.'
- My finding that KPH did carry out substantial infrastructure works for HWM is inconsistent with some statements in documents prepared in connection with the investment to the effect that KPH did some inter-company work for HWM, but not much. I can only say that those statements were incorrect. It is not clear who was responsible for the documents in which they were contained or what the sources of information were.
- I should also comment on the VAT implications of what was happening in relation to the payments which HWM was making to KPH. On my findings they were payments made for goods and services supplied, but were not made in payment of invoices. Rather they were made on account of invoices expected to be delivered later. Should KPH have paid VAT when it received the payments? If so, was HWM entitled to a VAT credit for input tax? Mrs Hardman, who was normally responsible for preparing the VAT returns of the companies, was asked about these matters, but was not able to give clear answers. The VAT position ought to have been considered, but it is not clear whether it was or not.
- That is unsatisfactory, but it cannot deflect me from finding that, when Mrs Hardman made inter-company payments from HWM to KPH, she did so believing (and justifiably believing, as I conclude) that substantial sums were owing, ever if not yet invoiced, by HWM to KPH for works which KPH had done for HWM.
- Leaving the particular topic of uninvoiced KPH infrastructure works for the moment, there is another matter which Mrs Hardman, according to her oral evidence, also had in mind when she wished to make a transfer of funds from HWM to KPH (or to HTH, for that matter) in order to keep the bank balances for the companies within the overdraft limits. Mrs Hardman did not know any details, but she understood (correctly, I think) that in preparation for the investment a substantial number of vehicles were transferred from HTH to HWM. These vehicles were being acquired on hire purchase contracts, or possibly were subject to finance leases. They presumably had balance sheet values in the accounts of HTH, reflecting the capital contents of hire purchase instalments or finance lease rentals which HTH had already paid. Although Mrs Hardman knew no details she imagined that, when the vehicles moved from the balance sheet of HTH to the balance sheet of HWM, corresponding figures would appear as inter-company debts owed by HWM to HTH. She had in mind that the balance sheet value of the vehicles was £1m or more. In fact she may have been mistaken in her assumption that the vehicles were transferred at their balance sheet values. It seems that one of the 18 December 1997 documents which was part of the investment, a document referred to as the Confirmation of No Claim, may have wiped out any inter-company debt from HWM to HTH which might otherwise have arisen. Nevertheless, Mrs Hardman's assumption that, if valuable assets had been transferred from one company to another, an inter-company debt would have arisen was a natural one to make. She was not involved in the investment or in the negotiations which led up to it, and she knew nothing about the Confirmation of No Claim
- Mrs Hardman did not say anything about this point in her witness statement, but she alluded to it in her oral evidence. She was not precise about it – understandably so given the passage of time – but the general point was that, when she wished to make a transfer of money from HWM to the HHHL companies, she had in mind that HWM owed £1m or more to one of the HHHL group companies. This too led her to believe that the payments which she wanted to make in order to keep the various companies within their overdraft limits could be made in circumstances where the amounts concerned were comfortably within the level of indebtedness which existed between the HWG group and the HHHL group. Her belief in this particular respect may have been wrong (because of the Confirmation of no Claim), and her belief seems to have been based on a group view rather than an individual company view, but I accept her evidence about what she believed at the time.
- After the foregoing lengthy discussion I can now round off on this section of my judgment. It has been directed to the allegations by the claimants that improper payments were made by HWM to the HHHL companies, and in particular to KPH. I repeat a quotation which I set out in paragraph 58 above from Mr Lazarus's closing address:
"We accept … that there can be no complaint about any of that to the extent that those payments either were or were honestly believed to be in respect of debts owing by HWM, … invoiced or not."
It seems to me right that this matter should be evaluated taking together all the three periods covered by the Revised Summary, that is on the basis of the full 20 months from 19 December 1997 to 10 August 1999. I will summarise the position on the five companies as respects which figures appear in the Summary.
i) HTH. HWM made total payments to HTH of £2,881,955 against invoices totalling £6,293,417 (D7 and C7 in the Revised Summary). Manifestly there can be no complaint about that. (The claimants' complaint in relation to inter-company transactions between HWM and HTH concerns a lack of receipts by HWM from HTH, not an excess of payments to HTH, and is considered in the next section of this judgment.)
ii) KPH. The Revised Summary shows total payments by HWM to KPH of £924,501 against invoiced purchases of £419,205 (H7 and G7). This is apparently an aggregate overpayment of a little over £0.5m. However, if the figures are recast to take account of all purchases, invoiced and uninvoiced (in accordance with Mr Lazarus's acceptance that it is right to do that), and if total purchases are assumed to have been Mr Middleton's figure of £1.7m, there was an underpayment of around £776,000. As Mr Lazarus acknowledged, there can be no complaint about that. Mr Middleton's £1.7m is a round figure, and is an estimate, but, if I accept his evidence as being truthful and not fabricated (as I do), there has been no challenge to his figure of £1.7m as the best estimate available.
iii) KPHPH. This second PH in this abbreviation stands for Plant Hire. The Revised Summary records two payments to KPHPH aggregating to £67,326. I imagine that there is some information about these payments somewhere in the voluminous documentation before the court, but I cannot remember them ever being referred to, and I do not know what they were about. I apologise to Mr Lazarus if I am wrong, but I do not think that he made any specific allegations about inter-company transactions between HWM and this company. It is possible that, if I had upheld claims 2 and 3 in principle in relation to payments to KPH, Mr Lazarus would have sought some recovery also in relation to the sums paid to KPHPH. I can, I think, assume that, since I do not uphold claims 2 and 3 in relation to payments to KPH, no independent claim for relief is pursued in relation to KPHPH.
iv) Nivek. The Revised Summary shows that payments totalling £206,367 were made by HWM to this company. The evidence was unclear about them. Nivek seems to have been the company which took out insurance for other companies in the group and paid the insurance premiums. When Mrs Hardman prepared her witness statement she assumed that Nivek had continued to pay the premium for HWM's insurance, and that HWM was reimbursing Nivek for it. Later she saw some documents which showed that that was not correct. Nivek was only paying the premiums for the insurances of HTH and KPH. She now believed that HWM was reimbursing to Nivek the premiums, or part of them, for the insurances of those companies, and was doing so in part discharge of the amounts which it owed to those companies. In my view this was an untidy loose end of the evidence, but, given my decision that claims 2 and 3 cannot stand as regards the payments which HWM made directly to KPH and HTH, I do not think that Mr Lazarus would wish to press an independent claim as respects the payments made to Nivek. In any case, even if there are continuing obscurities as regards HWM's payments to Nivek, the observations which I made earlier about the absence of any evidence of the formation or existence of a fraudulent conspiracy, and about the unlikelihood of one, have the same force in relation to inter-company transactions involving Nivek as they do in relation to transactions involving KPH and HTH.
v) Harfield. This company was called Harfield Brothers (Contractors) Ltd. It is still in existence. The Revised Summary records a payment to it by HWM of £64,851. Mrs Hardman states that it 'did small works and surfacing'. What I said in (iii) above in relation to KPHPH applies, with appropriate adaptations. I recall nothing from the hearing in relation to the £64,851, and as far as I know Mr Lazarus does not seek any relief in respect of it independently of his much more substantial claim (which in my judgment fails) as respects payments by HWM to KPH.
- The cumulative effect of all of the foregoing is that I do not accept claims 2 and 3 in so far as they seek relief in respect of payments made by HWM to KPH or others of the HHHL companies.
Claims 2 and 3: the claimants' allegations that HWM improperly continued to supply goods and services to HHHL companies when those companies were failing to pay HWM's invoices
- This element of claims 2 and 3 is put forward principally in relation to inter-company trading between HWM and HTH. To repeat figures which I have already given and which are taken from the Revised Summary, over the entire 20 months HWM invoiced HTH for supplies of goods and services to it for an aggregate of £5,238,307, and was paid only £945,587 (A1 and B1 in the Revised Summary). It can be seen from the figures for the three separate periods in columns 2, 3 and 5 that in the claim 2 period HTH paid only 16.1% of the invoices rendered to it, in the claim 3 period only 22.2%, and in the final period to 10 August 1999 zero%. These figures need to be qualified to some extent. Under the terms of trade annexed to the inter-group services agreement HTH was entitled to a month's credit before having to pay HWM's invoices. Further, for most of the final period the revisions to the inter-group services agreement which I mentioned in paragraph 26 above were in force: they provided for mutual set off of inter-company charges, and, as A5 and C5 in the Revised Summary show, HTH's purchases from HWM were lower than HWM's purchases from HTH. In addition, everyone agrees that HTH's cash flow was in a disastrous condition. It is not surprising that HTH made no payments to HWM in the final period.
- Nevertheless, the earlier pattern was one of HTH being allowed credit, or taking credit, significantly in excess of that provided for by the contractual terms of trade between it and HWM, and of HWM allowing that situation to continue. The claimant's case is that HWM should have withdrawn credit long before the end. That is a tenable point of view, although I shall have some observations to make about it. However, the claimants continue by alleging that the non-withdrawal of credit was part of the alleged fraudulent conspiracy for which the three individual defendants were responsible. I cannot see that as a maintainable proposition. I will discuss various aspects of these contentions by the claimants in the following paragraphs.
- I start by observing that I did not detect any serious challenge to the proposition that the main reason, if not the only reason, why HTH did not pay HWM's invoices on the dates when they ought to have been paid was that HTH's cash flow was so bad that it simply could not afford to pay them. A reason why the cash flow was bad may have been because of Mr Hoare's profligate expenditure on new vehicles (as Mr Vincent suggested), but that does not change the position that HTH could not afford to pay HWM's invoices except to a very limited extent. Mr Lazarus points out that, while HTH was paying only a low proportion of HWM's invoices, HWM was paying, not all of HTH's invoices, but a significantly higher proportion of them. That is true, but the inter-group services agreement obliged HWM to pay all the invoices in cash immediately on presentation. That may have shown that the inter-group services agreement needed to be changed. In fact it was changed in May 1999, too late to make any real difference. To leave it that late may have been a business misjudgement (hardly a matter on which I feel qualified to express any confident opinion), but even if it was it is extremely hard to see a fraudulent conspiracy between the three defendants as the cause of what in fact happened.
- The board met monthly. The board packs and the minutes show that from about the middle of 1998 onwards the board started to have concerns about HWM's cash flow, and about the way that inter-company debt was building up with the HHHL companies owing significantly more to HWM than it owed to them. I must immediately record that the figures which the board was considering are now known not to have been correct. This is an aspect of the falsified accounting records issue, which I will explain in the next section of my judgment: the truth is that the relative balances of inter-company indebtedness were adverse to HWM to a far greater extent than was being reported to the board. Nevertheless the board did receive reports of adverse inter-company balances, and discussed them with some anxiety. It is worth remembering that two of the three defendants were not members of the board. Mr Hazell did attend board meetings, but he attended mainly to speak to the management accounts. There is no evidence that he was an active participant in discussions about the problem of adverse inter-company balances. As regards Mr Hoare, that was not the sort of thing which he would be likely to immerse himself in, and there is no suggestion that he contributed significantly to the board's discussions about it. The directors who were most concerned about the issue seem to have been Mr Vincent and Mr Grassby. The board was concerned about the adverse balances reported to it (though probably not as concerned as it would have been if the true balances had been reported), but there is no indication in the minutes, nor was there in the oral evidence, that an acceptable solution might have been for HWM to withdraw credit from HTH.
- It seems to me that for HWM to have withdrawn credit would have involved questions of business judgment which were scarcely, if at all, explored in the trial. A withdrawal could easily have meant that HTH would have gone out of business: HWM was the largest user of HTH's fleet of lorries and trucks. A corollary of HWM withdrawing credit would surely have been that HWM would stop paying HTH's invoices for the use of the HTH vehicles until HTH started to pay its invoices from HWM. Since HTH apparently could not pay those invoices in full, HWM, upon its stopping paying HTH's invoices, would risk losing the use of HTH's vehicles for the purposes of its own (HWM's) business. Could the business have survived if it was not able to call on HTH's vehicles? What would have been the impact on HWM's business if HTH had carried on trading, but had operated its fleet of vehicles in competition with HWM instead of in conjunction with it? What would have been the implications of the system whereby HWM's and HTH's fleet of vehicles were in practice administered very much as one fleet, with a single transport desk serving and administering them both?
- I do not know the answers to any of those questions, but it seems to me that they could realistically have arisen from the course of action which the claimants now say should have been followed. For HWM to have withdrawn credit from HTH seems to me to have been far from the obvious course of action which it is presented in the claimants' case to have been. Mr Lazarus asked some questions of Mr Hoare about a hypothetical situation where one trader regularly pays the invoices of another, but the other trader consistently fails to pay the invoices of the first trader. Mr Hoare's answers stopped some way short of what Mr Lazarus was angling for, but in my view what he said was thoughtful and interesting:
"I would not have said it was an acceptable situation to continue, but we would be working along with them, trying to reduce the debt and trying to get our money in, because the experience in the trade is you are better to work along with people, reduce the debt and bring it into order.
[A little later, on a slightly different situation]: I would not have been pleased, but I have helped an awful lot of people who have been in these positions over the years, Mr Lazarus. We have helped them to negotiate their way down and sort themselves out. One or two of them have caught me over the years as well where they have just pulled the rug and caught us for it. Mostly we have tried to help people.
Q. You would not have thought that was an acceptable situation for a moment, would you?
A. No, but they happen. Within companies they happen."
- A particular implication of the problem created by HTH's debt to HWM which became important as time progressed was the threat that it posed to the negotiations for HWM's business and assets to be sold to an outside purchaser, initially Onyx, later A&J Bull Ltd. Mr Vincent was very much concerned about this. One thing which he said gave me the impression that A&J Bull Ltd wanted to buy, not just the business and assets of HWM, but also the tipper fleet of HTH. That sounds quite likely to me, though I do not recall it coming up elsewhere in the trial. Mr Vincent was very anxious that HTH should continue in business, and clearly feared that if there had been a breakdown of the inter-company trading relationship between HWM and HTH the negotiations with A&J Bull Ltd would have been broken off. I see the point.
- Mr Chivers says, and I agree, that this raises a question which was scarcely touched on in the trial. It may be true that HWM, by continuing to allow credit to HTH, allowed a bad debt to increase and in the end recovered none of it. However, HWM did succeed in selling its business and assets to A&J Bull Ltd for over £30m It is arguable that, if HWM had done what the claimants say it should have done and cut off credit from HTH, that would have prompted a chain of events which would have ended with A&J Bull Ltd withdrawing from the negotiations. On that basis was the irrecoverability of the bad debt owed by HTH truly a loss? If it enabled HWM to sell its business for a good price where otherwise it might not have been able to sell it at all, the overall result may have been profitable to HWM.
- The points which I have made in the foregoing paragraphs seem to me to show that the claimants' assertion that HWM should have withdrawn credit from HTH when HTH was consistently failing to pay HWM's invoices raises difficult and complex issues which the claimants' case scarcely touches on. If this action was a negligence claim against the directors of HWG (who would include Mr Vincent and Mr Grassby) it would be a difficult claim to win. When it is formulated as part of claim that Mr Hoare, Mrs Hardman and Mr Hazell brought the result about as a deliberate part of a fraudulent conspiracy which had started very soon after the investment was made back in December 1997, it seems to me that the argument is virtually unmaintainable. I do not accept it.
- I must, however, add one qualification to what I have just said. I have up to now not taken into account the falsified accounting records issue. It could be said against me that that is somewhat unreal, because part of the claimants' argument is that the continued extension of credit by HWM to HTH would not have happened if the accounting records had not been falsified. I therefore now turn to the falsified accounting records issue.
The falsified accounting records issue
- Over time as the investigations and preparations for this case proceeded three respects in which incorrect figures were recorded in the documents and records of HWM have been discovered.
i) Receipts of HWM from HTH and KPH were recorded in HWM's computerised sales ledger or ledgers in respect of HTH and HWM. The claimants have discovered that in the year to 31 March 1999 (the claim 3 period) a significant number of entries were made in the sales ledger as respects which other records show that the amounts recorded as received were not in fact received at all. (The other records include the cash book, maintained, and accepted as having been accurately maintained, by or under the control of Mrs Hardman.) These entries in the sales ledger have sometimes been referred to as the 'false postings'. If I have understood the figures correctly, the actual receipts from HTH and HWM in the year were £887,776.92 of which only £78,092.90 were posted to the ledger correctly. There were further postings of £3,814,763.67. All of those postings were false in the sense that the amounts recorded as received were not received when the ledger said they were. However there were amounts totalling £809,693.92 which were in fact received but not correctly posted. (£887,776.92 less £78,092.90 – both of which figures are given earlier in this paragraph) is £809,693.92.) Therefore the receipts posted to the ledger exceeded the amounts actually received by £2,926,986.85. A significant effect of this was that the amounts still owed by HTH and KPH to HWM were shown by the ledger to have been much lower than they actually were.
ii) The board packs for the monthly board meetings of HWG gave information about the amounts of inter-company indebtedness. The amounts reported to the board showed HTH and KPH as owing money to HWM, but considerably less than they in fact owed. I assume that this reflected the false postings (except to the extent that the HWM had received actual sums which were not posted – corresponding to the £809,693.92 given in (i) above as respects the whole accounting year).
iii) When the draft balance sheet at 31 March 1999 was being prepared the understatement in the sales ledger of the amounts owing by HTH and KPH, if reflected in a balance sheet which carried all other assets and liabilities at their true values, would produce an account which would not balance, and which would thereby expose to the auditors that something irregular had happened. So (according to the claimants' analysis, which the defendants acknowledge could well be right) it was necessary to manipulate some of the other figures which the accountants and the auditors would expect to include in the balance sheet so as to conceal the falsely low figures for the inter-company debts owed by HTH and KPH. I will not describe all the alleged manipulations which the claimants say were adopted to achieve that effect, but the main one on which the claimants place particular reliance is that the total sum for the aggregate of all trade debtors was shown as substantially more than it in fact was; and this was achieved by a forgery which, although crude, might not have been detected. There was a computer print out of all the trade debtors, and it extended to something like 50 pages. On the last page the aggregate of all the hundreds of separate entries was given, ostensibly being the total which the computer programme had calculated automatically. In fact the last page had been doctored on the computer. The true total was £4,826,421, but the figure shown on the last page had been altered to £5,703,076.
- The claimants say that all of that was the doing of Mr Hazell. The defendants accept that most of what the claimants' investigations have disclosed does indeed appear to have happened, and that the matters described at (i) and (iii) were clearly improper. However, they say that Mr Hazell had nothing to do with any of them. If they have to say who should be blamed, they suggest Mr Vincent. They also point out that there is absolutely no evidence that Mr Hoare or Mrs Hardman knew anything about the matters which I have described. In the circumstances I need to outline what is known about the responsibility for them.
- As regards the false postings, the sales ledger was maintained on computer by clerks who worked in one of the buildings at Wallington. It was not the building in which Mrs Hardman worked. Her staff were involved in maintaining the purchase ledger, but not the sales ledger. The false postings were made in the sales ledger. Some of the false postings were made by Mr Roger Ralf. His main function was to be a credit controller for HTH, but he did have access from the computer on his desk to, among other things, HWM's sales ledger in which the false postings were made. He remembered receiving telephone calls on five or six occasions from Mr Vincent, who told him that he was calling from Hazell Minshall's offices. Mr Vincent asked him to make some of the postings which are now known to have been false postings, and he made them. Since Mr Ralf regarded the requests as unusual he annotated them in the computer with three sets of initials: his own, RR, Mr Vincent's, TAV, and Mr Hazell's, RH. He added RH because the call had come from Mr Hazell's firm's offices. Mr Vincent did not say to him that he was making the calls at the request of Mr Hazell. Mr Ralf also said that there were some entries of postings which bore the same initials, but which had been made on Sundays or on public holidays. He had not made those entries himself. Some other entries of postings now known to have been false bore no initials at all. As I understood Mr Ralf's evidence, he had not made those entries.
- Some of the false postings were made on 16 August 1998, which was a Sunday. Mr Scott, a computer specialist who worked at Wallington, said that he made those postings at Mr Vincent's request. He added: 'I felt that something was not quite right.'
- Mr Ralf's evidence and Mr Scott's evidence was not disputed. There was, however, a dispute of evidence between Mr Vincent and Mr Hazell. Mr Vincent agreed that he made the telephone calls which Mr Ralf described, but he said that he did so at the request of Mr Hazell. He had no reason to suppose that there was anything false about the postings which he was asking Mr Ralf to make. Mr Hazell's evidence was that he knew nothing about the false postings. He had never seen them until details of them were supplied by the claimants in Voluntary Further Information served in July 2005. He did not ask Mr Vincent to instruct Mr Ralf to make any entries in the sales ledger. He never himself telephoned Mr Ralf to request him to make any ledger entry.
- So much for the evidence relating to the false postings. I move on to the information about inter-company debtors in the board packs (item (ii) in paragraph 124 above). This information was in the part of the board packs as respects which the responsibility for presenting the matter at the meetings was Mr Vincent's. He said that the figures were provided to him each month by Mr Hazell. I think that Mr Hazell would accept that the figures may have been provided to Mr Vincent by him or by his staff at Hazell Minshall, but he would add that the figures had been produced simply from the information which had been provided to his firm by the company. On this detailed aspect of the matter I do not think that there is any appreciable difference between the two of them. The figures for inter-company indebtedness to be placed before the board probably were compiled by Hazell Minshall's staff, but, given that they were working from the entries in the sales ledger which included the false postings, I would expect the figures to have been wrong.
- I move on to item (iii) in paragraph 124 above, the forgery of the total of the trade debtors by doctoring the computer print out so as to show a greater total than the true addition of all the individual figures listed on previous pages. The actual exercise on the computer print out was performed by Mr Scott, the computer specialist whom I mentioned at paragraph 127 above. He did it by scanning a print out of the original last page into the computer, and then altering the total. I am outside my knowledge and experience, but it sounds like quite an easy thing to do. Mr Scott did it on a Sunday, and had been asked to do it by Mr Vincent.
- Mr Vincent agrees, but he says that he had asked Mr Scott to change the total figure because he was persuaded to do so by Mr Hazell. Mr Hazell had asked Mr Vincent to go to his (Mr Hazell's) house, where he urged on Mr Vincent that, if the auditors discovered the misstatement of the amounts owed to HWM by HTH and KPH, the negotiations for the sale of the business to A&J Bull Ltd would be likely to collapse. Mr Vincent was uncomfortable, but in the end he thought that no-one would be harmed by what Mr Hazell was asking him to do, and he went along with what Mr Hazell wanted. Mr Hazell says that the whole of the evidence which Mr Vincent gave on this matter is a total fiction. He never asked Mr Vincent to cause the alteration to be made.
- There was one other minor item of evidence about this. In July of 1999 the investors instructed Postern to investigate the state of HWM's accounts and records. (See paragraph 27 above). The investigation was partly conducted by Mr Woodley. Mr Woodley gave evidence that he was suspicious of the figure for total debtors in the draft balance sheet as at 31 March 1999, because it was so large. He spoke to Mr Vincent about it, and Mr Vincent told him that the total was wrong. If all the individual amounts were added up it would be seen that the total was wrong. Mr Woodley agreed in cross-examination that Mr Vincent did not say to him anything about Mr Hazell having been involved in the falsification of the total for trade debtors.
- So what am I to make of this remarkable feature of the case? There can hardly be any doubt that some improper and suspicious things happened. It looks as if someone was conscious that the indebtedness owed to HWM by HTH and KPH was building up to an unacceptable level, and wanted to conceal that fact. Conceal it from whom? Presumably from the board of HWG, and I suspect particularly from the representatives of the investors on the board. The most prominent such representative was Mr Grassby. The concealment was achieved in the first instance by making false postings to the sales ledger, showing HWM as having received payments from HWM which it had not received. Those false postings led to significantly lower levels of inter-company indebtedness being reported to the board month by month. The board was still concerned by the build up of the indebtedness from companies in the HHHL group, but would without doubt have been much more concerned if it had known the true figures. Then it was necessary to try to conceal the truth from the auditors when the accounts of HWM to 31 March 2003 were being prepared and audited. The auditors for those accounts were PricewaterhouseCoopers. So, among other things, the forgery of the total amount for debtors was resorted to.
- Mr Lazarus submits that this shows that the conspiracy which he asserts was indeed taking place, and that the conspirators were trying to conceal the way in which they had caused and allowed HWM's funds to be shifted across to the HHHL companies over a period of time. What Mr Lazarus contends for in that respect is a possibility. But the problem is the lack of any clear and convincing evidence linking the suspicious events with the defendants. There is no evidence at all linking Mr Hoare and Mrs Hardman with those events, and as regards Mr Hazell the only evidence is statements by Mr Vincent that things which he admits he did were done at the instigation of Mr Hazell. Those statements are flatly denied by Mr Hazell, and there is no independent corroboration either of Mr Vincent's statements or of Mr Hazell's denials.
- Mr Vincent's telling Mr Woodley about the forgery might be viewed as some indication that Mr Vincent was not the person primarily responsible for what was done, but that is much weakened by the evidence that Mr Vincent did not suggest to Mr Woodley that Mr Hazell had anything to do with it. In support of the contention that Mr Vincent was the person responsible it can be said, and was said by Mr Chivers, that it was Mr Vincent who made telephone calls to Mr Ralf to request him to make some of the false postings, that it was Mr Vincent who instructed Mr Scott to doctor the last page of the print out of the debtors, and that on neither occasion did he say that he was acting at the instigation of Mr Hazell.
- Another straw in the wind is that some of the false postings appear not to have been made by Mr Ralf. Who made them? There is no evidence about it, but it would have been easier for Mr Vincent than for Mr Hazell to make them. Mr Ralf's computer, through which access to HWM's sales ledger could be obtained, was (I believe) in the building which also contained Mr Vincent's office. Mr Hazell spent most of his time 30 miles or so away. Further, he said (and no-one contradicted this) that he did not know how to operate a computer. One of the mini-issues which were addressed from time to time in the trial concerned the level of Mr Vincent's computer skills. He said that he could do some things but not many. Some other witnesses said that, as they recalled, Mr Vincent was a competent operator of computers.
- The allegation that a person was responsible for making deliberately false entries to a company's books and records is a serious one. Admittedly in this case false entries were made, and somebody must have been responsible for them. But in my view I would need far clearer evidence than I have before I could make a finding as to who that person was. (Compare re H (minors) [1996] AC 563, and the discussion in Phipson on Evidence, 16th Edition, at pp 155 and 156.) I cannot proceed on the basis that Mr Hazell was responsible for the false postings, for knowingly false information being given to the board, and for the forgery of the debtors total. It follows that, in my judgment, the falsified accounting records issue does not add any support to the claimants' case.
- I would like to add that what I have said does not imply a finding that Mr Vincent was responsible for the falsifications. The correct position is that I do not know who was responsible, and I do not feel able to make any sort of confident inference about it either. The burden is on the claimants positively to make good their case. I do not think that they have succeeded in doing that so far as their allegations on the falsified accounting records issue are concerned. That does not mean, and I do not say, that the defendants have positively made good their contentions in response, that Mr Vincent was the person responsible for the false entries.
Conclusion on claims 2 and 3
- For all of the reasons which I have explained at considerable length in the foregoing sections of my judgment, I conclude that claims 2 and 3 fail. I add for completeness that, if there would otherwise have been liability under either or both of those claims, the defendants contend that they would have been relieved from it by a deed of release entered into as part of the arrangements whereby HWM's business and assets were sold to A&J Bull Ltd. Their interpretation of the deed of release is not accepted by the claimants. Since in my view there is no liability under claims 2 or 3 anyway, the deed of release arguments do not arise, and I say no more about them.
- I have (at last) reached the stage when I have covered all the matters which I believe need to be addressed in this judgment, and I have no further observations to make.
Table of Abbreviations, Dramatis Personae, etc
| A&J Bull Ltd |
Unrelated company which on 10 August 1999 purchased the business and assets of HWM. |
| BancBoston |
One of the two investors. |
| Bank of Scotland |
Bank which, at the time of the investment, made a loan of £9m to HWG or HWM and provided HWM with an overdraft facility. HWM banked with Bank of Scotland after the investment. |
| Bryant, Mr |
Chartered Accountant who audited the accounts of client companies of Hazell Minshall; a witness for the defendants (in particular for Mr Hazell). |
| Celet Properties Inc |
Panamanian company said to have been managed in Jersey; owned the J and W assets and sold them to HWM on 18 December. |
| Chivers, Mr |
David Chivers QC, leading counsel for the defendants. |
| Coe, Mr |
Peter Coe, development director of HWG and HWM from 1995 until August 1999; a witness for the defendants. |
| Davies, Mr |
Edward Davies, junior counsel for the defendants. |
| Elliott, Mr |
William Elliott, an employee of HWM from August 1998; currently managing director of HWM and HWG, and in general charge of the claimants' case in the present proceedings; a witness for the claimants. |
| Grassby, Mr |
Kevin Grassby, a director of Nash Sells; a director of HWM from 18 December 1997; a witness for the claimants. |
| Hardman, Mrs |
Karin Hardman; third defendant; an employee of KPH at relevant times; bookkeeper for the principal companies involved in the case, and responsible for the day to day management of their bank accounts; a witness for herself and the other defendants. |
| Hazell, Mr |
Richard Hazell, second defendant; proprietor of Hazell Minshall; accountant and financial adviser to Mr Hoare and his companies at material times; a witness for himself and the other defendants. |
| Hazell Minshall |
Hazell Minshall & Co, accountancy practice owned by Mr Hazell; its offices are in Over Wallop. |
| HHHL |
Hoare Hughes Holdings Ltd; holding company wholly owned by Mr Hoare; owner at material times of HWM, HTH and Nivek; until 18 December 1997 also the owner of HWM. |
| Hoare, Mr |
Kevin Hoare; first defendant; through HHHL 100% owner at all material times of HTH, KPH and Nivek, and until 18 December 1997 of HWM; a shareholder in HWG from 18 December 1997; a director at all material times of HHHL, HWM, HWG, HTH, and KPH; a witness for himself and the other defendants. |
| HTH |
HT Hughes & Sons (Transport) Ltd; a transport company which at all material times was wholly owned by HHHL, and thus indirectly wholly owned by Mr Hoare. |
| HWG |
Company whose name at the times when the issues in this case arose was Hughes Waste Group Ltd; now called NBH Group Ltd, and under that name the second claimant in the present case; the vehicle for the investment, in consequence of which it became and remains the sole shareholder in HWM (now called NBH Ltd). |
| HWM |
Company whose name at the times when the issues in this case arose was Hughes Waste Management Ltd; now called NBH Ltd, and under that name the first claimant in the present case; at material times a company which carried on business in waste management; originally wholly owned by HHHL; became owned by HWG as part of the investment; sold its business and assets to A&J Bull Ltd on 10 August 1999. |
| Investment, the |
The series of associated transactions on 18 December whereby, among other things, (1) HWM became a subsidiary of HWG, which in its turn was owned partly by Mr Hoare and partly by the investors; (2) the investors subscribed £9m of capital into HWG and HWM; (3) Bank of Scotland made large loans to HWG and HWM and provided an overdraft facility. |
| Investors, the |
Nash Sells and BancBoston, venture capital investors through HWG into the business of HWM. |
| J and W assets |
Certain landfill sites and landfill rights which were sold by Celet to HWM for £4.4m as one of the transactions comprised in the investment. |
| KPH |
KP Hoare Contractors Ltd; engineering and contracting company; at all material times wholly owned by HHHL and thus indirectly wholly owned by Mr Hoare. |
| Lazarus, Mr |
Michael Lazarus, counsel for the claimants. |
| Lloyds TSB |
Bank for HTH and KPH at all material times; bank for HWM until the investment and for some time after it (during which subsequent time Bank of Scotland were also a bank for HWM, as it continued to be after HWM's account with Lloyds TSB was closed.) |
| Merrick, Mr |
Non-executive director of HWM (at the investors' request) from January 1998; a witness for the claimants. |
| Middleton, Mr |
John Middleton; managing director of KPH from 1996 to 1999; a witness for the defendants. |
| Nash, Mr |
Chairman of Nash Sells; a witness for the claimants. |
| Nash Sells |
Venture capital company; one of the two investors. |
| NBH Group Ltd |
Second claimant; see HWG. |
| NBH Ltd |
First claimant; see HWM. |
| Nivek |
Nivek Holdings Ltd; wholly owned subsidiary of HHHL; at material times used to effect insurances for the benefit of other companies in the HHHL group. |
| Onyx |
Company with a large business in waste collection and management; for a time a party to negotiations for a possible sale to it of HWM or HWM's underlying business and assets. |
| Postern |
A company specialising in turnabout solutions for companies in financial difficulties. |
| Ralf, Mr |
Roger Ralf; credit controller employed by HTH; made certain postings on HWM's sales ledger relating to HTH and KPH; a witness for the defendants. |
| Revised Summary, the |
Summary of inter-company trade and cash flow 19/12/97 – 10/8/99; annexed at the end of the judgment. |
| Rose, Mr |
Michael Rose; operations director of HWM; not a director of HWG; a witness for the claimants. |
| Scott, Mr |
Percy Scott; computer specialist working in the offices at Wallington; a witness for the defendants. |
| Vincent, Mr |
Terry Vincent; managing director of HTH and of HWM; a witness for the claimants. |
| Woodley, Mr |
Director of Postern; a witness for the claimants. |
| Woodsend, Mr |
For a short time in the later part of 1998 finance director (so called, but not a member of the board of HWG) of HWG and HWM. |
