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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Sutcliffe v Lloyd & Anor [2008] EWHC 1329 (Ch) (09 June 2008) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/1329.html Cite as: [2008] EWHC 1329 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Royal Courts of Justice Strand, London, WC2A 2LL
		9 June 2008

1. This is the third judgment I have delivered in the continuing litigation between Mr Sutcliffe, Mr Lloyd and MGL concerning the development site at Willes Road, Leamington Spa ("Willes Road"). On this occasion there is also before me the litigation that has arisen in relation to the other development site mentioned in my earlier judgments at Dunchurch Road, Rugby ("Dunchurch Road"). This consists of a petition presented by Mr Sutcliffe as holder of 50% of the issued shares in Nimega Ltd ("Nimega") against Mr Lloyd as the other 50% shareholder for the winding up of Nimega either upon the ground that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of Mr Sutcliffe: or alternatively upon the ground that it is just and equitable to wind the company up. The defence to the petition includes a Part 20 claim by Mr Lloyd and by Amanda Wakelin Lloyd (Mr Lloyd's personal and business partner) ("Ms Wakelin Lloyd") in which they seek a declaration that Mr Sutcliffe holds his 50% shareholding in Nimega on trust for them (or in the alternative an order requiring him to transfer that holding to them because the consideration for which the shares were transferred to Mr Sutcliffe has wholly failed, that it is unconscionable for Mr Sutcliffe to retain them, and that he has been unjustly enriched).
2. All of the relevant background is set out in the judgment handed down on 15 December 2005: and is conveniently summarised in the judgment of Wilson LJ at [2007] EWCA Civ 153 paragraphs 3 to 19. I accordingly proceed directly to a determination of the issues which now arise, making such additional findings of fact as are necessary for that purpose.
3. At the conclusion of my principle and supplemental judgments I declared that there had arisen an equity in favour of Mr Sutcliffe which needed to be satisfied by MGL and might (upon enquiry) need to be satisfied by Mr Lloyd personally. The curious form of this relief was dictated by an earlier case management decision which had severed establishment of the equity from satisfaction of the equity. Accordingly the issue now before me is how the equity should be satisfied and by whom.
4. As to the applicable principles, I do not consider that there is any real doubt. The task is to identify the minimum equity to do justice (the qualification "minimum" not requiring the court to be constitutionally parsimonious, but simply being an express recognition of the need to do justice not only to the claimant but also to the defendant): Jennings v Rice [2002] EWCA Civ 159 at paragraph 48 per Robert Walker LJ. Relevant factors include the nature of the expectation created by the defendant, the detriment suffered by the claimant in reliance on those representations, the degree to which the defendant's conduct can properly be said to be unconscionable, and the need for some proportionality between the claimant's expectation and his or her detriment: see Cobbe v Yeomans Row Management Ltd [2006] EWCA Civ 1139 at paragraph 1.26 per Dyson LJ. No authority bearing upon the second question (who should satisfy the equity) was drawn to my attention: but I consider the principles tolerably clear. The theory upon which the doctrine proceeds is that of "estoppel": the customary freedom of disposition of the owner of the property is restrained by equity, which considers him to be estopped on grounds of conscience from dealing with it inconsistently with the equitable rights which have been created. The equity must therefore be satisfied by the owner of the relevant property (who may be the person who gave the relevant assurances, or who may be a volunteer or other successor bound by the equity). To this may be added the established principle that where a company is the creature of an individual and realistically to be regarded as a mask which he holds before his face in an attempt to avoid recognition by the eye of equity, then the equitable remedy will be granted directly against the participator: see Gilford Motor Co v Horne [1933] Ch 935 and Jones v Lipman [1962] 1 WLR 832 (cases not cited to me but which are uncontroversial).
5. My earlier judgments contain the following material findings and holdings:-

(a) the relevant understandings were reached between Mr Sutcliffe and Mr Lloyd personally but from the outset they intended that the Willes Road and Dunchurch Road projects should be carried out through a joint venture company;

(b) Mr Sutcliffe and Mr Lloyd agreed to use Nimega for that purpose: it was to Nimega that the owner of Willes Road granted the option to purchase it for £120,000 plus vat;

(c) this price represented the sum which the owner was prepared to accept for Willes Road without exposure to the market, and it did not include any element of "discount" to represent the settlement value of compensation claims that Mr Lloyd and Ms Wakelin Lloyd were at that time advancing against the site owner;

(d) in the minds of Mr Sutcliffe and of Mr Lloyd the option price probably represented a discount on true open market value of about £35,000 which was the salary it was subsequently agreed Mr Lloyd could draw in recognition of work previously undertaken in securing the options;

(e) the initial joint venture arrangements were altered by an understanding reached at the time of the entry of a Shareholder's Agreement on 15 January 2002 between Mr Sutcliffe and Mr Lloyd as shareholders in Nimega (forty nine shares in Nimega having been transferred by Ms Wakelin Lloyd to Mr Sutcliffe on 10 January 2002, and one share by Mr Lloyd on that date also);

(f) the Shareholder's Agreement recognised that Willes Road would be purchased by Mr Lloyd and Ms Wakelin Lloyd, though very shortly thereafter they incorporated MGL for that purpose;

(g) Mr Sutcliffe funded Nimega so as to enable it to make a commercial loan to MGL (and to facilitate drawings by Mr Lloyd intended to be used for the further funding of MGL) in connection with MGL's acquisition of Willes Road;

(h) notwithstanding the entry of the Shareholder's Agreement there remained a (modified) understanding that Mr Sutcliffe should participate not in Willes Road itself but in the profit arising from the development of the site, in connection with which Mr Sutcliffe's business was to build the flats at cost;

(i) the mechanism by which it was intended that this should be achieved was the entry of a building contract between Mr Sutcliffe's business and MGL which it was anticipated would contain some formula for the calculation of the net development profit and the payment of a profit share by MGL to Mr Sutcliffe's business;

(j) by the time the negotiations relating to this contract had broken down Mr Sutcliffe had by the selection, coordination and supervision of a professional team (whom he on occasion instructed in the name and at the expense of MGL) coupled with his own input prepared for MGL a residential development project at Willes Road of a quality and density higher that might have been expected.

6. At this hearing I again received the evidence of Mr Sutcliffe and of Mr Lloyd: though it was notable that upon this occasion each was more partisan than on the last (possibly in consequence of my first judgments and the appeal therefrom). I also heard the evidence of Ms Wakelin Lloyd (although that evidence was principally directed to her own Part 20 claim): unsurprisingly she aligned herself entirely with Mr Lloyd. I say "unsurprisingly" not because I attribute to her an intention to come to court and to lie, but rather because the events with which she was dealing are of such significance that they must inevitably have been the subject of endless conversations between herself and Mr Lloyd so that independent (rather than shared) recollection is not to be expected. I also received the valuation report of Mr K. T. Parsley BSc FRICS ACIArb, the single joint expert witness. I propose to accept his evidence so far as it is consistent with the facts as I have found them and insofar as it is internally coherent.
7. Adopting that approach I make the following findings:-

(a) Although Willes Road was sold in a state of decontamination fit for commercial use, the prospect of a viable commercial development was limited and a potential purchaser was likely to have had an eye on the prospect of obtaining residential planning permission;

(b) Such a purchaser would, however, have adopted a cautious approach to the value attributable to the hope of residential permission because the standards of decontamination required for residential development are higher than those for commercial development;

(c) That consideration would have inclined a prospective purchaser to think in terms of a development of flats (which would be constructed off a concrete slab and vapour proof membrane and with no gardens, thereby limiting exposure to contaminated land);

(d) In June 2002 when MGL acquired Willes Road it had an open market value of £240,000;

(e) In August 2002 after the grant of planning permission for nine two bedroom flats with nine underground parking spaces (but with other approvals outstanding) Willes Road had an open market value of £465,000;

(f) With the grant of subsequent approvals this rose to £560,000 by February/March 2003 (when the split occurred);

(g) If the planning permission had been for only six flats the open market value in August 2002 would have been only £215,000. But I regard this as the least secure and most suspect of Mr Parley's valuations because it continues to assume the absence of lift provision, (which I consider a smaller development would have permitted), it makes no reduction for build costs, it seems to allow no enhancement for the provision of visitor parking, and it has the curious consequence that the actual grant of planning permission reduces the value of the land below hope value;

(h) The conventional developer's profit on a development would have been 15%;

(j) The total construction costs calculated as at February 2003 were estimated by Mr Parsley at £878,000 for the nine flat development, but it is not clear whether this figure is "at cost" or whether it includes an element of builder's profit. Since the other cost heads used by Mr Parsley plainly relate to profit costs and since he does not qualify the building costs in any way I shall assume that the construction costs also include a profit element: and I shall further assume (since this is the only profit margin referred to in Mr Parsley's or any of the other valuations undertaken in the course of development) that this is also 15%;

(k) It follows from this that I would analyse Mr Parsley's opinion of the building costs (in very approximate terms) as comprising £750,000 direct costs and £130,000 profit: and I would propose to compare that with such other contemporaneous material as exists (which suggests net build costs of £800,000 to £810,000). I therefore find the net building costs would have been in the range £750,000 - £800,000 and the builder's margin to be £130,000.

8. Turning from the expert evidence to that of the parties and to Miss Wakelin Lloyd I make the following findings:-

(a) I have already found and held that Mr Lloyd unconscionably resiled from his promise that Mr Sutcliffe should participate in the profits of the development at the end of March 2003;

(b) At that time there was in circulation a draft cost plan for the development of nine flats in the sum of £810,000 and a cash flow forecast (revised in October 2002) showing a build cost (which must have excluded any profit element) of £800,000;

(c) After the split Mr Lloyd altered the proposals in two respects. First he amended the plans to turn the separate kitchen and dining room into an open plan space. Second he specified the flats to a very high standard. Mr Sutcliffe, as an experienced builder, would have done neither of these things.

(d) Mr Lloyd then engaged a third party builder to construct the development. I was not shown the terms of the building contract nor was there any convenient statement of sums paid by MGL to the builder under it. But a cursory examination of MGL's accounts (adding outstanding work in progress to purchases made) suggests that the total building costs have been in the order of two million pounds. Since the matter was not the subject of detailed analysis at trial I propose to take that figure as merely indicative, and find that using a third party builder has significantly increased the project costs and significantly reduced the development profit;

(e) What has been built is a three storey residential block of flats consisting of nine two bedroom apartments with lower ground floor basement parking affording nine spaces. The three ground floor flats have the benefit of balconies and terraces: those on the upper floors do not. There are no lifts;

(f) The construction period envisaged by Mr Sutcliffe and Mr Lloyd had been nine months and this is also the assumption adopted by Mr Parsley for the purposes of his residual valuations. It appears from MGL's accounts that the actual period of construction was substantially longer (since there are "purchases" and "work in progress" spreading over three accounting years). But this issue was not explored in any detail at trial (and I again propose to take the accounts as only indicative). My findings accordingly are that if Mr Sutcliffe had undertaken the construction and managed the project the build period would have been nine months: but in his absence and under Mr Lloyd's control it took substantially longer. This, of course, had a significant impact on funding costs and has reduced the development profit;

(g) I accept the thrust of Mr Sutcliffe's evidence that once Mr Lloyd had prevented him from participating in the Willes Road project "he did not allow me to influence what happened, he went ahead recklessly, and you can see the outcome."

(h) The outcome is that flat No. 1 was sold off plan for £299,000, flat No. 7 was sold off plan for £269,000 completing in the summer of 2004, flat No. 5 was sold in January 2005 for £225,000, and flat No. 8 in February 2005 for £245,000. No other flats have been the subject of commercial sales.

(j) At the date of the trial four flats (No.'s 3,4,6 and 9) remained on the market with a combined asking price of £1.14 million, and with a prospect of their achieving about a million pounds;

(k) Flat No. 2 was bought by Mr Lloyd himself. By reference to the prices achieved for Nos. 5 and 8 Mr Lloyd considered that a fair price would be about £252,000. He needed a 100% mortgage from a sub-prime lender. On the advice of brokers, in order to achieve the lender's 85% LTV ratio the transaction was structured with a headline price of £315,000 but with a "deposit gift" of 5% and a 10% "cash back". It should be said that Mr Lloyd was given to understand that this was an entirely proper arrangement well understood by his lenders. It was put into effect. Mr Sutcliffe is concerned that Mr Lloyd has obtained some unfair advantage. I expressly acquit him of any such thing. He has paid £267,500 for Flat 2. There is not the slightest hint in the evidence that this is an undervalue, the higher figures having been achieved for ground floor flats which No. 2 is not. What Mr Lloyd has done is, in effect, to ease MGL's cash flow by purchasing one of its flats using his personal credit, and thereby taken upon himself borrowing that was otherwise borne by MGL.

(l) The financial state of MGL on the latest figures available at trial is that it is on the margins of solvency. On the footing that its remaining apartments are valued at £1.15 million pounds and its current bank borrowing is taken at £858,000 then (on the rather uninformative statement of affairs used at trial) MGL has net assets of £223,900. This figure may, however, be regarded as in some doubt because it takes no account of MGL's exposure to liability in costs under orders already made in this litigation and it slightly overvalues the remaining flats. The profit on the entire development itself would appear to be slightly under £100,000.

(m) Because he was not involved in Willes Road Mr Sutcliffe was able to undertake other work during the nine-month build period, work which he told me was profitable. He did not suggest in his evidence that the Willes Road project would have brought him an exceptionally high return, but I assume from his entry into the joint venture arrangement that it had some attraction over simply doing solo development or building contract work.

9. On that material the question arises: what is the minimum equity to do justice? Mr Clegg submits that it is to award Mr Sutcliffe one half of the difference between the option price of Willes Road and its enhanced value in February/March 2003 (£560,000 - £120,000). This sum would be of the order of £220,000 (which Mr Clegg frankly acknowledged may be on the generous side). Mr Taylor submits on behalf of Mr Lloyd that nothing should be awarded because MGL is probably insolvent so there is no profit to a share of which Mr Sutcliffe would have been entitled.
10. I reject each of these submissions.
11. I reject Mr Clegg's submission because the "property" to which the equitable obligation attaches is the profit earned on the development of Willes Road, not the land at Willes Road itself. The promise from which Mr Lloyd resiled was a promise to allow Mr Sutcliffe to participate in the profit earned by the development, not a promise to give him the half share in the value of Willes Road. Moreover to give Mr Sutcliffe an equal share in the enhanced value of the land would be to overlook the fact that although Mr Sutcliffe undoubtedly deployed his skills in identifying a good professional team (a) it was MGL (not Mr Sutcliffe) that substantially paid that team: and (b) the real skill of the team was not in getting residential planning permission (as to which there was a real prospect for any purchaser) but in assembling an acceptable and attractive nine flat development with appropriate parking. I have considered whether in view of this last consideration it is appropriate to compensate Mr Sutcliffe by giving him one half of the uplift arising from the grant of planning permission for 9 rather than 6 units by reference to the only comparable dates I have (£465,000 - £215,000). That would lead to a sum of £125,000. I reject the approach because it again proceeds on the footing that Mr Sutcliffe's expectation was to share in the site enhancement, whereas the expectation was to share in the development profit (and to share the risks).
12. I reject Mr Taylor's submission because although it proceeds on the correct principle (namely that Mr Sutcliffe was ultimately entitled to a share in the development profit) it ignores the fact that the actual development profit achieved has been very substantially brought about by the way in which Mr Lloyd has proceeded with the project (with a longer and more expensive build of flats built to a specification shaped by his inexperience).
13. In my judgment on the evidence (which is barely sufficient for the task) the minimum equity to do justice is that Mr Sutcliffe shall receive the sum of £25,000, that sum to be supported by the personal guarantee of Mr Lloyd. I claim no more for this relief than that it is, in my judgement, the least unsatisfactory solution. I do so for these reasons.
14. Mr Sutcliffe's only expectation was to participate in any profit yielded by the development. In order to participate he had himself to invest nine months work with a value of some £750,000-£800,000: he was effectively investing his builder's profit of £130,000 as risk capital in the development. Mr Lloyd deprived him of that expectation and relieved him of that obligation. Mr Sutcliffe was thereby enabled to undertake other profitable work. Any assessment of what it is "just" to award him must take that into account. It must also take into account that at the time when he was unconscionably deprived of his expectation of a profit share the real risk in the venture from Mr Sutcliffe's point of view (undertaking £750,000 -£800,000 worth of work over a 9-month period at cost) had yet to be incurred.
15. Because he did not have to build at cost the detriment he suffered was to devote his time and skills and to deploy his knowledge and connection in promoting MGL's development at Willes Road rather than his own individual project. The fruit of that skill was to increase the development from 6 to 9 units. (That is the finding in my main judgement: insofar as Mr Parsley's opinion proceeds on a different footing then the opinion is not based on the facts found, and, as Mr Sutcliffe observed in evidence, is overly influenced by knowledge of what has in fact happened, rather than reflecting the potential in 2001/2002). Furthermore, Mr Sutcliffe invested money in Nimega (to enable it to fund MGL's acquisition of Willes Road) albeit at a commercial rate, when (as he told me) he was not in the business of lending money and could make substantially better returns from investing in his own projects. Any equity must be proportionate to that detriment.
16. The equity arises in relation to the development profit: but the only figures that are available are MGL's profit and loss accounts and balance sheet. It would be just to require Mr Sutcliffe to look first to MGL (because that was the expected source of his profit share, the entity with which he intended to contract, and the entity in whose name he undertook the preparatory work). It would not, however, be just to treat MGL's profit and loss account and balance sheet as correctly showing the development profit. Such accounts will reflect other transactions (such as the costs liabilities incurred by MGL in litigating with Mr Sutcliffe, so that the more MGL spends or is found liable to pay, the lower the distributable profit). Furthermore, the profit and loss account and balance sheet are significantly shaped by decisions which Mr Lloyd took (and might yet take): in addition to decisions about the nature of the development he has, for example, chosen to repay his own loan accounts in priority to the bank, thereby influencing the funding costs.
17. It is simply not possible on the available material to make a securely grounded assessment of what would have been Mr Sutcliffe's return had the project proceeded (or to adjust it to reflect the fact that he has not had to make his investment in the project). All that is known for sure is that it was seen as attractively profitable by both Mr Sutcliffe and Mr Lloyd. The only other material I have is that in his witness statement in this action Mr Sutcliffe suggested (though this was never tested) that his share of the profit would have been £350,000 (for which, as I say, he would have to have invested £130,000 leaving him a net £220,000). Given the quality of that material the sensible course in this case is to assess in a very broad way the detriment to him (through the provision of his skills and the opportunity cost of his funding) and then to charge that as an expense in the company's accounts. Although this moves Mr Sutcliffe's entitlement from a share of profits to a charge against profits, I do not think that is unfair because of the extent to which the profits are and have been determined by the actions of Mr Lloyd. (I also take into account that Mr Lloyd took a charge against profits of £35,000 for the work he did on the options). Nor do I think it unfair that (having regard to Mr Lloyd's ability to influence the ultimate development profit and his effective control of MGL) he should have an incentive to ensure that MGL meets its liabilities: that is achieved by the mechanism of a personal guarantee. (I have considered whether it was appropriate to secure Mr. Sutcliffe's entitlement by a charge over MGL's assets as tentatively suggested in paragraph 7 of my main judgement: but Mr Taylor resisted this on the ground that it would be unfair to MGL's general creditors, and I accept this objection).
18. I do not think that this approach undervalues Mr Sutcliffe's contributions so as to render relief on this basis "a travesty" (cf Cobbe v Yeomans (supra)). By the time of the split Mr Sutcliffe had run no real commercial risk such as would warrant earning a real commercial profit. Planning permission (although co-ordinated by Mr Sutcliffe) had been obtained substantially at the expense of MGL. Any potential purchaser would have cautiously factored in the possibility of residential development permission. Mr Sutcliffe's skill was to seize on this and to identify an architect who could develop a difficult site to a high-density. On the bare valuation figures this increased the site value by £250,000 (£465,000 - £215,000): but I regard this figure as suspect. It produced three extra top floor flats with a combined sale price of about £675,000 and (allowing a conventional developer's profit margin 15%) an extra profit of £100,000. The development itself is on the margins of solvency, in part because of market conditions but in part because of the Lloyd's choices. In this context what is in effect "an introducer's commission" of £25,000 (Mr Sutcliffe introduced Mr Manning to the project) seems to me fair and reasonable, given Mr Sutcliffe was able to obtain other profitable building work. It compares fairly with the £35,000 which Mr Lloyd got as "introducer's commission" in respect of the introduction of the options (which, as will appear, had an inherent value of at least £170,000). I therefore assess the equity arising as being the sum of £25,000 payable to Mr Sutcliffe by MGL by 31^st August 2008 (Mr Lloyd having already withdrawn his £35,000 and obtained repayment of his advances to MGL); such payment to be treated as if personally guaranteed by Mr Lloyd.
19. I turn to consider the Petition and the Part 20 claim. These relate to Nimega which owns the Dunchurch Road development site. Certain key facts are not in dispute. Mr Lloyd is the holder of 50% of the issued shares: Mr Sutcliffe is the holder of the other 50% of the issued shares (having acquired 49% from Ms Wakelin Lloyd and 1% from Mr Lloyd at par). On the 15^th of January 2002 Mr Sutcliffe and Mr Lloyd (who were then the two directors of Nimega) entered into the Shareholders Agreement. At this stage Nimega held the benefit of an Option Agreement dated the 31^st of August 2001 for the acquisition of Dunchurch Road for the sum of £165,000 plus VAT: but it did not have the funds to do so.
20. The key material terms of the Shareholders Agreement are these:-

(a) the agreement recited the intention of Nimega to exercise the option on the Dunchurch Road site and to develop the property in accordance with a business plan appended to the Agreement ("the Business Plan"):

(b) Clause 3 of the Agreement provided that notwithstanding anything contained in the Articles Mr Sutcliffe and Mr Lloyd would exercise all voting rights and all other powers and discretions available to them as directors or members of Nimega so as to procure (i) that board meetings should be convened at not less than seven days notice in writing accompanied by an agenda specifying the business to be transacted; and (ii) that the company was operated in accordance with the Business Plan "as updated from time to time by the unanimous agreement of the shareholders" :

(c) Clause 4 provided that the shareholders should exercise all voting rights and other powers and discretions so as to procure that (except as set out in the Business Plan) Nimega would not without the prior written consent of each of Mr Lloyd and Mr Sutcliffe sell or otherwise dispose of any material part of the property of the Company otherwise than in the ordinary course of its business or change the nature or scope of its business as set out in the Business Plan;

(d) Clause 5.1 provided that in the event that any resolution proposed at the directors' meeting was not passed as the result of the operation of clause 4 then any director could convene a General Meeting for the purpose of resolving the matter in issue;

(e) Clause 5.2 then provided that if that General Meeting was inquorate because of non attendance by either Mr Lloyd or Mr Sutcliffe or if the General Meeting was itself unable to arrive at a decision then "a deadlock" should be deemed to have occurred;

(f) Clause 5.3 then provided that whenever "a deadlock" occurred either party could within 30 days serve a notice requiring that Nimega be wound up "whereupon the shareholders shall be bound to take all such steps as may be necessary to wind up the company forthwith". (I interpose to observe that "winding up" is not, of course the only method of resolving deadlock: the parties could have chosen to provide for the dissenter to be bought out at a valuation - but they did not). A simple machinery was set out for the identification of an acceptable liquidator;

(g) Clause 11 provided that each of the shareholders was to make a loan to the company in the sum of £50,000 shortly before completion of the Dunchurch Road purchase;

(h) Clause 16.2 said that the Shareholders Agreement could not be varied or cancelled except with the agreement of Mr Lloyd and Mr Sutcliffe in writing;

(j) The Business Plan annexed to the Shareholders Agreement ascribed certain primary roles to each of the parties (Mr Sutcliffe's being development viability analysis and operational matters, Mr Lloyd's being administration, management and financial) and set out the accepted principle that in the event of dispute "the view of the director covering the area of responsibility concerned be accepted as the overriding view", and that if this was not followed then it was probable that the relationship had broken down and "the company should be dissolved in some previously agreed manner".

(k) The Business Plan identified the first project for Nimega as being "the acquisition and development of [Dunchurch Road]" and provided:-

"….the initial objective and understanding being that [Mr Lloyd] acquired the site and [Mr Sutcliffe] would develop it through his business Milverton Construction. Both parties would charge reasonable expenses, with the net profit being split equally within the framework of the company….".

But (as was common ground at trial) the Business Plan could be amended.

(l) It was provided that if Nimega did not give a 10% return on the net value of the balance sheet then consideration should be given to liquidating the company. But otherwise the Business Plan contemplated that Nimega would continue in being for 5 years, reinvesting the proceeds of the Dunchurch Road development in further projects.

21. The original Articles of Association provided by regulation 26 for the quorum at a board meeting to be one. But it is common ground that sometime in January 2002 new Articles were adopted which had the effect of raising the quorum to two. The Chairman did not have a casting vote.
22. The Petition alleges breach of the Shareholders Agreement and (in the alternative) that the affairs of Nimega have been conducted in a manner which is unfairly prejudicial to the interests of Mr Sutcliffe and that the company ought to be wound up. The acts of "unfair prejudice" are not specifically identified: but the form of the pleading suggests that they relate to a failure to implement the deadlock provisions, reliance being placed on actions prior to 1^st December 2004.
23. On 27^th November 2007 (shortly before the hearing of the petition) it was agreed between Mr Sutcliffe and Mr Lloyd that Nimega ought to enter voluntary liquidation. No substantive relief is therefore necessary on the petition: but the parties are unable to agree an order because they cannot agree as to the liability for the costs of the petition. They therefore require me to determine the petition itself. It should not be assumed that the outcome of the petition will be determinative of the question of costs. CPR44.3(2)(a) is only the starting point. CPR44.3(5) brings in a whole range of other factors, included amongst which may be an insistence upon litigating for the sake of costs only. But I am called upon to determine the petition, and must do so.
24. Before turning to my findings of fact I must relate the petition to the action I have already determined. It was Mr Taylor's position that because Nimega was a party to the proceedings on the petition (and so was Ms Wakelin Lloyd in the sense that she had brought the Part 20 claim), but neither was a party to the action, it was open to me to conduct a complete review of all of my findings in the Willes Road action so far as necessary for the purposes of the petition. I was specifically invited to make inconsistent findings: see paragraph 19 of the Defence. I have not found it necessary to conduct a general review of my findings in the action in view of the terms of paragraph 19(e) of the Defence to the Petition which specifically asserts that "the development of the Dunchurch Road site by Nimega and the development of the Willes Road site by MGL were two separate ventures". I am prepared to adopt that approach and in the deciding the Petition to focus upon Dunchurch Road.
25. I find the following facts:-

(a) The Shareholders Agreement recited the intention to exercise the Dunchurch Road option and to develop the property. It had already been ascertained by Mr Sutcliffe that the planning authority would favour a residential development of the site.

(b) Mr Lloyd knew that development was not inevitable, and that the transfer of the shares and the entry of the Shareholders' Agreement might have to be given effect even if development did not occur. This appears from the following exchange in his re-examination by Mr Taylor at the trial of the action (when both parties were notably less partisan):-

Mr Taylor: Now you've described your understanding of what would have happened if Mr Sutcliffe had developed Dunchurch Road. What was your understanding of what the position would be if he had not developed Dunchurch Road?

Mr Lloyd: I was cautioned and counselled on this at the time, and it would have been that he would have legally been entitled to half of whatever the value of the property was.

Mr Taylor: Through his shares in Nimega?

Mr Lloyd: That's correct

(c) Mr Sutcliffe and Mr Lloyd each contributed £50,000 to Nimega to facilitate the completion of the option with additional funding provided by HSBC by way of a £100,000 loan secured on Dunchurch Road and an overdraft of £30,000. The option price was £193,875 inclusive of VAT;

(d) At the time of entering the Shareholders' Agreement Dunchurch Road had an open market value of £335,000 (that being the opinion of Mr Parsley the single joint expert) though neither Mr Lloyd Moore Mr Sutcliffe was aware of that figure; it gave the option an inherent value of £170,000.

(e) On 29^th May 2002 at a meeting of the board of Nimega it was agreed that Dunchurch Road would be "parked up for a year" whilst other projects were explored. This represented a modification to the Business Plan.

(f) During this lull an unsolicited approach was received offering £650,000 for the site. Mr Lloyd and Mr Sutcliffe decided to see whether a formal bid process would elicit a higher offer. It did not. Mr Lloyd told the estate agent on the 22^nd of October 2002 that he and Mr Sutcliffe had discussed the matter, decided that there was no point in pursuing the bidders any further and "with this in mind and given immediate commitments we can park the scheme up either for the short or long term". This confirmed the modification to the Business Plan that the project be "parked up".

(g) On 10^th December 2002 at a meeting of the board of Nimega it was agreed that "as a result of changing market conditions and the circumstances it was confirmed the Dunchurch Road should be sold for £650,000….[to Parker Lake Homes]". This transaction did not proceed though an alternative purchasers emerged (David Wilson Homes and Kings Oak). This was, strictly construed, the adoption of a specific transaction though (as the subsequent negotiations with Kings Oak demonstrated) it was in substance the adoption of an alternative strategy viz a sale of the bare site (hence the reference to "changing market conditions" and general "circumstances"). This represented a further modification of the Business Plan. The project was "parked up" in the sense that building the development out was not being actively pursued: but now a sale of the bare site was also within the Business Plan.

(h) Although a sale of the site was regarded as one alternative, development by Nimega had not been completely abandoned (plans for two-bedroom flats were being informally commissioned, and desultory discussions about funding were being undertaken with HSBC). Either a sale of the site or "a build-out" would have been within the Business Plan as at February 2003: and a positive decision would have to be made as to which was to be followed either during or at the end of the period for which the project was "parked up".

(i) The split over Willes Road in March 2003 effectively put an end to the prospect of building out Dunchurch Road. Mr Sutcliffe thereafter wanted Dunchurch Road sold (prompted in part by renewed interest from Kings Oak and another offer at £650,000 that had emerged): though he did not pursue a sale on any terms, on three occasions terminating negotiations with Kings Oak. Mr Lloyd (whilst apparently agreeing to negotiations with Kings Oak) insisted that Mr Sutcliffe was subject to a contractual obligation to build (contained in the Shareholders Agreement and the Business Plan). The Willes Road proceedings were begun in August 2003 which made the prospect of a resolution of the Dunchurch Road dispute remote.

(j) On 8^th Oct 2003 Mr Sutcliffe convened a board meeting: he threatened that if Mr Lloyd did not attend he would apply to wind up Nimega. Mr Lloyd did attend. There was discussion of Mr Lloyd's claim that Mr Sutcliffe's business was bound to "build-out", of Mr Lloyd's earlier agreement to a sale of the site to Kings Oak, and of Mr Sutcliffe's desire to resurrect a sale.

(k) Mr Sutcliffe then called a General meeting of the company for 28^th October 2003. Mr Lloyd said he could not do so unilaterally save under clause 5 of the Shareholders' Agreement: and that clause 5 was not operative because no resolution had been put at the preceding board meeting.

(l) Mr Sutcliffe refused to accept this: and in turn he invoked clause 5.2 of the Shareholders Agreement together with that part of the Business Plan which provided that if the responsible director's view did not prevail then the parties should wind up the company.

(m) Mr Lloyd did not attend the General Meeting. On 29^th October 2003 Mr Sutcliffe invoked the deadlock provisions and required the company to be wound up. This appears to have resulted in a stalemate.

(n) The issue appears to have revived about a year later (following a failed attempt by Mr Lloyd to "buy-out" Mr Sutcliffe at a substantial discount) when Mr Sutcliffe (on 4^th November 2004) gave notice convening a board meeting to consider resolutions proposing the immediate sale of Dunchurch Road and proposing that on receipt of such proceeds of sale the company be wound up. The original meeting was convened for 12^th November 2004, but Mr Lloyd had a hospital appointment on that day (and no-one suggested at trial that this was not genuine). It was re-scheduled for 19^th November 2004. Immediately before the adjourned meeting Mr Lloyd said neither resolution could lawfully be considered, and he declined to attend the meeting.

(o) Mr Sutcliffe therefore convened an Extraordinary General Meeting of the company for 10^th December 2004 to consider those same resolutions and a board meeting for 29^th of November to reconsider those and other resolutions. (The correspondence also refers to a board meeting on 1^st December which I take to be a re-scheduling of that for which notice was apparently given). Mr Lloyd said he could not do so, asking "How do you propose that a resolution to sell the property can be taken without breaching your contract?" and "How [can] the resolutions which you propose…be voted upon without a breach of the shareholders agreement?". Mr Lloyd wrote: "There is no good reason why the development of the property at [Dunchurch Road] cannot be completed to the significant financial benefit of [Nimega Ltd] and the achievement of its purpose and objectives". He therefore did not attend either meeting. He would not at that time have done anything to facilitate the winding up of Nimega and the distribution to Mr Sutcliffe of anything in respect of his shareholding.

(p) Mr Sutcliffe presented this petition in May 2005 shortly before the commencement of the trial of the Willes Road action.

(q) The deadlock lasted until on the 5^th June 2006 Mr Lloyd convened a meeting for the 12^th of June 2006 to sanction the sale of Dunchurch Road. It was now Mr Sutcliffe's turn to object to this proposal, because he now took the view that the market was on the rise. Mr Lloyd was worried that the current planning permission was about to lapse and that any new permission would impose a requirement for the incorporation of affordable housing; and he drew attention to the existence on offer of £950,000.

(r) By August 2006 (and as a direct result of an ultimatum delivered by the bank) good sense prevailed and the parties were able to agree up on the sale. They also agreed in principle upon repayment of directors' loans and the winding up of the company.

(s) In October 2006 Mr Lloyd made the Part 20 claim on his own and Ms Wakelin Lloyd's behalf.

(t) In November 2006 Dunchurch Road was sold for £1 million pounds to Benfield Construction.

(u) The parties were thereafter regrettably unable to agree instructions to Nimega's bankers as to the repayment of the directors' loans or upon the identity of a voluntary liquidator. Mr Sutcliffe wanted the director's loans repaid (as had been agreed in principle) before he would agree to a winding up, and he wanted the Part 20 claim disposed of. As to the liquidation process, he objected to the liquidators proposed by Mr Lloyd, expressing a preference for a compulsory liquidation despite the extra £165,000 costs thereby incurred.

26. On these facts I hold, first, that Mr Sutcliffe was not under a contractual obligation to build the development at Dunchurch Road by virtue of the Shareholders' Agreement. His contractual obligation under clause 3 was to use his voting and other rights to secure fulfilment of the Business Plan. That may have imposed on him an implicit obligation to procure that his company submit a building contract in relation to any defined project which, pursuant to the Business Plan, Mr Lloyd and Mr Sutcliffe had agreed upon and decided to commence. But there never was any finally "agreed" project. My attention was drawn to no scheme approved by the board by reference to prepared drawings and in respect of which all requisite approvals were in place (though some drawings and planning permission certainly existed): nor to any meeting of the directors or of the members of Nimega at which it was decided that the project should cease to be "parked up" and a choice made between the alternatives for which I have held the Business Plan provided. So there is no question of Mr Sutcliffe being in breach of some general contractual obligation "to build". (I would note that the Part 20 claim itself specifically asserts that Mr Sutcliffe's promise to undertake the design and development of Dunchurch Road "is and was at all material times unenforceable as a contractual obligation").
27. Second, I hold that the Business Plan was altered to provide for the "parking up" of the project and to include the possibility of sale of the bare site. I reject the submission tentatively advanced on behalf of Mr Sutcliffe that the Business Plan was altered so as to become solely the realisation (and not the development) of the land: it is plain that throughout the "build-out" of the development remained a possibility. A choice had simply to be made between those alternatives. At the time of the alteration of the plan to incorporate the alternative Mr Lloyd knew and had been advised that in the event of a sale of the bare site without development Mr Sutcliffe would be entitled to one half of the sale proceeds.
28. Third, Mr Sutcliffe was entitled on 4^th November 2004 to call a meeting of the board to consider a sale of the bare site (which was within the amended Business Plan). Mr Taylor submitted that this was not proper business for a board meeting and should have been the subject of a general meeting. I do not see why this should be so. No fundamental change in the Business Plan itself was thereby being proposed: merely the implementation of one of the alternatives. That was the province of the directors. The point may, however, technically be made in relation to the proposal to wind up Nimega following the sale: this was a proposed alteration in the Business Plan, which was something that was part of an agreement between shareholders (not directors). But I consider the point without substance in the present case. (a) The proposal to "wind up" (i.e to cease trading) would have been a change in the nature of the company's business which clauses 4 and 5 of the Shareholders' Agreement specifically contemplated would be considered by the directors. (b) The argument ignores the identity between directors and shareholders (Mr Lloyd and Mr Sutcliffe in each case), and the lack of any distinction between the voting power of a director and that of a shareholder (equality with no casting vote in either case). (c) Mr Lloyd did not take the point at the time: indeed he treated Mr Sutcliffe's powers and duties as director as governed by the terms of the Shareholder's Agreement.
29. Fourth, Mr Lloyd was in error in thinking that a resolution to sell the property could not be considered by the board because it would occasion a breach of contract by Mr Sutcliffe (as is now recognised in the Part 20 claim). There was no subsisting contract to build: the only obligations are to be found in the Shareholders' Agreement, and they relate to the casting of votes to support the Business Plan. The proposal to sell was not a breach of the Shareholders Agreement (a) because the Business Plan had been amended to incorporate that as an alternative; and (b) in any event the Shareholders' Agreement contemplated the possibility of amendment to the Business Plan, and it cannot have been a breach to propose an amendment. Mr Taylor sought to parry the thrust of the last argument by saying that it was a breach of the Shareholders Agreement to propose an amendment in that form, because the resolution should have said that the sale would be "with the prior written consent of Mr Lloyd". But I do not think there is anything in that point: it cannot be a breach of contract simply to propose an amendment in technically the wrong form. (In any event, written consent was only required for a sale not within the Business Plan or not within the ordinary course of the business of the company: and the proposed sale was). He was likewise in error in thinking that a proposal to cease business was a breach of the Business Plan: The Agreement and the Business Plan each contemplated the possibility of amendment.
30. Fifth, Mr Lloyd's refusal to sanction a sale did not itself amount to "unfair prejudice" because it affected him equally along with Mr Sutcliffe, and because his refusal was hardly "prejudicial" since it eventually led to a higher price being achieved. Mr Lloyd's implicit reluctance to contemplate a winding up was not unfairly prejudicial to Mr Sutcliffe: it was a view that he was (at that time) entirely free to take because it constituted a proposed departure from the Business Plan.
31. Sixth, I hold that Mr Lloyd's failure to attend the board meeting on the 19^th of November meant that the resolutions (including that to wind up) then proposed were not passed. This triggered clause 5.1 of the Shareholder's Agreement, and Mr Sutcliffe correctly invoked those provisions by calling for an EGM on 10^th December. The petition does not however rely on any failure by Mr Lloyd to attend the EGM, or upon the service of any notice by Mr Sutcliffe under clause 5.3 of the Shareholders' Agreement requiring the company to be wound up, or upon the failure of Mr Lloyd thereafter to take all such steps as may be necessary to wind up Nimega.. It relies upon his failure to attend board meetings prior to 1^st December 2004.
32. Seventh, I accept Mr Taylor's submission that the presentation of a petition based on "unfair prejudice" was, in these circumstances, premature since the Shareholders' Agreement provided a means of escape for Mr Sutcliffe which he had not exhausted before commencing proceedings: Re XYZ Limited [1987] 1WLR 102 . Nor do I think that Mr Sutcliffe could properly have applied at that point to wind up the company on the "just and equitable" ground, for Mr Lloyd had not at that point breached the Shareholder's Agreement: compare Re A & B C Chewing Gum [1975] 1 WLR 579 at 591c. But I do not consider that the technical prematurity of the petition had any substantial consequences. The means of escape required the co-operation of Mr Lloyd. On the evidence before me Mr Lloyd did not attend the EGM in any event and would not (in breach of the Shareholders' Agreement) have facilitated a winding up. An action to enforce the Shareholders' Agreement or a petition to wind up on the ground of unfair prejudice or on the "just and equitable" ground (arising from a failure to co-operate in the winding up envisaged by the Shareholders' Agreement and the Business Plan in the event of breakdown) was at that stage inevitable: no winding up was likely to have been brought about without proceedings.
33. Eighth, by August 2006 the petition had served its purpose (achieving agreement upon a sale and to wind up). The Shareholders' Agreement contained provisions for the identification of a liquidator. If the parties voted for a voluntary liquidation (as Mr Lloyd was willing to do) and used the machinery in the Shareholders' Agreement a Court order would be unnecessary (and would not have been made). The substantial reason why this did not occur was Mr Sutcliffe's insistence upon the prior resolution of ancillary matters (repayment of loans, clarification of bank mandates and abandonment of the Part 20 claim). The relief sought by the petition itself (which centred upon his inability to realise the value attached to his shares) could have been obtained even if these ancillary matters remained to be addressed. Mr Sutcliffe was using the petition as a negotiating tool in those other respects. From August 2006 the only issue on the petition itself was costs. Following the actual agreement upon a voluntary liquidator in November 2007 that remains the position at the date of the hearing: and I would accordingly dismiss the petition and rule upon costs (taking into account the facts as I have found them and any "without prejudice" correspondence).
34. I turn to deal (more shortly) with the Part 20 claim. This relates to the transfer in early 2002 of one share in Nimega by Mr Lloyd to Mr Sutcliffe and of 49 shares by Ms Wakelin Lloyd to Mr Sutcliffe. At the date of the transfer Nimega held an option with an inherent value of £170,000 but without any capital or funding with which to exercise the option. The shares accordingly had a substantial value but were transferred at par. The Part 20 claim asserts that the true consideration for the transfer was not simply the payment of one pound per share but also a promise by Mr Sutcliffe that he would undertake the design and development of the Dunchurch Road site (though this promise was unenforceable as a contractual obligation). The pleading then claims that the consideration for which the shares were transferred has wholly failed, that it would be unconscionable for Mr Sutcliffe to be able to retain the shares, and that by virtue of the transfer to him of the shares he has been unjustly enriched.
35. So far as Mr Lloyd is concerned I would dismiss the Part 20 claim. Assuming for present purposes that Mr Sutcliffe made an unenforceable promise to design and build the development at Dunchurch Road prior to the transfer of the shares, the contractual obligations of Mr Sutcliffe and Mr Lloyd were thereafter set out in the Shareholders' Agreement which (as I have held and appears to be acknowledged in the Part 20 claim) contains no contractual obligation to build, and was entered into at a time when Mr Lloyd knew that if Mr Sutcliffe did not build then nonetheless he would be entitled to one half of the value of the Dunchurch Road site via the Nimega shares. Mr Sutcliffe gave (and performed) a promise to make a loan to Nimega which enabled it to exercise the option. He thereafter undertook the formulation of a development plan (though this did not reach final settled form). These circumstances cannot give rise to a claim for restitution based either upon the total failure of consideration or upon unjust enrichment. Furthermore, the evidence establishes that the original intention of the joint-venture to develop Dunchurch Road site was modified to incorporate the possibility of the sale of the bare site, but it does not establish any clear decision by the board on Nimega to embark upon a defined scheme as from a specified date. Mr Sutcliffe is fortunate in the return made on his investment: but his good fortune arises from the terms of the arrangement which Mr Lloyd chose to enter (which did not provide for him to buy back Mr Sutcliffe's shares) not from any unconscionability.
36. So far as Miss Amanda Wakelin Lloyd is concerned I would also dismiss the Part 20 claim. I find that there were no negotiations between her and Mr Sutcliffe (and indeed that they only met once at the relevant time): he did not make any promise to her (enforceable or otherwise). I find that she parted with her shares because she was persuaded to do so by Mr Lloyd. As she told me in evidence she was clear that she was losing her interest in Nimega, clear that Nimega was going to retain Dunchurch Road, and clear that what Nimega did with Dunchurch Road was down to Mr Sutcliffe and Mr Lloyd. Although she was not happy with this, she relied on Mr Lloyd to create a favourable framework for his and her mutual benefit, and she understood that she would get her benefit from her relationship with Mr Lloyd when he took his profit out of the development. No doubt she did expect Mr Sutcliffe to arrange for the building out of the development: that indeed was the original intention (though the Shareholders' Agreement entered into by Mr Lloyd provided for that to change, as in fact it did). But the disappointment of her expectation is not the same as a breach of promise by Mr Sutcliffe; nor is the operation of the Shareholder's Agreement (which Mr Lloyd deliberately chose to enter into with Mr Sutcliffe) according to its terms to be equated with unjust enrichment.
37. I would accordingly dismiss both Part 20 claims.
38. I will formally hand down this judgement at 10.00am on 16^th June. I do not expect the attendance of Counsel. I will adjourn the question of costs and of any other applications to a telephone hearing to be arranged to the usual channels.

26 May 2008

Mr Justice Norris……………………………………………………….16 June 2008